This month, our legal experts delve into the mysteries of the NEC standard form, early warning and compensation, and look at whether you can sue a local authority that doesn't give you the job even though you entered the lowest bid
The NEC in close detail
In an NEC contract, can an early warning notice (clause 16), be deemed to be notice of a compensation event (clause 6), even if the words "compensation event" aren't used?

The essence of the NEC contract is one of the parties working together in the spirit of trust, and it uses simple language. The problem with its simplicity is that, if taken literally and applied without common sense, many of its provisions won't work and others will be grossly unfair.

On strict interpretation, clause 13.7 says a valid early warning notice or notification of a compensation event must be communicated separately from other communications. The purpose, presumably, is to avoid an important notifications being overlooked. The interpretation given to this clause is that separate, distinct communications are required. Even where, say, a project manager gives an instruction under clause 61.1, he would also be required separately to notify the contractor that a compensation event had occurred and separately to instruct that a quotation be submitted.

It seems likely, therefore, that a communication headed "early warning notice", even though dealing with the same "event" as the compensation event, would not be deemed to be a notification of that compensation event.

However, having said that, the parties should be co-operating, and one of the main facets of the compensation event provisions is the need for their early notification. The words of clause 63.4 are there to protect the employer from losing the opportunity to mitigate the effects of an event where there has been a failure by the contractor to give an early warning of it. But the words are not clear: do they relate only to the service of an early warning notice or also to separate notice of the compensation event? The point that can be made is that the employer has sustained no prejudice through the contractor's failure to serve a separate notice of the compensation event, given that it was made aware of the event at a much earlier stage, through the early warning notice.

Furthermore, it remains a matter of debate as to the effect of a failure by a contractor to notify a compensation event under clause 61.3 – that is, within two weeks of becoming aware of it. Whatever the intention of clause 61.3, it does not expressly prohibit notification of a compensation event at whatever time the contractor chooses. Also, note that clause 61.4, which lists the circumstances in which the contract price and completion date remain not changed, does not include in its list the late notification of an event.

If not, under clause 60.1.6, can a project manager's failure to reply to an early warning to a specific event then invoke a compensation event when it is known they have not replied? If the project manager does not reply to a communication from the contractor within the period required by the contract, then that would be a compensation event. However, under clause 16, there appears to be no requirement for a project manager to reply to an early warning notice and so, there is no time period required under the contract.

Although it may be a technical breach of clause 10.1, requiring the project manager to act in a spirit of mutual trust and co-operation, it is likely that such a duty is nothing more than a duty not to act in bad faith.

The event for which you are seeking extra payment or time will presumably be the event that was the subject of the early warning, and not the circumstances that have followed – that is, no response from the project manager to the early warning notice. Although the project manager, in failing to respond, did not take the opportunity to mitigate the costs of that event, the failure to respond is unlikely to be the cause of a claim by the contractor for time or money.

Who gets to bid?

As we found out to our cost, there is no provision in the Public Services Contracts Regulations that requires a local authority to select as tenderers those who submit the “most economically advantageous application”. However, a precedent was established in Denmark in 1996 that it is acceptable under the European procurement regime for authorities to maximise competition by selecting a cross-section of tenderers, providing they all meet minimum standards. Does the authority that failed to select us as tenderer have a case to answer?

The PSCR allows contracting authorities decide for themselves on what their minimum standards are, but these must be justifiable and not arbitrary. The most common method for producing a tender shortlist is to use relative financial, economic and technical scoring, and to select the bidders that gets the best scores. The general view is that relative scoring should be permissible, providing it does not discriminate on the grounds of nationality. On the assumption that the use of relative scoring in this has not involved any discrimination and is related to the ability to successfully complete the contract, it appears that the contracting authority in question has undertaken its selection process in accordance with the requirements of the PSCR and established market practice.