Euan Pirie from Harper Macleod discusses the limited “checks and balances” applied to project managers (PM) under nec 3 contracts.

My firm regularly advises clients who procure projects using the nec 3 engineering and construction contract. The (unconventional) drafting style of nec 3 is well publicised and tension is created where lawyers try to “Z clause the standard form to death”. This is nothing new, as lawyers have produced highly detailed (and highly onerous!) schedules of amendments to JCT/SBCC based contracts for many years.

We don’t do this for the fun of it. The motivation is always to arrive at a set of legal conditions that is “fundable”. Hopefully, the need for many of those “boilerplate” legal Z clauses will disappear with the introduction of the nec 4 standard form in June, and that is very much what is being hoped for by the drafting committee.

There is generally much greater resistance to making changes to nec contracts than is the case with other standard forms. When advising clients, we try to respect this and keep the number of changes sought to the minimum – we see that as Harper Macleod’s contribution to working in “a spirit of mutual trust and co-operation”.

Who’s managing the manager?

One aspect of nec 3 that never ceases to amaze us, however, and is frequently a cause of significant surprise when explained to clients, is the extent of the contractual powers afforded to the project manager (PM) and the limited “checks and balances” applied to the exercise of those powers.

Supporters of nec 3 argue that ensuring the availability of a highly competent, well resourced and (contractually) powerful project manager to sit at the heart of the contract is one of the critical features behind the success of the contract. The PM’s key powers include:

There is no requirement for the PM to obtain the Employer’s prior approval for any proposed exercise of his contractual powers, or even to give advance notice of his intentions. There are also only a limited number of contractual provisions that control how the PM is to exercise his powers, and as a consequence, the PM is left with a very significant amount of discretion. This is surprising, as many of the PM’s actions (or failures to act) can directly result in the Employer incurring additional costs to the Contractor.

What is most surprising of all is that much of the “contract administration” (i.e. contractual notices, decisions etc.) is to take place directly between the PM and the Contractor, with no overarching requirement on those parties to copy the Employer in on key correspondence. This means that, contractually, the Employer may be kept completely in the dark in relation to any significant matters that have arisen and that may result in him receiving unexpected bills for additional costs.

How can an Employer be protected?

It is clear from case law that the PM under a nec 3 contract has quasi-judicial functions. It will, therefore, be inappropriate for the Employer to introduce Z clauses under which the PM will have to obtain his prior approval in relation to key contractual matters, as this would compromise the PM’s ability to act impartially.

What can be done, therefore, to protect the poor and oppressed Employer against the risk of over vigorous use by the PM of his contractual powers?

The Employer must be afforded the courtesy of seeing contractual correspondence, in real time, as this passes between the PM and Contractor. We also recommend that the Employer expressly reserves a right to challenge the validity of decisions taken and notices sent etc. by the PM. Finally, we recommend a legal review of the Works Information, to introduce greater clarity regarding the processes the PM is to follow and the controls he is to observe when exercising his powers.

The additional processes and controls will always be practical based and must not prevent the PM from acting impartially. As well as protecting the Employer, they should also reassure Contractors, who can equally be concerned about the PM having very wide discretionary contractual powers.

That is helping parties to arrive at sensible contractual solutions without “death by Z clause”.