Interim decisions and disputes: The benefit of hindsight

An economic downturn usually leads to an increase in disputes, and this one has been no exception. One type of dispute that seems to be on the rise is over interim certificates, whether for time or money. Of course, interim decisions can be reviewed by an adjudicator. But usually by that stage, the work is complete and what the adjudicator is then looking at is the final, post-completion review of the contract administrator’s decision.

However, the NEC3 New Engineering Contract, unlike the JCT contracts, does not contain a “final review” procedure for the project manager. With the NEC, the whole idea is that the parties sort out their differences as they arise - as opposed to storing them up for a colossal bun fight after completion of the works.

What’s more, when a “compensation event” occurs - that is an event that entitles the contractor to some time and money, in principle - the project manager has to assess what the likely cost and delay will be, for work that has not yet been done, and must award it there and then. This can lead to difficulties when an adjudicator later
comes to review that assessment.

It was artificial, said the court, to ignore what was known to have occured. As one judge put it: why, with the light on, should you shut your eyes and grope in the dark?

To take an example, suppose that an employer changes the design so that some extra steelwork will be needed. Even though the steel sections may not go in for another few months, the project manager must assess the likely cost to the contractor (or make a “forecast” in NEC-speak) soon after giving the instruction for the change.

Let’s say that the project manager makes an assessment based on the cost of steel at its current market price, and also assesses prolongation costs at six weeks. Suppose that there is then a hefty rise in the cost of steel, and also that the contractor, doing all it can to reduce delay, now takes nine weeks. That’s tough on the contractor. It still gets paid in accordance with the forecast. Under this contract, the project manager cannot review his “forecast” of cost.

So what happens when the contractor goes to adjudication? Some employers will argue that the adjudicator must disregard the facts as they turned out (the fall in steel prices) and must instead consider whether the project manager’s forecast was reasonable at the time. This sounds like a weird argument, but it is one that is often put forward - by contractors as well as employers, when it suits them. And it is in line with what the NEC apparently requires.

Some years ago, the House of Lords dealt with a related problem in a case named after a ship, the Golden Victory. The charterer or hirer of the ship breached the contract,
and the shipowner claimed damages. These are normally calculated at the time of the breach. At that point it seemed clear that the owner could claim for the lost hire charges for the remaining four years of the hire contract.

But about 15 months after the breach, and before the case got to trial, the Second Gulf War broke out in Iraq. This would have given the charterer the right to terminate
the agreement anyway, thus substantially reducing the shipowner’s damages. The question was whether the court was entitled to look at matters with the benefit of hindsight - that is, taking into consideration the fact that the Gulf War (which was not foreseeable at the time) had broken out.

The court sided (narrowly) with the charterer. It was artificial, said the court, to ignore what was now known to have occurred. Surely, it said, the court does not have to try to imagine how matters might have looked at some earlier date. Or, as one judge put it: why, with the light on, should you shut your eyes and grope in the dark?

Adjudicators are practical people and will be disinclined to review matters of this nature by closing their eyes to the facts as they have turned out, even if that is what the contract tells them to do. If the NEC contract really does require this approach, employers should perhaps consider at procurement stage whether they want a contract that has such an artificial way of assessing costs.

The Golden Victory was not a construction case. But it does contain some encouraging words that adjudicators might fasten onto, if they are asked to review a project manager’s assessment and where one side is urging them to ignore what actually happened.

Ian Yule is a partner at Weightmans