Compensation events − the debate goes on

In the well-publicised case of Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Ltd [2017] NIQB 43, Northern Ireland’s High Court of Justice ruled on the approach to assessing compensation events under an NEC3 Professional Services Contract (PSC) 2005 edition.

It is one of the first cases where the courts have been asked to consider compensation events provisions in NEC contracts. Although not strictly binding in Hong Kong, the much-debated decision provides an insight on how courts and arbitrators here may approach the assessment of compensation events under NEC3 and NEC4 service and works contracts.

Background to the case

In summary the client, a social housing landlord, instructed a change to the scope of asbestos surveys being carried out by the consultant in January 2013. The consultant notified the instruction as a compensation event in May 2013 and, after the work had been completed, the client requested quotations in August and October 2013. The consultant provided these in less than two weeks but they were rejected by the client, which assessed the compensation events as zero. The client then asked to see the consultant’s actual records and costs but the consultant refused and, following an adjudication, the parties took the issue to court.

The court held that assessment of the effect of an NEC compensation event was to be calculated by reference to the actual cost incurred where the contractual time provision for assessing the compensation event had not been followed and the relevant works completed.

In particular the court said that it would be a strained and unnatural interpretation to rely on the word ‘forecast’ in clause 63.1 to prevent access to the actual records when the forecast was a claim for work that had been done by the time of the quotation. Clause 63.1 of PSC 2005 provided, ‘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’.

Implications of decision

It seems that one of the main factors which affected the court’s decision was that the work had already been carried out. Under common law, and in general, the assessment of damages should be based on actual loss. Hence the court’s views on the relevance of the actual cost records.

Arguably, this creates a strain between the various provisions in NEC and the common law principles of damages. The underlying spirit and indeed many of the express provisions of NEC3 are intended for the parties to address issues as they arise during the works (hence the prospective and forecast provisions), including the assessment of compensation events.

Given the court’s findings to use actual cost for a retrospective assessment of a compensation event, it would be interesting to see whether this would encourage retrospective assessments in NEC contracts with the parties not following the contractual mechanism for assessing changes in prices – a practice which could undermine the objectives of NEC.

It appears the issue will remain live for some time to come as the contents of clause 63.1 also appear in the NEC3 and NEC4 Engineering and Construction Contracts (ECC), though with more clarification on the dividing date between actual and forecast work in contracts published since 2013. However, under the Hong Kong government’s standard amendments to NEC forms, the assessment of compensation events involving changes to the prices adopt a similar mechanism for valuation of variations under traditional Hong Kong government contracts.