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NEC 3 Compensation Events – Forecasting Versus Actual Cost

June 2017 - Issue 94

In a recent decision the Northern Irish High Court has considered the correct position for the assessment of compensation events under an NEC 3 contract. The decision considers the extent to which an assessment is required to be made on the basis of forecasts as opposed to actual cost information when an assessment is being made after the impacts of a compensation event are known. This appears to be the first decision of a UK court on the assessment of compensation events under this popular form of contract.

Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43

The Northern Ireland Housing Executive (the “Employer”) engaged Healthy Buildings (the “Consultant”) as an asbestos survey consultant in relation to two contracts in the form of the NEC 3 Professional Services Contract (PSC). The Employer gave an instruction changing the scope of the works to the Consultant but failed to notify this as a compensation event in accordance with the contract. The Consultant notified the instruction as a compensation event four months later, and quotations to assess the effect were provided three and five months after the notification, falling well outside the timeframe required by the contract.

The Employer rejected the quotations and assessed the effect of the compensation event as being zero, eleven months after giving their initial instructions.

The dispute was referred to adjudication and subsequently the High Court. The parties disagreed as to whether the Consultant’s records of actual costs were relevant to the assessment of the compensation event. The court was therefore asked to determine two questions –

The relevant provision of the PSC was clause 63.1. The question in this case was how a compensation event should be assessed after the relevant work was completed. Should the prescribed forecast still apply?

The Employer argued that, where the evidence is available, the Consultant’s actual time and cost incurred should be taken into account by the court. This argument was advantageous to the Employer as it would reduce the amount of compensation payable by it. In contrast, the Consultant pointed to clause 63.1, arguing that its actual costs incurred were irrelevant. It relied on the fact that this clause goes on to state that the point at which the Employer should have instructed the Consultant to submit a quotation “divides the work already done from the work not yet done”.

Decision

The court recognised that the Consultant’s time sheets and associated events were the best evidence available to decide the dispute. The question was whether they could be used in light of the PSC’s express wording.

The court emphasised that the PSC needs to be read as a whole and, as such, the infamous obligation to act “in the spirit of mutual trust and cooperation” was relevant. For the Consultant to object to the use of use of the actual evidence would offend this provision. Further, the court held that business common sense should be applied to the interpretation, stating “it seems to be that to give an efficacious and business like interpretation to the contract a quotation which arises in those circumstances, rather than as a genuine forecast, ought to be informed by the best information available as to the actual cost and time incurred by the consultant as a result of the instruction”.

Implications of the decision

It must be remembered that this is a Northern Ireland decision and is therefore not binding on courts in England and Wales. It will however be persuasive. The court’s willingness to rely on the best evidence available when assessing compensation events (rather that following the express words of the contract) is likely to create cost uncertainties for both sides and it is unclear how parties will choose to respond. Depending on the circumstances, the decision may incentivise contractors to get their quotations in as soon as possible on a forecast basis but similarly it may encourage employers to notify or assess compensation events promptly in order to justify the use of an actual costs assessment later on. Of course, neither party will be able to know for certain at the outset which assessment method will favour which party. But parties seeking to capitalise on the decision and potentially exploit the other side should be wary of the impact the mutual trust and cooperation obligation will likely have in curbing such exploitative conduct.

It is worth noting that the new NEC 4 contracts were released on 22 June 2017 and do not appear to have made any major changes to the compensation event assessment provisions; as such the impact of this case will remain relevant.

 

 

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