NEC CONTRACTS ASSESSMENT OF COMPENSATION EVENTS - NEC3 and NEC4

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1 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 Those assessments were issued on 14 November 2013 (Belfast) and 21 November 2013 (North East) and valued the compensation Events at 0. 1

2 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: Clause 63.1: "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." "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 2

3 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: Clause 65.1: 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." "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. 3

4 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 4

5 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). 5

6 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. 6

7 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. 7

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