Contracting in uncertain times: NEC compensation events and JCT relevant events in the face of geopolitical disruption

The recent escalation of hostilities in the Middle East has started to reverberate across supply chains, with knock-on effects for contractors operating on infrastructure projects worldwide. Increases in materials and labour costs, together with logistical disruption raise questions about how widely used construction contracts respond when performance becomes onerous, or impossible, as a result of external events beyond parties’ control.

Two of the most widely adopted standard forms in the UK market, the NEC Engineering and Construction Contract and the JCT suite of contracts, address these risks through different contractual lenses: compensation events under NEC and relevant events/force majeure under JCT. We explore both below.

NEC ECC: Compensation Events

NEC ECC clause 60.1(19) allows a contractor to notify a compensation event if its contractual performance is prevented or delayed by an event which neither the Contractor nor the Employer could prevent, and which is not at the Contractor’s risk. Certain conditions must be met:

The event must stop the Contractor completing the works: Increased costs alone, without delay or prevention of performance, will not trigger the clause;
Neither party could prevent the event occurring: the impact of war, embargoes or sanctions often meet this threshold;
At the Contract Date an experienced contractor would have judged the event to have such a small chance of occurring that it would have been unreasonable to allow for it; and
It is not one of the other compensation events listed in the contract.

If these conditions are satisfied, the contractor can claim (1) an extension of time to the completion date, and (2) payment of additional costs arising as a direct consequence of the event.

Note: the Contractor must notify a compensation event within 8 weeks of becoming aware of the event (and 7 weeks under the standard subcontract form). Failure will mean that the Contractor loses its entitlement to claim additional time or money.

JCT Contracts: Relevant Events and Force Majeure

JCT Design & Build 2016 clause 2.26.14 defines “force majeure” as a Relevant Event, which if it occurs, may entitle the contractor to claim an extension of time. The JCT suite does not offer a definition of what a force majeure event is, so its meaning is taken from case law and general principals – i.e. extraordinary events beyond the parties’ control, such as war, pandemics, or major industrial action.

Force majeure events are not recognised as Relevant Matters, which means that under the JCT suite a contractor cannot usually make a claim for losses incurred as a result of the delay (although parties can choose to amend the wording of the standard forms to find otherwise).

Note: under clause 2.24 a contractor is required to give written notice to the Employer (or Contract Administrator) as soon as it becomes “reasonably apparent” that the works are, or are likely to be, delayed, setting out the cause and whether the contractor considers the circumstances to be a Relevant Event. Unlike with NEC, however, when it comes to claims for additional time, failure to do so is unlikely to mean the contractor loses its entitlement to claim an extension of time.

Key takeaways

Contractors should not assume that they can automatically recover time and/or money caused by geopolitical disruption. NEC and JCT standard forms take different approaches and it is important that contractors check that they are entitled to claim either an extension of time or loss, and that those claims are notified according to wider contractual requirements.

For those drafting contracts, in the face of increasing geopolitical volatility, it may be prudent to consider tailoring definitions of compensation/force majeure events and giving thought to including bespoke clauses for cost compensation linked to sanctions, embargoes or energy price shocks.

If you have any concerns or questions please do not hesitate to contact our construction and engineering team or your usual Brodies Contact.