A Compensation Event is an event which can affect the cost to the Client of the work being carried out, the time when the works will be completed, or both. The contract lists a number of events which, if or when they occur, entitle the Contractor to additional payment and/or time. The standard form contract lists 21 Compensation Events. Parties may list additional events in the contract by way of a Z Clause (amendments to an NEC contract). If an event is not listed as a Compensation Event, it cannot be relied on as the basis for a compensation claim.
Compensation Events include, amongst others, failure to allow access to the site, failure to respond timeously to communication from the Contractor (which time period is set out in the contract) and the project manager issuing instructions which change the scope of works, subject to certain exceptions.
When a Compensation Event occurs, it must be notified to the other party. The particular event will determine which party requires to give notification. For example, the project manager must notify the contractor if the project manager is giving an instruction which changes the scope of works.
If the contractor requires to give notification, it must do so within eight weeks of becoming aware that the event has occurred (regardless of its effects). If the contractor fails to do so, it cannot rely on the event to seek a change in the price, completion date or key dates, unless it is an event which the project manager should have given notification of. This is an absolute requirement and the claim for a Compensation Event will be lost if it is not notified on time.
Notification of a Compensation Event generally takes place after it has occurred. Therefore the absence of an Early Warning Notice is not fatal. However, the absence of timeous notification of the Compensation Event itself may well be fatal where the Compensation Event is one of which the contractor was obliged to give notification.
Next week we will consider time limits for notifying delays. If you haven’t read our previous delay blogs, they can be found in our insights section.
Should you require assistance with any aspect of a construction contract, we have a large and experienced construction team who would be happy to discuss this with you.
