A victory for common sense – actual cost relevant to compensation event assessment

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 facts

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 [2014] 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:

1. On the true construction of the contract and clauses 60 to 65, is the assessment of the compensation event calculated by reference to forecast or actual cost; and
2. Are actual costs relevant to the assessment process in clauses 60 to 65?

 The Consultant argued that actual cost was not relevant and relied in particular on:

• Clause 63.1 (Assessing Compensation Events) that “the changes to the prices are assessed as at 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.” Further that the date when the Employer instructed or should have instructed the consultant to submit quotations, “divides the works already done from the work not yet done”.  The court previously held that the date for this purpose was January 2013.
• Clause 65.2 (Implementing Compensation Events) 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”.

The decision

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:

1. Evidence of actual cost such as time sheets etc, was not only relevant but the “best evidence to assist the court in calculating the ‘compensation’” to which the Consultant was entitled. The court also relied on the principle that where a court has actual knowledge of what has happened, it need not speculate and should base itself on the known facts.  As the judge said, “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?”
2. That the arguments put forward by the Consultant on clauses 60 to 65 were “somewhat fragile” and that the overall sense of the contract with its emphasis also on the assessment of compensation events was strongly against the Consultant.
3. That the proper interpretation of the contract supported the disclosure of actual costs. He pointed to the parties having regard to the ‘spirit of mutual trust and cooperation’ and rejected the Consultant’s interpretation of the PSC including that it was “strained and unnatural” interpretation of the contract to rely on the use of the word “forecast” in clause 63 to prevent access to the best evidence in a situation such as this where the “forecast” is in reality a claim for work that has been done by the time of the quotation by the Consultant.  In so doing, he preferred a construction of the contract which was consistent with business common sense.

Conclusion

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.