By Flora Ngo-Martins LLB, B.L, LLM- Contract Manager –Julius Berger Nigeria Plc.
This article discusses the protective measures available to a contractor when an Employer descopes/omits works in a construction contract. There is already a basic principle for the omission of works, which is to the effect that there is no right to omit works in a construction contract for the sole purpose of giving that work to another contractor at a competitive price. It is argued here that irrespective of the wordings of the contract, the Employer should be prohibited from omitting works to give to a cheaper contractor as that amounts to a breach of contract. This article focuses on other protective measures a contractor should adopt in protecting itself against loss of profit from omitted or descoped works.
One fundamental principle of a construction contract is that it confers on the Contractor not only a duty to carry out the works but a corresponding right to complete the work which it is contracted to perform. An intrusion on the Contractor’s contractual right to complete the works and realise the profits arises in the following instances:
- Variation by way of omission;
- The Employer’s requirements in respect of that part of work have changed;
- The works are no longer required for the project;
- The Contractor’s contract has been terminated for material breach;
- Lack of money on the part of the Employer to execute the work;
- In the event of the Employer’s insolvency.
Although the contractual rights of the Employer to vary works by omission provides flexibility over the scope of works to be executed by the Contractor, it at the same time affords the Employer the opportunity to swap contractors mid-way for more competitive prices being offered by another contractor. In such circumstances where the Employer misuses the right to omit a particular scope of work what remedies does the Contractor have against the Employer?
Contractors often contend that if an Employer omits a substantial scope of work by virtue of variation for purposes of giving the same work to another contractor at a competitive price, then such variation amounts to a breach of contract. In such an instance, the Contractor should be entitled to claim the loss of profit that it would have earned on such works. In the American case of Gallagher v. Hirsch the court held that the word “omission” meant only work not to be done at all, not work to be taken from the contractor and given to another to do.
However, the remedies available to the Contractor depend on the exact wording of the conditions of the contract which may or may not serve as an adequate remedy to the Contractor. In certain instances, the provisions of the contract might not afford the Contractor the right to claim compensation or loss of profit for descoped works.
This was the case in Abbey Developments Limited v. PP Brickwork Limited where the letter of invitation to tender which formed part of the contract provided: “However, Abbey Developments Limited reserve the right to vary the number of units and the construction programme without vitiating the Contract or giving rise to a claim from the Sub-Contractor.”
If this provision was strictly applied, the Contractor will not only lose its right to complete the works but also lose its right to compensation for the descoped works. Fortunately, the facts of the case were in favour of the Contractor (In this case it was a subcontractor).
Briefly put, the facts of the case were as follows; the Claimant, a contractor – Abbey Developments Limited subcontracted a labour-only brickwork and block work for the development of an estate of some 69 houses at the Willow Farm, Broomfield, Herne Bay, Kent to P.P Brickwork Limited- a subcontractor. The contract contained the standard provision for variations, including omissions, which would not vitiate the contract. The contractor terminated the contract on the grounds of insufficient labour and quality to maintain its building programme and further communicated that an alternative contractor will be employed to complete the development and additional costs will be charged to the subcontractor’s account. The case was initiated to determine whether the claimant/contractor was entitled to take away the remainder of the work which the defendant /subcontractor had agreed to execute. The court held that a convenience or omissions clause required reasonably clear words to allow an employer to transfer work from one contractor to another, thus under the construction of the subcontract, the claimant/contractor was not entitled to reduce the quantity of work by removing all plots which the defendant/subcontractor had not yet started work.
Protective measures for consideration
In light of this, it is pertinent to examine the protective measures, in no particular order of preference, that a Contractor can adopt to safeguard its right to complete the work against the Employer’s misuse of its right to omit/descope works.
Standard Form Contracts
Although Standard Form Contracts give the Employer, the right to omit works, it places some form of restrictions on the extent to which works can be omitted.
- FIDIC Contracts: Sub-Clause 13.1(d) of the FIDIC Red Book 1999 permits the Employer to omit any work, except if such omitted works are to be carried out by another contractor. On the question of compensation of the Contractor for omitted works, the FIDIC Red Book 1999 does not provide for compensation. It is noteworthy to mention that Sub-Clause 15.5 of the FIDIC Red Book 1999 prohibits termination of the contract for the Employer’s convenience where such works shall be executed by the Employer himself or assigned to another contractor for execution.
The 2017 edition of the FIDIC Red Book addressed the unfairness of the lack of compensation to the Contractor for the omission of work by the Employer by having an improved provision. Sub-Clause 13.1 (iv) of the FIDIC Red Book 2017 has similar provisions to Sub-Clause 13.1 (d) of the FIDIC Red Book 1999. Both Sub-clauses permit the Employer to omit any work except if such omitted works will be executed by another contractor. However, the key difference between the FIDIC Red Book 1999 and the FIDIC Red Book 2017 is that in the FIDIC Red Book 2017, the Employer is allowed to omit work for the purpose of executing the work itself or by another contractor, if this has been agreed between themselves and the previous Contractor.
Interestingly, Sub-Clause 15.5 of the FIDIC Red Book 2017 gives the Employer the leeway to terminate the contract for convenience without any restrictions and further provides in Sub-Clause 15.6 (b) for loss of profit or other losses and damages suffered by the Contractor as a result of the termination for convenience. This simply means that if the Employer varies the contract by way of omission and such omitted works amount to a termination of the contract, the Contractor shall be entitled to claim for loss of profits and damages from the Employer.
It is without doubt that the FIDIC Red Book 2017 has a more desirable protective measure for a Contractor for omitted/decsoped work.
- JCT Design and Build: Sub-Clause 5.1.1 of the JCT Design and Build Contract 2016 gives the Employer the freedom to vary the scope of work by addition omission or substitution. Conversely, it does not provide for the omitted work to be assigned to another contractor. It is therefore a breach of contract to omit work from the Contract in order to give it to another contractor. However, the JCT Design and Build Contract 2016 is silent on whether the Contractor shall be compensated by the Employer for omitted work.
- NEC3 Engineering and Construction Subcontract (ECS) Option B (priced subcontract with bill of quantities): Clause 14.3 empowers the Contractor to issue an instruction to change the subcontract works information. There is no contractual limit to the Contractor doing this. In instances where the Contractor omits or descopes the subcontractor’s works, NEC categorises such omission as a compensation event and the compensation will be valued based on the forecast reduction in defined cost.
Does the NEC3 Engineering and Construction Subcontract contractually allow a Contractor to descope a subcontractor in order to give such work to another subcontractor at a lower price? This crucial question was answered in the recent case of Van Oord v Dragados where Dragados the main contractor for the design, management and construction of the Aberdeen Harbour expansion engaged Van Oord as its subcontractor to complete the soft-dredging works under the NEC3 form of subcontract (Option B). However, Dragados began to instruct the omission of certain works from the scope of Van Oord’s subcontract and gave it to another subcontractor. Van Oord raised three issues for determination namely:
- Whether Dragados was entitled to give the work omitted from Van Oord’s scope of work to another sub-contractor.
- Whether this action by Dragados amounted to a breach of contract; and
- Whether Dragados was entitled to reduce the amount payable to Van Oord; rather payment should have been made on the basis of the original bill of rates.
In relation to the first issue, Lord Tyre in the Scottish Court of Sessions did not identify a contractual entitlement for Dragados to omit the works and transfer them to another sub-contractor. The Court noted that even if the variation clause provides for omissions to be made from the scope of works, this does not necessarily mean they can be given to a third party to complete. The Court also identified that there was a breach, being the instruction to change the subcontract works information by way of the omission of works. The remedy for that breach was considered a ‘compensation event’ under the NEC subcontract.
Ceiling a limit percentage
It is beyond question that ceiling a limit percentage for omitted works is a protective measure for Contractors, but this is not provided for in standard form contracts such as FIDIC and JCT Design and Build Contract. Nevertheless, this provision can be found in the Egyptian Public Contracts Law No. 182 of 2018. Article 46 of the law provides that the ceiling limit of addition/omission is not to exceed 25% from each Bill of Quantities (BOQ) items.
Thus, as a protective measure, Contractors can insist on having a “limit percentage” clause for omitted works during bespoke contract negotiation. Additionally, Contractors can use the percentage stipulated in the Egyptian Public Contracts Law as a guide in negotiating on its limit percentage or explore and negotiate on a limit percentage that will be considered fair or acceptable to them.
Termination for Convenience Clause
There is no principle of law, which provides for works to be omitted and given to other contractors without the Employer or Contractor incurring liability to the original Contractor for loss of profit. This was demonstrated in the case of Abbey Developments Limited v. PP Brickwork Limited discussed above.
Thus, a termination for convenience clause can be adopted as a protective measure especially where it provides that the Contractor is to be compensated for its losses including overhead contribution on the balance of the work omitted.
The contractual principle on discount
Another protective measure a Contractor can explore is adopting the contractual principle on discounts in bespoke contracts as well as in its amendment to the standard form contracts. Consequently, if an Employer exercises its right to omit a provisional sum item, the contractual provision can also permit the Contractor to withdraw the discounts initially given on other BOQ items. It should be noted that the basis of withdrawing such discounts will only be applicable where the discounts are conditional on the execution of the provisional sum item by the Contractor.
A Contractor can elect to invoke any of the above protective measures, but one crucial point that is worth addressing is the determination of acceptable compensation for substantial omitted works. The absence of any clear-cut provision in a bespoke contract can lead to a myriad of disputes notwithstanding the fact that both the Contractor and the Employer (Parties) are in agreement that the Contractor should be compensated. One pertinent way Parties can determine acceptable compensation is by ensuring that the bespoke contract captures the omission of substantial work as a compensation event especially where the Employer descopes the work of the Contractor for the sole purpose of executing the work itself or giving it to another contractor.
In conclusion, it is clear that varying the scope of work by omission is a common practice in construction projects, however, the right of the Employer to omit substantial work is limited by the Contractor’s right to compensation. Contractors are therefore enjoined to explore the protective measures discussed above in order to enforce their right to complete the works they are contracted to do and earn their profit.