Descoping: Can the omission of works constitute a breach of contract?

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White & Case LLPA recent Scottish case considers the contractual power to omit works and highlights key principles applicable to the question of whether omitted works can be transferred to another contractor.

The descoping or omission of works (sometimes referred to as "negative variations") relates to the removal of part (or, on rare occasions, all) of the works awarded to a contractor or subcontractor, and is a common feature of construction contracts. 

The contractual right to omit works grants employers and contractors flexibility over the scope of works in main contracts and subcontracts, respectively. However, it may also deprive the contractor or subcontractor of the "right" to make a profit on the omitted works. 

The omission of work from one contractor for the purpose of giving the work to another contractor is a particularly problematic issue, especially where the contract does not expressly permit an omission to be made for this purpose, or does not provide for adequate compensation to the contractor whose work has been descoped.

Standard Forms of Contract

The framework governing the right to descope works varies across the standard form contracts. Contract forms typically place some form of limitation on the extent to which works may be omitted. 

  • Sub-Clause 13.1(d) of the FIDIC Red Book 1999 and Sub-Clause 13.1(iv) of the FIDIC Red Book 2017 permit omissions to the work, but prohibit the employer from omitting work where the employer intends to hand over the work to another contractor. 
  • Similarly, Sub-Clause 15.5 of the 1999 edition of the FIDIC Red Book provides that after terminating the contract for convenience, the employer shall not execute the works itself or arrange for any part of the works to be executed by another contractor. The 2017 edition permits the employer to do so only after the contractor has been properly compensated for its losses (including loss of profit).

Not all standard form contracts expressly empower omission of works for the purpose of giving the work to another contractor. Although clause 5.1.1 of the JCT Design and Build 2016 permits "the addition, omission or substitution of any work," it does not provide for the provision of the omitted work to other contractors. This raises the question: May omitted work be given to another contractor if a contract does not clearly provide for the right to do so?  This was the issue that arose recently before the courts of Scotland.

Van Oord UK Limited v Dragados UK Limited [2020] CSOH 87

Background

Decision

The court followed the guidance provided in the English case of Abbey Developments Limited v. PP Brickwork Ltd [2003] EWHC 1987 (TCC), which involved a similar omission of work from one subcontractor and the engagement of an alternative subcontractor to carry out the omitted work. The applicable principles derived from this case law are that:

  • A contract for the execution of work confers on the contractor not only a duty to carry out the work but a corresponding right to complete the work which it contracted to carry out.
  • A clause permitting variation to the works must be construed carefully so as not to deprive the contractor of its right to complete the work and realise profit from completion. Clear words are needed to grant an entitlement to omit work from one contractor and to transfer it to another.
  • The motive or reason for the omission of the work is irrelevant. The test is whether the clause relied upon is wide enough to permit the change.

After applying these principles, the court held that the Contractor did not have a clear contractual entitlement to omit works and to transfer them to another subcontractor in these circumstances. Clause 14.3 of the Subcontract did not apply, since the project manager under the main contract had not issued a corresponding instruction to omit the descoped works.

Commercial implications

Descoping work, whether by a negative variation or even a termination for convenience, may be an uncomplicated matter where the employer simply wants to omit the work in question.  But where an employer wishes to descope work to give it to another contractor, the employer’s conduct is often treated far more seriously in law, and may constitute a breach (as in Van Oord v. Dragados) or even a repudiation of the contract in question by the employer.  

Drafting clarity is therefore needed:

  • First, contract clauses dealing with variations and termination for convenience should indicate either way whether work may or may not be descoped and given to another contractor.  Doing so is highly desirable to prevent there being disputes over the proper scope and exercise of variations or a termination power.
  • Secondly, if work is permitted to be descoped and given to another contractor, the mechanism for valuing the omission of work must be as straightforward as possible.  Commonly, an omission will involve the deduction of the relevant part of the contract price for the omitted work, whilst compensating the contractor for costs it may have incurred prior to the work being omitted, including overheads.  The recoverability of any loss of profit for the contractor on the omitted work may be controversial, and should therefore be addressed in the contractual mechanism for valuing omitted works.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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