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Van Oord UK Limited v Dragados UK Limited [2020] CSOH 87

In a recent Scottish case, the Outer House of the Court of Session considered the law on instructions to omit works and a contractor’s entitlement to transfer that work to others. The court found that the contractor had breached its subcontract, but the subcontractor’s only remedy was to be determined in accordance with the compensation event regime, which resulted in a reduction of sums due. The case reminds us that clear, unambiguous wording is necessary to allow an employer the contractual right to omit works and transfer that work to others.

Background

Dragados UK Limited (the Contractor) was employed as the main contractor in a project for the design, management and construction of the Aberdeen Harbour Expansion Project. The Contractor subcontracted certain works to Van Oord UK Limited (the Subcontractor), including soft dredging works and the filling of caissons. The subcontract incorporated the standard form NEC3 subcontract conditions, using Main Option B and bespoke amendments.

From time to time, the Contractor instructed the omission of work falling within the Subcontractor’s subcontract and transferred that work to one of two other subcontractors.

Each omission of works had two separate effects, firstly and most obviously that the Subcontractor was no longer obliged or entitled to carry out the work and be paid for it, but secondly, in terms of the NEC3 contract, each omission of works constituted a compensation event. According to the Contractor, this resulted on each occasion in a reduction of the total amount payable to the Subcontractor for the works that it still had to carry out under the contract.

A dispute arose regarding the omission of works and the court had to consider three issues:

  1. Whether the Contractor was entitled in terms of the subcontract to transfer work to others or alternatively, whether in doing so, the Contractor was in breach of contract
  2. If the Contractor was in breach of contract, whether, in terms of the contract, the effect of omission of the works transferred was to reduce the bill rate payable to the Subcontractor in respect of works that it still had to carry out, and
  3. The proper interpretation of the provisions of the subcontract relating to wave measurement for the purpose of determining whether the Subcontractor was entitled to a compensation event for adverse weather conditions

In relation to the first issue, the Subcontractor relied on the case of Abbey Developments v PP Brickwork [2003] EWHC 1987 (TCC) where the court said that the question of whether works could be omitted depended on the interpretation of the contract. The Subcontractor argued that clause 14.3 of the contract contained expressly agreed circumstances in which the Contractor could instruct that work to be omitted and this was only where the project manager under the main contract had issued a corresponding instruction. As there was no corresponding instruction here, the clause had no application. The Subcontractor also submitted that the Contractor’s removal of work from the scope of works was a breach of the obligation to act in a spirit of mutual trust and co-operation as it transpired that the Contractor had included parts of the same works in other subcontracts and therefore the Contractor clearly had the possibility of transfer in mind when contracting with the Subcontractor.

The Contractor submitted that by means of the compensation event mechanism, NEC3 provided a fair and adequate procedure to compensate a subcontractor for omissions and therefore instruction of an omission should not be regarded as a breach of contract.

Held

Applying the principles identified in Abbey Developments, Lord Tyre found that the Contractor did not have a clear contractual entitlement to omit works and transfer them to another subcontractor as it had done here. It was significant that the contract expressly provided in clause 14.3 for a particular situation in which the Contractor was entitled to give an instruction to omit work, and in Lord Tyre’s view, that raised an inference that in other circumstances, the Contractor was not so entitled.

Given that the Contractor had no entitlement to omit works (other than under clause 14.3), such instructions were in breach of the subcontract. However, despite it being a breach, the court held that the Subcontractor’s only remedy was to be determined in accordance with the compensation event regime, even if this resulted in the Subcontractor being entitled to a reduction in sums. The court did not make a decision on the wave measurement issue, stating that the proper interpretation would be better determined at trial.

Comment

If working under the NEC3 subcontract provisions, subcontractors should be aware that where an instruction to omit works is issued and this instruction is made in breach of contract, that instruction will trigger the compensation event process which may result in a reduction in rates paid for the remaining work. The court commented that this should not necessarily leave the subcontractor ‘worse off’ as the contract is designed to provide an objective measure of change. The judge held that a reduction in rates that might, on its face, leave the subcontractor worse off, may only reflect losses that would in any event be incurred.

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