Tuesday, 6 October 2020

Van Oord UK Ltd v Dragados UK Ltd

2020 CSOH 87 

Dragados was employed as the main contractor in a project for the design, management and construction of a harbour expansion project in Aberdeen. By an agreement, incorporating NEC3 option B, Dragados subcontracted the soft dredging works to Van Oord. However, Dragados entered into subcontracts with two other subcontractors. These both included an area of soft dredging works which also formed part of the scope of the work under Van Oord’s subcontract. Van Oord did not know about this prior to the commencement of the court proceedings. Van Oord began dredging work in May 2018. In the course of 2018 and 2019, Dragados issued various Contractor’s Instructions to omit certain areas of soft dredging from Van Oord’s works. This work was transferred to the other subcontractors.

In terms of the NEC3 contract, each omission of works constituted a compensation event. The effect of a compensation event on the sum payable under the contract was calculated not under reference to sums in the bill of quantities but rather under reference to Defined Cost. According to Dragados, this resulted on each occasion in a reduction of the total amount payable to Van Oord that it still had to carry out under the contract. Those reductions were given effect by a reduction on each occasion in the bill rate payable by Dragados for Van Oord’s remaining work. 

So was the transfer of work from Van Oord to the other subcontractors a breach of contract? Van Oord relied on the case of Abbey Developments Ltd v PP Brickwork Ltd [2003] EWHC 1987, where the court said that there was no absolute rule of law prohibiting transfer of work to another contractor in any circumstances. The question of whether works could be “omitted”, i.e. removed from the scope of the contract, whether transferred to another contractor or not, depended upon the proper interpretation of the contract. 

Van Oord said that here there was no provision permitting such transfer. By clause 14.3, the parties had expressly agreed circumstances in which Dragados could instruct that work be omitted, even if it was transferred to someone else to carry out, namely where the project manager under the main contract had issued a corresponding instruction. The parties had further agreed by inclusion of clause 60.1(21) that the issuing by Dragados of such an instruction was a compensation event. It was not suggested that there had been any corresponding instruction issued under the main contract and accordingly those subclauses had no application to the circumstances here. Dragados’ purpose or motive was irrelevant. 

Van Oord further said that the removal of work from the scope of its works and its transfer to the other subcontractors was a breach of Dragados’ obligation under clause 10.1 to act in a spirit of mutual trust and cooperation. Without informing Van Oord of its intention at the time of entering into the subcontract, Dragados had “triple-contracted” in relation to approximately one third of Van Oord’s works.

Dragados said that the removal of work from the scope of works was not a breach of contract. By means of the compensation event mechanism, NEC3 provided a fair and adequate procedure to compensate a subcontractor for omissions, with the purpose of ensuring that the subcontractor was neither better nor worse off as a result. Instruction of an omission should not therefore be regarded as a breach of contract. 

Lord Tyre summarised the PP Brickwork case in this way:

  • “A contract for the execution of work confers on the contractor not only a duty to carry out the work but a corresponding right to complete the work which it contracted to carry out. 
  • A clause entitling the employer to vary the works must be construed carefully so as not to deprive the contractor of his contractual right to the opportunity to complete the works and realise such profit as may then be made. Clear words are needed if the employer is to be entitled to remove work from the contractor in order to have it done by somebody else. 
  • There is no principle of law that says that in no circumstances may work be omitted and given to others without incurring liability to the original contractor. The test is whether, on a proper interpretation of the contract read as a whole, the clause relied upon by the employer is wide enough to permit the change that was made. 
  • The employer’s motive or reason for instructing the omission of the work is irrelevant.” 

Applying those principles to the circumstances here, the question for the Judge was whether the terms of the subcontract entitled Dragados to omit works from the scope of the subcontract works and have them carried out instead by another party. Lord Tyre did not consider that there was a clear contractual entitlement to omit works and transfer them to another subcontractor in the way Dragados had done here. By expressly providing for a particular situation in which Dragados was entitled to give an instruction to omit work, that raised an inference that in other circumstances Dragados was not so entitled.

The Judge made it clear that he had reached this conclusion without having to place any significant weight upon clause 10.1. Given that the motive for omitting the works was irrelevant, it was not necessary in this context to inquire into whether the omission of the works amounted to a breach of the obligation under clause 10.1 to act in a spirit of mutual trust and cooperation. 

In terms of the NEC3 contract here, the omission of work did constitute a breach of contract. And the contract then went on to specify the remedy – and indeed the only remedy – available for a breach of contract, namely that it was a compensation event. 

Case over-turned on appeal. See Issue 257.

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