Case Update – The Assessment of Compensation Events, the debate continues..

Northern Ireland Housing Executive v Healthy Building Ltd

The Facts

Northern Ireland Housing Executive (Employer) engaged Healthy Buildings Limited (Consultant) to carry out asbestos assessments in buildings in Belfast and the North East of Northern Ireland. The Works were carried out under an amended NEC3 Professional Services Contract (PSC).

In January 2013, an instruction by the Employer amounted to a change in the scope of the Works. The Employer failed to comply with the contractual procedures regarding the notification of a compensation event.

The Consultant carried out the Works and in August and October 2013 they submitted a quotation.

The Employer rejected the quotation on the grounds the instruction was not a compensation event and submitted its own assessment at nil.

The instruction was found to be a compensation event by both the adjudicator, the High Court and the Court of Appeal. The Consultant was entitled to payment as the Employer changed the scope but failed to notify the Consultant of the compensation event. However, this case dealt with how to assess the compensation event. In particular, the Court considered

  • Should the assessment of the effect of the compensation event be calculated on the forecast cost or actual cost incurred?
  • Are actual costs relevant to the assessment process” of the compensation event?

 

The Dispute

The Consultant’s position was that the date of assessment was when the Employer should have instructed the Consultant to submit quotations (i.e. January 2013). Therefore, forecast cost should be used.

The Employer’s position was that because the work had been carried out by the time the quotation was prepared, actual cost should be used.

The Consultant principally relied on clause 63.1, which states that “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.”

The clause provides a dividing line through which work done (actual Defined Cost) and work not yet done (forecast Defined Cost) can be identified (the ‘switch date’). Thus, an assessment is required to identify:

  1. how much of the actual Defined Cost was impacted by the compensation event; and
  2. to provide a forecast Defined Cost that takes into consideration the effect of the compensation event.

Whilst the timeframes for assessment were not adhered to, the Consultant refused to share their actual cost records on the basis that the quotations constituted a forecast.

Court Findings

The High Court found in favour of the actual cost approach put forward by the Employer, stressing that the contract must be interpreted with business common sense, stating: “why should I shut my eyes and grope in the dark when the material is available to show what work [the Consultant] actually did and how much it cost them”.

The Court went on to state that: “While in the wording of the contract the word “forecast” is applicable if what should be done is done, what in reality the consultant was doing in August and October 2013 was making a claim for work done.”

The Court considered “it a 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 on behalf of the consultant”.

On the facts of this case, forecast Defined Costs can only be relied upon should the timeframes of the assessment provisions of clause 63 be adhered to.

Points to Note

The court’s interpretation is both interesting and controversial:

  • The ‘switch date’ of clause 63.1 was not clarified by the court. However, the following can be assumed:
    • Contractual time provision followed – an assessment should be based on forecast Defined Cost.
    • Contractual time provision not followed and works completed before quotation – an assessment is based on actual Defined Cost.
    • Contractual time provision not followed and works only partially complete – left unclear by court’s decision.

 

  • The assessment of compensation events is a prospective exercise. It is designed to provide the employer with certainty over what the effect of an event will be. By relying on a retrospective assessment, the Court’s decision may lead to employers failing to notify an instruction as a compensation event in the hope that actual records are relied upon rather than forecasts.
  • A practical solution, and one that is catered for by the contract, would be for contractors to notify a breach if an employer fails to confirm a compensation event or make a proper assessment in the time allowed, which could prevent an employer from gaining the benefits of that breach.
  • The danger for employers is that if they fail to make an assessment and/or confirm a compensation event in the hope that the eventual actual Defined Costs are lower than any quotation, is that in the event the actual Defined Costs turn out to be higher, they will be forced to pay that cost.
  • Careful consideration must be given to the ‘mutual trust’ provision of clause 10; a party may have a case if it can prove that the other is seeking to improperly exploit them by failing to notify an instruction for financial gain.

The NEC4 has not addressed the contentious retrospective v prospective debate of clause 63.1. This opens up the opportunity for employers or contractors to bully sub-contractors. The findings have left many in the industry to continue to “grope in the dark” over the Court’s interpretation.

 

A full transcript of the case can be read here.

 

An article written by Alexandre Dansette and Tom Lamb


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Disclaimer: This article is provided for information only and is not intended to provide legal advice. No reliance should be placed on the information contained herein.