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NEC CONTRACTS – ASSESSMENT OF COMPENSATION EVENTS - NEC3 and NEC4

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

One of the common themes that we have covered in our seminars over the past few years has concerned
the basis and timing of compensation event assessment under NEC3 forms and the lack of any judicial
guidance on the interpretation of these provisions; more particularly at what point should assessments be
made and can Compensation Event 'forecasts' be retrospective and thereby based on actual cost
information? A case has finally come before a Court that has considered these issues in some detail.

The matters in dispute here concern one of the core principles of NEC, which is the contemporaneous
assessment of compensation events (as opposed to the 'final account wrap up' approach of other
standard forms). Where a Compensation Event arises, the default position under NEC3 is that it is then
assessed by reference to Time Charge or Defined Cost (depending on what form is being used). The key
clause then provides a 'dividing date' for assessment of Time Charge/Defined Cost for services/work done
by that date and a forecast of Time Charge/Defined Cost not yet done at that date and this then forms the
basis of the NEC quotation procedure. The contract specifies the actual dividing date and the
implementation provisions make clear that a Compensation Event is not revised if 'later' recorded
information comes to light that shows a forecast on which an assessment is made turns out to be wrong.
So, it is often argued that all Compensation Event quotations and/or assessments must be prospective
from the dividing date (i.e. a 'forecast' looking forwards from there) irrespective of when the
quotation/assessment is actually carried out.

But is this the correct approach? What happens if new information comes to light in respect of a
Compensation Event between the dividing date and when it is quoted/assessed? Can it be taken into
account or should the party quoting/assessing put himself in the position of assessing as if this
assessment was done as at the dividing date? Where and to what extent can an adjudicator/tribunal take
into account new information if a disputed Compensation Event comes before it?

Below we examine how these points were addressed in the judgement in Northern Ireland Housing
Executive v Healthy Buildings (Ireland) Limited. Also, given the rarity of cases on NEC, the fact that the
judgment goes through the bulk of the Compensation Event mechanism and the changes to the wording
as between NEC3 and NEC4 provisions, we provide a slightly longer update than usual to review the
implications of this for the old and new forms.

Background

The case concerned the interpretation of two NEC3 Professional Service Contracts. Northern Ireland
Housing Executive ("NIHE") was a landlord that engaged Healthy Buildings (Ireland) Limited ("HB") to
provide consultancy services including the assessment of asbestos in various buildings. The two NEC3
agreements were in the 2005 form (which, insofar as material to the issues in this case is the same as the
2013 NEC3) and were in respect of Belfast and North East areas respectively.

NIHE issued an instruction to HB changing the scope of works on 10 January 2013 but did not notify this
as a Compensation Event at the time (and it was not disputed that this was in fact a Compensation Event)
or instruct HB to submit a quotation in relation to the Compensation Event.

HB eventually notified that the instruction was a Compensation Event on 21 May 2013 and quotations
were sought by NIHE on 19 August 2013 (for Belfast) and 22 October 2013 (for North East). HB provided
these quotations on 29 August 2013 and 31 October 2013 respectively. The quotations were submitted
after the services had been carried out.

NIHE rejected the quotations and carried out its own assessments in accordance with clause 64.1. Those
assessments were issued on 14 November 2013 (Belfast) and 21 November 2013 (North East) and
valued the compensation Events at £0.

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HB referred the matter to an adjudicator who assessed in HB's favour. After a series of cases trying to
overturn the decision on other specific points of law, the case came before the Court again. This time, the
arguments focused on Compensation Event assessment with the dispute distilled down to two preliminary
issues for the Court to determine:

(1) On the true construction of the contract, and in particular Clauses 60 to 65 of the contract, is the
assessment of the effect of the compensation event calculated by reference to the forecast Time
Charge or the actual cost incurred by the consultant?

(2) Are actual costs relevant to the assessment process in Clauses 60 to 65 of the contract?

The key clauses for consideration (with most relevant wording emphasised) here were:

Clause 61.1:

"For compensation events which arise from the employer giving an


instruction … the employer notifies the consultant of the
compensation event at the time of giving the instruction … He
also instructs a consultant to submit quotations, unless the event
arises from a fault of the consultant or quotations have already been
submitted. The consultant puts the instruction or change decision into
effect."

Clause 62.3:

"The consultant submits quotations within two weeks of being


instructed to do so by the employer. The employer replies within two
weeks of the submission. His reply is:

 An instruction to submit a revised quotation.


 An acceptance of the quotation.
 A notification that a proposed instruction will not be given or
a proposed changed decision will not be made.
 A notification that he will be making his own
assessment."

Clause 63.1:

"The changes to the prices are assessed as the effect of the


compensation event upon:

 the actual Time Charge for the work already done and
 the forecast Time Charge for the work not yet done.

The date when the employer instructed or should have


instructed the consultant to submit quotations divides the work
already done from the work not yet done.”

Clause 63.6:

"Assessment of the effect of a compensation event includes risk


allowances for cost and time for matters which have a significant

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chance of occurring and are at the consultant’s risk under this
contract."

Clause 63.7:
"Assessments for work not yet done are based upon the assumption
that the consultant will react competently and promptly to the
compensation event and that the accepted programme can be
changed. Assessments for work already done include only cost and
time which were reasonably incurred."

Clause 64.1 (extract)

"The employer assesses a compensation event:

 if the employer decides that the consultant has not


assessed the compensation event correctly in a quotation
and he does not instruct the consultant to submit a revised
quotation."
Clause 65.1:
"A compensation event is implemented when:

 the employer notifies his acceptance of the consultant’s


quotation.
 the employer notifies the consultant of his own
assessment, or
 a consultant’s quotation is treated as having been accepted
by the employer."

Clause 65.2:

 "The assessment of a compensation event is not revised


if a forecast upon which it is based is shown by later
recorded information to have been wrong."

Option W2.4(3)

 "The Tribunal settles the dispute referred to it. The Tribunal


has the powers to reconsider any decision of the adjudicator
and to review and revise any action or inaction of the
employer related to the dispute. A party is not limited in
Tribunal proceedings to the information or evidence put
to the adjudicator."

In essence, HB argued that the effect of the Compensation Event provisions (particularly 63.1) was that as
the date when NIHE should have instructed the quotations was 10 January 2013, then this is the dividing
date and, consequently, the Time Charge assessment should be in the form of a 'forecast' looking forward
from that date. As there was no actual Time Charge prior to 10 January 2013, the actual time charges of
HB were irrelevant.

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NIHE's position was quite simply that the Court should base any assessment upon the actual Time
Charges incurred as a consequence of its instruction.

The High Court Decision

Here the Court considered that actual costs as opposed to forecast costs should be the basis of the
assessment (so answered 'yes' to both preliminary issues). The judge went through the relevant clauses
and concluded that taking the contract in the round, there was no intention exclude actual costs from
assessments and that much of the Compensation Event language (such as clause 62) was only
applicable in relation to 'forecasts' where these predated the services/works. For example, he considered
clause 62.3 'illustrative' in that:

"It is clearly the intention of the parties that [the employer] is not bound by the quotation put
forward by the consultant".

Against this background, the judge considered key clause 63.6 and observed that this was "central" to
HB's case. As he clearly decided that the use of the word 'forecast' and the reference to a 'dividing date'
were not in themselves determinative of whether or not actual costs could be used to value the effects of a
Compensation Event, he looked to other related clauses for guidance. It should be noted that whilst the
contract specifies a date from which forecast costs needs to be assessed, it does not require that the
assessment itself is deemed to be as at that dividing date.

The judge considered clause 63 generally and noted that:

"there is emphasis throughout the clause here on assessing effects of the compensation event.
What better way assessing those effects, one might ask, than by seeing the actual time spent by
the employees of the Consultant?"

Again, as with clause 62, the judge observed that many of the relevant clauses contemplate a situation
where quotations/assessments are done in advance of a Compensation Event occurring - in particular
63.6 and 63.7 and stated:

"what this [63.6 risk allowances] is stating is that the assessment made in advance of doing work
should try and allow for the cost and time which is likely to be incurred….This is entirely consistent
with [NIHE's] position that any assessment by the Court in reviewing the adjudicator's decision
should have the assistance and benefit of the actual cost and time expended by the consultant".

Here [63.7 reacting competently and promptly] where the 'quotation' or 'forecast' took place after
the actual work was done….[HB] is seeking to exclude relevant evidence as to the competence or
promptness of the consultant's action and the 'cost and time' which were reasonably incurred' it
seems to me that the court would need to know these matters [actual evidence] to make such an
assessment ".

The judge therefore concluded that the provisions of clause 63 relied on by HB simply did not apply to a
quotation/forecast made after the event. He also found that the last sentence of W2.4(3) [tribunal ambit]
was also against HB as it allowed the tribunal to go beyond information/evidence put to the adjudicator
(who appears not to have had the actual time data available to him at the date of the adjudication).

In summary, he concluded:

.."I would say this with regard to clause 63. It is clearly contemplating a situation where the
employer complies with the contract and notifies the instruction at the time that is given. He
should then invite a quotation where the consultant within two weeks, estimates the cost to
it…..The reality, however, is that in this case this did not happen. While in the wording of the
contract the word 'forecast' is applicable if what should be done is done what in reality the

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consultant was doing in August and October 2013 was making claim for work done. It seems to
me 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…."

He then went on to state:

"faced with seeking to award compensation to the consultant here for any cost to it as a result of
the instruction…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?"

On a related point, the judge considered clause 65.2 and commented as follows:

"…If assessment is by the employer not the consultant which is based on a forecast i.e. from the
consultant, the employer cannot subsequently revise the assessment……"

..that is not the situation here…..[the employer] rejected them [the consultant's forecasts] out of
hand and made an assessment of zero cost……it could not be said to be based on the
forecast/quotation of the consultant. On the contrary, it is a rejection of the consultant's
quotation/forecast……65.2 simply does not apply to the situation."

In other words, he did not address the substantive interpretation of this clause but simply decided it did not
apply where an employer made an assessment and it was not based on a consultant's forecast

Case Commentary

The above seems to suggest that forecasts are not relevant where a quotation/assessment post dates the
works/services concerned so that 'actual' Time Charges or (or actual Defined Cost in the main contract
forms) as opposed to 'forecasts' can form the basis of valuation at the point a Compensation Event is
assessed. Whilst the judgment refers in places to the timing of a forecast, there seems no reason why the
same 'actual costs' principle would not be applicable to any quotation or assessment by the
contractor/consultant or employer/PM; which has important implications for valuations. This is because the
NEC process has a number of possible stages following notification of a Compensation Event from
requesting quotations, submission of quotations, revision of quotations, acceptance of quotations,
PM/employer assessment and finally implementation. (I have enclosed a chart below summarising this
process (using NEC3 terminology and numbering) for ease of reference).

As will be evident, there is potentially a lengthy period of time between, say, an instruction for additional
works/services through to when the final acceptance/assessment/implementation takes place and plenty
of scope for new 'actual cost' information to come to light in the intervening period. The PM/employer can
require a contractor to submit alternative quotations (and give reasons for doing so) or make its own
assessment if the contractor's assessment is incorrect. There are no specific grounds for requiring an
alternative quotation (but new information would probably be a valid reason) and, given the comments of
the judge in this case, if a quotation does not accord with actual costs information that has previously
come to light, this is probably grounds for saying a quotation is incorrect and a PM/employer then doing its
own assessment. Following the logic applied in this case, actual information would be relevant at each of
the quotation/assessment stages.

In one sense, a retrospective valuation based upon 'actual cost' makes life a little easier for the party
carrying out a quotation/assessment as it will not have to try and put itself in back in a position it would
have been in had it done the assessment at the dividing date and/or ignore actual data as at the date of its
quotation/assessment. However, would this encourage an assessor to delay notification/assessment as
long as possible in order to try and 'wait and see' what actually occurs? (more on this below).

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This also raises another point. What if, say, a PM/employer carries out an assessment and implements a
compensation event that is then disputed by the consultant/contractor? By the time it comes before the
relevant adjudicator/tribunal, what if further information has come to light? Can the tribunal take this into
account? Here is where we should consider the changes between NEC3 and NEC4 (with key parts
highlighted).

Under NEC3, clause 65.2 provides that:

"The assessment of a compensation event is not revised if a forecast upon which it is based is
shown by later recorded information to have been wrong".

However, NEC 4 provides at 66.3:

"The assessment of an implemented compensation event is not revised except as stated in


these conditions of contract".

In the NIHE case, the Court produced a curious interpretation of the NEC 3 clause 65.2 whereby it
decided that this clause did not apply at all where an employer does not make an assessment based upon
a consultant's forecast. This seems odd because it would mean that an employer could avoid the effects
of this clause by simply rejecting a contractor's quotation and doing its own.

An alternative interpretation (and probably the original intention) is that any assessment (whether that be a
contractor's assessment that is accepted or an employer's assessment) is not revised if later recorded
information comes to light (later meaning after implementation). There is certainly an argument on this
wording that even if referred to adjudication or a tribunal, the contract limits that adjudication/tribunal to
data that precedes implementation. After all, so the argument would go, if Compensation Event
assessment can be retrospective at whatever point post the event that the assessment is being made
(whether by the PM, adjudicator or tribunal), doesn’t this undermine one of the core NEC principles –
contemporaneous assessment? (again, more on this below).

Turning to NEC4, it would appear that the core principles (actual cost data as opposed to forecasts) apply
to this also. However, there is a change that may impact on the 'cut-off date' for actual cost data and
render the argument as to any data limitation imposed under 65.2 academic in any event. This is because
the new clause has the 'information restriction' removed. There is also an interesting change to the
adjudicator powers. NEC 3 states that the adjudicator may:

"Review and revise any action or inaction of the Project Manager or Supervisor related to the dispute
and alter a quotation which is treated as having been accepted."

Under NEC 4 this now reads (with changes highlighted):

"Review and revise any action or inaction of the Project Manager or Supervisor related to the
dispute and alter a matter which has been treated as accepted or correct."

And in addition to being able to reconsider any decision of the adjudicator:

"….a Party is not limited in tribunal proceedings to the information, evidence or arguments put to
the adjudicator".

It should be noted that in the Northern Ireland case, the judge also stated that the tribunal was not
precluded from considering actual costs unless such preclusion is contained in the contract. Applying
this to NEC 3, there may be an argument that the tribunal (and an adjudicator) is indeed precluded by
clause 65.2 from revising an assessment based on 'recorded information' that post-dates implementation.
Whilst arguable, such an interpretation would mean that implementation would effectively be the 'cut off'
date for actual cost data irrespective of when the adjudicator/tribunal is appointed.

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However, no such restriction exists in NEC4 so it seems to be the case that an adjudicator/tribunal can
consider any actual costs information that has come to light whether pre or post implementation if a
Compensation Event dispute comes before it. This would mean that the adjudicator/tribunal would not be
restricted from carrying out a retrospective assessment based on actual cost data or be concerned as to
when that data arose and/or whether it is 'recorded information'. This seems to be further affirmed by the
changes to the wording of the powers of the adjudicator set out above. In both NEC3 and NEC4 the first
part of the paragraph seems wide reaching and the second part thereby strictly not necessary. However, if
there was any doubt as to the extent of these powers, the widening of the wording in NEC 4 from altering
a 'quotation' to altering any 'matter' and the addition of 'correct' would seem to confirm that any
quotation/assessment can be reviewed with no restriction on relevant information.

So what about any argument that this 'retrospective assessment' position undermines NEC3/4
Compensation Event mechanisms? It should be remembered that the NEC is very prescriptive in terms of
stages, timelines, reasons for rejection/review of quotations and sets out in detail the elements that form
the basis of those assessments (such as schedules of cost components). Following these procedures
gives set deadlines for action, requires specified information to be disclosed and forces 'reasoned'
decisions to be made and communicated at each step. Together, these make 'delaying tactics' more
difficult and necessarily render the process from Compensation Event notification onwards more
'transparent' than is often the case with equivalent provisions under other forms. If adhered to (whether
under NEC3 or NEC4), all of this still greatly assists in reducing scope for potential 'valuation' disputes and
should make adjudicator/tribunal appointments less likely.

Finally, it should be noted that being a Northern Ireland case is it is not strictly binding on the British
Courts. However, it gives some useful guidance as to how our Courts are likely to view such disputes
should they ever have to decide how Compensation Events should be assessed – whether under NEC3 or
NEC4.

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