Omissions in NEC Contracts

Anyone who has been involved in a project governed by an NEC project will know that there are lots of high-minded “good faith” obligations that often get ignored.  They may also know that omissions from the contract are permitted and that they are classed as compensation events.

Last year, in Van Oord UK v. Dragados UK [2020] CSOH 87, the Scottish Court of Session (separate jurisdiction to England, but applying similar principles) considered the NEC provisions on omissions.

NEC3 provided for omissions to provide to another contractor, but only if there was a corresponding instruction under the main contract.

Dragados (the main contractor) engaged Van Oord as the dredging subcontractor.  It then omitted a large amount of Van Oord’s work and gave it to another subcontractor.  More significantly, the effect of that omission (according to Dragados’s interpretation of the contract) was to reduce the amount payable to Van Oord for its remaining work, making the remaining work much less profitable.

When the case got to the first instance court (called the “Outer House” in Scotland), Lord Tyre decided that Dragados was in breach.  That part is fairly unsurprising, particularly given the English case of Abbey Developments Ltd v PP Brickwork Ltd [2003] EWHC 1987 which says that the right to omit works to give to another contractor must be very clear to be enforceable.

However, also at first instance, Lord Tyre decided that the breach by Dragados was a compensation event under 63.10 (agreeing with Dragados’s position), which entitled Dragados to reduce the amounts payable.  This meant that Van Oord lost out considerably because it had the price of the easier (more profitable) works removed, leaving it with the less profitable works only.

The Scottish appeal court (called the “Inner House”) reversed that latter decision, and it did so expressly on the basis of the NEC’s “good faith” provisions.  This is what makes the case so interesting; the courts of both England and Scotland have historically been fairly slow to recognise “good faith” clauses, generally regarding them as getting in the way of proper business practices.  However, this is not the first case that they have been enforced and may not be the last; the courts appear to be increasingly willing to .  Anyone who has had training in relation to NEC will know that “good faith” is regarded as a central pillar of the NEC process, and it is nice to see the courts recognising it as having force of law.

Following the Inner House’s recognition of the “good faith” clause, it decided that in fact this breach should not be dealt with as a compensation event under 63.10, on the basis that the omission was not made “in accordance with this subcontract”, and instead should be a compensation event under clause 60.1, which did not entitle Dragados to reduce the prices.

The interpretation of the contract given by the Inner House is probably the preferred interpretation in any event, even without the “good faith” obligations.  However, the fact that it was used by the court in its analysis leading up to that interpretation at least means that the “good faith” obligation does in fact have some teeth.

 

David Richards | Partner | Litigation Department

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