The Good, the Bad and the Ugly: A Brief Guide to Z Clauses

Author: Eugene Lenehan

September 2021

Introduction

NEC Option Z is called “Additional conditions of contract”. However, ‘Z clauses’ (as they have become known) are understood to be any bespoke amendments to an NEC contract, whether they add to, or alter, the standard NEC conditions.

We believe Z clauses are used far more often than is necessary. NEC forms of contract have been developed by experienced practitioners to suit a specific procurement route and to apportion risk fairly between the parties. Project specifics are generally achieved through completion of the Contract Data and by the selection of the various secondary (W, X and Y) options. It was never intended that there should be many Z clauses. In fact, the NEC3 Guidance Notes state as follows:

Additional conditions should be used only when absolutely necessary to accommodate special needs, such as those peculiar to the country in which the work is to be done. The flexibility of the ECC main and secondary options minimises the need for additional conditions. Additional conditions should never be used to limit how the contractor is to do the work in the contract as this is part of the function of the Works Information”.

However, clients frequently amend the standard NEC contract, with the inclusion of a large number of Z clauses. Many Z clauses are onerous and/or poorly drafted, generating additional risk for contractors and possibly undermining the effectiveness of the contract.

The Good, the Bad and the Ugly

It may be debatable as to how far one can go in comparing Z clauses to the three main characters in the quintessential  spaghetti western, The Good, the Bad and the Ugly. However, to my mind the analogy is not inappropriate, as the three main characters in the 1966 film depict varying degrees of good and evil, along with trust and mistrust, all whilst trying to improve their financial position. Financial gain certainly appears to be the driving motivation for all three characters, which makes sense, given that the first two instalments of the trilogy were titled A Fistful of Dollars and For a Few Dollars More.

Z Clauses

The standard NEC is perfectly fine for many projects, but Part 1 of its Contract Data section provides the Client with the opportunity to include Option Z. Nearly all of the NEC contracts that we come across are heavily amended by the addition of a large numbers of Z clauses, In fact, this article was written after coming across an NEC3 contract that included an astonishing seven times more Z clauses than there are standard clauses. I asked myself ‘Why bother using the NEC contract at all!

For some projects the inclusion of certain Z clauses is entirely necessary, but we have also seen many Z clauses that are inappropriate, highly onerous and poorly drafted.

Research has found that Z clauses that amend or delete standard NEC clauses occur approximately ten times more often than Z clauses that provide additional conditions, demonstrating that in practice the main purpose of Z clauses is to alter the contract risk profile. This is where the problems start!

The ‘Good’

Clint Eastwood’s poncho-wearing, cigar-chewing character in The Good the Bad and the Ugly is called Blondie. He is not exactly a nice guy, but compared to the other two main characters, he definitely constitutes the good guy. One film critic described his character as having “an unorthodox sense of justice”.

It is not fair to say that all Z clauses are bad. No standard form of contract can possibly deal with the needs of each particular client and/or project. Some Z Clauses, the ‘good’ ones, are used for matters that are not dealt with by the standard form.

The NEC is certainly not as comprehensively written as some other standard forms. The NEC3 failed to include provisions in respect of matters such as confidentiality, value engineering, collateral warranties, BIM, the contractor’s payment applications and a final account procedure. Depending upon the nature of the project and the client’s goals and objectives, these are all worthy topics for contract clauses. As a result of the NEC3 not containing clauses on these subjects, clients drafted Z clauses to cater for them. If well drafted, these could be considered ‘good’ Z clauses.

However, an issue with some of these Z clauses was that they were often written poorly and inconsistent with the terminology and language of the contract. Hence, a key objective of NEC4 was to reduce the need for Z clauses, by including a standard NEC clause that would avoid arguments about the true meaning of the clause. The need for Z clauses has therefore been reduced by including in NEC4 new core clauses, main option clauses and secondary options, such as in respect of:

  • Value engineering (clause 16 and Option X21)
  • Corrupt Acts (clause 18)
  • Assignment (clause 28)
  • Disclosure / confidentiality (clause 29)
  • Contractor’s payment applications (clause 50.2)
  • Final account procedure (clause 53)
  • Collateral warranties (secondary option X8)
  • BIM (secondary option X10)

Nevertheless, although the NEC4 has provided some much-needed standard clauses on topics that previously prompted clients to draft Z clauses, it still does not provide standard clauses for every circumstance.

For example, the Office of Government Commerce published a list of optional Z clauses for use in government contracts and which are generally required to deal with the Official Secrets Act 1989, as well as security matters, such as restrictions on site admittance and photography. These clauses are not lengthy, and some users choose to expand upon them. There may also be legitimate client/project specific issues in relation to intellectual property rights, insurances or more detailed Completion provisions.

The JCT Design & Build 2016 contains comprehensive detail in relation to insurance requirements, contained at Clause 6 (over 7 pages) and Schedule 3. These are far more detailed than the insurance arrangements at clause 83-86 of the NEC4 (amounting to approximately 1 page). It therefore should not be surprising that clients wish to supplement clauses 83-86 with Z clauses.

If a client identifies an issue that the NEC3 or NEC4 contract does not cater for, it should ensure that it drafts any necessary Z clauses in the same style, using the same terminology and language of the contract. The client also needs to consider how the new Z clauses work with the other clauses.

We suggest that a further example of a Z clause that could be considered as ‘good’, would be one that deals with a hierarchy of documents, to help resolve ambiguities and inconsistencies. Without such a clause, there is a risk that a provision in another contract document could take priority over the Conditions of Contract.

Such a Z clause could be drafted as follows:

Where there is any ambiguity or inconsistency in this contract the documents and provisions which form part of it will rank in the following order of priority:

  1. Contract Data
  2. Standard NEC Conditions of Contract
  3. Z clauses

Nevertheless, although we suggest that an order of precedence clause is usually a good idea, it might be better to express it within Articles of Agreement, rather than in Option Z.

Another common target for amendment in NEC contracts relates to the compensation event category at clause 60.1(19), in respect of Prevention. This is a type of force majeure clause, but it might expose the client to significantly more risk than the traditional understanding of force majeure.

Clause 60.1(19) is very broadly drafted and has been argued to include events such as subcontractor insolvency, which has been claimed to be an event that “an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for it”. Quite rightly, clients do not see why they should take the risk of subcontractor insolvency. It is consequently understandable that clients wish to amend this compensation event, along with the corresponding clause 19.

The ‘Bad’ 

Whilst we have seen numerous ‘good’ Z clauses, we have also seen many bad ones. Z clauses are less likely to be appropriate if they depart from the NEC’s underlying philosophy (i.e., a spirit of “mutual trust and co-operation”) and take on an adversarial approach. Some of these Z clauses could be likened to Lee Van Cleef’s character (Angel Eyes Sentenza), an intimidating killer who is ruthless, unfeeling and mercenary. He is a hired gun who will kill if he is paid to, and perhaps even if he is not!

Many Z clauses are drafted for no other reason than to adjust the risk profile, placing greater risk on to the Contractor.

We regularly see Z clauses that target the compensation event procedure including, for example, in respect of clause 61.3, which places an obligation on the Contractor to notify compensation events. This clause operates as a time bar in respect of some of the compensation event categories:

If the contractor does not notify a compensation event within eight weeks of becoming aware of the event, he is not entitled to” any additional time or money.

We regularly see clients amend clause 61.3, from “eight weeks of” actually “becoming aware of the event”, to the likes of “within 10 days after the Contractor became or ought reasonably to have been aware of the material circumstance that gave rise to the event” i.e., they significantly reduce the notice period, which can also commence from an earlier point.

Under the standard NEC this time bar does not operate on all compensation event categories, i.e., the time bar does not apply to compensation events “where the Project Manager should have notified the event to the Contractor but did not do so”. Such compensation events typically include variation instructions (i.e., instructions from the Project Manager changing the Scope / Works Information). However, some clients amend clause 61.3 so that the time bar applies to all categories of compensation event, even those that have been created by the Client / Project Manager, and where the Project Manager is hence primarily responsible for notifying them.

The following are further examples of what could be categorised as ‘bad’ Z clauses:

  • The Contractor shall be deemed to have “verified all of the Client’s design information contained in the Scope [/Works Information] and to have obtained any supplementary information needed in respect of the Client’s Requirements” and the Contractor “accepts sole responsibility for the adequacy of any and all design contained within the Scope [/Works Information]”.
  • Clauses that pass the risk for ground conditions onto the Contractor, including the deletion (/amendment) of clauses 60.1(12), 60.2 and 60.3 and provisions whereby the Client “makes no representation or warranty as to the accuracy or completeness of any survey, report or other document prepared by or on behalf of the Client. The Client shall have no liability arising out of or in relation to any such survey, report or document or from any representation or statement, whether negligently or otherwise made, therein contained”.
  • The deletion of several other compensation event categories.
  • Clauses that substantially increase the period for interim payment.

There is no such thing as a free meal and the client will usually pay for the inclusion of onerous Z clauses by receiving an increased tender price, and/or encountering a lot more arguments and disputes during the project.

Somewhat ironically, despite a key objective of NEC4 being to reduce the need for Z clauses, its introduction of new NEC clauses has prompted clients to draft new Z clauses, including for example in respect:

  • the Contractor’s programme being ‘treated as accepted’ (NEC4 clause 31.3).
  • the Contractor’s assessment of Defined Costs being “treated as correct” (NEC4 clause 50.9).
  • the Contractor’s final assessment becoming “conclusive evidence of the final amount due” (NEC4 clause 53.3).

All of these ‘bad’ Z clauses move the NEC away from its origins as a collaborative procurement tool towards a far more adversarial document, where one party is in a much more dominant position.

Clients that use these type of Z clauses might be seen as prescribing to the following view expressed in the film:

You see in this world there’s two kinds of people, my friend. Those with loaded guns, and those who dig. You dig.”

The ‘Ugly’

Some of the Z clauses we have seen could be used mercilessly. We have seen others that are so badly thought out that we find them comical. These are both characteristics of Tuco, the Mexican bandit also known as ‘The Rat’ (played by Eli Wallach). He is the ‘Ugly’ character in Sergio Leone’s masterpiece, a greedy, brutal and despicable bandit, happy to kill in search of a large sum of gold. He is even worse than Van Cleef’s ‘Bad’ character. In fact, the film could have been called The Good, the Bad and the Downright Nasty!

We have seen clauses whereby the Contractor is prevented from carrying out its works on an unlimited number of occasions and for an unspecified length of time. One especially onerous Z clause that we encountered in an NEC3 contract was as follows:

The Employer shall be entitled to change the Access Requirements specified in the Accepted Programme including instructions to stop or not to start work at any time. The Contractor warrants that the Accepted Programme takes account of this obligation and it shall not constitute a compensation event”.

Why would a contractor accept such a clause? How can a contractor possibly commit to any programme if the client is permitted to issue instructions to stop or not to start work at any time?

Such clauses are utterly contrary to the spirit of “mutual trust and co-operation” in which the standard NEC contracts are intended to be operated. In our opinion, it is entirely unacceptable for a client to expect to have the power to restrict the Contractor’s operations in such a fundamental way without it giving rise to a compensation event.

In the film, Tuco is wanted for a number of unspeakable crimes. From the instant we see him, mowing down a string of adversaries before crashing through a storefront window, we know he is capable of cold-blooded murder. It seems to me that the moment a contractor reads the above clause, it should be equally clear that the clause could have similar effects, destroying the contractor’s expected profit margin – and perhaps even sending the contractor into liquidation.

Before signing up to such a clause, perhaps contractors should be mindful of Tuco’s words:

There are two kinds of people in the world, my friend. Those who have a rope around their neck and those who have the job of doing the cutting”.

Any contractor who commences a project, with a contract that contains the above clause, has effectively got a rope around its neck. It will be up to the client whether the rope hangs the contractor.

Another recent example of an ugly clause that we have come across was in a proposed NEC4 contract, containing the following clause:

“.. the Client may require certain other works or activities not forming part of the Contract to be carried out prior to Completion of the Works. The Contractor agrees that such works and activities may be carried out by the Client and/or the Client’s authorised contractors and representatives. The Contractor confirms that the carrying out of such works and activities will not prevent the Contractor from meeting the Completion Date or otherwise prevent the Contractor from carrying out the Works in accordance with this Contract. The Contractor agrees that this will not be a compensation event and he will not be entitled to (i) any extension of time or delay to the Completion Date under clause 63.5; or (ii) a change to the Prices or any addition to the Contract Sum”.

The contract that contained the above clause went even further, with an obligation that the Contractor:

shall do all things necessary to ensure the successful completion of the works being carried out by the Client’s authorised contractors and representatives, including (without limitation):

  • managing the Client’s authorised contractors and representatives.
  • coordinating the Contractor’s activities with the work being carried out by the Client’s authorised contractors and representatives.
  • fully cooperating with the Client’s authorised contractors and representatives and not preventing or delaying the Client’s authorised contractors and representatives in carrying out their works or otherwise interfering with the activities of the Client’s authorised contractors and representatives”.

In effect, the Contractor was asked to take on an obligation that it could not quantify. No detail was provided of the “certain other works” that the “Client may require”.  Whilst the Contractor suspected that these Z clauses were aimed at facilitating some fit out works and the installation of furniture, this was not necessarily the case. The Contractor also did not know:

  • how many of the Client’s authorised contractors there might be;
  • where, when or how the works of the Client’s authorised contractors would interface with the Contractor’s works;
  • what “all things necessary” might include; and
  • what might be required to ‘fully cooperate’ with the Client’s authorised contractors.

How can a contractor possibly prepare his programme to include for such obligations! We also wonder how far a client might go in reliance on such a clause?

Tuco is not only brutal but also displays frequent bouts of oafish stupidity, a trait we occasionally find with some Z clauses. Z clauses can sometimes even change the nature of the contract. A Z-clause that amends one part of the NEC may have an impact on other clauses. Some Z clauses purport to be ‘stand-alone’, but in fact conflict with some of the standard NEC clauses. Some Z clauses can be difficult to understand. This can be because Z clauses are not always drafted using the same terminology as the standard NEC contracts, producing discrepancies and ambiguity. The potential for inconsistency, conflict and or confusion in the contract could become expensive in an unpredictable way.

From our experience, it is clear that some Z clauses have been drafted by somebody unfamiliar with the NEC contract and, as a result, they have overlooked the wider effect that a particular Z clause may have. Many professionals add JCT type clauses to the NEC, creating conflicting language that can lead to unpredictable and occasionally amusing results.

Summary

The NEC contract is not as comprehensively drafted as some other standard forms of construction contract, although NEC4 is better than NEC3. Contracting parties frequently consider it necessary to amend the NEC contracts, including amending / deleting standard NEC provisions, which is done by means of ‘Z clauses’.

Z clauses look set to be here to stay for the foreseeable future. Consequently, given that many Z clauses are onerous and/or poorly drafted, it is essential for both parties to have a clear understanding of how Z clauses can affect their contractual obligations and entitlement.


Note:     An earlier version of this article was published in 2015 (prior to the publication of NEC4), in the journal of the Chartered Institution of Civil Engineering Surveyors.

 

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