A new ruling shows you can’t breach part of a contract then use the contract machinery to turn that breach in your favour, explains Tony Bingham 

The recent case of Van Oord UK Ltd vs Dragados UK Ltd in the Scottish Court of Appeal isn’t exactly a pebble in the pond; it’s more like a boulder in the briny. And if you currently have an NEC contract that is a tad niggly, the findings of this senior court may give you some excitement or at least pause for thought.

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The court explained a particular clause that sits smack bang on the first page of an NEC contract: clause 10. In the NEC 3 contract, this clause reads: “The contractor and the subcontractor shall act as stated in this subcontract and in a spirit of mutual trust and co-operation.” And in NEC4 it says: “The parties, the project manager and the supervisor act in a spirit of mutual trust and co-operation.”

This wording has been there since 1993. On its face it means that the parties are to work together in a co-operative manner. The bed-fellow of the phrase “mutual trust and co-operation” is “good faith”. That is explained as a contractual duty to be “honest, fair and reasonable and not attempt to improperly exploit” the other party to the contract. I baulk; I mutter “as if”!

Is it possible to suggest that our beloved building and contracting world would attempt to exploit, to take advantage, of the other party? My mind runs to the next adjudication where it is argued that X is being “unfair” to Y. That notion, said one judge, is difficult to police because it is so subjective.

Good faith has conveyed ideas of playing fair, coming clean or putting one’s cards face upwards on the table. “Dear me, no,” say the lawyers in these lands hereabouts. We have not committed ourselves to any overriding principle of good faith. Instead we have developed particular solutions to problems of unfairness … we strike down unconscionable bargains, we legislate against unfair contract terms. We didn’t like the EU when it imported a requirement of good faith. Damn it: there is a real possibility that disputes would become so plagued by these notions as to undermine what the contract says on its face!

A party cannot enforce a contractual stipulation in its favour, if it is the counterpart of another obligation which it has breached

So, what’s up? Dragados is the main contractor for the harbour extension at Nigg Bay, near Aberdeen. Its subcontract for dredging just over 2 million m³ of work was placed with Van Oord UK Ltd. It was for £26.4m. The per m³ rate of £7.48 was an all-in blended rate, taking in its costs for both easier and more difficult dredging. That was in May 2018.

Dragados then issued an instruction omitting 400,000m³ of work, and then later one for another 300,000m³. It also said to Van Oord that the rate then payable for the work done via NEC3 was £5.82/m³, then that it was £3.80/m³. That was, said Dragados, just the way the “defined cost” system in NEC contracts works.

But there is a snag. Unbeknown to Van Oord, the omitted works were placed with two other subcontractors. But, it’s not in this subcontract to remove works from the employed subcontractor to have it done by some other subcontractor. To do that, said all of the judges, was a breach of contract. So now what?

Dragados persuaded the first-instance court that the NEC compensation events and defined cost machinery applied even to such breaches of contract. Those rules pointed to reducing the rate for all the work done by Van Oord from £7.48/m³ to £3.38/m³. Van Oord argued for its £7.48/m³ rate.

NEC compensation event machinery and defined costs machinery cannot be used as a gotcha by the outfit that breached the bargain

But the Court of Appeal took hold of clause 10. It rejected the first-instance judge’s remark that, “I do not consider that [Van Oord’s] argument based on clause 10.1 adds anything to what has already been discussed.” The upper court said that it did. “In our view, clause 10.1 is not merely an avowal of aspiration. Instead it reflects and reinforces the general principle of good faith in contract.”

Oh dear! It has taken damn near 30 years to get that bald statement from the courts. NEC folk have been saying it for all that time.

So what? Here is what this means:

  • A contracting party will not in normal circumstances be entitled to take advantage of its own breach of contract.
  • A subcontractor is not obliged to obey an instruction issued in breach of contract.
  • Clear language is required to place one contracting party completely at the mercy of the other.

Or, in lawyer language – the words of the ruling: “A party cannot enforce a contractual stipulation in its favour, if it is the counterpart of another obligation which it has breached.” It’s called, said the Court of Appeal, “the doctrine of mutuality”.

To put it in my language: Dragados cannot behave as it did then seek a price reduction. NEC compensation event machinery and defined costs machinery cannot be used as a gotcha by the outfit that breached the bargain. The clause 10 stipulation to act “in a spirit of mutual trust and co‑operation” collides head on with what Dragados did in breach of contract.

Now what? The boulder will go, I guess, to five judges in the Supreme Court. Meanwhile, can I decide the next NEC adjudication, please?

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple