Introduction
Construction contracts are unique in a way that allows changes to be introduced to the works without running afoul of the law.
The variation mechanism in construction contracts allows that flexibility to make changes to the works, not foreseen at the time of the execution of the contract. Changes can consist of additional works, replacement works or the omission of certain works.
Contractors are often averse to omissions to the work. It is understandable as they would have entered into the contract expecting to realise profit for performing the works. Work that has been omitted would effectively deny the contractor the profit associated with that work.
Some standard forms, however, allow for the mitigation of possible effects of omitted works to the contract. FIDIC Conditions of Contract for Construction 2017, for instance, allows for the assessment of the effect of any omitted works under the variation provision (Clause 12.4).
NZS 3910: 2013, also tries to mitigate the effects of decrease of quantities from the original work through Clause 9.3.7 read in conjunction with Clauses 9.3.9, and 9.3.10. This allows for the valuation of variations based on Net Cost (Cl 9.3.7) plus On-site Overheads (Cl 9.3.9), plus Off-site Overheads and Profit (Cl 9.3.10). Net Cost is defined under Clause 1.2 as “The reasonable actual or assessed expense or direct cost to the Contractor plus return on investment in Plant, after deduction of trade discounts and exclusive of the Contractor’s On-site Overheads, Off-site Overheads and Profit.”
Properly construed, works that are omitted should be works that are taken out because they are legitimately either no longer required or they are to be replaced with something else.
Omission of Works for the Purpose of Giving it to Another
Works which are omitted and later arranged to be undertaken by another, or “descoping”, is often contentious. Works omitted in such circumstances do not fall within the ambit of the variation provisions.
Clause 13.1 of the FIDIC Red Book 2017 states that “… a Variation shall not comprise the omission of any work which is to be carried out by the Employer or by others unless otherwise agreed by the Parties.”
Similarly, Clause G9.1.1 of the Guidelines Section 9 of the NZS3910-2013 states that “… the Engineer’s power to omit work by ordering a Variation can only be exercised where the work in question is no longer intended to be carried out. Omitting or deferring work in order that it can be carried out by another contractor or otherwise by the Principal would require the Contractor’s Agreement…”.
Power to Omit Works must be Exercised Bona Fide
If the parties intend to provide for circumstances where it may be necessary to descope works from the contractor and have them carried out by another, that intention must be expressly set out in the contract with the mechanism for omission stated clearly and properly to avoid later disagreement.
The parties must genuinely believe that the reason, for descoping of the works, is due to actual and legitimate hurdles which affect the works and could only be overcome by descoping portions of the work from the contractor. There must be no intention to mislead, misrepresent or to benefit at the expense of the other party.
In Van Oord UK Limited v Dragados UK Limited [2020] CHOS 87, the court held that it was a breach of Dragados’ obligation under the contract when Dragados omitted certain areas from its Subcontractor’s (Van Oord) dredging works and transferred those works to another subcontractor. Unknown to Van Oord, Dragados awarded a significant portion of Van Oord’s work to two other subcontractors.
Dragados in its defence argued that it has used an express contractual power to omit works and relied on what appear to be a loose understanding of an express contract provision. Parts of Clause 14.3 in the contract allowed the descoping and subsequent award of works to another party on the occurrence of a specific event, which the Court used to raise a prima facie inference that an equally clear provision is required to allow the omission of works in any other circumstances.
Based on the decision in Van Oord, express contract provisions to omit works and award the same to another are required and the particular situation in which the power to omit may apply must be clear. In the absence of such provisions, descoping may be construed as a breach.
Descoping as a Remedy Under the Contract
Aside from the common goal of achieving the satisfactory completion of the work, parties to the contract engage to foster a mutually beneficial and continuing business relationship. It would therefore be contrary to the parties’ interest to conclude a contract on a bad note.
Most standard forms of contract provide for (a) imposition of damages or (b) suspension of the work or (c) termination of the contract when a contractor defaults on its obligations. Depending on the fault, some remedies may not be appropriate. Invoking the termination provisions in the contract, for instance, when a target performance is not met may in certain circumstances be harsh and could result in unintended consequences to the parties.
There may be instances when the common interests of the parties such as satisfactory performance of the works, delay mitigation, dispute avoidance, etc. may best be served by departing from the strict remedies available in the contract and mutually agreeing on descoping of portions of the uncompleted works.
In one rail project I was involved in, the employer had the foresight to include an express provision in the contract which allowed the descoping of parts of the works in certain circumstances. The project was fraught with several issues at the outset, from delayed possession of the site to quality issues with the cast in-situ concrete works. One of the conditions which allowed the employer to descope is when delay to the works, for which the contractor is liable, reached a certain percentage, from which the contractor would unlikely be able to recover from based on the resources available. Therefore, when delay continued for several months without any signs of recovery, the employer invoked the descoping provision as a last resort in a bid to improve progress.
Standard contract forms may not expressly provide for descoping of works. However, when a project is faced with difficulties, it may sometimes be up to the parties to collaborate, cooperate, and agree on a solution to save the project and the business relationship. Clause 5.21.2 of NZS 3910: 2013 provides an opportunity for a dialogue between the parties “… for the purpose of exploring proposals for avoiding or reducing the impact of the notified matter.”[1]. A notified matter under Clause 5.21.1 can be “… any matter which is likely to …. (a) materially alter the Contract Price, or (b) materially delay completion of the Contract Works, or (c) result in a breach of a statutory duty in connection with the Contract Works…”[2].
Efforts are currently underway to revise NZS 3910:2013 Conditions of Contract for Building and Civil Engineering Construction, the most widely used standard form in the construction sector in New Zealand. The ongoing review of NZS 3910 aims to provide the construction sector with a revised standard of contract which will be fit for purpose, minimize the need for special conditions, allocates risk fairly, and address common issues.[3] One of the topics to be addressed in the review is the “elevation of Clause 5.21… to encourage and support communication and agreement…”[4].
After Descoping
The story does not end after successfully descoping. Descoping re-allocates the risk associated with that work to another and that must be addressed. Other issues such as site arrangement – e.g., when works are descoped from a main contractor who is in possession of the site, new interfacing works, coordination of the works, warranty, additional costs, delay, insurances, bonds, handover at completion, etc. must be managed and provisions for dealing with them carefully considered in the contract.
About the Author
Pamela is a Senior Associate Director in CCi’s New Zealand office. She has over 25 years of combined experience in commercial & contract management and providing expert witness & dispute resolution support.
