Scottish appeal court reinforces NEC ‘mutual trust and co-operation’

The clause 10 duty on NEC users to act in a spirit of, ‘mutual trust and co-operation,’ has often been criticised as adding very little (if anything) to the express provisions. As reported by Shy Jackson on page 9, this was the view of the trial judge in the 2020 Scottish case of Van Oord UK Ltd v. Dragados UK, but has thankfully been overturned on appeal.

Subcontract cut in half

The case was about a £26 million dredging subcontract on the Aberdeen Harbour expansion project. It was let by main contractor Dragados to subcontractor Van Oord under an NEC3 Engineering and Construction Subcontract (ECS). But, after work started, the main contractor decided to transfer almost half the value of the subcontract to two other firms. It then reduced the sum payable to the original subcontractor for the remaining works under the ECS compensation event provisions.

While the trial judge held this to be a breach of the subcontract, he said the main contractor was entitled to reduce the subcontract price in accordance with ECS clause 63.10. Under this clause, prices can be reduced if the effect of the compensation event is to reduce the defined cost and the event is a change to the works information or a correction to an assumption made by the main contractor when assessing an earlier compensation event.

Successful appeal

Fortunately the subcontractor successfully appealed the decision in October 2021. The Inner Court of Session (Scotland’s appeal court) held that clause 63.10 did not apply where the instruction was issued in breach of the contract, relying upon the wording of clause 63.2 that prices are not reduced, ‘except as stated in this Subcontract’.

The appeal court said the outcome was reinforced by the clause 10 duty of, ‘mutual trust and co-operation,’ which was, ‘not merely an avowal of aspiration… it reflects and reinforces the general principle of good faith in contract’. The decision aligns with the three following principles:

• a party cannot take advantage of its own breach of contract

• a contracting party is not obliged to accept an instruction in breach of contract

• clear language is required to place a contracting party at the mercy of the other.

The decision is very welcome. Hopefully it will encourage courts in England and elsewhere to give far greater consideration to the impact of NEC clause 10.