What’s it worth guv’nor? Forecast v actual costs assessments pursuant to NEC3

The High Court in Northern Ireland grappled with the issue of the valuation of Compensation Events pursuant to the NEC3 in a judgment delivered this year.

The High Court in Northern Ireland grappled with the issue of the valuation of Compensation Events pursuant to the NEC3 in a judgment delivered this year.

The form of contract under consideration was the NEC3 Professional Services Contract (based on Option G) and the argument before the court was about different interpretations of the contract, which in turn would affected the valuation of the work.

The circumstances of the case are that a landlord (N) of a large housing stock had agreements with an asbestos consultancy (H) in relation to surveying of its properties.

It was “agreed” (due to Court of Appeal proceedings relating to that issue) that N communicated an instruction changing the scope of the works under those agreements at a meeting on 10 January 2013. The instruction was effectively that more detailed asbestos surveys were required going forward.

Contrary to the NEC requirements, N failed to:

  • Notify this instruction to H as a Compensation Event. 
  • Instruct H to submit a quotation in relation to the assessment of the effects of that Compensation Event.

Rather, it was H that notified N that it was treating the 10 January 2013 instruction as a Compensation Event, albeit H did not do so until 21 May 2013. N duly sought quotations (albeit some yet further months after).

Clause 63 requires such quotations to assess the effects of the Compensation Event and clause 62.3 entitles an employer such as N to reject such quotations and make its own assessment pursuant to Clause 64.1.

By the time H provided the quotations, it had already carried out the relevant work. Despite this, H’s quotations were based on theoretical forecast costs.

In November 2013 N rejected H’s quotations and assessed the effect of the Compensation Event as being zero.

The question for the court was whether the assessment of the effect of the Compensation Event should be calculated by reference to forecast costs or the actual cost incurred by the consultant; and indeed whether or not actual costs were relevant to any assessment pursuant to clauses 60 to 65.

Clause 61.1 provides for Compensation Events which arise from the employer giving an instruction and states:

“… the Employer notifies the Consultant of the compensation event at the time of giving the instruction … He also instructs the 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 changed decision into effect.”

Clause 62 deals with quotations for compensation events:

62.1: After discussing with the Consultant different ways of dealing with the compensation event which are practicable, the Employer may instruct the Consultant to submit alternative quotations. The Consultant submits the required quotations to the Employer and may submit quotations for other methods of dealing with the compensation event which he considers practicable.

The language of the NEC3 does create a “forward thinking” ethos and this is because where an employer creates a Compensation Event the intention is that the employer should know how much it will cost, or what a range of options might cost, and decide accordingly how to proceed.

H sought to assert that this ethos meant that the correct assessment to employ was a forward thinking one, basically what would have been anticipated at the time of the instruction in January 2013. H drew further comfort from sub-clause 65.2, which reads:

“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.”

But in circumstances where the actual costs are known, the court took the view that not only was the actual contemporaneous evidence relevant, but was “clearly the best evidence to assist the court in calculating the ‘compensation’ to which the consultant is entitled.”

In the present case N had never made an assessment based on a forecast, so there was no question of later trying to revise it and clause 65.2 was found to be inapplicable.

In what is still one of a relatively small group of cases concerning NEC3, the judge made reference to “the spirit of mutual trust and co-operation” that is central to the NEC3 ethos. The court found that H’s refusal to disclose actual contemporaneous records (fixated as it was on forecast costs) was contrary to this ethos.

The judge also agreed with the eloquent decision in a 120-year old case in which Lord Macnaghten had stated:

”If the question goes to arbitration, the arbitrator’s duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?”

Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited

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