NIHE v Healthy Building (2017)
Neutral citation: Northern Ireland Housing Executive v Healthy Building (Ireland) Ltd [2017] NIQB 43
NEC contract topics: compensation events, defined cost, prospective (forecast) versus retrospective (actual) cost
Form of contract: NEC3 Professional Services Contract (PSC) Option G
Main areas of law: disclosure obligations, interplay between contract mechanisms and common law principles of assessing loss
Background and the Dispute
The dispute arose from two NEC3 Professional Services Contracts (2005 edition) between the Northern Ireland Housing Executive (the employer) and Healthy Building (Ireland) Ltd (the consultant). The consultant was engaged to conduct asbestos surveys in Belfast. On 10 January 2013, the employer issued an instruction changing the scope of works. This constituted a compensation event under the contract. However, contrary to the contractual procedure, the employer did not notify the compensation event.
The consultant notified the compensation event four months later, on 21 May 2013, after the relevant work had already been completed. Quotations were submitted in August and October 2013. The employer rejected both quotations and assessed the compensation events at zero value. The consultant referred the matter to adjudication, succeeded, and was paid. The employer then brought the matter before the High Court.
The central contractual provisions discussed included clause 63.1, which addresses how changes to prices are assessed. It provides that “the changes to the Prices are assessed as the effect of the compensation event upon: the actual Time Charge for the work already done, [and] the forecast Time Charge for the work not yet done.” Clause 65.2, which states that a forecast on which an assessment is based is not revised if later shown to be incorrect, was also raised by the consultant.
Legal Issues
The court was asked to resolve whether the consultant was required to disclose its actual cost records, or whether forecast costs alone could be relied upon to assess the compensation event. The consultant contended that the contractual mechanism required a prospective assessment using forecast costs, and that clause 65.2 insulated the forecast from challenge based on subsequent records. The employer sought discovery of the actual time charges and maintained that, since the work had been completed, the assessment should be retrospective and based on actual costs.
The court therefore had to interpret the meaning and application of clauses 63.1 and 65.2 in the context of an unnotified instruction where the work had already been carried out, and determine whether the consultant’s actual records were relevant and disclosable.
Judgement
The court held that the employer was entitled to disclosure of the consultant’s actual time and cost records. It concluded that the provisions of clause 63.1 allowed the court to assess the change in prices based on actual Time Charges where the work had already been done. The judge found that, although NEC contracts contemplate a prospective assessment, that was predicated on the employer complying with its obligation to notify the event and request a quotation at the appropriate time.
Referring to clause 65.2, the judge noted that it applied where a forecast was accepted and implemented. In this case, the quotations were rejected and the assessment was set at zero, so the clause did not apply.
The judge emphasised that “evidence, such as time sheets and other material, illustrating what the consultant actually did during the compensation event... is not only relevant evidence but clearly the best evidence” to calculate the proper compensation. He described the consultant’s argument that forecast costs alone should be used as “a strained and unnatural interpretation” of clause 63.1. In his words: “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?”
NEC contract learning points and implications for the construction industry
The decision provides clarity on how NEC compensation events may be assessed when contractual procedures are not followed. The court confirmed that, while the NEC3 PSC does include mechanisms for prospective assessment using forecasts, these do not override the use of actual cost data where the work has already been completed and no timely quotation was requested.
This judgment reinforces the importance of procedural compliance. Contractors and consultants should ensure timely notification of compensation events and submission of quotations. Employers must also fulfil their notification duties. Failure to follow procedures may open the door to retrospective assessment using actual records, despite the NEC’s usual prospective framework.
Clause 63.1 distinguishes between actual and forecast Time Charges based on when the instruction was given. However, the court interpreted this clause in a way that aligns with common law principles of assessing compensation based on actual loss. The decision suggests that forecast costs may not be sufficient if the event and its consequences are in the past and records are available.
There is potential tension between this approach and the intended NEC process. As noted by legal commentators, if parties use this judgment to justify delay in notification or assessment, it could undermine the NEC's proactive ethos. However, the court’s reasoning aligns with the contract’s objective of mutual trust and cooperation, particularly where a party has unilaterally failed to operate the contract as intended.
The court delivered a practical judgment affirming that actual costs can be considered in assessing compensation events under NEC3 PSC where the event has occurred and been completed before quotation. While the contract’s language supports prospective assessments, the court preferred a more commercial interpretation based on the realities of performance and record-keeping. Practitioners using NEC contracts should take note of this judgment and ensure strict adherence to contractual mechanisms to avoid similar disputes.