The recent case of Van Oord vs Dragados offers guidance on the pricing of compensation for omission of work

Michael Sergeant

The omission of work from a contractor’s scope raises a number of complex and challenging legal issues. First, there is the question of whether such an omission is even allowed if the employer transfers the work to a different contractor. Second, valuing such changes can be problematic, not least because most contract valuation mechanisms are designed with additions (not omissions) in mind. Both points were considered by the Scottish Court of Session (Outer House) in Van Oord vs Dragados, published on 30 September.

Van Oord had been employed under standard NEC subcontract conditions (Option B) to carry out dredging work on the Aberdeen harbour expansion project, when part of its scope was transferred to other subcontractors. There is a widely held perception in the construction industry that this amounts to a breach of contract. In fact, the position is rather more nuanced.

For obvious commercial reasons, omitting work and redistributing it to others can undermine the commercial basis of the parties’ contract. A contractor’s lump sum may contain low rates and high rates, so if an employer can subsequently retender certain parts, this can unfairly subvert the bargain. However, construction contracts typically contain wide variation clauses with no limit on the right to omit – and so on what basis is there a restriction? After all, English (and Scottish) courts are normally reluctant to imply extra terms into an agreement.

The Court of Session reiterated the position that there is no principle of law debarring an employer from omitting work and giving it to another

Even though this point concerning the right to omit often arises in practice, there is very limited case law on the subject. There is only one English TCC case, Abbey Developments vs PP Brickwork dating from 2003, which tries to get to grips with the point. That case was not included in any official law reports, although a transcript of the judgment is referred to (and relied upon) in the Van Oord case.

The Court of Session reiterated the position that there is no principle of law debarring an employer (or main contractor in this case) from omitting work and giving it to another. The court made it clear that it is necessary to review the contract as a whole to determine whether it contains such a power. The contract expressly stated that the main contractor could omit and redistribute the subcontractor’s work where it had received a corresponding instruction under the main contract. The court concluded that because the contract provided for this express entitlement, if there was no instruction (as was indeed the case), the main contractor had no right to omit. The judgment therefore usefully adds to the slim body of case law available to parties that are trying to assess whether an omission of work amounts to a breach.

Having determined liability, the court moved onto the question of quantum. Since it had decided the omission was a breach, one may have expected its assessment to be based on the usual principles for assessing damages. However, the court decided that even though the instruction was a breach it still had the effect of altering the scope of works under the contract. This, in turn, meant that compensation for the omission had to be calculated in the usual way, using the pricing mechanism under the NEC subcontract valuation rules.

Of course, all compensation events (including variations) are priced under NEC using the figures in the contract appendix called the Shorter Schedule of Cost Components (SSCC). Assessing an omission in this way will seem counterintuitive. The expectation will often be to simply delete the relevant item from the contract sum build-up – the corresponding figure from the bill of quantities. Calculating the deduction using the SSCC figures can lead to significantly different results. The justification for this approach, as cited by the Court of Session, is that NEC contracts’ use of the SSCC ensures that variations are priced in a neutral way that avoids using the lump sum build up which is often said to lead to difficulties. The court stated that the SSCC was intended to “provide an objective method of giving effect to the change … in a way that does not leave the contractor either better off or worse off”.

Of course, whether this is the case depends, in turn, on the figures that have been included in the SSCC. While the name of the SSCC indicates that it adopts cost-based pricing, the figures incorporated in such schedules will often include prices (not costs), such as pre-agreed equipment rates and hourly rates for personnel. Therefore, if one uses the SSCC to price variations (including omissions) one is arguably simply exchanging a set of prices in the bill of quantities for another when it comes to pricing change.

Michael Sergeant is a partner in the construction team at HFW and co-author of Construction Contract Variations.