Last edited 26 Oct 2020

Z clauses

NEC was first published in 1993 as the New Engineering Contract. It is a suite of construction contracts intended to promote partnering and collaboration. The third edition, NEC3 was published in 2005.

Z clauses are used to amend standard form NEC contracts. They can be inserted into NEC contracts as a means of adding conditions or amending wording. This is often seen as necessary because some consider that the provisions within NEC3 contracts are not as extensive as some other standard forms of construction contract. Parties to the contract therefore often seek to amend the core clauses to add detailed provisions according to the particular requirements of the project.

A Z clause that features frequently is one that introduces a general obligation for the contractor to comply with applicable statues, codes of practice, regulations, and so on. This is because the NEC3 contracts do not have such a clause as standard, so if legislation is breached by the contractor, the employer is not always unable to obtain a direct contractual remedy against them.

Another common Z clause relates to the requirement for collateral warranties. The NEC3 Professional Services Contract is the only NEC form to contain a clause requiring the provision of collateral warranties. A Z clause introducing collateral warranties is often added to the Engineering and Construction Contract and Subcontract.

Whilst being seen as necessary for many projects, modifying clauses in standard forms of construction contract can change the balance of risk and create legal uncertainty. Z clauses often introduce ambiguities within contracts as the amendments are not always as rigorously checked or verified as the core contract clauses. A Z clause which amends one part of the core clauses may impact upon other core clauses as there is a complex interaction between many of the terms. It is an easy mistake for those unfamiliar with the NEC3 contract to fail to appreciate the wider impact that a Z clause may have.

The Latham Report recommended the use of standard contracts without amendments (Latham, 1994) and amendment was also criticised by Lloyd QC in Royal Brompton Hospital National Health Trust v Hammond and Others who said, “A standard form is supposed to be just that. It loses its value if those using it or, at tender stage those intending to use it, have to look outside it for deviations from the standard.”

Both parties must have a clear understanding of how Z clauses that are incorporated into the contract can affect their contractual obligations. Contractors contracting ‘upstream’ under the NEC3 Engineering and Construction Contract, and ‘downstream’ using the NEC3 Engineering and Construction Subcontract, need to ensure that, where necessary, Z clauses are incorporated ‘back-to-back’, that is, there should be replication of contractual terms through the supply chain.

Because of the perceived misuse of Z clauses, in October 2014, NEC started a campaign to try and reduce their prevalence. According to the general manager for NEC, Rekha Thawrani, “The biggest problem with the misuse of Z clauses is that when they’re used incorrectly, they change the risk profile of a contract. The issue all users can face is that if a Z clause is wrongly inserted, it can make the contract ambiguous. As a result, good project management can be hampered and the project is likely to cost more, or take longer to complete.

“Clauses should only be inserted if they define what is required and should be drafted by someone with experience of NEC, who understands how the clauses will affect the rest of the contract.”

See Modifying clauses in standard forms of construction contract for more information.

In October 2020, the Chartered Institute of Architectural Technologists (CIAT) warned: 'Members tendering for procurement projects at this time should be extra vigilant when agreeing to terms in contracts. In order to protect their interests during Covid-19, there has been an increase in what are known as 'Z clauses' being added by those organisations procuring services. Some of these clauses may render the terms of the contracts unattractive in removing any rights to claim for 'compensation events' for unforeseen additional costs due to Covid-19 and not recognising the pandemic as a force majeure. Members are advised to carefully consider the contents of any of these Z clauses and attempt to negotiate more favourable terms where they are felt to create unacceptable risks for Members.' Ref https://architecturaltechnology.com/resource/z-clauses-in-procurement-covid-19.html