We are regularly consulted by contractors and sub-contractors where works have been or are to be omitted from their original scope of works: employer and contractor have agreed terms and works have commenced, only for the employer to inform the contractor that it no longer requires a particular element of the works to be carried out and the Contract Sum reduced.
Understandably aggrieved, the questions we are regularly asked are, for example, can employers do this, and what are our rights if they do?
It will come as no surprise to hear that the first thing to consider is the precise wording of the contract. Express provision allowing an Employer to omit works is required, failing which the omission of works will amount to a breach: there is no common law right to omit works from an agreed scope of works. Some standard form contracts, such as the SBCC, allow employers to reduce the scope of works by way of a Variation. Whether or not this entitles the Contractor to any financial recompense for the omitted work will again turn on the precise terms of the Variation valuation provisions within the contract.
What if the Employer wishes to instruct a different Contractor to carry out the omitted portion of the works, for a lower price?
The courts have long ruled that a party should not be allowed to breach a contract simply because it has entered into a bad bargain. In other words, if an Employer seeks to omit or reduce the scope of a contractor’s scope of works simply because it has found a cheaper alternative elsewhere, unless there are clear express terms entitling the Employer to instruct others to carry out omitted works, that omission would amount to a breach of contract.
In October 2021, the Inner House of the Court of Session issued a highly anticipated Opinion in the case of Van Oord UK Ltd v Dragados UK Ltd. Dragados had entered into a subcontract with Van Oord for dredging works at Nigg Bay. Subsequently, Dragados instructed Van Oord to omit a significant amount of work from its scope and transferred that work to other subcontractors to carry out. While the NEC3 contract governing the works allowed for the omission of works, it did not provide for the transfer of those works to other subcontractors. The court at first instance decided that while Dragados was in breach of contract in omitting the works and transferring them to others, the NEC3 provisions provided that breach amounted to a Compensation Event which should be valued in accordance with the relevant valuation provisions. On appeal however, the Court ruled that the omission of works and transfer to others was also a breach of Dragados’s obligation under clause 10.1 of the NEC3 core provisions (“to act in a spirit of mutual trust and cooperation”). The court concluded that obligation was a counterpart to the valuation provisions and Dragados could not rely on those valuation provisions where it was in breach of its obligation to act in a spirit of mutual trust and cooperation.
A duty to act in good faith, while the norm in certain other jurisdictions, has not traditionally carried much weight in the UK. In NEC contracts however, clause 10.1 provides that “The Contractor and Subcontractor shall act as stated in this subcontract and in a spirit of mutual trust and co-operation”. The Inner House confirmed that this clause should be given as much weight as any other and that parties’ breach of that duty can have significant impact on their respective rights and obligations under the contract.
A contractual duty to act in “good faith” looks like it will be given more teeth by the courts than has been in the case in the past.
How can we help?
MacRoberts' specialist Construction team advises on all aspects of construction contracts. If you would like to discuss your business' particular circumstances, please get in touch with a member of our team.