Can a Project Manager's assessment of a Compensation Event be subsequently revised if shown to be incorrect?

"Can a Project Manager's assessment of a Compensation Event be subsequently revised if shown to be incorrect?"

The possible answers were:

1. No, under no circumstances.
2. Yes, in all circumstances.
3. Only in certain circumstances.

Thanks to everyone who voted in the very last poll of our LinkedIn series on NEC! I have set out the answer below.


The answer

The correct answer is no.3: only in certain circumstances.

Under clause 65.2 of the NEC3 Engineering & Construction Contract the assessment of a compensation event is not to be revised if a Project Manager's original forecast is later shown to be wrong.

However, there are some exceptions to this general rule.

• The contractual exception

There is one exception to the "no-revision" rule stated in the contract. This is found at clause 61.6, which states that where it is "impossible to prepare a sufficiently accurate quotation", the Project Manager states certain assumptions that the quotation is based on. If those assumptions are then found to be wrong, the Project Manager's notification of their correction is deemed to be a separate compensation event.

• Other exceptions

There has also been some relevant decisions on the "no-revision" rule in the courts.

In the decision of ICI v Merit Merrell Technology [2017] EWHC 1763 (TCC) the Court confirmed that whilst clause 65.2 of the NEC3 ECC Form provides that “[the] assessment of a compensation event is not revised if a forecast upon which it is based is shown by later recorded information to have been wrong”, this did not preclude the court from revisiting a project manager’s decision. To argue otherwise would, as the Court put it, “ignore the dispute resolution clause” (Option W2).

As such, by providing that an adjudicator has the power to “review and revise any action … of the project manager”, the court found that by implication an adjudicator is authorised to review and revise a project manager’s determination of a compensation event.

Indeed, such a review is what happened in the case of Northern Ireland Housing Executive v. Healthy Buildings (Ireland) Limited [2017], where Northern Ireland's High Court looked at the "no-revision" rule in the context of a NEC professional services contract, which had similar provisions regarding the assessment of compensation events to the Engineering & Construction Contract.

The Court in this case decided that an Employer cannot unilaterally "revise the assessment if it turns out that he had accepted a forecast from the consultant which was unduly pessimistic, even "wrong", because in fact the consultant was put to less trouble and expense than it had forecast". However, rather than adopting a prospective approach to assessing the compensation event, as anticipated by the wording of the clause, the compensation event was re-assessed based on actual time and records. Given that the compensation event had occurred at the point of the Court assessment and actual costs had been incurred, the court favoured a retrospective approach to assessing the claims. The court emphasised that “evidence, such as time sheets and other material, illustrating what the consultant actually did during the compensation event, particularly with change in instructions, is not only relevant evidence but clearly the best evidence to assist the court in calculating the ‘compensation’ to which the consultant is entitled.”

The court referred to UK case law which emphasised that a court must at all times avail itself to all information accessible at the time of making its award. The court should not guess the calculation of the potential claim nor should it “shut its eyes and grope in the dark”, in circumstances where actual costs were incurred and are known.

The judge further noted that an effective and business-like interpretation of the contract meant using the best information available to determine the consultant’s actual costs and time incurred (as opposed to forecast costs) as a result of the instructed variation.

Ethos of the contract

It is important to note that the kind of retrospective assessment seen in Northern Ireland Housing Executive generally goes against the ethos of the NEC contracts and is to be avoided where possible.

NEC contracts seek to address issues as they arise, rather than at the end of the project where there is a risk of issues being clumped together in a larger, costly dispute. Whilst a retrospective assessment could save the employer money by basing the assessment on the actual loss of the contractor or consultant rather than projected loss, it is also prevents compensation events from being dealt with swiftly and efficiently during the lifetime of the project.

When using the NEC ECC Contract, best practice is to ensure that the mechanisms of clauses 62 to 65 are followed correctly. Where a Project Manager feels that his or her assessment is conditional upon certain factors, those should be outlined as assumptions under clause 65.1 so that the assessment can be revised, whilst allowing redress for the contractor in the form of a new compensation event.