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Back in 2017, Deeny J published his decision on Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited  NIQB 43, a case that Cleaver Fulton Rankin’s construction law experts were involved in on behalf of the Plaintiff.
The case was deemed the first of its kind by a UK court in relation to the assessment of compensation events under the popular NEC form of contract.
In his decision, the Judge considered the correct approach to the assessment of compensation events under an NEC3 contract, and considered the extent to which an assessment is required to be made on the basis of forecasts, as opposed to actual cost information when that assessment is being made after the impacts of a compensation event are known. This “forecast vs actual” issue (sometimes referred to as the “prospective vs retrospective” debate) is one which arises frequently in disputes under the NEC3 form.
Despite the prospective wording of the NEC3 contract, the Judge, asking “why he should shut [his] eyes and grope in the dark when the material is available to show what work they actually did and how much it cost them”, permitted a retrospective approach, in line with the general approach to assessment of damages.
For a more detailed overview of the background of the case, please see our Case Note: Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited  NIQB 43, 2 June, 2017.
A similar approach was subsequently taken by Edwards-Stuart J in Fluor v Shanghai Zhenhua Heavy Industry Ltd  EWHC 1 (TCC). Although considering the issue in passing, and in relation to extensions of time rather than additional cost, the Judge stated:
“There has been an extensive debate about the correct approach to delay analysis. … A prospective analysis … does not necessarily produce the same answer as an analysis carried out retrospectively. The former is the correct approach when considering matters such as the award of an extension of time … I agree that some form of retrospective analysis is required”.
It appears that the drafters of the NEC have taken on board these decisions and comments from the courts (which it should be noted align with commentary in Keating on NEC3 on the general assessment of damages) in the changes introduced by the NEC4 Engineering and Construction Contract, as well as other forms within the NEC4 suite, such as the Term Service Contract and Professional Services Contract.
Clause 63.1 of the NEC4 now introduces the concept of a ‘dividing date’ for assessing compensation events. That is, if a compensation event arises from a communication of the Project Manager or the Supervisor, the ‘dividing date’ is the date of that communication. For others, it is the date the compensation event is notified.
In respect of cost, the purpose of the dividing date is to distinguish between the actual Defined Cost (occurring before the dividing date) and the forecasted Defined Cost (occurring after the dividing date). These retrospective and prospective elements are then used to determine the overall assessment of cost for a particular compensation event.
Extension of Time
Delays under the NEC4 are now assessed under Clause 63.5 by reference to the Accepted Programme current at the ‘dividing date’. As such, the starting point is the Accepted Programme. In making the assessment, under Clause 63.5, only operations which the Contractor has not completed and which are affected are changed. According to the NEC4 user guide, this will be a factual test to be applied.
It is important to note that if the Accepted Programme current at the ‘dividing date’ shows an operation as complete, but which in fact is not at the assessment date, this will need to be considered in the assessment of the impact of the compensation event. Conversely, operations which are not complete on the relevant Accepted Programme, but which are in fact complete at the assessment date will need to be considered in such assessments.
Although it remains to be seen whether the “dividing date” concept introduced by NEC4 will resolve the issues which gave rise to the Healthy Buildings case, and the wider “prospective vs retrospective debate” in relation to the assessment of compensation events, it is welcomed as a sensible, logical approach and one which Employers, Contractors and Project Managers entering into, or who have already entered into, NEC4 contracts, should be fully aware of in terms of its application.
This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Construction & Procurement team at Cleaver Fulton Rankin for further information or advice.