7/9/13

NEC 3: when is the project manager obliged to notify a compensation event, and what are the effects of his failure to do so? | MDA Consulting

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NEC 3: when is the project manager obliged to notify a compensation event, and what are the effects of his failure to do so?
Introduction
Time bar clauses that are found in the standard form construction contracts (almost) always operate against the contractor. Hopefully we are all aware of the consequences of failing to comply with a time bar clause/s in a construction contract. However, the NEC is a change from this norm and it exonerates the contractor in certain circumstance and then shifts some risks onto the shoulders of the project manager for failing to respond to the contractor.

The relevant provisions of the NEC3

Compensation events are events stated in the contract, which, if they occur, entitle the contractor to be compensated for any effect, which the compensation event has on the prices and / or the accepted programme. Compensation events, therefore, represent risks borne by the employer. The principle function of the compensation events is to reduce the incidence of the risks highlighted by application of collaborative foresight. This is, amongst several other things, reflected in the clauses addressing the project managers and contractors duty to notify the other of a compensation event. The NEC3 lists the 19 compensation events in clause 60 and the duty to notify the compensation event in clause 61. To understand the mechanics of the NEC3 we will take a look at the duties of the project manager and the contractor to notify the other of a compensation event and the consequences of the project manager failing to do so where he should have. Sub-clause 61.1 places a duty on the project manager to notify the contractor of a compensation event in the following instances: (i) if the compensation event in question arises from the project manager or (ii) where the supervisor gives an instruction or changes an earlier decision. Moreover, the second bullet point in sub-clause 61.3 imposes an obligation to notify other compensation events that the contractor would normally be expected to notify. This argument is supported by the early warning clause in 16.1 which requires that the project manager must have his finger on the pulse of everything that may have an impact on time and money. The following compensation events arise from the project manager: sub-clause 60.1(1) being an instruction changing the works information, (4) instruction to stop or not start work or change a key date, (6) failure to reply
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NEC 3: when is the project manager obliged to notify a compensation event, and what are the effects of his failure to do so? | MDA Consulting

to a communication with the period for reply, (7) instructions for objects of value or of historical content, (8) changes a decision, (9) withholds an acceptance, (10) search for a defect and no defect is found, (11) test or inspection done by the supervisor causes an unnecessary delay, (15) the project manager certifies take over or a part of the works before both completion and the completion date, and (17) the project notifies a correction to an assumption stated about a compensation event. Sub-clause 61.3 places a duty on the contractor to notify the project manager of a compensation event which has happened or which he expects to happen as a compensation event if (i) the contractor believes that the event is a compensation event and (ii) the project manager has not notified the contractor of the event. Even if the compensation event does not strictly originate from the project manager, he has an obligation to notify these also, like a weather delay in terms of the early warning procedure and then also a subsequent compensation event as the project manager cannot argue that didnt know that it may or may not have a time and cost impact

The consequences of the engineers failure to notify a compensation event

Sub-clause 61.3 goes on to set out the consequences for the contractor if one of the following two situations occur. Firstly, if the contractor does not notify the compensation event within eight weeks of becoming aware of the event, it would not be entitled to a change in the prices, the completion date or a key date. This means that the contractor is time barred. However, the clause goes on to state as follows: unless the Project Manager should have notified the event to the contractor but did not. Therefore, the contractor cannot be time barred if the compensation event arises from the project manager (or any other cause of which he could or should have been aware) and he failed to notify the project manager thereof within eight weeks of becoming aware thereof.

The project managers failure to reply to a quotation for a compensation event

It is important to bear in mind that there is a further time bar provision in the NEC3 against the project manager. This time bar relates to the failure of the project manager to respond to the contractors quotation for a compensation event. Clause 61.4 provides that, should the project manager fail to reply to a compensation event notification within a further 2 weeks, the quotation is treated as being accepted. The following diagram illustrates this schematically:
(http://www.loud.za.com/clients/mda/wp-content/uploads/2011/09/pic_1.png)

Becoming aware of the event

We believe it is necessary to examine what the NEC3 means by the words in sub-clause 61.3 of becoming aware of the event. In other words, when does the clock actually start ticking before the contractor will be time barred and not be entitled to a change in the prices, the completion date or a key date, bearing in mind the project managers duty to notify a compensation event. The intention is clearly to establish a contractual time bar. However, this does not in our view succeed. It is a requirement that the contractor became aware of the event, which is when the time period of eight weeks start within which to notify the project manager. The NEC3 does not state that the eight week period starts running when the contractor ought to have become aware of the event. There is nothing to stop the Contractor saying, legitimately or otherwise, on the last day of the project: I have now become aware of these circumstances that pertained two years ago and then submit a compensation event to the engineer.
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NEC 3: when is the project manager obliged to notify a compensation event, and what are the effects of his failure to do so? | MDA Consulting

Dispute resolution time bar

Option W1 in the NEC3 applies where a dispute arises in connection with the contract and is referred to and decided by an Adjudicator. Set out in the adjudication table are the time periods within which a dispute may be referred to the adjudicator and the consequences of such failure are stipulated in sub-clause W1.3(2). Either party may refer a dispute to the adjudicator but this must be done between two and four weeks after notification of the dispute to the other party and the project manager. It is interesting to note that a referral prior to the two weeks will be premature and of no effect and after the four week period will be out of time and time barred.

Conclusion
From the above we note that, where the project manager should have notified a compensation event and did not, the contractor is exonerated from the time bar provisions and it may still claim a change in the prices and/or the completion date. This gives action to the above stated principle function of the compensation events which is to reduce the incidence of the risks by application of collaborative foresight. Where the project manager fails to respond to a quotation for a compensation event from the contractor within two weeks after a further notice from the contractor, it bears the risk that the quotation will be treated as accepted after the expiry of the period and is then be liable to pay the contractors quotation in full.

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