Healthy buildings - unhealthy contract?

There has been debate over how compensation events should be assessed more or less since the NEC was first published. Should they, as some say people say, be forecast as the majority of the clauses in the contract seem to suggest. On the other hand, where one has the actual information, shouldn´t that be used. This debate has been brought into sharp focus by the recent Northern Ireland case of Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017].

This is the latest in a series of judgments arising out of a contract between these parties for the provision of asbestos surveying services to housing stock in various locations across Northern Ireland. The form of contract involved is an NEC3 PSC (professional services contract) 2005 Option G with various standard and bespoke amendments. However, the relevant terms under consideration are common to other NEC3 forms, including the main contract ECC, so the court guidance is of general application across the NEC3 suite of contracts.

The parties have reached the Court of Appeal previously on an argument over what amounts to notification of a compensation event (in particular, can an instruction also be a notification and, if given in a meeting, are the minutes sufficient to meet the test at clause 13.7). This is, in effect, a continuation of the same argument. The parties are now asking, the court having decided that there was a compensation event, what information is relevant to the assessment of a compensation event. The application before the court related to two linked questions. The first was whether the effect of a compensation event was to be calculated based on a forecast or utilising actual cost incurred information if that were available. The second question was whether the actual costs are relevant to the assessment of compensation events. So, simply, can you actual cost records and are they relevant if you can.

The first point to note is that these are very broad questions being asked of the court which, at face value, would seem to lead to a general application of how the compensation event mechanism under the NEC3 form of contract is to operate. That is not the case. While the court has taken these wide questions, it is quite clear from the judgment that the decisions are, as one would expect, based on the factual circumstances of the case before it. This is of great significance when those facts are considered as the application may not be as wide as it first appears.

The key facts here are that during a meeting on 10 January 2013, the Employer changed the scope of the services - the change was to alter an assumption which meant that significantly more testing was required increasing cost but having no impact on completion. Neither party, at that point, notified the other of a compensation event. Therefore the quotation and assessment procedure of the contract was not engaged. Work under the changed scope of services started to be carried out and on 21 May 2013 the consultant notified that the 10 January instruction was a compensation event. In August and October 2013 quotations were requested and such quotations were provided within ten days.

It is not clear from the judgment how those quotations were formulated but, in the context of the questions being asked it seems safe to assume that they were prospective, making a forecast based on the information that had been available in January, or otherwise prior to the work being carried out. Whether there was any element of retrospective or actual cost assessment is, again, not clear. In November the Employer rejected both quotations preferring its own assessment of nil value.

There was an adjudication, but no details of the adjudicator´s findings are provided in the judgment.

In very simple terms, neither party complied with the contract procedure starting point in notifying a compensation event. By the time the notification was given a large amount of work had been completed. By the time the court reviewed the matter all of the work subject to the compensation event had been carried out.

At paragraph 35 of the judgment the court deals, head on, with the second question it was posed - whether the actual costs are relevant to the assessment of compensation events. It found as follows:

“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. Therefore the answer to the second question posed by the parties is yes unless the court as Tribunal is precluded from looking at the actual time charges by reason of the contract”

It would be easy, having read that part of the judgment, to make broad and sweeping generalisations about whether the court was following the spirit or even the letter of the NEC3 approach to compensation events. However, the point is then clarified at paragraph 38 of the judgment where the court states:

Here, where the "quotation" or "forecast" took place after the actual work was done in 2013 the defendant is seeking to exclude relevant evidence as to the competence or promptness of the consultant’s action and the "cost and time which were reasonable [sic] incurred". It seems to me that the court would need to know of these matters to make such an assessment.

So what the judgment is really concluding is that where a quotation is only produced after some or all of the costs associated with that quotation have been incurred then the actual cost should be considered. The dividing line in clause 63.1 of the NEC3 in fact says much the same thing:

“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 form of words in the NEC3 does not say whether you should use the actual instruction date or when the instruction should have been given. Perhaps this is an area for common sense, or even some application of mutual trust and cooperation. In either event, it is clear that the judgment of the court is not a broad application to all compensation events but only a failing provision in case the parties have not done what they were supposed to do.

That leads on to the first question, whether actual cost records can be used under the contract in assessing a compensation event. The starting point for the court was that it was assessing the “fair and reasonable “compensation” due under the contract”. It is perhaps unfortunate that, in this context, the word compensation is used by the NEC form of contract as it possibly does not express the intention accurately and starts off on the path of looking for a damage caused by a breach or event. The emphasis should be on the latter half of the sentence (under the contract) rather than the earlier part (fair and reasonable compensation). Nevertheless, the court proceeded to consider various authorities, including Keating on NEC3 and made a number of observations.

Paragraph 48 of the judgment is important. It identifies that:

“While in the wording of the contract the word "forecast" is applicable if what should be done is done what in reality the consultant was doing in August and October 2013 was making a claim for work done.”

This is further explained at paragraph 50:

“I consider 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" is in reality a claim for work that has been done by the time of the quotation on behalf of the consultant.”

What can be expected to become a standard submission in NEC adjudications then followed at paragraph 54:

“Faced with seeking to award compensation to the consultant here for any cost 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?”

Finally, at paragraph 58:

“I accept that there might be a degree of ambiguity in the contract with regard to the questions which I have to determine. However pursuant to the authorities I am not left in "a real state of uncertainty as to the correct interpretation" of the contract. I am satisfied that this is a situation where the right course to adopt is also the lawful course to adopt.”

The court therefore found that actual cost records should be used in order to give business efficacy to the contract and to achieve the result with fairly compensated for the compensation event. However, and this is vital, that was done in the context of the contract not having been complied with in terms of the expected time periods. The judgment does not deal with the position of the parties arriving in the same position before a judge but having complied with the time requirements of the contract.

The more difficult issue which this judgment started to try and grapple with is what information you use during the process of assessing the correct value for a compensation event where the assessment is being carried out by different people, at different times, with different amounts of information available and, potentially at least, with different purposes behind the decision making.

 

 

One of the key reasons for having a contract at all is to bring certainty to commercial relationships, and this was reinforced by the Supreme Court in the recent case of Arnold v Britton [2015]. Here the Supreme Court made clear that:

“…while reliance must be place on commercial common sense, this should not undervalue the importance of the language of the provision [17].

Commercial common sense cannot be invoked by reference to facts which arose after the contract was made; it is only relevant to ascertaining how matters would or could have been perceived as at the date of the contract. The fact that an arrangement has worked out badly or even disastrously is not a reason for departing from the natural meaning of the language; neither is the fact that a certain term appears to be very imprudent. It is not the function of the court interpreting a contract to relieve a party from the consequences of imprudence or poor advice [19-20].

Moreover, there exists no special principle of interpretation that service charge clauses are to be construed restrictively [23].”

Interestingly, this Supreme Court decision was not cited or apparently relied on by the court in the present case. Instead the court relied on the older decision in Rainy Sky S.A. v Kookmin Bank from 2011 where the Supreme Court then emphasised the importance of commercial common sense.

Given the reasoning in Arnold v Britton it is to be hoped that, should the question of use of actual costs where the contract is clearly worded to base assessments and quotations on forecasts, come before a higher court (Court of Appeal or Supreme Court), clear guidance to follow the contract will follow. The possibility of multiple different ways of calculating the value of the same event coming to significantly different conclusions is neither helpful to the parties nor the industry as a whole.

The prospective nature of the compensation event process in the NEC form of contract is well known. It is time, after over 25 years of the process having been in existence, to leave behind the notions of how we want the assessment to be carried out after the event and simply apply the contract in the way it has always been intended to operate.

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