Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T.

1317 (2021)

For educational use only

*1317 Van Oord UK Ltd v Dragados UK Ltd
No Substantial Judicial Treatment

Court
Court of Session (Inner House, First Division)

Judgment Date
5 October 2021

Report Citation
[2021] CSIH 50
2021 S.L.T. 1317
Court of Session (Inner House, First Division)

The Lord President ( Carloway ), Lords Menzies and Woolman

5 October 2021

Construction law—Main contractor on harbour expansion works transferring subcontracted dredging works to other
subcontractors—Whether in breach of contract—Whether entitled to reduce sum payable for subcontractor’s remaining work
under compensation provisions of NEC3—Whether contractor failing to act in a spirit of mutual trust and co-operation.

The main contractor on a harbour expansion project concluded an agreement with a subcontractor to dredge an estimated
2,150,000m³ of material, as well as the filling of caissons; the total value of the subcontract being some £26.4 million. The
terms of both the main contract and the subcontract were based on the third revision of the New Engineering Contract (NEC3).
During the course of the subcontract, the contractor transferred about one third of the dredging to two other subcontractors,
and later advised it proposed to significantly reduce the sum payable for the remaining work under the compensation event
provisions of the NEC3 contract. The bill of quantities specified £7.48 per m³ as the rate for dredging, and the contractor
had proposed to reduce it, in June 2019, to £5.82 m³, namely a 22% reduction, and further in September 2019 to £3.80 m³,
a 49.2% reduction. The subcontractor contested the reduction on the basis it was invalid as the contractor had breached the
subcontract, and sought payment at the original bill rate. Following a debate, the Lord Ordinary held that the transfer of work
did constitute a breach of the subcontract, which was now accepted, but that the contractor was entitled to reduce the bill
rate payable for the remaining works. The subcontractor reclaimed to the Inner House. The respondents argued there had
been no manipulation on its part, that NEC3 provided a blueprint for the circumstances which had arisen; further, that the
recalculation yielded a fair result to the subcontractor which would otherwise receive a windfall benefit.

Held, (1) that by cl.10.1 of NEC3, “[t]he Contractor and the Subcontractor shall act as stated in this subcontract and in a spirit
of mutual trust and co-operation”, and the court would decline to follow the Lord Ordinary’s conclusion that the term did not
add much when the clause was not merely an avowal of aspiration but rather it reflected and reinforced the general principles
of good faith in contract, in particular, cl.10.1 aligned with three specific propositions, namely that (i) a contracting party “will
not in normal circumstances be entitled to take advantage of his own breach as against the other party”, (ii) a subcontractor
is not obliged to obey an instruction issued in breach of contract, and (iii) clear language is required to place one contracting
party completely at the mercy of the other (paras 18–20); (2) that a party could not enforce a contractual stipulation in its
favour if it was the counterpart of another obligation which it had breached, cll.10.1 and 63.10 were counterparts and unless
the contractor fulfilled its duty to act “in a spirit of mutual trust and co-operation”, it could not seek a reduction in prices
in terms of cl.63.10, and the subcontractor had pled a relevant case to go to proof (paras 22–23); (3) that by cl.63.10, “[i]f
the effect of a compensation event is to reduce the total Defined Cost and the event is a change to the Subcontract Works
Information, or a correction of an assumption stated by the Contractor for assessing an earlier compensation event, the Prices
are reduced”, but, properly construed, it applied only to a lawful change and excluded instructions issued in breach of contract;
they were invalid, because they were not given “in accordance with this subcontract” (see clauses 14.3 and 27.3), the natural
synonym for “in accordance with” was “consistent with”, and a breach is plainly inconsistent with the contract; in support
of the aforementioned interpretation, all breaches were treated equally, none produced a reduction in the prices, further, it

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

avoided the suggestion that the subcontractor was bound to obey a “breach instruction”, and the NEC3 should not be a charter
for contract breaking (paras 24–30); and interlocutors recalled and proof before answer allowed .

Alghussein Establishment v Eton College [1988] 1 W.L.R. 587; [1991] 1 All E.R. 267 ; [1988] E.G. 69 (C.S.) , Thorn v
The Mayor of Commonalty of London (1876) 1 App.Cas.120, and Parkinson (Sir Lindsay) & Co Ltd v Commissioners of His
Majesty’s Works and Public Buildings [1949] 2 K.B. 632; [1950] 1 All E.R. 208 , considered .

Action for declarator

(Reported at 2021 S.L.T. 1267 )

Van Oord UK Ltd raised an action seeking declarator that Dragados UK Ltd was in breach of contract, that it was not entitled
to reduce the sum payable to it for work done consequent upon the disputed contractor’s instructions, and payment of a sum
calculated on the basis of an unreduced bill rate.

The action came before the Lord Ordinary (Tyre) for a debate of the parties’ preliminary pleas to relevancy.

On 30 September 2020 the Lord Ordinary put the case out by order (reported at 2021 S.L.T. 1267 ) .

The pursuers reclaimed.

Cases referred to

Alghussein Establishment v Eton College [1988] 1 W.L.R. 587; [1991] 1 All E.R. 267; [1988] E.G. 69 (C.S.) .
Bank of East Asia Ltd v Scottish Enterprise, 1997 S.L.T. 1213; [1996] 5 Bank. L.R. 93; [1996] C.L.C. 351 .
Macari v Celtic Football and Athletic Co Ltd, 1999 S.C. 628; 2000 S.L.T. 80; 2000 S.C.L.R. 209 .
Parkinson (Sir Lindsay) & Co Ltd v Commissioners of His Majesty’s Works and Public Buildings [1949] 2 K.B. 632; [1950]
1 All E.R. 208 .
Thorn v The Mayor and Commonalty of London (1876) 1 App. Cas. 120 .

Textbook referred to

McBryde, The Law of Contract in Scotland (3rd edn) , paras 17–23–17–34.

Reclaiming motion

The reclaiming motion was heard before the First Division.

On 5 October 2021 the court recalled the interlocutors and allowed a proof before answer.

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

The following opinion of the court was delivered by Lord Woolman:

OPINION OF THE COURT.—

Introduction

[1]. In 2016 Aberdeen Harbour Board embarked on the construction of a new harbour at Nigg Bay. It employed Dragados
as the main contractor on this major expansion project. In turn Dragados engaged Van Oord UK Ltd as the dredging
subcontractor.

[2]. The terms of both the main contract (20 December 2016) and the subcontract (16 March 2018) were based on the third
revision of the New Engineering Contract (“NEC3”).

[3]. During the course of the subcontract, Dragados transferred about one third of the dredging to two other companies. Later
it informed Van Oord that it proposed to reduce the sum payable for Van Oord’s remaining work under the “compensation
event” provisions of NEC3.

[4]. The proposed reduction was a significant one. The bill of quantities specified £7.48 per cubic metre (m3) as the rate for
dredging. Dragados proposed to reduce it, in June 2019, to £5.82 per cubic metre, a 22% reduction, and further in September
2019 to £3.80 per cubic metre, a 49.2% reduction.

[5]. 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.

[6]. The commercial judge heard a debate at first instance. He held that the transfer of work by Dragados constituted a breach
of the subcontract. He also concluded, however, that Dragados was entitled to reduce the bill rate payable to Van Oord for the
remaining works. His decision largely mirrored the outcome of earlier adjudications, which had found in favour of Dragados.

[7]. Breach is now accepted. So the question for determination is this. Was Dragados entitled to reduce the sums payable to
Van Oord? The answer turns on the proper construction of NEC3. *1319

Background

[8]. Van Oord undertook to dredge an estimated 2,150,000 cubic metres of material to create the new harbour. It also agreed
to carry out various other works, including caisson filling. The total value of the subcontract was about £26.4 million.

[9]. In its tender Van Oord inserted a ‘blended’ rate for the dredging. That rate averaged out the cost of easier and more
difficult works. Van Oord selected the rate on the footing that it would undertake all the dredging work.

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

[10]. Van Oord began dredging on 5 May 2018. Within a short period, Dragados began issuing notices to omit certain
dredging, which it transferred under the following contractual arrangements:

Date (2018) Company Volume

15 May WASA Dredging UK Ltd 400,000 cubic metres

14 December Canlemar SL 300,000 cubic metres

The formal subcontract with Canlemar was preceded by a letter of intent dated 13 August 2018.

[11]. Van Oord did not learn about the transfers for some time. It raised this action in September 2019. At that stage it
sought various orders, including interim interdict against further transfers of dredging work. Its application was unsuccessful.
The commercial judge concluded that the balance of convenience tipped in favour of Dragados, because it had entered into
binding obligations with WASA and Canlemar.

[12]. Dragados terminated the subcontract on 6 March 2020. The issue now concerns the correct valuation of the dredging
works in the termination account. Van Oord seeks (i) declarator that Dragados was not entitled to reduce the sum payable to
it for work done consequent upon the disputed instructions, and (ii) payment of a sum based on the original bill rate.

[13]. The parties advance various claims and counterclaims. Some of the disputes can only be resolved by means of evidence.

[14]. The theme of unfairness underpins Van Oord’s position. It contends that Dragados is 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. Van Oord claims that Dragados: (a) insisted on a blended rate in
the tender; (b) transferred more of the easier work to the other two companies; and (c) did so to avoid having to pay standby
charges (at least in the case of WASA).

[15]. Dragados argues that there has been no manipulation on its part. It maintains that NEC3 provides a blueprint for the
circumstances that have arisen. It also maintains that the recalculation yields a fair result to Van Oord, which would otherwise
receive a windfall benefit. With regard to factual matters, Dragados claims that Van Oord: (a) showed poor productivity; (b)
would have made a loss on the transferred work; (c) facilitated the transfer of works to WASA; and (d) would be left neither
better nor worse off by the NEC3 compensation event mechanisms.

NEC3

[16]. Like all standard form contracts, NEC3 consists of a series of interlocking terms.

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

Relevant terms

[17]. The following clauses are at the centre of the dispute:

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.”

Clause 14.3 : “The Contractor may give an instruction to the Subcontractor which changes the Subcontract Works Information
or a Key Date. The Contractor may, in the event that a corresponding instruction is issued by the Project Manager under
clause 14.3 of the Main Contract only, also give an instruction to omit a) any Provisional Sum and/or b) any other work,
even if it is intended that such work will be executed by Others. The Subcontractor has no claim for loss of revenue, loss of
opportunity, loss of any contract, loss of profit or for any indirect loss or damage against the Contractor in relation thereto.”

Clause 27.3 : “The Subcontractor obeys an instruction which is in accordance with this subcontract and is given to him by
the Contractor.” *1320

Clause 60.1 : “The following are compensation events … (18) A breach of subcontract by the Contractor which is not one
of the other compensation events in this subcontract or any act of prevention.”

Clause 60.4 :

“A difference between the final total quantity of work done and the quantity stated for an item in
the Bill of Quantities is a compensation event if

• the difference does not result from a change to the Subcontract Works Information,

• the difference causes the Defined Cost per unit of quantity to change and

• the rate in the Bill of Quantities of the item multiplied by the final total quantity of work done
is more than 0.5% of the total of the Prices at the Subcontract Date.

If the Defined Cost per unit of quantity is reduced, the affected rate is reduced.”

Clause 60.6 : “The Contractor corrects mistakes in the Bill of Quantities which are departures from the rules for item
descriptions and for division of the work into items in the method of measurement or are due to ambiguities or inconsistencies.
Each such correction is a compensation event which may lead to reduced Prices.”

Clause 63.2 : “If the effect of a compensation event is to reduce the total Defined Cost, the Prices are not reduced except
as stated in this subcontract.”

Clause 63.4 : “The rights of the Subcontractor to changes to the Prices and the Subcontract Completion Date are its only
rights in respect of a compensation event.”

Clause 63.10 :

“If the effect of a compensation event is to reduce the total Defined Cost and the event is

• a change to the Subcontract Works Information or

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

• a correction of an assumption stated by the Contractor for assessing an earlier compensation

event,

the Prices are reduced.”

Did Dragados act in good faith?

[18]. Clause 10.1 provides a useful starting point. The commercial judge concluded that this term did not add much. He
instead based his decision on the cluster of clauses that regulate compensation events. Counsel for the defenders invited us
to take the same approach.

[19]. We decline to do so. In our view cl.10.1 is not merely an avowal of aspiration. Instead it reflects and reinforces the
general principle of good faith in contract: McBryde, The Law of Contract in Scotland (3rd edn), paras 17–23 to 17–34.

[20]. In particular, cl.10.1 aligns with three specific propositions:

(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 , [1988] 1 W.L.R., p.591D-E, per Lord Jauncey.
(ii). A subcontractor is not obliged to obey an instruction issued in breach of contract: Thorn v The Mayor and
Commonalty of London , per Lord Cairns (LC) at (1876) 1 App. Cas., pp.127–128.
(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] 2 K.B., p.662 per Asquith LJ.

[21]. Counsel for the pursuers places special emphasis on the first proposition, although accepting that he did not cite it to
the commercial judge.

[22]. Lord Jauncey’s statement embodies the doctrine of mutuality. A party cannot enforce a contractual stipulation in its
favour, if it is the counterpart of another obligation which it has breached: see Macari v Celtic Football and Athletic Co Ltd
at 1999 S.C., pp.640G–641D; 2000 S.L.T., p.88; 2000 S.C.L.R., pp.220–221, per the Lord President (Rodger), and Bank of
East Asia Ltd v Scottish Enterprise , per Lord Jauncey at 1997 S.L.T., pp.1216L–1217K; [1996] C.L.C., pp.356–358.

[23]. We conclude that cll.10.1 and 63.10 are counterparts. Unless Dragados fulfils its duty to act “in a spirit of mutual trust
and co-operation”, it cannot seek a reduction in the prices. Accordingly, Van Oord has pled a relevant case to go to proof.
Evidence can be led to evaluate Dragados’ conduct. *1321 Did it act in a spirit of mutual trust and co-operation? Or did
it act in a contrary manner?

Did the instructions lead to a reduction in the dredging rate?

[24]. Each breach by Dragados constituted a compensation event. That is because of the “catch all” wording of cl.60.1(18).

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

[25]. NEC3 contains a complex formula to assess the value of a compensation event. Happily it is not necessary to carry out
the exercise here. The parties agree that there is a reduction in the defined cost. They disagree, however, on whether there is
also a reduction in the prices and the bill rate payable for the remaining work.

[26]. By way of clearing the ground, breach of contract is not such an occasion (cll.60.4, 60.6 and 63.10). Accordingly, the
breach of contract by Dragados does not give rise to a reduction in the prices, even if its effect is to reduce the total defined cost.

[27]. The commercial judge held that cl.63.10 governed the situation. He held that the sole remedy available to Van Oord
was to have that change assessed in accordance with the compensation event pricing mechanism (cl.63.4).

[28]. Counsel for the defenders urged us to accept that approach, which he amplified as follows. Recalculation arises because
of Van Oord’s pricing strategy and its failure to achieve its productivity rates. It would have made a loss if it had completed
the omitted work. Payment at the original bill rate would result in it receiving a windfall benefit. The aim of the recalculation
is to place both parties in the same position as they would have been in if the breach had not occurred. Neither would be
better or worse off. So Dragados gains no advantage by this procedure.

[29]. We reject that argument. NEC3 states that all compensation events are valued in the same way (cl. 63.1), but continues
that if “the effect of a compensation event is to reduce the total Defined Cost, the Prices are not reduced except as stated
in this subcontract” (cl.63.2).

We conclude that, properly construed, cl.63.10 applies only to a lawful change. It excludes instructions issued in breach of
contract. They are invalid, because they are not given “in accordance with this subcontract” (see cll.14.3 and 27.3). The
natural synonym for “in accordance with” is “consistent with”. A breach is plainly inconsistent with the contract.

[30]. We add these points in support of our interpretation. First, it means that all breaches are treated equally. None produces
a reduction in the prices. Second, it avoids the suggestion that Van Oord was bound to obey a “breach instruction”. That
cannot be right. To take a fanciful example, it would have been under no obligation to build a hotel if Dragados had issued
such an instruction. Third, the NEC3 should not be charter for contract breaking.

Conclusion

[31]. We shall recall the interlocutors of the commercial judge dated 7 October 2020, and allow a proof before answer. We
shall sustain Van Oord’s second plea in law to the extent of excluding from probation those averments in answers 14, 15 and
20 stating that Dragados is allowed to reduce the bill rate.

Representation

Counsel for Pursuers and Reclaimers, Moynihan, QC ; Solicitors, Burness Paull LLP
Counsel for Defenders and Respondents, Walker, QC ; Solicitors, CMS Cameron McKenna Nabarro Olswang LLP. *1322

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Van Oord UK Ltd v Dragados UK Ltd, 2021 S.L.T. 1317 (2021)

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