In the recent case of Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd  NIQB 43 Northern Ireland’s High Court of Justice ruled on the correct approach to the assessment of compensation events under NEC3 Professional Services Contracts. The Court held that the assessment of the effect of a compensation event was to be calculated by reference to the actual costs incurred. This is perhaps one of the first cases where the Courts have been asked to consider compensation events provisions in NEC3. Although, not strictly binding in Hong Kong, the decision provides useful guidance as to how the Courts/Arbitrators here may approach the assessment of compensation events under NEC3in particular, for retrospective assessments.
In December 2012, the Plaintiff, Northern Ireland Housing Executive (the Employer), a landlord of publicly owned housing in Northern Ireland, awarded two Asbestos Surveying Services Contracts to the Defendant, Healthy Buildings (Ireland) Ltd (the Consultant). Both contracts were in the form of NEC3 Professional Services Contract (June 2005) as amended.
Under clause 60.1(1) of the contract, an instruction issued by the Employer which changes the scope of the works will amount to a compensation event. Clause 61.1 of the contract states that where a compensation event arises, the Employer should instruct the Consultant to submit a quotation for the cost of the change of the scope of works.
At a meeting on 10 January 2013, the Employer communicated an instruction to the Consultant to change the scope of the works. However, the Employer failed to notify the instruction as a compensation event under the terms of the contract, as it should have done. In accordance with clause 61.1 of the contract, the Employer should have instructed the Consultant to submit a quotation on 10 January 2013 in relation to the assessment of the effects of that compensation event on the contracts.
Four months later, the Consultant notified the instruction as a compensation event to the Employer. The Employer then sought and the Consultant provided quotations. In accordance with Clause 63 of the contracts, the quotations were to assess the effects of the compensation event in each contract. At the time of the Employer’s requests, the instructions had already been carried out by the Consultant.
Clause 62.3 of the contract entitles an employer to reject a consultant’s quotations and Clause 64.1 permits the employer to make its own assessment. In November 2013, the Employer rejected the Consultant’s quotations and assessed the effect of the compensation event as being zero under both contracts.
Previous adjudications and proceedings
The dispute regarding the effect of the compensation event was referred to adjudication.
The Employer applied for discovery of the Consultant’s records of its costs relating to the period after the change of instruction on 10 January 2013. This was resisted by the Consultant on the ground of relevance. At the hearing of the discovery summons, the parties agreed that two preliminary issues should be determined in advance of the substantive trial of the action, namely:
The High Court answered “yes” to both of the above two questions and held that the Consultant should therefore make discovery of all relevant documents relating to the actual costs incurred and time spent by it as a result of and following the Employer’s instruction of 10 January 2013. The Court asked “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?” Evidence from time sheets and other material of what the consultant actually did in the period during the compensation event, particularly with reference to change in instructions, is the best evidence, the Court said, to assist the Court in calculating the compensation to which the Consultant is entitled.
The Court also preferred the construction of the contract which was consistent with business common sense i.e. that the information as to actual time and cost expended by the Consultant should be made available to allow the court to fairly assess the compensation event.
The consultant submitted that it was not obliged to submit its actual costs as only its forecast costs were relevant to the assessment of the effect of a compensation event, since the amount claimed by the Consultant related to work carried out after 10 January 2013. It relied on Clause 63.1 of the contract which provides that “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.” However, the Court said that it 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” was in reality a claim for work that had been done by the time of the quotation on behalf of the Consultant.
The underlying spirit and indeed many of the express provisions of NEC3 are intended for the parties to address issues as they arise, including assessments of compensation events. In this case, the Court was addressing a situation where the parties had failed to assess the compensation event at the time when it arose, which required a retrospective assessment. Given the findings of the Court to use actual costs for a retrospective assessment of compensation events, it would be interesting to see whether this would encourage retrospective assessments in NEC contracts – a practice which could undermine the objectives of NEC. Although under the Hong Kong Government’s Standard Amendments to NEC ECC Standard Documents, the assessment of compensation events involving changes to the Prices adopt a similar mechanism for valuation of variations under traditional Hong Kong Government contracts.