Articles from the Silver Shemmings Ash Team on contractual matters, recent case law changes and items of interest in the construction and property world

Notification Of Compensation Events Under The NEC3 Contract by Richard Silver

November 2, 2018 | Silver Shemmings

One of the most important provisions within the NEC3 form of Contract is Clause 61.3, which states that:

“if the Contractor does not notify [the Project Manager of] a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not”.

The question that naturally follows from this provision, is whether notification within eight weeks is a condition precedent to a change in the prices, the Completion Date or a Key Date? In other words if the Contractor doesn’t give such a notice in time, does the Contractor lose its entitlement?

This question is particularly important given that Contractors do not always give the Project Manager notice of a compensation event within eight weeks of becoming aware of the event or sometime at all. This is because of a variety of reasons such as:

• Not wanting to upset the Employer/Project Manager with news that there is a delay to the Completion Date or a Key Date

• Not being aware of the obligation to notify

• Being more focused on the work it is completing than issuing a notice of a compensation event

• Not being aware that the delay is caused by a compensation event

Before delving into the question of whether notification within eight weeks is a condition precedent, it is worth explaining some of the terms:

What is the NEC3 Contract?

The NEC 3 Contract is the shorthand name for the NEC Engineering and Construction Contract 3rd edition and is widely used for civil engineering projects in the UK

What is a Compensation Event?

Compensation events are events which are usually not the fault of the Contractor and change the cost of the Work or the time needed to complete it. This means that should a compensation event occur, the amount due to the Contractor and/or the Completion Date of the Contract is likely to be reassessed. However, it must be noted that the NEC3 Contract limits compensation events to those, and only those, identified in the Contract. If an event is not identified in the Contract as being a compensation event, then no claim should be submitted independent of whether or not there has been a delay

Clause 60.1 lists nineteen compensation events under NEC3 and further events are listed in the secondary options. An example of some of the compensation events that are listed in Clause 60.1 are:

• The Project Manager gives an instruction changing the Works Information except
o A change made in order to accept a Defect
o A change to the Works Information provided by the Contractor for his design which is made either at his request or to comply with other Works Information provided by the Employer
• The Employer does not allow access to and use of a part of the Site by the later of its access date and the date shown on the Accepted Programme
• The Project Manager gives an instruction to stop or not to start any work or to change a Key Date
• A test or inspection done by the Supervisor causes unnecessary delay
• The Project Manager certifies take over of a part of the works before both Completion and the Completion Date
• The Employer does not provide materials, facilities, and samples for tests and inspections as stated in the Works Information

What is a condition precedent?

A condition precedent is a clause which one party must comply with before it is entitled to other rights or remedies

Many consider the requirement of notice of a compensation event within eight weeks to be a condition precedent to entitlement to a change in the Prices, the Completion Date or a Key Date. Failure to comply with this time limit time-bars the Contractor from being entitled to a change in the Prices, the Completion Date or a Key Date.

Is notice of a Compensation Event a condition precedent?

The clear intention of Clause 61.3 is that notification within eight weeks is a condition precedent to a change in the prices and the Completion Date, however this is subject to one very important caveat in the clause, namely that it does not apply where the Project Manager was obliged to give such a Notice. Clause 61.1 provides in this regard that the Project Manager is required to notify of a compensation event when giving an instruction or changing an earlier decision. So for any instructions issued by the Project Manager or changes by him of previous Decisions, the fact that the Contractor did not issue a notice of a compensation event, be it in eight weeks or otherwise, will not act as a bar to his entitlement.

This, obviously, is an issue that often arises and indeed is a matter that was put before me as Adjudicator in Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43

Facts of the case

1. There was an instruction to change the scope of the works which was communicated by the Executive to the Consultant at a meeting held on 10 January 2013. The Executive did not, however, notify this instruction as a compensation event under the terms of the Contract but ought to have done so

2. The Consultant notified that instruction as a compensation event to the Executive on 21 May 2013 and hence outside the eight week period provided at Clause 61.3

3. The Executive rejected the Consultant’s quotations on a number of grounds including the failure of the Consultant to issue a notice within eight weeks of the instruction

4. The dispute as to the effect of the compensation event was referred to Adjudication and I was appointed as the Adjudicator in this matter. I decided that the failure of the Contractor to notify of the compensation event within eight weeks did not prevent the Contractor from receiving its full entitlement as the compensation event related to an instruction issued by the Executive

5. The Executive appealed my decision

What was held in the case?

The Courts held, however, that the Consultant would be entitled to a change in the price and the completion date, notwithstanding the time-bar. This was because the Executive was obliged under Clause 61.1 to notify the Consultant of the compensation event at the time of giving the instruction and hence the time bar in Clause 61.3 did not apply

Author Richard Silver is Senior Partner at Silver Shemmings Ash. He is multi qualified as a Barrister, Solicitor & Chartered Quantity Surveyor with over 30 years of experience in the Construction Industry

Aside from his work globally as a legal advisor, his main focus is dispute resolution, encompassing the Construction, Building, Rail & Civil Engineering sectors. Having acted as Arbitrator, Adjudicator, Mediator, Lead Representative and Expert Witness on quantum, programme & planning he is widely experienced, as Lead Representative & Advocate, in all forms of Dispute Resolution

At Silver Shemmings Ash, we provide seminars and training alongside our core activities in contentious and non-contentious matters. The purpose of these is to facilitate a greater knowledge and understanding of construction and property law. There remains a considerable lack of training in such areas for companies and this is an issue which we are looking to address

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