Neutral citation: Farrelly (M & E) Building Services Ltd v Byrne Brothers (Formwork) Ltd [2013] EWHC 1186 (TCC).

NEC contract topics: clause 63.1, assessment of compensation events, prospective versus retrospective assessment.

Form of contract: NEC3 Engineering and Construction Subcontract.

Main areas of law: Enforcement of adjudication decisions, principles of natural justice, stay of execution on grounds of insolvency.

 

Byrne Brothers was appointed by London Underground Limited as the main contractor for the refurbishment of Hammersmith Underground Station. Under a subcontract dated 21 March 2011, Byrne engaged Farrelly (M&E) Building Services to carry out mechanical and electrical works. The agreement was based on an NEC3 subcontract with bespoke amendments.

A dispute arose concerning the valuation of compensation events. Farrelly referred the matter to adjudication. Byrne contended that the method for assessing direct costs had shifted from a prospective to a retrospective basis. Additionally, Byrne argued that Farrelly was in concurrent delay, which, although not affecting Farrelly’s entitlement to an extension of time, would serve as a defence against time-related costs.

Clause 63.1 of the NEC3 contract, dealing with compensation events, became central to the adjudicator’s inquiries. The adjudicator invited both parties to provide submissions on whether events should be assessed prospectively or retrospectively and, if both approaches were applicable, when the switch from one to the other should occur. Farrelly responded stating:

 

“The approach of the NEC 3 Sub-Contract, and clause 63.1 is clear. It is based on prospective forecasts of time and costs. “

 

Byrne responded by providing a more detailed statement to the adjudicators questions stating:

 

“Clause 63.1 provides a 'switch date' based on the date that an instruction was issued (to provide a quotation) or should have been issued. Before that date the costs should be assessed on the basis of actual Defined Costs incurred. After that date the assessment is of the effect on forecast Defined Cost of work not yet done at that date. However, the switch date moves each time a subsequent instruction is given to revise a quotation. In the instant case the 'switch date' for each compensation event moved to a date when the vast majority of works had been completed. Accordingly, the compensation events are to be assessed based on the actual Defined Costs incurred by FBS or 'retrospectively'.”

 

Byrne’s response to the adjudicator also referred to clauses 62.3 to 62.5 and they attached a commentary on Clause 63.1 from Keating on NEC3 which referred to the four situations in which the Project Manager assesses a compensation event under clause 64.1. The commentary from Keating stated;

 

“Leaving aside the quotation being out of time, failure to submit a program or alterations thereto, or the latest programme not being accepted, the most general ground on which the Project Manager can make his own assessment is if he decides that the Contractor has not assessed the compensation event correctly in a quotation and he does not instruct a revised quotation.”

 

The adjudicator concluded that the switch date remained fixed because Byrne had failed to comply with the NEC3 contract procedures for compensation events, including not instructing quotations properly or assessing under clause 64.1 when FBS missed its own deadlines.

The adjudicator rejected Byrne’s argument of concurrent delay on the basis Byrne’s delay analysis was retrospective, whereas the NEC3 required prospective assessment per clause 63.1. The adjudicator didn’t reject the delay claim on evidentiary grounds but due to Byrne's use of the wrong methodology.

The parties did agree upon a procedure whereby the adjudicator would issue a draft decision on the substantial issues, with any changes to be limited to those falling under the slip rule. The adjudicator’s draft, issued on 6 December 2012, prompted objections from Byrne. Most of Byrne’s responses were rejected as impermissible further submissions. The final decision, issued on 18 December 2012, awarded Farrelly £561,194.92.

Byrne did not pay the awarded sum and instead questioned Farrelly’s solvency. Byrne requested accounts and indicated that it might argue the adjudicator’s decision was unenforceable on natural justice grounds. Farrelly initiated court proceedings.

 

The court was asked to determine whether Byrne had waived its right to raise a natural justice challenge by not objecting earlier in the adjudication process. It also had to decide whether the adjudicator’s decision on prospective assessment and his rejection of the concurrent delay defence breached the rules of natural justice. Lastly, the court considered whether enforcement of the adjudicator’s award should be stayed due to Farrelly’s financial position.

 

The Court ruled that Byrne had not waived its right to raise the natural justice challenge. A party only waives such a challenge by a clear and unequivocal act with knowledge of the right to object. Byrne’s conduct did not meet this threshold.

On the issue of natural justice, the Court found that the adjudicator had not “gone off on a frolic of his own.” He had sought submissions on the question of prospective versus retrospective assessment and had not decided the matter based on a ground not advanced by either party. The adjudicator was entitled to conclude that the assessment should be prospective and that Byrne had failed to establish concurrent delay.

The Court also found no basis to conclude that Farrelly was insolvent. Byrne had not presented sufficient evidence that Farrelly’s financial condition had materially changed since entering into the subcontract. There was no general duty for a party seeking enforcement to disclose financial information unless a proper case for a stay had been made. Byrne’s request for a stay of execution was therefore refused.

 

This case reinforces the importance of the prospective method of assessment in compensation events under clause 63.1 of the NEC3 contract. The adjudicator’s emphasis on the difference between prospective and retrospective assessments aligned with the structure of the NEC3 approach, which favours forward-looking contract management.

The decision confirms that arguments surrounding concurrent delay must be clearly evidenced and are insufficient to defeat claims for time-related costs where the delay analysis does not align with the contractually appropriate basis of assessment.

This case also offers practical lessons in how courts treat adjudicator conduct. So long as an adjudicator seeks submissions on material issues and does not decide matters on new or unheralded grounds, enforcement is unlikely to be denied.

Lastly, the judgment clarifies that raising issues about solvency requires more than suspicion or general assertions. The courts will enforce adjudicators’ decisions robustly unless there is compelling evidence of risk to the judgment sum.