Compensation Events Under NEC3

This is the second of a three-part series on NEC3.

The first part looked at recent case law on NEC31, and this second part looks at one of the most contentious areas of the NEC3 form: compensation events. In particular, we review what might constitute a compensation event under NEC3, and the possible approach of the English court in relation to the time bar provision at clause 61.3 regarding notification of compensation events. The practical points arising in relation to both these issues are also considered.

Part three of the series will come at the end of the year and examine time under NEC3.

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. As a result, the prices, key dates or the completion date may be reassessed, and in many cases the contractor will be entitled to more time or money.

Examples of compensation events

NEC3 does not provide a definition of what might constitute a compensation event, but there is a list of specific compensation events at clause 60.1. The list includes:

actions by the employer (i.e. an employer's failure to allow a contractor access to and use of the site by the agreed date); actions by the project manager (i.e. when the project manager gives an instruction to stop or not start any work); actions by the supervisor (i.e. when the supervisor instructs the contractor to search for a defect and no defect is found); actions by others (i.e. other contractors or statutory bodies affecting the project); and other events which are outside the control of either party (i.e. extraordinary weather conditions that would occur less than once every ten years). Whilst the list is fairly extensive, it is not exhaustive in that there are additional compensation events elsewhere in the NEC3 form, such as those that arise from an employer breach and employer risk events. The former is particularly important as it covers any failure by the employer to comply with its contractual obligations.

Practice points

(1) To ensure you take full advantage of all the compensation events that are available to you, familiarise yourself with:

the list of employer risks at clause 80.1; any additional risks which may appear in part 1 or part 2 of the contract data; any Z clauses; any main option clauses; and any secondary option clauses that might apply.2 (2) If the employer breaches any express or implied terms of the contract, don't forget to notify as any breach by the employer will trigger a compensation event under clause 60.1(18).

Notification of compensation events

The aim of the compensation event regime is for compensation events to be assessed as early as possible at the time they incur and not at the end of the project. For this reason, the NEC3 form imposes strict notification provisions. The mechanism for notification depends upon the type of compensation event and there are separate requirements for compensation events arising out of actions by the project manager or supervisor, and compensation events as a result of the contractor becoming aware of an event which he believes to be a compensation event but which has not been notified to him as such by the project...