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Brief Counsel

NEC3 supply contract provides useful model

17 June 2010

An NEC3 supply contract developed this year for high value or high risk purchases where the supply must be actively managed may provide a model for use across a broad range of sectors in New Zealand.

This Brief Counsel discusses the NEC3 supply contract from both a commercial and a New Zealand law perspective.

Features of the NEC3 supply contract

The contract is similar in structure to the other contracts within the NEC3 family, with core clauses, secondary clauses (the optional clauses that can be selected by the parties) and Z clauses (clauses which amend the core clauses and secondary clauses if required). 

It also contains the usual collaboration and project management principles, in particular the early warning provisions, the compensation event procedure and time management by use of the programme. These are all valuable contract management tools, particularly for high risk supply contracts that require active management.

But, in addition, it has some innovative features.  These include:

  • A “Supply Requirements” section detailing the delivery of the goods on a contract-by-contract basis, including any applicable ICC Incoterm, any packaging specifications, the required mode of transport and which party is responsible for obtaining customs clearance and paying customs duties

  • A partnering option within one of the secondary clauses to incentivise suppliers to work constructively with the purchaser to meet the purchaser’s objectives (useful for supply only contracts where there are a number of different suppliers and contractors that all need to work together if the project is to be completed on time), and

  • The ability for the parties to specify additional services that the supplier will provide to the purchaser under the same contract.  These could include assembly, installation, testing, commissioning of the goods, supervision services and the provision of training.  Use of the associated services provision could, however, bring the contract within the Construction Contracts Act 2002 – in which case the supply contract may not be the most appropriate contract to use from the NEC3 Suite of Contracts.

Key considerations when using the NEC3 supply contract

A number of provisions commonly used in supply contracts are not provided for in the NEC3 supply contract and the parties will need to consider whether these should be written in.  They include:

  • Extension to defects period:  There is no provision for the defects date to be extended in respect of goods or parts of goods that are defective and have consequentially been replaced or repaired during the defects period

  • Latent defects/serial defects:  There is no provision addressing the obligations of the supplier in respect of latent defects (defects that are not discovered during the defects period) nor any provision addressing the obligations of the supplier in respect of serial defects (where the same defect occurs in a number of the goods supplied)

  • Separate warranties:  Under supply contracts there is often a separate warranty or warranties provided by the supplier in respect of the goods, in addition to the supplier simply having an obligation to remedy defects that arise during the defects period.  There is no separate warranty option in the NEC3 supply contract.  If a separate warranty is provided by the supplier, it will need to be linked back to the core conditions by a Z clause, and

  • Warranties from third parties:  There is no obligation on the supplier under the NEC3 supply contract to transfer to the purchaser or hold for the purchaser’s benefit, any warranties that the supplier itself has obtained from third parties in respect of the goods supplied to the purchaser.

Also a number of the matters provided for in the NEC3 supply contract may not be appropriate for all contracts.  These include:

  • Title:  The contract states that title to the goods supplied passes to the purchaser upon full payment of the goods.  This may not always be appropriate.  In addition, where the goods are delivered to the purchaser prior to full payment being made, the supplier will have a security interest for the purposes of the Personal Property Securities Act 1999, requiring the supplier to register a financing statement on the Personal Property Securities Register to protect its interest

  • Failure to deliver:  Under a supply contract, if a supplier has failed to deliver the goods within a specified material period after the due date for delivery and after warning notices etc, and if the supplier is not entitled to an extension of time, it is common for the purchaser to have a clear right to cancel the contract, receive back any payments made to the supplier and procure the plant from a third party.  But the NEC3 contract provides that the purchaser can only terminate the contract if the supplier has substantially failed to comply with its obligations and has not remedied such non compliance within four weeks’ notice.  This could lead to disputes between the parties as to when a delay in delivery amounts to a substantial failure by the supplier and therefore when the purchaser’s right to cancel under this provision arises.  Also, there is no express provision entitling the purchaser to receive back any payments made to the supplier in this circumstance

  • Supplier’s design:  The NEC3 supply contract contemplates that the goods that are to be supplied may be designed by the supplier but does not contain any of the usual design covenants that a supplier would normally provide.  In particular, it is common for a supplier to covenant that it has the skills, experience and capacity necessary to carry out the designs and that the goods to which the designs relate will comply with the requirements of the contract, and

  • Compliance with laws:  There is no express obligation on the supplier in the NEC3 supply contract to comply with all applicable legal requirements in supplying the goods.  While such an obligation may be implied in respect of some obligations (for example, a reason for the purchaser not approving the supplier’s design is that it does not comply with the applicable legal requirements), it is desirable for the contract to contain an express obligation to this effect.

Changes required for use of the NEC3 supply contract in New Zealand

As with other NEC3 contracts, the NEC3 supply contract has been drafted in the UK and consequentially does not take into account specific New Zealand legal requirements. 

Notwithstanding this, it will be appropriate for use in New Zealand without further amendment if an obligation is inserted on the supplier to comply with all applicable legal requirements.  As noted above, however, the parties will need to be mindful when the associated services provision is used, that it does not result in the contract becoming a “construction contract” for the purposes of the Construction Contracts Act 2002.  If so, the payment provisions and the dispute resolution procedure in the NEC3 supply contract will need to be amended for consistency with that Act.

Our thanks to Fiona Bennett, Principal, for writing this Brief Counsel.

For further information, please contact the lawyers featured.

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