Neutral citation: Van Oord UK Ltd v Dragados UK Ltd [2021] CSIH 50.

NEC contract topics: project manager instructions, spirit of mutual trust and co-operation (clause 10.1), compensation events (clause 63.10).

Form of contract: NEC3 Engineering and Construction Subcontract.

Main areas of law: doctrine of good faith, enforceability of instructions issued in breach of contract.

 

Aberdeen Harbour Board engaged Dragados UK Ltd as the main contractor for the Nigg Bay harbour expansion project. Dragados subcontracted Van Oord UK Ltd to carry out dredging and related works under an NEC3 Engineering and Construction Subcontract, dated 16 March 2018. Van Oord priced the dredging works using a blended rate, premised on undertaking the entire dredging scope. The subcontract value was approximately £26.4 million.

In 2018, Dragados began omitting portions of Van Oord’s work and transferring them to WASA Dredging UK Ltd and Canlemar SL. Specifically, WASA received 400,000m³ and Canlemar 300,000m³. Dragados proposed a corresponding reduction in the rate payable for Van Oord’s remaining dredging from £7.48 per m³ to £5.82, and later to £3.80. Van Oord only became aware of the transferred work later and contested these reductions, asserting that the instructions omitting work constituted a breach of contract. Clause 14.3 permitted Dragados to omit work only if a corresponding instruction was issued under the main contract. Clause 10.1 imposed an obligation to act “in a spirit of mutual trust and co-operation”. The parties’ dispute focused on whether Dragados was entitled to reduce the bill rate in the termination account following the alleged breaches.

 

The main legal questions before the Inner House were: 

• Whether the omission of work by Dragados, and the reassignment to third parties, constituted a breach of the subcontract.

• Whether Dragados was entitled to reduce the bill rate payable to Van Oord for the remaining works under the NEC3 compensation event mechanism, particularly clauses 63.2 and 63.10.

• Whether clause 10.1 imposed enforceable obligations that affected the operation of pricing adjustments under clause 63.10.

• Whether instructions issued in breach of contract could still be used to trigger contractual pricing mechanisms.

Van Oord argued that Dragados’s conduct invalidated its right to recalculate prices, as the omissions were not in accordance with the contract. Dragados contended that the NEC3 structure permitted rate adjustments and that its approach avoided granting Van Oord a windfall.

 

The Inner House (Lord President, Lord Menzies and Lord Woolman) overturned the commercial judge’s decision. The court accepted that the omission of work and reassignment to third parties constituted breaches of contract. While the breach itself was undisputed by the time of the appeal, the key issue was whether Dragados could reduce the payment rate for the remaining work.

Lord Woolman held that clause 10.1 was not “merely an avowal of aspiration” but reflected the general principle of good faith in contract (McBryde, The Law of Contract in Scotland).

Clause 10.1 and 63.10 were deemed to be “counterparts” 63.10 and the reduction in prices was interpreted to apply only to lawful instructions.  Relying on legal authorities such as Alghussein Establishment v Eton College (1988) and Thorn v The Mayor and Commonalty of London (1876), the court concluded that Dragados’s breach disentitled it from relying on clause 63.10 to reduce the bill rate. The court added that:

 

“The NEC3 should not be a charter for contract breaking.”

 

The court found that Van Oord had pled a relevant case to proceed to proof. It recalled the earlier decision and sustained Van Oord’s plea to exclude averments asserting Dragados’s entitlement to reduce the rate.

 

This judgment reinforces that the duty to act in a spirit of mutual trust and co-operation under NEC3 clause 10.1 has, at least in Scotland, substantive legal effect. The court treated it as a binding obligation capable of conditioning the operation of other contractual mechanisms, such as pricing adjustments under clause 63.10. This was a case heard in a Scottish court, and it is notable that the law of good faith is treated differently in Scots law and English law.

In English law, there is no general duty of good faith in contract law. Courts are reluctant to imply such a duty into contracts as a matter of course. English law traditionally relies on express terms and the principle of freedom of contract. However, good faith may arise in specific contexts, such as in certain fiduciary relationships, or in contracts that are relational in nature. In such cases, a limited duty of good faith may be implied, but only where the relationship and context justify it.

In Scots law, there is greater receptiveness to the principle of good faith. Good faith is recognised more clearly as a general principle underlying contractual and other obligations. It is not always enforceable as a standalone obligation, but courts may consider it more readily when interpreting and applying contract terms. Scots law draws upon civil law influences, which treat good faith as a broader guiding standard in legal relations.

Thus, while neither system gives absolute effect to good faith as a binding rule in all contracts, Scots law is more open to it as an underlying principle than English law.

The ruling confirms that clause 63.10 cannot be used to justify a reduction in Prices if the underlying instruction was issued in breach of contract. Parties must distinguish between lawful variations and unauthorised omissions, particularly when pricing consequences are involved. The decision also signals that the NEC3 compensation mechanism does not permit retrospective justification of rate changes where the initiating act was itself a breach.

This case serves as a reminder that despite its procedural clarity, NEC contracts still rest on the fundamentals of contract law. Pricing models that depend on assumptions of full work scope allocation can unravel if omissions occur without due process. Main contractors must carefully follow contractual pathways when altering scope, particularly where clause 14.3 requires alignment with instructions issued under the main contract.