The High Court analysed the assessment of compensation events under the Professional Services Contract that forms part of the NEC3 suite of construction contracts. NEC3 is a popular form of construction contract used both in the UK and internationally to procure major projects.

The court determined that the assessment of the financial effect of a compensation event under NEC3, where the effects were known, ought to be calculated by reference to the actual cost incurred, rather than a forecast. This helps to clear up some uncertainty as to how NEC3’s compensation event regime – which generally aims to resolve compensation events on a prospective, as opposed to a retrospective, basis – should operate when the assessment takes place after the actual effects of a compensation event have become known. Whilst NEC3’s successor, NEC4, will make its debut on 22 June 2017, the compensation provisions remain largely the same across both versions. The court’s decision is therefore likely to have far-reaching effects.

What happened?

Northern Ireland Housing Executive (“the Employer”) employed Healthy Buildings (Ireland) Limited (“the Consultant”) to carry out asbestos-related assessments in certain buildings. The contracts were NEC3 Professional Services Contracts (“the Contract”).

After entering into the contract, the Employer changed the scope of the services without specifically notifying that change to the Consultant as a compensation event. In terms of the contract, the Employer ought to have notified the Consultant of the compensation event and to have invited the Consultant to submit a quotation assessing the effects of the compensation event. In any event, the Consultant later submitted quotations which were subsequently rejected by the Employer, who assessed the effect of the compensation event as zero.

The matter was referred to adjudication which found in favour of the Consultant. The Employer paid up, only to later challenge the Adjudicator’s decision in the Northern Ireland courts, demanding repayment. The Consultant counterclaimed for additional monies over and above those awarded by the adjudicator.

Clause 63.1 of the contract required the financial impact of compensation events to be assessed with reference to (1) the actual Time Charge for work already done and (2) the forecast Time Charge for work not yet done. The Consultant defended the court action on the basis that under clause 63.1, the date when the Employer instructed or should have instructed the Consultant to submit quotations divided the work already done from the work not yet done. The Consultant’s position was that although its quotation was submitted after the Employer ought to have requested it, the Consultant’s quotation should nevertheless have been in the form of a forecast, not based on an actual Time Charge - because at the time when the Employer should have instructed the Consultant to submit a quotation, the work had not yet been done (so there was no actual Time Charge).

The court was asked to determine, in this situation:

a) whether the assessment of the effect of the compensation event should have been calculated by reference to actual costs incurred, instead of a forecast Time Charge?

b) whether the actual costs were relevant to the assessment process under the NEC3 PSC?

Fact v Forecast

The court answered “yes” to both (a) and (b), describing reliance on the forecast as being “strained and unnatural” and “groping in the dark”, in a situation where the facts were now available. The court opted for an interpretation of the contract that, in its view, was “consistent with business common sense”. The court requested the Consultant to make available all documents relating to its actual costs, in order to assess the financial impact of the compensation event.

In favouring the facts over a forecast, the court considered the leading authority on NEC3, Keating on NEC3, 2012. At paragraph 7-109, Keating comments that assessment of compensation events “suggests an idea of appraisal or judgment”. The court applied this authority to the facts of the present case and noted that where a quotation is provided after the effect of the compensation event is known, “ 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”. In the court’s opinion, this interpretation of the Contract was “efficacious and business-like”.

Key Points

Although there has been at least one other reported case in which the prospective versus retrospective question was an issue between the parties, this decision appears to be the first case in the UK to specifically address that question (as opposed to being decided on the basis of a breach of natural justice in the context of adjudication proceedings). As such, Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited provides some much-needed clarity in relation to the assessment of compensation events under NEC3 (and NEC4), in a situation where the parties have failed to assess a compensation event at the time it occurred, or where the assessment is disputed. This case is however unlikely to be the last word on the vitally important compensation event provisions of NEC.

Employers may view the case as justification for deliberately delaying the assessment of compensation events in the hope that actual costs, calculated retrospectively, will be lower than forecast costs, calculated prospectively. That approach would be contrary to the stated aims of NEC and would be unlikely to be welcomed by at least some NEC users.