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Omitting works under NEC, reduction in the Prices and good faith

  • United Kingdom
  • Construction and engineering
  • Construction and engineering - Articles
  • Litigation and dispute management

18-11-2021

The Scots courts have issued guidance in two decisions on Van Oord UK Ltd v Dragados UK Ltd which confirm that it requires clear words to allow works to be omitted from the scope under NEC, and that an invalid instruction to omit works will not reduce the Prices.

As one of the first cases to deeply analyse omissions under NEC contracts, the decisions are likely to be persuasive across the UK. This article considers the rationale for the decisions and how they could apply more widely to NEC contracts.

Background

Dragados was the main contractor on the Aberdeen Harbour Expansion Project at Nigg Bay in Aberdeen. Dragados sub-contracted the soft dredging works to Van Oord under an amended NEC3 (April 2013) Option B contract using the Shorter Schedule of Cost Components.

The dredging of 2,150,000m3 of material from the harbour involved different elements with different degrees of complexity and the parties agreed to apply a fixed blended bill rate.

Shortly after the subcontract was agreed, Dragados engaged two additional subcontractors, and instructed Van Oord to omit certain works to transfer those elements to these subcontractors. Dragados compounded its actions by seeking to rely on the omission to reduce the fixed bill rates in the contract for the remaining scope of work by almost one half.

Van Oord sought payment at the original rates and commenced adjudication proceedings, which found in favour of Dragados. Court proceedings were subsequently issued.

The Contract Terms

These express clauses were relevant in the Van Oord case:

1. an instruction by the Project Manager changing the Works Information is a compensation event (60.1(1));

2. a breach of contract by the Employer, which is not one of the other compensation events, is a compensation event (60.1(18));

3. a reduction in prices, the completion date and the key dates are the only rights available to the parties in respect of a compensation event (63.4); and

4. the Prices are reduced if the effect of a compensation event is to reduce the Defined Cost and the event is:

i. a change to the Works Information; or

ii. a correction of an assumption made by the Project Manager in assessing a previous compensation event (63.10).

Was the Omission Valid or A Breach of Contract?

The first hearing, of the Court of Outer Session on 30 September 2020, resolved these issues:

1. was the transfer of works valid or was it a breach of contract? and

2. was Dragados entitled to rely on the omission to reduce the fixed bill rates?

Clause 14.3 of Van Oord’s contract had been amended to allow Dragados to omit works and give them to another sub-contractor, provided that a corresponding instruction had been given by the Project Manager under clause 14.3 of the main contract. Otherwise, the standard terms of the NEC contract do not define a Change or provide guidance on what can and cannot be instructed.

The Court referred to two previous decisions. The first was Abbey Developments2  in which the court reiterated that a contractor has both an obligation and a right to undertake the whole of the contracted works; so clear words are required to remove that right to finish ie to omit works. The second was Amec v Cadmuswhich confirmed that the motive for omitting works was irrelevant in determining whether any instruction was a breach of contract.

As no instruction had been given under the main contract, and there was no other term giving the contractor the right to omit works under the subcontract, , the Court found that the sub-contract did not allow Dragados to transfer the work, and these instructions were in breach of the subcontract.

Essentially, the court confirmed that clear words were needed to undermine the subcontractor’s right to finish the whole of the contracted scope. This decision is consistent with the laws of England and Wales.

On the second issue, the Court confirmed that the NEC contract includes breach of contract as being one of the tiggers for the subcontractor to claim compensation via the compensation event procedure and that clause 63.10 applied.

Van Oord appealed.

How Is An Invalid Omission Valued?

The sole issue before the Court of Inner Session (the Scots appeal court for civil matters) was whether Dragados was entitled to reduce the Prices.

Whereas the lower court has dismissed clause 10.1 – which refers to the spirit of mutual trust and co-operation of the parties - to be irrelevant, the appeal court decided it was significant in determining the matter of compensation.

The Court stated that Clause 10.1 was not “merely an avowel of aspiration” but rather reinforced the general principle of good faith in contract. The Court found that this principle aligned with these three propositions:

1. a contracting party is not entitled to take advantage of its own breach4;

2. a subcontractor is not obliged to obey an instruction issued in breach of contract5; and

3. clear language is required to place one contracting party completely at the mercy of the other6.

Generally the parties had accepted that Clause 60.1(18) specified a breach of contract as being a compensation event, and the valuation under the remainder of clause 60 required a reduction in the Defined Cost.

By considering all relevant terms in clause 60, the Court held that the instruction to remove work was not given “in accordance with this subcontract” so that clause 63.10 only applies to a valid change in the scope, which the omission was not.

Critically, the Court also found that clause 63.10 has to be read by reference to clause 10.1. Unless Dragados acted “in a spirit of mutual trust and co-operation”, it could not use clause 63.10 to reduce the Prices.

Although not part of its legal reasoning, the Court provided further explanation summarised below:

1. all breaches of the subcontract should be treated equally and none of them should result in a reduction of the Prices;

2. by avoiding clause 63.10 as determining the cost, the decision avoids any suggestion that Van Oord was bound to obey an invalid instruction, which the Court decided could not be right; and

3. the NEC should not be a charter for contract breaking.

Our Analysis

Historically, English law, (as also Scottish law) recognises no implied duty of good faith in contracts, except in limited circumstances such as for contracts of insurance.

This has been justified where the parties have an equal bargaining position as it allows the parties greater freedom in negotiating and operating their contracts, even if one party benefits from a more favourable position.

Although this Court referred to the decisions of Alghussein, Thorn and Parkinson (mentioned above) each of which discusses elements of what has been considered good faith. However, none of these cases are based around the issue of good faith in contracts and, arguably, this decision extends those principles .

In English law, Mid Essex7 determined that if the parties require each other to act in good faith, the contract must expressly state this and define the elements of the contract to which that good faith applies. The Courts are not willing to imply that good faith overrides or qualifies all express terms.

The NEC contract suite contains the express provision that the parties must act in a spirit of mutual trust which is akin to good faith, but the clause lacks any specific duties or obligations. The courts have previously held that this statement does not override other express terms of the contract, nor does it require a party to set aside its own self-interests8.

The Court found that the omission of works and transfer to another sub-contractor was a breach of contract because there was no express provision in the contract allowing such. However, the Court did not specifically address whether, as an unlawful instruction, the omission could still be a compensation event under clause 60.1(1) as found by the Court of Outer Session. The Court merely stated that clause 63.10 only applies to a lawful change.

Whilst there remains gaps in the logic of these decisions, the Court has placed significant weight on the good faith provisions in the NEC in reaching this decision. Accordingly, if a similar scenario came before the courts in England and Wales, this case will certainly form part of its decision-making, although ultimately it will be for the court to agree whether to follow its rationale.

Companies with existing NEC contracts should take note of the limits on when instructions can be given to contractors and subcontractors to omit works and how those omissions affect the pricing of the remaining scope. Companies entering into NEC contracts should check that there are clear words allowing any instructions that they envisage to retain flexibility to act as circumstances or the project may require. words allowing any instructions that they envisage to retain flexibility to act as circumstances or the project may require.

 

[1] [2021] CSIH 50

[2] Abbey Developments Limited v PP Brickwork Limited [2003] EWHC 1987

[3] Amec Building Ltd v Cadmus Investments Co Ltd (1996) 51 Con LR 105

 

[4] Alghussein Establishment v Eton College [1988] 1 WLR 587, 591 D-E

[5] Thorn v The Mayor and Commonalty of London [1876] 1 App Cas 120

[6] Parkinson (Sir Lindsay) & Co Ltd v Commissioners of His Majesty’s Works and Public Buildings [1949] 2 KB 632, 662

 

[7] Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd (trading as Medirest) [2013] EWCA Civ 200

[8] Costain Ltd v Tarmac Holdings Ltd  [2017] EWHC 319 (TCC)

 

 

 

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