The 'no claims' clause in the NEC4 Alliance Contract and the statutory right to adjudicate

As readers will be aware, there has been a trend in recent years towards more collaborative methods of contracting in the construction and engineering industry. Alliance contracting is one method that has been gaining momentum.

In this post, we will look at the way in which the NEC4 Alliance Contract ("ALC") ensures collaboration through its 'no claims' clause and how this clause interrelates with the parties' statutory right to adjudicate at any time under the Housing Grants, Construction and Regeneration Act 1996 ("Construction Act").

Alliance Contracting Generally

Before turning to the ALC specifically, we provide a high-level overview of alliance contracting for those unfamiliar with the concept.

As the name suggests, alliance contracting seeks to eliminate the adversarial relationship that all too often exists between clients and the supply chain on major projects. This is achieved through a number of key features which are unique to alliance contracting.

First, each participant in the alliance is represented on the alliance board, ensuring that there is one key decision making forum and an alignment of goals. The alliance board is the key decision making body within the alliance and is responsible for setting the alliance's strategy, allocating work and resolving disputes. Critically, subject to a few exceptions, decisions made by the alliance board are on a 'best for project' and unanimous basis.

Second, goals of the client and the supply chain are aligned by creating a fully integrated and collaborative team whose relationship is underpinned by collective risk and reward sharing. The collective sharing of risk and reward manifests itself through a compensation regime whereby the alliance collectively shares in any cost under or overrun against the alliance budget. Importantly, cost under or overrun is assessed not on an individual basis but on a collective basis (i.e. all costs expended by the client and the supply chain against one collective budget).

Third, as a corollary of collective risk and reward sharing, the parties sign up to a 'no blame, no claim' culture. The expectation is that the need to allocate risk and attribute blame to individual alliance members is displaced through each alliance member being incentivised to behave in a 'best for project' basis and being exposed (through the compensation regime) for failing to do so.  Accordingly, when problems arise the response should not be to ascertain responsibility and apportion blame, but rather to collaborate and determine an appropriate and mutually acceptable solution that mitigates the effect of the problem to the benefit of the alliance as a whole.

The NEC4 Alliance Contract

The ALC is 'set up as a true alliancing contract, where all the parties involved sign up to the same single contract'.[1]

The ALC imposes an obligation on alliance members to act 'in a spirit of mutual trust and co-operation' (clause 10.2). In keeping with this spirit, the alliance members must also:

• collaborate with each other to achieve the Alliance Objectives and the partner objectives of every Partner;
• work collectively to support the delivery of the contract on a best for project basis;
• develop and use common systems and processes as set out in the Implementation Plan;[2]
• give advice, information and opinion fully, openly and objectively to the Alliance Board and to the other members of the Alliance when asked to do so by the Alliance Board; and
• establish an integrated alliance delivery team on a best for project basis and supporting the sharing of knowledge, information, and best practice (clause 20.1).

Due to the commitment to collaboration that is required from alliance members and the significant set-up costs, the ALC is suited to long-term, high value and/or complex projects.

Option Y(UK)2 contains additional payment provisions to ensure that the contract complies with the Construction Act. Clause Y2.6 expressly provides that 'a member of the Alliance may refer a dispute to adjudication at any time whether or not it has been referred to the Alliance Board for resolution'.

The 'No Claims' Clause

Clause 94.1 of the ALC, which is 'at the heart of the concept of an alliance',[3] provides that:

"The members of the Alliance agree that any failure by a member of the Alliance to comply with their obligations stated in these conditions of contract does not give rise to any enforceable right or obligation at law except for an event which is a Client's or Partner's liability. Any disputes between the members of the Alliance arising out of or in connection with the contract are only resolved in accordance with these conditions of contract."

The guidance to the ALC explains why clause 94.1 is so central to the collaborative nature of the contract:

"The members of the Alliance agree that they will give up any enforceable right or obligation at law against any other member of the Alliance except for an event for which the failing member has a liability. Any disputes between the members are not to be taken outside the contract to any arbitration or court, but dealt within the contract under the dispute procedures in clause 95 to 97 (or any others added into the Contract). This also applies to any past members of the Alliance (clause 95.1)."[4]

The narrowness of the carve out in clause 94.1, which is limited to 'an event which is a Client's or Partner's liability', further reinforces the commitment to refocus the parties' attention on collectively finding a solution as opposed to attributing blame on a particular member. Unless otherwise specified by the parties in the Contract Data, the only liabilities that the alliance members bear under clause 94.1 are wilful default in respect of third party claims, breach of the intellectual property rights of Others, or death or bodily injury to the employees of the alliance member (see clauses 80.1 and 81.1).

The waiver of the ability to enforce rights or obligations is a feature unique to alliance contracting and any party embarking on an alliance contract should carefully consider its implications. It places significant weight on ensuring that a relationship of mutual trust and confidence between the parties is established and maintained. Notably, and perhaps contrary to expectation, the wilful default exclusion from the 'no claim' provision is limited to claims from third parties arising from or in connection with wilful default. It is not clear why this does not extend to claims between the members which arise from or in connection with wilful default; parties using the ALC might consider amending it accordingly.

The Right to Adjudicate

There is a potential tension between the principle that disputes must be resolved under the contractual dispute resolution process and the right to adjudicate that is guaranteed by the Construction Act.

The answer may be that the ALC does not fetter the right to adjudicate disputes at any time – indeed, it expressly recognises it in Option Y, clause Y2.6 – but rather narrows the types of dispute that might arise under the Contract. The primary question therefore is whether the dispute concerns a "Client or Partner's liability" (to use the language of clause 94.1). If it does, it can be adjudicated. If it does not, then it is not a dispute, and so cannot be adjudicated; or, at least, is not a dispute in respect of which an adjudicator can grant a substantive remedy. If a party refers a matter to adjudication under the ALC, the other party should carefully consider whether the adjudicator has jurisdiction, and, if not, be prepared to challenge jurisdiction at an early stage – in order to prevent any decision by the adjudicator from being subsequently enforced.

The limited scope of adjudication in the ALC underlines the need for the alliance members to establish a solutions orientated relationship where risks are shared as opposed to being allocated – the working assumption of the ALC is that the parties will embrace the concept of shared risk and not resort to adjudication when problems are encountered. Indeed, if an alliance member decides to adjudicate, then the subject matter and substantive merit of the claim is the least of the alliance's problems; the deterioration of the relationship is likely to be of far more concern.

[1]        Section 1, page 1 'Understanding Alliance Contracting' in Managing an Alliance Contract, Volume 4, (Thomas Telford, June 2018).

[2]        Implementation Plan is defined as 'information which describes the management structure of the Alliance; the roles and responsibilities of the members of the Alliance; delegation by the Alliance Board; the use of common systems and processes; and other information which the Alliance Board requires to be included, and is either in the documents which the Contract Data states it is in; or in an instruction given in accordance with the contract'.

[3]        Section 9, page 65 'Termination, Resolving and Avoiding Disputes' in Managing an Alliance Contract, Volume 4, (Thomas Telford, June 2018).

[4]        Section 9, page 65 'Termination, Resolving and Avoiding Disputes' in Managing an Alliance Contract, Volume 4, (Thomas Telford, June 2018).

For further information, please contact David Nitek, Harith Canna, Jake Reynolds or your usual Herbert Smith Freehills contact.