Around this time last year, I produced an article on the first instance decision on the case of Van Oord UK Limited v Dragados UK Limited [2020] CSOH 87. The Inner House has recently reversed the decision in that case and has set the case down for a proof before answer (a trial on facts and law).

Background

Whilst the works were on-going, Dragados (the main contractor) issued a number of Contractor's Instructions to omit works from Van Oord's (the sub-contractor) scope. These works were then given to other sub-contractors. Dragados argued that each of these instructions was a compensation event, which meant that the bill rate payable to Van Oord could be reduced accordingly.

Van Oord's position was that the instructions were issued in breach of contract and that the bill rate should not be amended. The works which were omitted were the "easier" parts of its works – meaning that, if Dragados position was correct, Van Oord would have to carry out the more difficult works for a lower rate.

First Instance Decision

Two key points arose from the original decision:

  1. Dragados was not entitled to omit the works from the Van Oord contract. Dragados was in breach of contract by issuing these instructions.
  2. Despite the fact that the instructions were issued in breach of contract, compensation events still fell to be valued in accordance with the mechanism set out in the contract. This meant that, as the scope changed, the rates required to change accordingly.

The judge at first instance therefore found in favour of Dragados and their approach of reducing the rates for the remaining works.

Inner House Decision

However, the Scottish appeal court (the Inner House) found in favour of Van Oord. In doing so, they relied on a number of factors:

  1. The terms of clause 10.1, that parties "shall act as stated in this subcontract and in a spirit of mutual trust and co-operation.
  2. That a party will not normally be entitled to rely on its own breach of contract.
  3. A subcontractor is not obliged to obey an instruction issued in breach of contract.
  4. It must be clear from the words used in a contract if a party is to be left at the mercy of the other.

The Court stated that the doctrine of mutuality applied – and that clauses 10.1 and 63.10 were counterparty clauses under the NEC form of contract. This meant that as Dragados had breached its contractual obligations to act in a spirit of mutual trust and cooperation (under clause 10.1), it could not then seek to benefit from a provision that allowed it to reduce the Prices (clause 63.10).

The Court went on to confirm that changes to the Prices under clause 63.10 could only apply to a lawful change – not one which arose from an issue instructed in breach of contract. This meant that Dragados could not reduce the Prices.

Conclusion

Clause 10.1 has sometimes been regarded as ineffectual, suggesting good intentions but with little practical effect. The Inner House expressly rejected this saying "clause 10.1 is not merely an avowal of aspiration. Instead it reflects and reinforces the general principle of good faith in contract." A breach of this clause will have real and practical consequences. As the title suggests, perhaps we all now need to have a little more "faith" in our contractual dealings under the NEC model.