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NEC3 compensation events: Why the court won’t ignore actual costs

A Northern Irish case has considered the compensation event assessment provisions under the NEC contracts for the first time in a UK court.

In the case of Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43, which came before the Northern Irish High Court, Northern Ireland Housing Executive had engaged Healthy Buildings as an asbestos survey consultant in relation to two NEC3 contracts.

NI Housing Executive gave an instruction changing the scope of the works, but failed to notify this as a compensation event as required under the contract.

Healthy Buildings notified the instruction as a compensation event four months later, and provided quotations to assess the effect of the compensation event three and five months after this. NI Housing Executive rejected the quotations and assessed the compensation event as being zero, 11 months after the initial instruction was given.

The two questions

A previous hearing had already deemed that the Healthy Buildings’ claim for a compensation event was not time barred (see Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2014] NICA 27) and so this issue was not disputed in this current case.

Since the quotations were provided after the work had been done, both parties disputed whether the compensation event effects should be considered only by reference to the forecast quotations provided, or by reference to the actual costs incurred.

The dispute was referred to adjudication and subsequently to the High Court, with the court asked to determine two questions:

  • Should the assessment of the effect of the compensation event be calculated by looking at the quotations provided or the actual costs incurred by Healthy Buildings?
  • Were actual costs relevant to the assessment process for compensation events?

Why should I grope in the dark?

The court answered both questions in favour of an actual cost approach, asking rhetorically: “Why should I shut my eyes and grope in the dark when the material is available to show what work [Healthy Buildings] actually did and how much it cost them?”

It also emphasised the need to take a business-like interpretation to the contract, and that where the timeframes stipulated by the contract were not complied with, an actual costs approach was the appropriate approach.

The court held 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 [Healthy Buildings] as a result of the instruction”.

Implications of the case

This appears to be the first time the compensation event assessment provisions under the NEC contracts have been assessed by a UK court.

While it remains to be seen if the same approach will be taken in the English courts, the ‘forecast v actual’ dispute around compensation events is a common one, and this case provides some guidance as to the possible approach of the courts.

What the case doesn’t make clear is whether a party would still need to make a ‘forecast’ when carrying out an assessment as to the effects of a compensation event after the event by reference to actual cost. The tenor of the court’s judgment here suggests that no forecast would be needed, but this is not explicitly referred to.

The judgement also leaves a question around whether this could allow an employer to benefit from its own failure. This could arise where an employer fails to notify a compensation event as required under the contract, but benefits from having to pay lower actual incurred costs than it would have owed if it had notified correctly, and where genuine but higher forecasts had been provided by the consultant. This would seem to be contrary to the overall philosophy of the NEC’s co-operative nature.

The new NEC4 contracts are due to be released shortly, but do not appear to make any major changes to the compensation event assessment provisions, meaning that for the time being the impact of this case will remain relevant to all NEC contracts.

Anne Thompson is an associate at CMS

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