Forecast assessment of compensation events and recent case law

22 May 2017 | Case Law, Contracts

The High Court of Northern Ireland has recently issued a judgment in connection with the assessment of compensation events under NEC3 contracts and, in particular, whether the assessor of a compensation event should make an assessment using forecast cost or available actual cost.

Judgements on the interpretation of NEC3 contracts are few and far between and we should embrace these opportunities when they arise for bringing precision and clarity to what would otherwise be uncertainty, and this case really helps NEC3 users…..doesn’t it? Well yes, no, maybe……..actually, probably not.

The Employer, the Northern Ireland Housing Executive, engaged the Consultant, Healthy Buildings, under the NEC3 Professional Services Contract to carry out asbestos survey works. During the course of those works, the Employer issued an instruction to change the Scope. At the time of that instruction, the Employer should have notified that instruction as a compensation event and instructed the Consultant to provide a quote (clause 61.1).

The Employer did neither.

Some months later, the Consultant notified the Employer of the compensation event and that process resulted in an instruction to provide a quotation. Quotations were eventually issued some time after that.

Suffice to say, neither Party did what they should have done. To add insult to injury (from the Consultant’s point of view), the Employer assessed the value of the compensation event as nil.

The matter before the court was whether, in assessing the compensation event, the Parties should take into account known actual cost. The contract says, at clause 63.1, that the changes to the prices are assessed as the effect of the compensation event on the actual cost and on the forecast cost and “the date when the Employer instructed or should have instructed the Consultant to submit quotations divides the work already done from that not yet done”.

The Consultant said that the instruction to provide a quotation should have been issued at the same time as the instruction to change the Scope. At that point, all the costs would have been forecast and the Consultant was entitled to add to his prices an element of risk, as per clause 63.6.

In contrast, the Employer said that due to neither Party complying with the contractual timescales, by the time the quotations were issued, the work was done and actual cost was known, albeit at that time the Consultant had not disclosed what that was.

The question for the court was whether the assessment of the compensation event is made by reference to the forecast cost or the, known, actual cost.

The court said the assessment should be made by reference to actual cost, on the face of it significantly changing the interpretation of clause 63.1. The court based its decision on business common sense and said, rhetorically, “why should I shut my eyes and grope in the dark when the material is available to show what work they actually did and how much it cost them?”.

Before we get too excited, close examination of the judgement reveals the following:

  • The NEC3 contract in question pre-dated the April 2013 amendments which changed clause 63.1 (the clause the court has interpreted in this judgment). Accordingly, it is unlikely to apply to the same extent, or at all, to post April 2013 amended NEC3 contracts;
  • The court appears to have based its judgment on the fact that neither Party complied with the process and timescale set out in the contract for the notification and assessment of compensation events. It would seem that the judgment is confined only to those circumstances and does not apply where the Parties do comply;
  • The judgement suggests that the abandonment of forecast costs in favour of actual costs is not available to the initial assessors but only to an Adjudicator or a Tribunal who are later attempting to make a reasonable assessment without the detailed knowledge the Parties may have had at the time.

On that basis, it would seem that this judgement is not as far reaching or significant as many commentators suggest; however, it may well be relevant and persuasive in the limited circumstances described above.

The transcript of the judgement can be found below and it is worth reading, not least that the judge also made a reference to clause 10.1 and the Parties’ obligation to act in a spirit of mutual trust and co-operation and how that clause affected his judgement.

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

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.

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