03 October 2017 #Construction
A defining principle of the NEC3 is that the parties should deal with issues as they arise and not save these up to the end. Hence the provision in the standard form contract allowing for forecast assessments of compensation events. However, this principle can get forgotten when the parties fail to comply with the contractual machinery and timeframes or the compensation events are disputed. A case from earlier this year in the Northern Ireland courts has looked at the question of whether actual costs are relevant to the assessment of compensation events: Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited (2017).
The Employer (Northern Ireland Housing Executive) engaged the Consultant (Healthy Buildings) to carry out asbestos surveys on its properties under two separate contracts on the NEC3 Professional Service Contract June 2005 with June 2006 amendments (PSC).
During the course of the works, in January 2013 the Employer issued an instruction changing the scope of services but failed to also notify that change as a compensation event in accordance with clause 61.1 of the contract. In May 2013, the Consultant notified the Employer that this was a compensation event. The Employer requested quotations in August and October 2013 which were provided promptly and assessed by the Employer as ‘zero’ in November 2013.
Following adjudications in January 2014 where the adjudicator held in favour of the Consultant, the parties have been engaged in court action challenging the adjudicator’s decision (the Employer) and claiming more money (the Consultant). The Northern Ireland Court of Appeal previously held that there was a compensation event and the Consultant was not time barred: Northern Ireland Housing Executive v Healthy Buildings Limited  NICA 27.
As part of the ongoing litigation as to the value of the compensation event, the parties referred two preliminary issues to the court which related to whether the Employer was entitled to discovery (akin to disclosure) of the Consultant’s actual costs and records arising from the instruction in January 2013. The issues were:
The Consultant argued that actual cost was not relevant and relied in particular on:
The judge agreed with the Employer that actual cost was relevant and should be disclosed. His decision seemed to hinge on his assessment that the Employer’s view was in accordance with common sense, whilst the Consultant’s was not. His reasons were threefold:
This case is likely to be used by parties trying to argue for an actual cost based approach in circumstances where a compensation event is disputed or timeframes not complied with. Whilst the case is from Northern Ireland it is likely to be persuasive but we will need to see if the English courts follow suit. We note also that the new NEC4 contract does not make any significant changes to the NEC3 compensation event provisions.
Of interest also is whether the decision could encourage Employers to take advantage of the situation by failing to notify or assess a compensation event when it should have done so and instead, hold on in the hope that the “actual costs” may be less than the forecast cost would have been. In so doing they may well be in breach of the principle that a party cannot benefit from their own wrong.