Omitting works from an NEC contract: Valuation under the contractual mechanism
The recent decision in Van Oord v Dragados [2020] CSOH 87, is a useful reminder to parties to construction contracts about the potential dangers of varying the scope of works under the contract and how such variations may be assessed under the contract, in particular under an NEC form of contract.
Background
Dragados was the main contractor for the design, management and construction of the Aberdeen Harbour expansion. Van Oord was engaged by Dragados as its subcontractor to complete the soft-dredging works under the NEC3 form of subcontract (Option B).
As the works progressed through 2018 and 2019, Dragados began to instruct the omission of certain works from the scope of Van Oord’s subcontract. The works were not simply omitted, but were given to another sub-contractor to complete. As a result, Van Oord was denied not only the opportunity to carry out a significant portion of its works but its profit on those works.
The matter went to adjudication with the adjudicator finding largely in favour of Dragados.
‘Defined Cost’ under NEC v bill of rates?
Dragados argued that the compensation events mechanism was appropriate for all compensation events, including breaches of contract. As the omission of works constituted a compensation event under the NEC subcontract, Dragados claimed that this reduced the total amount payable to Van Oord for the remaining works to be carried out. The amount payable for the works which remained should be valued on the basis of the ‘Defined Cost’ (the actual costs), rather than the amounts included in Van Oord’s bill of rates.
Van Oord commenced court proceedings and contended, among other things, that:
- Dragados was not entitled to give the work omitted from Van Oord’s scope of work to another sub-contractor;
- this amounted to a breach of contract; and
- Dragados was not entitled to reduce the amount payable to Van Oord, rather payment should have been made on the basis of the original bill of rates.
The decision
In relation to the first issue, Lord Tyre in the Scottish Court of Sessions did not identify a contractual entitlement for Dragados to omit the works and transfer them to another sub-contractor. The Court noted that even if the variations clause provides for omissions to be made from the scope of works, this does not necessarily mean they can be given to a third party to complete.
The principles identified in the English decision in Abbey Developments Limited v PP Brickwork Limited [2003] EWHC 1987 (TCC) were followed in this case, namely:
- The contractor has a duty to carry out the work and has the right to complete the work;
- Variation clauses must be considered carefully, so as not to deprive the contractor of their right to complete the work – there must be wording entitling an omission of work and giving it to another contractor; and
- The reason or motive behind the omission is irrelevant. The entitlement to omit work and give it to another to complete all turns on whether the contractual clause allows for the change.
The Court also identified that there was a breach, being the instruction to change the Subcontract Works Information by way of the omission of works. Despite it being a breach, the omission of works was considered to be a ‘compensation event’ under the NEC subcontract, meaning that it would fall to be considered within the compensation event mechanism. The Court held that this was the only method of assessment, even if it resulted in Van Oord being entitled to a reduction in payment.
Lord Tyre identified that the use of the compensation calculation in the NEC subcontract, which is based on identifying the ‘Defined Costs’, was a more objective way of giving effect to the change to the scope of works, including a change that occurs as a result of a breach of contract.
Going forward
It is unsurprising that the court held that omitting the scope of works and giving these works to another party was a breach of contract. However, parties to construction contracts, in particular an NEC form of contract should take note of the court’s use of the contractual compensation mechanism as a means of assessing the consequences of omitting works. Just because the instruction, i.e. the omission of works, resulted in a breach of contract, this did not prevent it from also being a change to the subcontract which should then be assessed in accordance with the contractual mechanism.
This decision highlights the fact that contractual compensation mechanisms may not work in your favour, even in circumstances where the other party has breached the contract.
Although this was a Scottish decision, it is more widely relevant as the NEC contracts are used extensively across the UK. Care should be taken when it comes to drafting and negotiating variation clauses. If changes to the scope of works are envisaged, ensure that the contract properly provides for this so that the affected contractor (or subcontractor as in this case) is no better or worse off.
This article was written by Anna Sowerby and Eveline Strecker. For more information, please contact Anna or Eveline.
