UK: Can NEC3 Compensation Events Be Assessed By Reference To Actual Cost Incurred?

In 2014, the High Court and Appeal Court of Northern Ireland considered one of very few cases where an NEC3 contract was the underlying contract at the heart of the dispute.

The same parties, the Northern Ireland Housing Executive (NIHE) and Healthy Buildings (Ireland) Limited (HBI), were back before the High Court in Northern Ireland again recently, and the case has resulted in another judgment that will be of interest to those using the NEC3 in England and Wales.

Background

Back in 2012, the parties entered into two contracts on a modified NEC3 Professional Services Contract (PSC) whereby HBI was to provide certain services to NIHE regarding the assessment of presence of asbestos in homes owned by NIHE (which is a public sector landlord).

In January 2013, NIHE issued an instruction changing the scope of the Services on both Contracts.

The parties first came before the Court in 2014 in a dispute over the enforceability of an adjudicator's decision. It was concluded that HBI was entitled to a change to the Prices because, although HBI's claim for compensation was made outside of the eight week notification period required by Clause 61.3, on the facts, the instructions issued by NIHE were ones which NIHE should have itself notified as being a compensation event. As such, they fell within the exception to the 'time bar' imposed by Clause 61.3.

The Recent Dispute

The parties returned to the Court recently to settle two preliminary issues arising out of the same agreed facts as to:

  1. whether when considering the compensation due, it should be assessed by reference to a forecast or to the actual cost incurred; and
  2. whether actual cost is relevant to the assessment process.

In addressing these questions, the Court also reached an interesting conclusion as regards the duty to disclose documents / information.

Facts

Having been given an instruction that changed the scope of the Services (for each of the contracts) in January 2013, it was not until May 2013 that HBI gave notice of a compensation event. As noted above, the Court had previously decided that the Adjudicator was correct to decide that HBI was not time barred.

In due course NIHB sought a quotation from HBI for the effect of the compensation event upon the Prices, which HBI provided within the time limits required by the PSC (i.e. within 2 weeks of being asked).

As it was entitled to do under Clause 62.3, NIHE rejected the quotations and made its own assessment of the compensation due to HBI, which it valued at £0 for each contract.

HBI was not satisfied with that assessment and in the ensuing adjudication, it was successful in obtaining a decision increasing the compensation due (which NIHB duly paid).

However, each of the parties was unhappy with the value of compensation assessed by the adjudicator, and sought to challenge the decision in the 'tribunal' as defined in the PSC - which was the High Court of Northern Ireland under option clause W2.

The Judgment

In his consideration of the issues, Mr Justice Deeny reviewed some of the provisions of the PSC that are of wider use within the NEC suite of contracts. First, the Judge considered whether the correct value of compensation should be based on a forecast (rather than actual cost), as if NIHE had asked for a quotation in January 2013 when it issued its instructions, that quotation would have been based on a forecast.

As we know, Clause 65.2 provides that if a forecast is provided and it turns out to have been inaccurate, it nonetheless stands as the correct value of compensation due.

The Judge concluded that, when reading the contract as a whole, Clause 65 was dealing with a situation where the employer made an assessment based on the consultant's forecast, and served to prevent the employer from revisiting that assessment once accepted.

In this case, this was not the situation as the employer had dismissed the forecast '...out of hand and made an assessment of zero cost...'. As such HBI could not rely on a forecast of the costs.

Second, and of more interest, the Judge considered the effect of (secondary option clause) W2 and, in particular, clause W2.4(3). This allows the tribunal to consider more documents than were available to the Adjudicator; and, whether there was any reason why the Court could not rely on the contemporaneous documents that by that time existed.

In seeking to answer this question, the Judge considered various cases such as Rainy Sky S.A v Kookmin Bank [2011] in which the Supreme Court emphasised the need to consider the contract in light of what a reasonable person would consider the intention of the parties to have been, and to prefer the construction that is consistent with business common sense.

The Judge also considered Bwllfa and Merthyr Dare Steam Colliers (1891) Limited v The Pontypridd Waterworks Company [1903] in which Lord Macnaghten in the House of Lords stated (at para 431):

'Why should [an arbitrator] listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes?'

As the costs incurred by HBI were by this time settled and certain, Mr Justice Deeny concluded that the correct level of compensation due to HBI should be assessed by reference to actual cost and the Court could act in reliance on all the available evidence. It should not be a 'guess' based on either earlier forecast or any other form of assessment.

The Judge decided that HBI was required to disclose all of its contemporaneous documents to NIHE to allow this calculation to be made and if the parties were subsequently unable in light of that direction to reach agreement on the correct value of compensation, the Court would do so by reference to the same documents.

Conclusions

Cases based on the NEC3 are in short supply. The original decision involving these two parties was interesting in itself for settling the uncertainty as to the operation of the 'time bar exemption' created by Clause 61.3 (of the PSC).

This judgment has provided further guidance as to how the adjudication option clause operates, and how the tribunal will function when considering the correct value of a compensation event in the process of reviewing an earlier adjudication decision. While not binding in England and Wales, this guidance from the High Court of Northern Ireland will be influential in future cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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