De-scoping occurs when a contractor varies a subcontractor’s scope of works to omit certain works, for the purpose of having those works done by another contractor.
This article will discuss the recent Scottish case of Van Oord Uk Limited v Dragados UK Limited. In that case, the Outer House of the Court of Session discussed whether the contractor’s de-scoping amounted to a breach of contract. The article will also discuss the implications of the case for both contractors and subcontractors. [1]
Facts
Dragados UK Limited (“Dragados”) engaged Van Oord UK Limited (“Van Oord”) to carry out dredging works on the Aberdeen Harbour Expansion Project on the west coast of Scotland. The subcontract was an amended NEC3 form of contract.
Shortly after the contract between Van Oord and Dragados was formed, Dragados entered into agreements with two other contractors. The scope of those contracts included work that was also in Van Oord’s subcontract. This took place without the knowledge of Van Oord.
During the progress of Van Oord’s subcontract works, Dragados issued instructions which had the effect of taking work from Van Oord’s work scope and adding it to the other contractors’. Van Oord brought a claim against Dragados, arguing that this amounted to de-scoping and was a breach of contract.
Issues
The court had to decide the following issues:
- Was Dragados in breach of contract by omitting work from Van Oord’s subcontract in order to give it to other contractors?
- If so, how are the damages flowing from that breach to be valued?
Issue 1
The key term of the amended NEC3 subcontract was clause 14.3, which stated that
“The Contractor may give an instruction to the Subcontractor which changes the Subcontract Works Information or a Key Date. The Contractor may, in the event that a corresponding instruction is issued by the Project Manager under clause 14.3 of the Main Contract only, also give an instruction to omit (a) any Provisional Sum and/or (b) any other work, even if it is intended that such work will be executed by Others. The Subcontractor has no claim for loss of revenue, loss of opportunity, loss of any contract, loss of profit or for any indirect loss or damage against the Contractor in relation thereto.”
In considering whether Dragados’ instructions resulted in a breach of contract, Lord Tyre examined the decision in Abbey Developments Ltd v PP Brickwork Ltd [2003] EWHC 1987.
In Abbey Developments, the contractor removed work from the brickwork subcontractor’s contract, in order to have it done by another subcontractor. The contractor’s primary gripe was that the subcontractor was falling behind on programme. HHJ LLoyd QC set out the following principles in a case where a contractor omits work from a subcontractor in order to have it done by another subcontractor:
- A contract for the execution of work provides the subcontractor with a duty to carry out that work and a corresponding right to complete it. To omit work without a variations clause is a breach of contract.
- A variations clause should be construed carefully so as not to deprive the subcontractor the opportunity to complete the work and make profit on it.
- Reasonably clear words are needed in the variations clause in order to remove work from the subcontractor in order to give it to others.
- The contractor’s motive for omitting the works – which could include commercial, timing or quality reasons - is irrelevant.
Applying the above principles, Lord Tyre held that clause 14.3 did not give Dragados a “clear contractual entitlement” to omit work from Van Oord in order to give to others. The only exception was where there was a corresponding instruction under the same clause of the main contract, which there was not. Therefore, Van Oord’s instructions amounted to de-scoping and was therefore a breach of contract. Lord Tyre also stated that the exception in clause 14.3 inferred that no other circumstance would permit omitting work from Van Oord’s contract in order to award that work to others.
Issue 2
In establishing how the damages from Dragados’ breach should be valued, Lord Tyre again found assistance from HHJ LLoyd QC in Abbey Developments. HHJ LLoyd QC stated that
“The valuation provisions of many contracts also provide the [sub]contractor with a means of obtaining acceptable compensation in the event of omissions which deprive it of profit…In these circumstances it may be doubted if there would be a viable claim for breach of contract even if the work is given to another if the contract provides its own means of awarding the contractor amounts it that might recover if it had a claim for breach of contract.”
Applying that principle in the present case, the judge held that the NEC3’s Compensation Event mechanism provided an adequate remedy to Van Oord.
Commentary
Contractors reducing a subcontractor’s work scope in order to give the omitted work to another subcontractor is a common occurrence on construction projects.
Parties should note the ingredients required in a variations clause as stated in Abbey Developments. The JCT Standard Building Contract 2016 (“JCT SBC 2016”), for example, states that the “addition, omission or substitution of any work” is a variation, but does not extend to allow the contractor to give the omitted work to others. The FIDIC Red Book 2017 expressly forbids the client from omitting work in order to give it to others.
As found in Abbey Developments and Van Oord, the remedy following a breach of contract for de-scoping will be to use the valuation mechanism contained in the contract. Taking the examples in this article, it could be argued that the NEC3, JCT SBC 2016 and FIDIC Red Book 2017 all have sophisticated valuation provisions which would satisfy this criteria. In instances where there is no valuation mechanism, the subcontractor may be able to claim for the loss of profits on the omitted work.
In the pre-contract stage, parties should consider what the variations clause permits, and whether this extends to an express right for the contractor to omit work in order to give it to others. If the clause is drafted to permit those circumstances, the commercial effect should be scrutinised. Does the clause allow only those costs that have been incurred by the subcontractor that will not be recovered (e.g. mobilisation of plant) or, more generously, loss of profits on the omitted work?
[1] This article is based on a contractor/subcontractor scenario in line with Van Oord v Dragados. However, the principles remain the same for an employer/contractor example.
