In this article, I have set out a “users guide” to the first instance and court of appeal decisions in the Van Oord UK Ltd v Dragados UK Ltd saga. In short, these decisions of the Scottish courts touch on the following issues arising under NEC contracts:
- When will an instruction to omit works and give them to others amount to breach of contract?
- How is an instruction to omit works assessed under the NEC?
- How does the requirement to act “in a spirit of mutual trust and cooperation” affect the answers to the questions above?
I have tried to keep this article as short as possible by focusing on the practical elements of the Van Oord decisions as they apply to the NEC contracts generally.
The Facts
The salient facts of the case are as follows:
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Dragados engaged Van Oord as its dredging subcontractor on a harbour project located in Nigg Bay. The contract between them as an amended NEC3 ECC Option B Subcontract.
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In its tender Van Oord inserted a “blended rate” for the dredging of £7.48/m3.
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During the contract, Dragados issued instructions to omit large quantities of work from Van Oord's subcontract. Dragados claimed it was entitled to reduce the “blended rate” for the dredging works to account for the omission down to £3.80/m3.
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Van Oord claimed that Dragados was not entitled to reduce its tendered blended rate.
If you care to read more about the facts, paragraphs [8] – [15] of the court of appeal decision set out all you need to know. The whole decision is only 9 pages long - worth a read in full!
As set out above, the NEC contract examined in the Van Oord case was an amended NEC3 ECC Option B Subcontract. Therefore, I have used the terminology from this contract throughout this article. The main form of the NEC3 and NEC4 ECC contain very similar provisions to those examined in Van Oord. Therefore, the lessons learned from this case will also generally apply to those contracts as well.
When will an instruction to omit works and give them to others amount to breach of contract?
Under the standard NEC3 ECC Subcontract, clause 14.3 permits the Contractor to issue an instruction to change the Subcontract Works Information. The standard contract however does not expressly mention works being omitted and being given to others.
This “omission instruction” issue was considered in detail in the first instance decision in Van Oord. In short, the court placed reliance on the decision in Abbey Developments Ltd v PP Brickwork Ltd [2003] EWHC 1987. The court summarised the Abbey Developments case in this way:
I hope the above is obvious. Clause 14.3 of the standard NEC3 ECC Subcontract does not contain “clear words… [entitling the Contractor] to remove work… in order to have it done by somebody else”. Therefore, if such an instruction is given, it would be a clear breach of contract.
Things were slightly more complicated in the Van Oord case however as clause 14.3 was amended by a z-clause (imagine that...). The amended clause read as follows:
“The Contractor may give an instruction to the Subcontractor which changes the Subcontract Works Information or a Key Date. The Contractor may, in the event that a corresponding instruction is issued by the Project Manager under clause 14.3 of the Main Contract only, also give an instruction to omit (a) any Provisional Sum and/or (b) any other work, even if it is intended that such work will be executed by Others. The Subcontractor has no claim for loss of revenue, loss of opportunity, loss of any contract, loss of profit or for any indirect loss or damage against the Contractor in relation thereto.” (emphasis added)
You might be thinking at this point that the Contractor was on to a winner, as the amended clause 14.3 has clear words allowing work to be omitted and executed by others. This was pretty much exactly what Dragados argued. However, under the amended clause, the “clear words” to omit work only came into play if “a corresponding instruction is issued by the Project Manger under clause 14.3 of the Main Contract”. This instruction was never given – and therein lies the issue. The court in Van Oord therefore decided that the instruction by Dragados to omit works was a breach of contract.
To wrap up this segment and answer the question directly – an instruction to omit works and give them to others will be a breach of contract unless the contract uses very clear words in accordance with the principles in Abbey Developments.
How is an instruction to omit works assessed under the NEC?
This is the main issue that the court of appeal had to address in Van Oord. In short, the answer depends on whether the instruction to omit was a valid instruction (i.e. the contract contained “clear words” to allow for it – see above) or whether the instruction was a breach of contract.
If the instruction to omit is a valid instruction, then it is simply a case of valuing it in accordance with the contract. In the first instance decision in Van Oord, the court again relied upon the decision in Abbey Developments which set out that:
“The valuation provisions of many contracts also provide the [sub]contractor with a means of obtaining acceptable compensation in the event of omissions which deprive it of profit…In these circumstances it may be doubted if there would be a viable claim for breach of contract even if the work is given to another if the contract provides its own means of awarding the contractor amounts it that might recover if it had a claim for breach of contract.”
Under the NEC3 ECC Subcontract, a valid instruction to omit would be a change to the Subcontract Works Information, and this would be a compensation event under clause 60.1(1). When it comes to assessing this type of compensation event, clause 63.10 allows the Prices to be reduced based on the change in Defined Cost associated with the omission. I have set out clause 63.10 below as its wording is very important, it states:
“If the effect of a compensation event is to reduce the total Defined Cost and the event is a change to the Subcontract Works Information or a correction of an assumption stated by the Contractor for assessing an earlier compensation event, the Prices are reduced.” (emphasis added)
The key point here is, only the compensation events under clause 60.1(1) i.e. a change to the Subcontract Works Information and clause 60.1(17) i.e. a correction of an assumption, can lead to the Prices being reduced. Nothing else. This is confirmed by clause 63.2 which states:
“If the effect of a compensation event is to reduce the total Defined Cost, the Prices are not reduced except as stated in this subcontract.” (emphasis added)
The “as stated in this subcontract” bit is a direct reference to clause 63.10 in this context!
If the instruction to omit is a breach of contract, the position is very different. This is where the court of appeal disagreed with the court of first instance in Van Oord.
In the first instance decision, the court decided that clause 63.10 could be used to reduce the amount payable to Van Oord. I personally find the court’s logic quite hard to follow, especially given that the court unequivocally accepted the instruction to omit was a breach of contract.
The court of appeal came to a different conclusion. It decided that since the instruction to omit was a breach of contract, that clause 63.10 did not come into play at all i.e. the Prices could not be reduced. This in my opinion is correct. The instruction to omit was a breach of contract and it was therefore a compensation event under 60.1(18) – and clause 63.10 (which permits the Prices to be reduced) does not apply to this compensation event.
To wrap up this segment and answer the question directly – a valid instruction to omit and give to others will be a compensation event under clause 60.1(1) and clause 63.10 permits the Prices to be reduced in this scenario – however, an instruction to omit which is given in breach of contract is a compensation event under clause 60.1(18) and the Prices are not reduced.
How does the requirement to act “in a spirit of mutual trust and cooperation” affect the answers to the questions above?
The court of appeal decision contains some useful analysis of the requirement to act “in a spirit of mutual trust and cooperation” under clause 10.1 when it comes to omitting work. The court of appeal confirmed that this requirement is “not merely an avowal of aspiration”.
Specifically, the court held that clause 10.1 aligns with the following propositions of law:
- a contracting party “will not in normal circumstances be entitled to take advantage of his own breach as against the other party
- A subcontractor is not obliged to obey an instruction issued in breach of contract
- Clear language is required to place one contracting party at the mercy of the other
With respect to the first point, this statement embodies the doctrine of mutuality. In this particular case, the court held that Dragados could not enforce a contractual stipulation in its favour (to reduce the Prices under clause 63.10) if it is the counterpart of another obligation which is breached (to validly instruct an omission in a spirit of mutual trust and cooperation).
To wrap up this segment and answer the question directly – when it comes to determining whether an instruction to omit works to give them to others is a breach of contract, the courts will look at the wording of the contract in detail i.e. does it contain clear words which permit such an omission. Moreover, this case also confirms that the courts will take into account whether such an instruction is given within the spirt of the contract.
Conclusion
The decisions in Van Oord confirm the principle set out in Abbey Developments that “clear words” are needed if a contractor intends to omit works from a Subcontractor’s contract to give them to others. These decisions also confirm that, in the absence of those clear words, such an omission would be a breach of contract. That breach of contract would be a compensation event under clause 60.1(18), which does not entitle the Contractor to reduce the Prices. Therefore, Contractors should be very careful when it comes to omissions.
Finally, the court of appeal decision also confirms that clause 10.1 is not simply there to pad out the contract. It has teeth. Specifically, clause 10.1 will be used by the courts when interpreting the likes of clause 63.10 and reductions to the Prices.
About the author
William Brown is a specialist construction and procurement lawyer, who originally qualified as a civil engineer. He uses his technical knowledge of construction issues to quickly solve legal problems for his clients. As an engineer, he prides himself on providing legal advice that is commercially focused and straight to the point.
Fortfield & Brown Ltd www.FortfieldBrown.com