A Practical Guide to Compensation Events - Chris Holden

7/31/2019 A Practical Guide to Compensation Events - Chris Holden

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NEC3A Practical Guide to Compensation Events

Chris HoldenLLB FRICS FBEng MCIArb

www.kerrigans.net


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Introduction

The intention of this presentation is toprovide a practical approach to dealing withcompensation events in terms of not only

what the contractual provisions require theparties to do, but also how the partiesshould proceed.


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Introduction

The philosophy of the NEC is that theContractor should not lose out, nor indeedshould he benefit from a windfall, as a

result of an event which the contract putsat the Employers risk, ie: compensationevents.


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Introduction

The approach adopted by the NEC inrelation to a contractors entitlement torelief, in terms of both additional time and

monetary relief is therefore quite differentfrom that of earlier standard forms such asthe ICE, GC Works 1, JCT and FIDIC forms.


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Introduction

The NEC does not contemplatecontractors claims, in the traditional(often advanced retrospectively) sense,

for extensions of time, additional cost, orloss and/or expense.

Under the NEC such matters are dealtwith by both parties proactively followingthe procedures set forth in the contractfor the notification and assessment of compensation events.


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Introduction

Clause 10.1 provides:

The Employer , the Contractor , the

Project Manager and the Supervisor shallact as stated in this contract and in aspirit of mutual trust and co-operation.


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Introduction

Clause 63.4 provides:The rights of the Employer and the Contractor tochanges to the Prices, the Completion Date and the KeyDates are their only rights in respect of a compensationevent.

Breaches of contract by the Employer arecompensation events (60.1).

The intended effect of Clause 63.4 is toexclude the parties common law rights.


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Introduction

Accordingly, since the Contractors only rightslie through the Contract, in order to maintainhis rights and obtain the relief to which he maybe entitled, it is essential that the Contractor

complies with the provisions of the Contract inrelation to the notification of events which mayconstitute compensation events.

No timely notice, no financial relief and noextension of time for completion, culpable delayand exposure to delay damages.


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CommunicationsClause 13.1 provides inter alia :Each instruction, certificate, submission, proposal,

record, acceptance, notification, reply and othercommunication which this contract requires iscommunicated in a form which can be read, copied and

recorded. i.e. in writing

Clause 13.7 provides:A notification which this contract requires is

communicated separately from othercommunications.

Notices of compensation events must be given inwriting and must be separate from othercommunications.


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CommunicationsMinutes in meetings of meetings will notconstitute valid notification, nor will it besufficient to include a notification within acommunication addressing other, unrelatedmatters.

Email would be compliant but it is recommendedthat whilst email may be used to forwardnotifications, the notification should not be inthe form of email itself.

In the interest of uniformity, use of standardforms (see example 1) is recommended. This willlead to greater clarity and certainty in complyingwith the provisions of the contract.


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Early WarningsClause 16.1 provides inter alia :The Contractor and the Project Manager give and earlywarning by notifying the other as soon as either becomesaware of anyany matter which could:

Increase the total of the Prices

Delay Completion Delay meeting a Key Date Impair the performance of the works in use

The Contractor may give an early warning by notifying theProject Manager of any other matter which couldincrease his total cost.

The obligation is not confined to notifying matters whichare/or may be compensation events. Use of a two-way

standard form is recommended (see example 2).


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Early WarningsClause 61.5 provides:

If the Project Manager decides that theContractor did not give an early warning of theevent which an experienced contractor couldhave given, he notifies this decision to the

Contractor when he instructs him to submitquotations.

Clause 63.5 provides:If the Project Manager has notified theContractor of his decision that the Contractor didnot give an early warning of a compensationwhich an experience contractor could have given,the event is assessed as if the Contractor had

given early warning.


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Early WarningsClause 63.5 is often misinterpreted as havingthe effect of letting the Contractor off the hookfor failing to give early warning.

In fact, the intention of the provision is toensure that the Contractor does not benefitfrom his own breach in failing to give earlywarning, in circumstances where early warningwould have had a mitigating affect on theeffects of the compensation event.


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Notifying Compensation Events

Early warning notifications do notconstitute notifications of compensationevents. The two require separatenotifications.

Both the Project Manager and theContractor are under an obligation tonotify. (61.1 and 61.3 respectively)

The use of two-way standard forms isrecommended (see example 3).


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Notifying Compensation EventsClause 61.1 provides inter alia :

For compensation events which arise from theProject Manager or the Supervisor giving aninstruction or changing an earlier decision, theProject Manager notifies the Contractor of the

compensation event at the time of given theinstruction or changing the earlier decision . Healso in instructs the Contractor to submitquotations,.

Note: the requirement to instruct thesubmission of quotations is mandatory (as towhich see 10.1).


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Notifying Compensation EventsClause 61.3 provides inter alia :

The Contractor notifies the Project Manager of an event which has happened or which heexpects to happen as a compensation event if

the Contractor believes that the event is acompensation event and

The Project Manager has not notified the eventto the Contractor..

Note: Clause 60.1 sets forth a list of events which arecompensation events (60.1(1) to (19)). As far as MainOptions A, C, E and F are concerned, the list is exhaustive.However, Main Options B and D carry two additionalcompensation events relating to changes in quantitiesstated in the Bill of Quantities (as to which see Main

Option Clauses 60.4 and 60.5).


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Notifying Compensation EventsClause 61.3 further provides:

.If the Contractor does not notify acompensation event within eight weeks of becoming aware of the event , he is notentitled to a change in the Prices, the

Completion Date or a Key Date unless theProject Manager should have notified theevent to the Contractor but did not .

Note: This provision is a condition precedentand must be complied with. The only provisobeing in circumstances of the Project Managersfailure.


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Notifying Compensation EventsFailure to give Notice Conditions PrecedentMultiplex Constructions (UK) Ltd v Honeywell Control SystemsLtd (No.2) [2007] EWHC 447 (TCC)

appears to support the Opinion of the Inner House of the Court of Session in City Inns v Shepherd

failure to comply with a condition precedent deprived theContractor of the right to claim and extension of time.

there is no reason to suggest why the same principlewould not deprive the Contractor of the right to claim anyother form of relief


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Failure to give Notice Conditions Precedent

Steria Limited v Sigma Wireless Communications Limited [2008]BLR 79

By virtue of Condition 6, if circumstances arose for which Sigma

was responsible, Steria was entitled to extensions of time providedSteria gave written notice within a reasonable period.

The wording of Condition 6 was clear and there was no needfor the inclusion of any expressed statement that unlesswritten notice had been given within a reasonable time, Steriawould not be entitled to an extension of time.

Thus the Judge was saying that there does not need to be anexpress warning as to the consequences of non-compliance for the

provision to operate as a condition precedent.



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Failure to give Notice Conditions Precedent

In the Scottish case of Education 4 Ayrshire Ltd v South Ayrshire Council [2009] CSOH 146

The Court dismissed the Contractors claim for both

extension of time and monetary compensation onaccount of the Contractors failure to comply withthe exacting requirements of a notice provision.

This was despite the fact that the Contractorsnotice was given within the time period stated inthe Contract.



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It is recommended not to wait for PM to notify, butto notify any event as soon as becoming aware,thereby avoiding the need for any claim to befounded upon reliance on a breach (ie. failure bythe PM to notify). This approach is, in any event,

consistent with the terms of Clause 61.3.Given the terms of 61.3 (condition precedent) it isrecommended that notification should be giveneven in circumstances where there may be doubtas to whether an event qualifies as a compensationevent or not. That matter can be debated later.

Use of a two-way standard form is recommended

(see example 4).



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If the Project Manager decides that an event notified bythe Contractor

arises from a fault of the Contractor, has not happened and is not expected to happen,

has no effect upon Defined Cost, Completion or meetinga Key Date or

is not one of the compensation events stated in thiscontract

he notifies the Contractor of his decision that the Prices,the Completion Date and the Key Dates are not to bechanged.

Note: the above four reasons are the only reasons uponwhich the PM can base his decision that there will be nochanges.



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Clause 61.4 further provides:

If the Project Manager decides otherwise,he notifies the Contractor accordingly and

instructs him to submit quotations

Note: it is mandatory for the PM to both notifyhis decision and instruct the submission of quotations (see Clause 10.1).



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Clause 61.4 further provides:

If the Project Manager does not notify his decision tothe Contractor within either

one week of the Contractors notification or a longer period to which the Contractor has agreed,

the Contractor may notify the Project Manager to thiseffect. A failure by the Project Manager to replywithin two weeks of this notification is treated asacceptance by the Project Manager that the event is acompensation event and an instruction to submitquotations.

Note: This provision is clearly contingent upon the giving of the reminder notice. It is only from the date of thereminder that the 2 week period can be calculated.



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It is therefore recommended that such notification byway of reminder should be given.

Use of a standard form is recommended (see example5).

Failure by the PM to notify his decision (as to whetherthe event falls within one or more of the four reasonswhy there will be no changes to the Prices, CompletionDate and Key Dates or to instruct the submission of quotations) within a further 2 weeks following thereminder, the event is treated as accepted by the PM asa compensation event and an instruction to submitquotations.



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AssumptionsClause 61.6 provides: If the Project Manager decides that the effects of a

compensation event are too uncertain to be forecast

reasonably, he states assumptions about the event inhis instruction to the Contractor to submit quotations.Assessment of the event is based on theseassumptions . If any of them is later found to havebeen wrong, the Project Manager notifies acorrection.



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AssumptionsClause 65.2 provides:The assessment of a compensation event is not revised if a

forecast upon which it is based is shown by later recordedinformation to have been wrong.

On the face of it Clause 65.2 would seem to be in conflict withClause 61.6. However, the notification by the PM of acorrection under 61.6 constitutes a compensation eventunder Clause 60.1 (17).

The effect is that a compensation event/quotation basedoriginally on incorrect assumptions is not reassessed , but anew compensation event is assessed in accordance with the

provisions under Clause 63.



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Clause 61.7 provides:A compensation event is not notified after the

defects date.

The defects date is stated in Contract Data PartOne.

This provision lends support to the proposition thatthe NEC does not allow retrospective claims of thetype mentioned at the start of this presentation.



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Clause 62.2 provides inter alia :Quotations for compensation events comprise

proposed changes to the Prices and any delay tothe Completion Date and Key Dates assessed bythe Contractor ..

Thus, the Contractors quotation must deal with therelief sought in terms of both time and money.

If a quotation does not deal with all the relief sought and is accepted (or treated as accepted) bythe PM, the Contractor will have lost his right tothat part of the relief not dealt with by thequotation.

Quotations and Assessments


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Clause 62.2 further provides:The Contractor submits details of his

assessment with each quotation

In complying with this part of the provision, theContractors quotation must be detailed in themanner prescribed by Clauses 63.1 and 63.3 (as towhich see below).



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Clause 63.1 provides:The changes to the Prices are assessed as the effect of

the compensation event upon

the actual Defined Cost of the work already done, the forecast Defined Cost of the work not yet done and

the resulting Fee.The date when the Project Manager instructed orshould have instructed the Contractor to submitquotations divides the work already done from thework not yet done.

Note: The actual physical progress of the work at the time theassessment/quotation is done is not the criteria for deciding workdone or not done. The line in the sand is the date of the instructionor, if that instruction is late, the date it ought to have been given.



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This method of assessment forms the basis of a quotation.Value does not enter into the matter, assessment is cost(i.e. Defined Cost) based.

The term work used alone is not confined simple to thework required by the compensation event. The Defined Costof any work affected by the compensation event is takeninto account in a quotation/assessment.

Due to the early warning provisions, the NEC contemplatesmost compensation event assessments will be on a forecastbasis, resulting in accepted quotations, rather than aretrospective basis. (This is clear from clause 63.6 whichprovides that assessments include risk allowances for costand time for matters at the risk of the Contractor whichhave a significant chance of occurring).



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Assessments are made on the basis of DefinedCost. It is important to note that the definition of Defined Cost varies between the Main Options.

Under Options C, D, E & F Defined Cost is defined

as:the amount of payments due to Subcontractors forwork which is subcontracted. And the cost of the components in the Schedule of CostComponents for other work.



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Under Options A and B, Defined Cost is defines as:

the cost of the components in the Shorter Scheduleof Cost Components whether work is subcontractedor not excluding the cost of preparing quotations forcompensation events

The implication of the different definition is that theContractor is not entitled to recover amountscharged by subcontractors (ie. the subcontractorsinvoice amount) in quotations/assessments of compensation events.



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This is a significant consideration when entering thefee percentages in Contract Data Part Two andwhen negotiating and finalising subcontracts.

If the Contractors subcontracted fee percentage in

Contract Data Part Two of the Main Contract is asignificantly lower percentage than that of thesubcontractor in Subcontract Data Part Two in theSubcontract, the Main Contractor will lose out interms of the amount recovered for a compensationevent under the Main Contract compared with theamount paid out under the Subcontract.



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Clause 62.2 further provides:If the programme for remaining work is altered

by the compensation event, the Contractor includes the alterations to the AcceptedProgramme in his quotation.

Note: Alterations to the Accepted Programme arenot confined to those affecting the critical path, butinclude non-critical activity delay.



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Clause 63.3 provides inter alia :A delay to the Completion Date is assessed as the

length of time that, due to the compensationevent, planned Completion is later than plannedCompletion as shown on the AcceptedProgramme.

Note: NEC contemplates the Contractor may planto complete the works earlier than the contractualCompletion Date, hence the reference to plannedcompletion.



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Thus, by virtue of Clause 63.3 any delay to plannedCompletion will result in an equivalent delay toCompletion Date.

Any float between planned Completion and thecontractual Completion Date is owned entirely bythe Contractor.

Activity float before planned Completion isavailable to either party to mitigate delay.



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Only by establishing a delay to planned Completioncaused by a compensation event, revising theprogramme to reflect that position, submitting therevised programme to the PM for acceptance andreceiving the PMs acceptance of the revisedprogramme can the Contractor gain an extension of time.

Failure on the part of the Contractor to submitrevised programmes for acceptance and to getacceptance will result in the Contractor being inculpable delay and exposure to delay damages.



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It is submitted that the correct approach is asfollows:

1) Take the Accepted Programme current at the time thecompensation event arises and bring it up to date toreflect reality in terms of progress at the time the PM

instructed or ought to have instructed the submissionof quotations. (This meets with the requirements of clause 32.1)

2) Impact the effect of the event on the AcceptedProgramme as updated in accordance with (1). If theeffect is a delay to planned Completion as shown on theupdated Accepted Programme, submit the revised andimpacted programme for acceptance by the PM, as partof the quotation for the compensation event submitted

for his acceptance.



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The Contractor submits quotations within three weeks of being instructed to do so by the Project Manager . TheProject Manager replies within two weeks of thesubmission. His reply is

an instruction to submit a revised quotation, an acceptance of a quotation, a notification that a proposed instruction will not be

give or a proposed changed decision will not be madeor

a notification that he will be making his ownassessment.



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Quotations and AssessmentsQuotations are to be submitted within 3 weeks of thePM instructing submission. The PM must reply within2 weeks of the submission .

It is recommended that, in circumstances where thePM has not instructed submission, whereverpossible, quotations should be submitted within 3weeks of the date when the PM ought to haveinstructed submission.

Note: time for submission and reply can be extendedby agreement (see 62.5) but be sure the PM notifiesthe extension as required by 62.5 (ie. get writtenconfirmation, otherwise there may be implications inrelation to 62.6 (see below))


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Quotations and AssessmentsClause 62.6 provides

If the PM does not reply to a quotation within thetime allowed, the Contractor may notify Project Manager to this effect. If the Contractor submittedmore than one quotation for the compensationevent, he states in his notification which quotationhe proposes is to be accepted. If the Project Manager does not reply to the notification withintwo weeks, and unless the quotation is for aproposed instruction or a proposed changeddecision, the Contractors notification is treated asacceptance of the quotation by the Project Manager.


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Quotations and AssessmentsIf the PM does not reply to a quotation within theallowed time (2 weeks unless agreed otherwise) theContractor may notify the PM to that effect.

It is recommended that such a notification by way of reminder should be given. Use of a standard form isrecommended (see example 6).

If the PM fails to reply within a further 2 weeks afterthe reminder, the notification is treated asacceptance by the PM of the Contractors quotation.

This provision is clearly contingent on the giving of the reminder notice. It is only from the date of thereminder that the 2 week period can be calculated.Note: the reminder notification must make it clear

which quotation is proposed to be accepted.


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Quotations and AssessmentsClause 63.2 provides:

If the effect of a compensation event is toreduce the total Defined Cost, the Prices arenot reduced except as stated in this

Contract .


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Quotations and AssessmentsUnder Options A and B, Clause 63.10 provides:

If the effect of a compensation event is to reducethe total Defined Cost and the event is

a change to the Works Information or a correction of an assumption stated by the

Project Manager for assessing an earliercompensation event,

the Prices are reduced.


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Quotations and AssessmentsUnder Options C and D, Clause 63.11 provides:

If the effect of a compensation event is to reduce the totalDefined Cost and the event is

a change to the Works Information, other than achange to the Works Information provided by the

Employer which the Contractor proposed and theProject Manager has accepted or

a correction of an assumption stated by the Project Manager for assessing an earlier compensationevent,

the Prices are reduced.

The additional wording in the first bullet point is to

do with value engineering


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Assessment of the effect of a compensation eventincludes risk allowances for cost and time for matterswhich have a significant chance of occurring and areat the Contractors risk under this contract.

Contractors will need to identify precisely whatsuch risks are. Merely adding an arbitrary sum orpercentage will not be acceptable.


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The Project Manager or the Contractor notifies the other as soonas either becomes aware of an ambiguity or inconsistency in orbetween the documents which are part of this contract. TheProject Manager gives an instruction resolving the ambiguity orinconsistency.

An instruction resolving an ambiguity or inconsistencymay or may not constitute a compensation event.


A compensation event which is an instruction to change theWorks Information in order to resolve an ambiguity orinconsistency is assessed as if the Prices, the Completion Date andthe Key Dates were for the interpretation most favourable to theParty which did not provide the Works Information.


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Quotations and AssessmentsThe inherent problems with such agreements, particularly inrelation to high cost compensation events, are:

(1) whether or not the individuals reaching suchagreements have actual, or even ostensible authority tocommit their respective employers to such agreements(these things are often done at site), and

(2) the scope for failure to actually agree what rates orlump sums are appropriate, thus dragging out the intensionof NEC to expedite early settlement in relation to what areeffectively claim items, culminating in reverting to theDefined Cost basis after a considerable time has elapsed.

However, in certain circumstances, such agreements mayovercome some difficulties in establishing Defined Cost.


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Project Managers AssessmentsClause 64.1 provides:

The Project Manager assesses a compensation event

if the Contractor has not submitted a quotation anddetails of his assessment within the time allowed ,

if the Project Manager decides that the Contractor hasnot assessed the compensation event correctly in aquotation and he does not instruct the Contractor tosubmit a revised quotation ,

if, when the Contractor submits quotations for acompensation event, he has not submitted aprogramme or alterations to a programme which thiscontract requires him to submit or

if, when the Contractor submits quotations for acompensation event, the Project Manager has notaccepted the Contractors latest programme for one of the reasons stated in this contract .


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Project Managers AssessmentsUnder clause 64.1 there are only fourcircumstances in which it is open to the PM tomake his own assessment of the effect of acompensation event.

The Contractor must submit details with hisquotation and submit his quotation within the

time allowed (three weeks).Note: The PM is not obliged to call for anyrevised quotations.

Note: Clause 32 sets forth the contractrequirements for submission of programmes.

Note: Clause 31.3 sets out the four reasons forwhich the PM can refuse to accept a

programme.


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Project Managers AssessmentsIt is not open to the PM to reject programmesfor reasons other than stated in clause 31.3.

It is recommended that PM is pressed to acceptprogrammes or give the reason for notaccepting, within the 2 weeks allowed.

Allowing the process of programme submissionand acceptance to slip can have disastrousconsequences under NEC.

It is the only process whereby time can beextended. There are none of the traditionalmechanisms available.


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The Project Manager assesses acompensation event using his ownassessment of the programme for the

remaining work if there is not Accepted Programme or

the Contractor has not submitted aprogramme or alterations to a programmefor acceptance as required by thiscontract.


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The Project Manager notifies the Contractor of hisassessment of a compensation event and giveshim details of it within the period allowed for theContractors submission of his quotation for the

same event. This period starts when the need forthe Project Managers assessment becomesapparent .

The period is three weeks. The need for thePMs assessment arises when one or more of the conditions set out in clause 64.1 arises.


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Project Managers AssessmentsIt is recommended that such notifications by way of reminder should be given.Note: If the Contractor has submitted more than onequotation, the reminder notification must make it clearwhich quotation is proposed to be accepted .

Use of a standard form is recommended (see example 7).

If the PM fails to reply within a further two weeks afterthe reminder, the notification is treated as acceptance bythe PM of the Contractors quotation.

This provision is clearly contingent on the giving of thereminder notice. It is only from the date of the reminderthat the two week period can be calculated.


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ImplementationClause 65.1 provides:

Compensation events are implemented when: the Project Manager notifies his acceptance of

the Contactors quotation, the Project Manager notifies the C ontractor of

his own assessment or a Contractors quotation is treated as having been

accepted by the Project Manager.

The quotation which will be treated as havingbeen accepted will be that referred to in thereminder notification given pursuant to clause62.6.


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ImplementationClause 65.1 provides:

Compensation events are implemented when: the Project Manager notifies his acceptance of

the Contactors quotation, the Project Manager notifies the C ontractor of

his own assessment or a Contractors quotation is treated as having been

accepted by the Project Manager.

The quotation which will be treated as havingbeen accepted will be that referred to in thereminder notification given pursuant to clause62.6.


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Worked ExampleThe example is based on a compensation eventunder a Main Option A, Priced Contract withActivity Schedule.

The same procedure would apply in the case of theother Main Options.

For simplicity, the example does not includesupporting documents in relation to Defined Costor planned resources but it is assumed that suchinformation would be provided in appendices tothe quotation submission.

Examples of programmes, notifications, coveringletters and activity schedules are provided.

Again, for simplicity, the programme periods do nottake account of public holidays or other shutdownperiods.


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Worked ExampleThe Contract:

John Wayne Contractors has contracted with RunningWater Ltd to construct a new oxidation ditch, settlementtank and associated ancillary works at an existing sewagetreatment works known as Wild West STW.The main work comprises the placement of reinforcedconcrete bases and the construction of reinforcedconcrete walls to the oxidation ditch and settlement tank.The Conditions of Contract are the NEC Edition 3, MainOption A.The Employer is to free issue the steel bar reinforcement .The starting date is 4 May 2010.The Completion Date is 3 December 2010.


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Worked ExampleThe Event:

The Project Manager has issued John WayneContractors with revised drawings and bar schedules,changing the design of the steel bar reinforcement tothe oxidation ditch walls.The original design called for predominantly 20 mmdiameter bars.The revised design calls for predominantly 16 mmdiameter bars.The oxidation ditch is 15m long x 10m wide x 6mdeep.

Documents

A Practical Guide to Compensation Events - Chris Holden