Actual -v- forecast costs: assessing the effect of retrospective Compensation Events under NEC3

A recent decision in the High Court of Northern Ireland provides rare guidance as to the correct approach to the retrospective assessment of compensation events under the NEC3 suite of contracts.

The Facts

The Northern Irish Housing Executive (the "Executive") was the landlord in respect of a number of publicly owned properties in Belfast and the North East.  In December 2012 the Executive entered into two separate Asbestos Surveying Services Contracts with Healthy Building (Ireland) Ltd ("Healthy Building") under which Healthy Building agreed to provide certain services in relation to the assessment of the presence of asbestos in homes owned by the Executive.  Both contracts were in the form of the NEC3 Professional Services Contract standard form of contract (June 2005) ("NEC3 PSC") and both contracts were in materially the same form.

In January 2013, whilst works were still underway, the Executive issued an instruction requiring Healthy Building to conduct more detailed surveys of its properties, the consequence of which was to increase the works to be undertaken by Healthy Buildings.

Under clause 60.1(1) of the NEC3 PSC, an instruction issued by the employer which changes the scope of the works will amount to a compensation event.  Clause 61.1 of the NEC3 PSC states that that where an employer's instruction gives rise to a compensation event, the employer should instruct the consultant to submit a quotation for the cost of the change of the scope of the works.  NEC3 PSC goes on to state that the employer then has two weeks in which to reply, at which point it must either i) accept the quotation; ii) request the consultant to submit a revised quotation; iii) notify that the instruction will not be given; or iv) notify that it will be making its own assessment.

Despite issue of its instruction to widen the scope of the services, the Executive failed to notify Healthy Building that a compensation event had occurred.  In May 2013, being four months after receipt of the instruction, Healthy Building issued its own notification that the instruction amounted to a compensation event.  In August 2013 (contract 1) and October 2013 (contract 2) the Executive requested that Healthy Building provide quotations in respect of the compensation event.  At the time of the Executive's requests, the additional works necessitated by the instruction had already been carried out.  Healthy Building promptly provided the requested quotations.

In November 2013, some 11 months after the instruction to change the scope of works was issued, the Executive rejected Healthy Building's quotations, instead assessing the effect of the compensation event as having zero impact on Healthy Building's costs.

Proceedings – rounds 1 and 2

Healthy Building disagreed with the Executive's assessment of the effect of the compensation event and the issue was referred to adjudication.  The adjudicator decided that the instruction amounted to a compensation event and that the Executive must pay Healthy Building's cost of the change in the works, which the adjudicator had valued within his decision.

In 2014 the Executive issued court proceedings, challenging the enforceability of the adjudicator's decision.  The issue eventually proceeded to the Northern Ireland Court of Appeal who found that the decision was enforceable.  The Executive duly paid the sums directed in the adjudicator's decision.

Proceedings – round 3

However, neither party was content with the value of the compensation event, as assessed by the adjudicator.  Therefore, the Executive issued new proceedings in the Northern Ireland High Court.

Assessment of Compensation Event

Among the issues to be decided by the High Court was the basis of assessment in respect of the compensation event.  Specifically:

• should the effect of the compensation event by calculated by reference to the forecast costs, or should it be assessed with reference to the costs actually incurred by the consultant; and

• were actual costs relevant to the assessment process for compensation events?

It was Healthy Building's case that the compensation event should be assessed with reference to forecasted costs.  Healthy Building pointed to a number of provisions within the contracts (all of which were standard form NEC3 PSC drafting) which it asserted supported its position, including for example clause 65.2, which stated:

"The assessment of a compensation event is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong".

Central to Healthy Building's case was clause 63.1 of the Contract which, under the heading "Assessing Compensation Events" read as follows:

"the changes to the process are assessed as to the effect of the compensation upon:

• the actual Time Charge for the work already done and

• the forecast Time Charge for the work not yet done.

The date when the employer instructed or should have instructed the consultant to submit quotations divides the work already done from the work not yet done."

Healthy Building claimed that the Executive should have instructed Healthy Building to submit its quotations in January 2013 (at the same time as the issue of the instruction).  Healthy Building therefore submitted that the "quotation" for the work done after that date should be in the form of a "forecast".  Healthy Building highlighted that no actual time charge had been incurred before January 2013 (the date of the instruction) and claimed therefore that 'actual' time charges incurred by Healthy Building were irrelevant when assessing the effect of the compensation event.

Judgment

The Northern Ireland High Court found in the Executive's favour, holding that the compensation event should be assessed with reference to actual costs incurred (Northern Ireland Housing Executive -v- Healthy Buildings (Ireland) Ltd [2017] NIQB 43 (27 April 2017).

In reaching its decision, the Court referred to the established case law surrounding the assessment of compensation (as opposed to damages), and pointed to the "Bwllfa" principle (deriving from the 1903 case of Bwllfa and Merthyr Dare Steam Colleries (1891) Ltd -v- Pontyproidd Waterworks Co) which states that where a Court assessing compensation has knowledge of what has actually happened, the Court should base its position on known facts.  Deeny J of the Northern Ireland High Court went on to state, "why should I shut my eyes and grope in the dark when the material is available to show what work [Healthy Building] actually did and how much it cost them".

As to the interpretation of the NEC3 PSC, the Court disagreed with Healthy Building's interpretation of the relevant clauses.  For example, while acknowledging clause 63.1 referred to "forecast" costs, the Court highlighted that Healthy Building's quotation had been provided after the work had been completed.  In reality, therefore, Healthy Building was simply making a claim for work done.  In such a scenario, "an efficacious and business-like interpretation of the contract…ought to be informed by the best information available as to actual cost and time incurred by [Healthy Building] as a result of the instruction".

As to Healthy Building's reliance on clause 65.2, the Court held that the purpose of such a provision was to prevent an employer from revising its assessment of a compensation event in circumstances where it subsequently becomes apparent that it had accepted a forecast which was too high (i.e. - because the consultant's expense had been less than forecasted).  The Court highlighted that in this case, the Executive had not assessed the compensation event on the quotation/forecast of Healthy Building.  On the contrary, the Executive had rejected Healthy Building's quotation out of hand and assessed the effect of the compensation event at zero.  The Court decided that clause 65.2 was therefore not applicable to the case.

The Court also referred to established principles of contract interpretation, which required the Court to look at the agreement as a whole.  The Court found that the "overall sense of the contract" supported assessment on the basis of actual cost incurred.

Lessons learned

With a view to ensuring smooth management of the project, the NEC3 suite of contracts are drafted so as to encourage the parties to address issues as they arise, rather than storing up disputes which then fall to be resolved at conclusion of the project.  Central to such an ethos is the NEC3's regime of prospective assessment of compensation events.  However, contracts are not always operated as they should be.

Although the decision is not strictly binding on the Courts of England and Wales it still provides helpful guidance as to the position the Courts will likely adopt in circumstances where the parties have failed to assess a compensation event at the time it arose, necessitating a 'retrospective' assessment of the effect of a compensation event.  On the basis of this case, it seems such an assessment should take place with reference to actual costs.

It remains to be seen whether this case will open the door to employers delaying notification or assessment of compensation events in the hope a retrospective assessment on an actual cost basis will result in a cost saving.

 

If you would like to discuss this topic in more detail, please contact Jessica Evans.