[2021] ScotsCS CSIH_50

We discussed this case in Issue 244. In short, in the course of 2018 and 2019, Dragados issued various Contractor’s Instructions to omit certain areas of soft dredging from Van Oord’s works. This work was transferred to the other subcontractors. Dragados further said it proposed to reduce the sum payable for Van Oord’s remaining work under the “compensation event” provisions of NEC 3. The reduction ranged from £7.48 per cubic metre to £5.82m then £3.80m. Van Oord contested the reduction on the basis it was invalid, as Dragados had breached the subcontract. It sought payment at the original bill rate.

The Judge, at first instance, said that, in terms of the NEC3 contract here, the omission of work did constitute a breach of contract. And the contract then went on to specify the remedy – and, indeed, the only remedy – available for a breach of contract, namely that it was a compensation event. Further, Dragados was entitled to reduce the bill rate payable to Van Oord for the remaining works. The Judge said that he had reached this conclusion without having to place any significant weight upon clause 10.1:

“The Contractor and the Subcontractor shall act as stated in this subcontract and in a spirit of mutual trust and co-operation.”

Van Oord appealed to the Inner House on the question of whether or not Dragados was entitled to reduce the sums payable to Van Oord? Lord Woolman noted that the theme of unfairness underpinned Van Oord’s position. Van Oord said that Dragados was seeking to manipulate the contract in its favour. Had Van Oord known that it would be left with a disproportionately higher share of the more difficult work, it would have increased the dredging bill rate in its tender. Dragados said that NEC3 provided a “blueprint” for the circumstances that had arisen and that the recalculation yielded a fair result to Van Oord, which would otherwise receive a windfall benefit.

The Judge noted that the NEC3 consisted of a series of interlocking terms, including Clause 10.1. In the view of Lord Woolman, Clause 10.1 provided a useful starting point. It was not: “merely an avowal of aspiration.” It reflected and reinforced the general principle of good faith in contract. It also aligned with a number of key propositions of contractual interpretation:

(i) A contracting party “will not in normal circumstances be entitled to take advantage of his own breach as against the other party”: Alghussein Establishment v Eton College;

(ii) A subcontractor is not obliged to obey an instruction issued in breach of contract: Thorn v The Mayor and Commonalty of London (1876);

(iii) Clear language is required to place one contracting party completely at the mercy of the other: Parkinson (Sir Lindsay) & Co. Ltd v Commissioners of His Majesty’s Works and Public Buildings [1949].

The court concluded that: “Unless Dragados fulfils its duty to act ‘in a spirit of mutual trust and co-operation’, it cannot seek a reduction in the prices.”

Did Dragados act in a spirit of mutual trust and co-operation? In short, no. Each breach by Dragados constituted a compensation event. Although NEC3 contains a complex formula to assess the value of a compensation event, that was not needed as the Parties agreed there was a reduction in the Defined Cost. They disagreed on whether there was also a reduction in the prices and the bill rate payable for the remaining work.

The court concluded that, properly construed, clause 63.10 applied only to a lawful change. It excluded instructions issued in breach of contract. They were invalid, because they were not given “in accordance with this subcontract”. The natural synonym for “in accordance with” is “consistent with”. A breach was plainly inconsistent with the contract. The court further added that this meant that all breaches were treated equally. Second, it avoided the suggestion that Van Oord was bound to obey a “breach instruction”. That could not be right. Third, and finally, the NEC3 should not be a charter for contract breaking.