Jordan ... surprises breed disputes.
De-scoping: How much is too much?
01 July 2017
Project owners believe that they can use de-scoping as a tool to terminate contracts at any time. However, this has given rise to disputes with contractors, writes STUART JORDAN*.
De-scoping is an issue which tends to polarise opinion between contractors and owners in the Gulf. Owners tend to view de-scoping (instructions to omit items from the scope of works) as a tool at their disposal for any reason at any time. It has become more common practice since the global financial crisis hit and again since the recent falls in oil price.
Contractors argue that de-scoping should be limited to unforeseen circumstances requiring legitimate change management: for instance where it is found that works are over-engineered or the needs of the built asset – size, capacity, specification – change after the construction contract has been let. Contractors complain that de-scoping is used unfairly, both when relations go sour and when the owner finds that someone else will take part of the works for a lower price.
Often the instruction is to omit all of the unperformed works, effectively terminating the contract but avoiding both the post-termination provisions and (potentially) the Middle East commercial code legal restrictions on terminating contracts without a court order. Of course, this approach aligns with contract provisions allowing termination for convenience, which is also common practice in the region.
Many disputes we see in the region involve contractors claiming that de-scoping orders were not lawful under the contract. The losses to the contractor include, of course, the profit element on the omitted works, wasted committed cost and imposed disruption. A reduced works value also makes fixed costs proportionately higher (for instance, a crane hired for two blocks instead of three) and reduces the contractor’s own bulk purchasing power. This might increase the rates and prices actually paid to suppliers and subcontractors, above those on which the contract was priced, and above those agreed in the contract for the valuation of variations.
So which party is correct? As usual, the answer lies in what the terms of the contract will allow and in what the law will allow.
Usual position
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The Fidic Silver Book... no express exclusions as to the type of change in the works. |
Change control through instruction of variations is a universal feature of construction contracts. The definition of what amounts to a change/variation is important – especially in whether it includes changes to the amount of work and specifically whether that includes reduction to the amount. Fidic (Fédération Internationale Des Ingénieurs-Conseils – International Federation of Consulting Engineers) Silver Book (First Edition 1999) defines variations as: “Any change in the employer’s requirements or the works which is instructed…,” which can be interpreted to include changes in quantity. This definition has no express exclusions as to the type of change in the works, nor any limits on how big a change can be.
However, Fidic excludes from this definition the omission of any work which is to be carried out by others. The intention is to disallow the owner from simply choosing to resile from the original award of the works and to give it to others. In the Gulf, amendments commonly delete this prohibition on awarding omitted work to other contractors.
Some contracts commonly restrict both additional and omitted scope – by only allowing changes in the overall contract value which increase or decrease it (in aggregate) by (say) 20 per cent. On the other end of the scale, a contract might give express owner rights to instruct omission of work “to any extent up to and including all remaining work and the parties acknowledge that such instruction shall not vitiate this contract”.
A contract might also include grounds for resisting an ordered variation. Fidic lists grounds including reduction in safety or suitability of the works and reduced ability to meet performance guarantees.
Finally, since a variation is a form of instruction, we need to consider whether there are any general limitations on the giving of instructions. The Silver Book for instance (Clause 3.4) limits instructions to those which are “necessary for the contractor to perform his obligations”, so there would be a strong argument that an instruction to omit work for convenience is not legitimate under the contract. Again, however, this clause is often amended in this region.
If de-scoping is allowed in the contract, to any extent and for any reason (including to award the work to others) we need then to consider whether the law allows it.
Applicable law
In considering these principles, we need to keep in mind that a lot depends on the individual circumstances: In particular the amount of the work to be omitted, the operation of the contract up to that point (whether there had been contractor failures), and the reason for the instruction. The most extreme situation would be a recently awarded contract with most (or all) of the works remaining to be performed; no question of contractor failure and a de-scoping is ordered just because the owner has received a better offer. Most situations are not so clear cut.
The most obvious principle to consider is ‘good faith’: The idea is that the variations mechanism cannot, in good conscience, be used to change the fundamental character of the contract. A substantial reduction in works scope effectively defeats the bargain which was made.
It might also be argued – in the extreme example above – that this full cut-off is effectively termination and it cannot be done without a court order. On the same premise, it might also be argued that the contractor has a right, such as that under the UAE Civil Code Article 895, to compensation for any termination.
Parties, of course, can try to eliminate these difficulties by addressing them in the contract. Without commenting on their effectiveness, I note that such provisions are common.
Parties should consider omission provisions carefully. Construction contracts can handle any amount of flexibility, whether omissions, suspension, or provisional sum items. It is preferable, of course, if the parties can identify the flexibility needed, allow for it and price it. Surprises breed disputes.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
