NEC3 Engineering and Construction Contract "Guidance Notes": more important than you realise for interpreting the ECC

18 January 2013

Certain terms of the NEC3 Engineering and Construction Contract ('ECC') are open to interpretation, and the recent case of E-Nik Ltd v Department for Communities & Local Government [2012] EWHC 3027 (Comm) has cast into doubt whether even something as routine as VAT is crystal-clear under the ECC.

Clause 50.2 of the ECC states, "Any tax which the law requires the employer to pay to the contractor is included in the amount due". Firstly, the law, technically, requires the contractor to pay the VAT (not the employer) and, secondly, the use of 'included' is pretty much the opposite of a crystal-clear statement that VAT is exclusive or in addition to the amount due.

However, the NEC3 Engineering and Construction Contract Guidance Notes (the 'Guidance Notes') for Clause 50.2 state that tax is to be added to the price of the works to calculate the amount due. Whilst the Guidance Notes provide some clarity as to what is intended, is it desirable that the Guidance Notes should have to be referred to for the answer?

We would always advise that the intention of the parties should be discernible from the contract itself; and having to refer to other materials to distil the meaning is never ideal. However, parties – before entering into the ECC and also after it is signed – regularly refer to the Guidance Notes to understand the terms of the ECC.

This does raise an important question as to the status, in law, of the Guidance Notes. The position is that they are not legally binding. However, when there is a question of interpretation, the Courts have determined that (i) consideration should be given to 'absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man'* and (ii) 'the meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using the words against the relevant background would reasonably have been understood to mean'*.

In view of this, the Guidance Notes could carry considerable persuasive weight when trying to interpret the ECC in the event of a dispute. The Guidance Notes could, of course, be dismissed as irrelevant if, in fact, they did not form part of relevant background. However, in reality, parties may struggle to exclude them from a dispute regarding interpretation given their general acceptance within the construction industry for understanding the ECC provisions.

Accordingly, if the Guidance Notes do not corroborate with what is actually intended it would be prudent to insert a clause in the ECC that expressly excludes them for the purposes of interpretation.

So, whilst (we hope) we'll never get to the point of having to negotiate and agree the Guidance Notes, it is quite clear that they have a potentially significant status in view of the rules on contract interpretation.

*Lord Hoffman; Investors Compensation Scheme v. West Bromwich Building Society [1997] UKHL 28; [1998] 1 All ER 98; [1998] 1 WLR 896 (19th June, 1997).

 

E-Nik Ltd v Department for Communities & Local Government [2012] EWHC 3027 (Comm)