In the recent case of Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited the Northern Irish Courts considered the assessment of a Compensation Event under the NEC3 Professional Services Contract.
The Executive engaged Healthy Buildings as Consultant under two NEC Professional Service Contracts. An instruction was then issued by the Executive changing the Scope of Work in January 2013 and at this point the Executive ought to have notified the event as a Compensation Event and instructed the Consultant to submit a quotation.
Instead, the Executive notified the event in May 2013 and the Consultant submitted a quotation at that time, which was then rejected by the Executive, which assessed the effect of the Compensation Event at zero.
The key question was then how the assessment should be divided between work already done (actual costs) and the work not yet done (forecast costs)?
It had been understood that both the Contract, and the Explanatory Notes which accompany it, were clear on the process to be followed. Clause 63.1 requires that the assessment of Compensation Events consider the impact of the event on: “(1) The actual Time Charge for the work already done; and (2) the forecast time charge for work not yet done”; importantly the Clause then states: “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 Explanatory Notes go on to provide that the switch date between actual and forecast is ascertained by when the Employer should have first notified the Compensation Event: “the switch date will be the date of the communication which led to the compensation event”.
Instead, the Court favored the Executive’s approach, deciding that where the assessment took place after the work had actually been done, evidence of what the Consultant actually did was both relevant and the best evidence available to assist the Court in assessing the compensation due. This would appear to promote an approach where an employer can proceed to not notify and assess Compensation Events as and when they arise, instead delaying notification and carrying out an assessment by reference to only known actual costs.
It remains to be seen whether the Scottish or English Courts will follow this judgment and, even in difficult cases, will apply the Compensation Event mechanism as the contract intended.
One element of the NEC 3 form of contract is that events are dealt with as and when they arise, which brings with it an element of forecasting. Whilst further judicial guidance is awaited, parties operating under the NEC3 Professional Services Contract should seek to timeously notify Compensation Events and submit quotations as required under the contract. Doing otherwise leads to uncertainty as to how an assessment is to be carried out and risk as to determining the compensation properly due.