A case considering whether:
- it is always a breach of contract to omit work from a sub-contractor and pass those works to another sub-contractor; and
- how that breach of contract is to be valued by reference to the contract terms.
In its judgment dated 30 September 2020, the Court of Session, Scotland, held that while instructions to omit certain sub-contract works constituted a breach of contract on the part of the contractor, the NEC compensation event mechanism nonetheless applied to the valuation of the remaining works.
By way of background:
- Aberdeen Harbour Board appointed Dragados UK Limited (contractor) in relation to the design, management and construction of the Aberdeen Harbour Expansion Project at Nigg Bay, Aberdeen.
- The contractor appointed Van Oord UK Limited (sub-contractor) under a sub-contract dated 16 March 2020 to undertake among other things, soft dredging works. The sub-contract was based on the NEC3 engineering and construction sub-contract conditions (Option B), as amended by schedules of amendments.
- Throughout the course of the sub-contract works, the contractor instructed various omissions of soft dredging work via contractor's instructions, which work it awarded to two other sub-contractors.
- The effects of the omissions were that: a) the sub-contractor was no longer able to undertake a significant proportion of the work and be paid for it (including the profit on that work); and b) each omission constituted a compensation event under the sub-contract, meaning the sum payable for works not omitted was calculated by reference to defined cost eg actual costs, both incurred and prospective, rather than sums included in the sub-contract's bill of quantities. In this matter, this resulted in a reduction in the amount payable to the sub-contractor for works still to be undertaken under the sub-contract.
- Following unsuccessful adjudication, the sub-contractor maintained before the court (among other things) that the contractor was not entitled to reduce the sum payable to it for work done following the contractor's disputed contractor's instructions and claimed payment of sums calculated by reference to the original bill rate.
The court's decision
The court endorsed and applied the principles of English case Abbey Developments Limited -v- PP Brickwork Limited  EWHC 1987, holding that while in principle agreements could provide for the omission of works and their subsequent award to alternative contractors (provided drafting is clear and sufficiently wide) the terms of this sub-contract did not entitle the contractor to omit works and have them carried out by others instead. Of particular note:
- Given the express entitlement in the sub-contract for the contractor to instruct the omission of works when they were omitted from the main contract, the lack of express provision entitling omission of works so that other third parties could undertake it created at least an inference that the contractor was not entitled to make the omission.
- In this case the omission was a breach of contract.
- The contractor's reasons for instructing the omission of work were irrelevant. In this case the contractor appeared to be contracted with the three sub-contractors for some of the works.
However, this did not assist the sub-contractor because the court held that notwithstanding that the contractor's instructions constituted a breach of contract, the compensation event mechanism (and consequently the method of valuing compensation events) applied to the instructions, even if this resulted in the sub-contractor being entitled to lower sums as a result. Here, the court highlighted, among other things, that:
- There was nothing unusual about compensation events comprising a breach of contract. Indeed, a large number of compensation events under NEC contracts relate to breaches of contract.
- The premise for assessing the financial effects of compensation events by reference to defined costs is to ensure that contractors are no better or worse off as a result of the relevant compensation event. Accordingly, it may be the case here that the reduction in the bill of rates merely reflected losses which would have been incurred by the sub-contractor in any event.
- The principles of Abbey Developments
remain good law in Scotland (and as this case will be persuasive
precedent in English courts, are likely to remain good law in
England and Wales too), namely:
- That a contract for the execution of work confers a right on the contractor to complete the work (in addition to the obligation to complete the work)
- Clear drafting is required if the employer is to be entitled to omit works from the contractor and award them to a third party (although this is permissible in principle)
- If you are an employer or a contractor and there is a component of the works which you may wish to omit from a (sub)-contractor's scope, you should consider your proposed form of (sub-)contract carefully to ascertain whether this is going to be possible without breaching the terms of the (sub-)contract.
- If you are a (sub-)contractor, this case highlights the importance of appropriate pricing of works and of the need to consider the likelihood of works being taken away from you (including the benefits of undertaking appropriate due diligence in this regard, wherever possible)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.