NEC and the principle of good faith in contracts: Decision in Van Oord v Dragados

The Inner House of the Court of Session has handed down its Opinion in the case of Van Oord UK Ltd v Dragados UK Ltd, a case relating to the construction of a new harbour at Nigg Bay.  Van Oord was a subcontractor to Dragados, engaged to undertake dredging work under a subcontract based on the NEC3 form.  Van Oord had priced the subcontract works on the basis of a blended rate, as some parts of the subcontract works were considered to be easier than others.  Dragados removed various elements of the easier subcontract works from Van Oord and gave them to other subcontractors. 

Things then got interesting with Van Oord having only learned of the reduction in scope sometime after the event.  Dragados then tried to reduce the rate for the remaining subcontract works, using the compensation event mechanism, by almost 50%.  Van Oord objected to this, with the end result being that Dragados terminated the subcontract.

The parties were unable to agree the valuation of the works on termination.  Van Oord argued that the termination account should be valued on the basis of the tendered blended rate, as Dragados’ transfer of the subcontract work amounted to a breach of the subcontract and it had undertaken the transfers to avoid having to pay additional charges. Dragados however argued that the reduction in rate would produce a fair result, as Van Oord would have suffered a loss had it had to undertake the transferred work and the rate reduction would therefore leave both parties in no better and no worse position. 

In coming to its conclusion, the Inner House considered the compensation event mechanism and also clause 10.1 of the standard form, the requirement to act “in a spirit of mutual trust and co-operation”.  The court found that this clause “reflects and reinforces the general principle of good faith in contracts”, and that it tied in with the principle that a party to a contract cannot enforce a term in its favour if it is the counterpart of another obligation which it has breached.  (By this time, it had been accepted that Dragados’ actions in transferring the elements of the subcontract works constituted a breach.)  The Court’s opinion was that, in the circumstances, Dragados could not seek a reduction in the Prices i.e. the blended rate.

This is not the first time the courts in the UK have been asked to consider the impact of wording such as that in clause 10.1 but it reinforces the position that the parties should do more than merely pay a passing regard to the words.  Of itself, the clause should not prevent a party from relying on the terms of the contract, unless that party has acted inappropriately. 

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