The recent Northern Irish High Court decision in Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2017] NIQB 43 has shed significant light onhow to assess compensation events under an NEC 3 contract where the compensation event is being retrospectively assessed. In a telling judgment, Deeny J noted, 'Why should I shut my eyes and grope in the dark when the material is available.'

The facts

The Northern Ireland Housing Executive (the 'Employer') was the landlord of a number of publicly owned houses around Belfast and the North East of Northern Ireland. The Executive engaged Healthy Buildings (the 'Consultant') in December 2012 as an asbestos survey consultant in relation to two separate Asbestos Services Contracts in the form of NEC3 Professional Services Contract (2005, as amended by 2006).

In January 2013, after the commencement of the works, the Employer issued a variation, requiring the Consultant to carry out more detailed surveys. The Employer did not notify this change as a compensation event under clause 60.1(1) of the NEC3 as it should have done. Four months after the variation, the Consultant issued a notification that the change amounted to a compensation event. The Employer then sought quotations from the Consultant in August 2013 and October 2013 for the compensation event. By this time the additional works had already been carried out. The Contractor provided the requested quotations to the Employer. The Employer rejected the quotations and assessed the impact of the Compensation Event as having zero impact on the costs. The additional quotation was therefore rejected.

Initial proceedings

The Consultant disagreed with the Employer's assessment. Procedurally, this matter was first referred to the adjudicator and then to the High Court. At adjudication, it was decided that the instruction amounted to a compensation event and the Employer should pay for the cost of the change of works. The decision was challenged in the High Court of Northern Ireland in accordance with the terms of the appointment. The High Court held that the decision was enforceable.

The Employer's case

The Employer contended that the claim had to be quantified by reference to actual costs as the work had been carried out at the time of the assessment, and sought disclosure of the Consultant's Actual Cost records.

The Consultant's case

The Consultant argued that the compensation event should be assessed with reference to the forecasted costs, relying heavily on clause 63.1, 63.6 and 65.2 of the NEC3. Specifically, the Consultant considered that the Employer should have instructed the Consultant to submit a quotation at the same time as its initial instruction. The Consultant contended that that 'quotation' (which would have occurred at the time of the initial instruction) for the work should be considered as the 'forecast'. Accordingly, evidence of its actual costs was irrelevant.

Appeal to the High Court

The parties disagreed over whether the Consultant's records of actual cost were relevant to the assessment after the compensation event. The High Court focused on two questions:

  1. Should the effect of the compensation event be calculated by reference to the forecasted charges or the actual cost incurred by the Consultant?
  2. Were actual costs relevant to the assessment process for compensation events?

Judgement

In this case Deeny J was tasked with assessing the, "fair and reasonable 'compensation' due under the contract to the consultant for the effect on it of the employer's change of instruction on 10 January 2013.'

With regards to the relevance of the actual costs documentation, the court noted:

"Evidence from time sheets and other material, of what the consultant actually did in that period, particularly with reference to the change in instructions, is not only relevant evidence but clearly the best evidence to assist the court in calculating the "compensation" to which the consultant is entitled."

Deeny J dismissed the possibility of relying on a forecast where it prevents the ability to rely on the best information available. The Judge therefore concluded:

"Faced with seeking to award compensation to the consultant here for any costs to it as a result of the instruction of 10 January 2013 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?"

With regards to the two questions, the judge answered these in the affirmative, noting that the actual costs were indeed relevant and resultantly ordering discovery of the Defendant's actual costs.

Summary

Whilst the decision in this case may, at first blush, appear surprising having regard to the onus on the part of an Employer to seek a forecast of costs from a consultant, Deeny J has acknowledged that projects do not always progress as they are intended, and where the terms of the contract have not been fully implemented, it would be counterproductive to ignore relevant evidence. As specifically addressed in this case, it would appear that in the event of a failure to address a compensation event in the time allocated in the NEC 3 contracts, the eventual assessment will be with regard to the actual costs incurred in the event, not the forecast that would have been made at the correct time.

The impact that this decision will have in practice remains, and in particular whether it will result in employers seeking to avoid perhaps inflated quotations by not seeking an early quotation but instead relying upon an assessment of actual costs, remains to be seen

It is worth noting that this is a Northern Ireland case and is therefore not strictly binding on the Courts of England and Wales. Nevertheless, the courts of England and Wales are likely to refer to this decision if such a dispute arises under the English jurisdiction.