The NEC suite of contracts, as used by the London Olympics, contain some highly specific requirements concerning compensation events. It’s worthwhile paying attention to them now

The UK Olympic Delivery Authority (ODA) has chosen the NEC suite of contracts to procure all fixed assets and infrastructure for the London 2012 Olympic Games. It’s worth paying attention, then, to what NEC3 has to say about compensation events that lead to claims of either further time or money against the contract.

As a “partnering” contract, NEC3 emphasises the importance of “early warning” and dealing with claims for compensation events as they come up. One of the procedural mechanisms of NEC3 dealing with compensation events is giving rise to debate.

Clause 61.3 of the contract states: “If the contractor does not notify 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 intention of this provision is clear. It alerts the contractor to the importance of the early notification of a compensation event. Any later than eight weeks and any claim is forfeit.

Where there are large infrastructure projects to be procured and where there may be many compensation events it is important to assess their impact, determine the entitlement, if any, and then move on. This provision is stepped down into the NEC subcontracts in order to retain consistency.

Such a provision could only be the subject of a challenge on the basis that it is an exclusion clause if the NEC3 could be regarded as the employer’s standard terms of business and the clause failed the test of “reasonableness” under section 3 of the Unfair Contract Terms Act 1977. In both cases, such an argument is unlikely to succeed.

But if the contractor defaults, does this provision bar all contractual remedies? There has to be an express exclusion of rights or causes of action for this to be the case. Reference to the NEC wording shows that some remedies will remain despite clause 61.3.

Early notification of compensation events is important. Any later than eight weeks after the event and any claim is forfeited

Whereas a breach of contract by the employer is to be construed as being a compensation event, clause 61.3 does not expressly exclude any claim for damages. Thus, a claim for damages must exist as well as a claim for money using the contract machinery.

This is a loophole that could be exploited by contractors. It could apply to express as well as implied terms. A contractor may, for example, allege the existence of an implied term.

This may be that the employer would not hinder or prevent it in the performance of its responsibilities.

A breach of that implied term would give rise to a claim for damages. Clause 10.1 of NEC3 compels the parties to act “in a spirit of mutual trust and co-operation”. It is not difficult to envisage that the fundamental principle based upon “co-operation” may form the basis of parallel claims from contractors for damages.

Anomalies arise in the case of named “employer’s risks”. An occurrence of an event that is an employer’s risk is a compensation event. In this situation there is a separate express obligation on the employer to indemnify the contractor against claims, proceedings, compensation and costs. The employer’s risks include, for example, “a fault of the employer or a fault of his design”. This again must give rise to a separate and parallel remedy in addition to that contained within clause 60.

Employers will need to be vigilant. If they have been responsible for critical delays then the procedure for assessing a compensation event and awarding an extension of time is a mechanism that preserves their right to claim liquidated damages. Thus where the employer is itself culpable, it will wish to ensure that the mechanism of clause 61.3 will not prevent it from awarding an extension of time by way of a compensation event.

It is for this reason that the employer may wish to ensure that it notifies the contractor of the compensation event, failing which the contractor may say that it should have done so within the eight-week timescale.