Omissions and contractual obligations

Importance of ensuring omitting work due to lack of funds is genuine:

by Dr. Chandana Jayalath

With the suspension of many large scale projects, its effect on the supply chain is no less significant than the suspension itself.

Projects have been functioning on a given scope of work within which the parties are geared, and indeed contractually obliged, to meet mutual obligations.

A few may know that any decision, whether by the engineer or the employer, to omit a part of the contract work saying there are no funds and later get the same work done by another contractor whose allocation meets this omitted part is as significant as a suspension from a strict contractual point of view.

FIDIC, being the most acclimatised standard forms of contract widely adopted in international contracts, recommends how omission can be made in a contract.

The position is clear in the Yellow, Silver and Gold Books in the FIDIC series wherein each states that 'A variation shall not comprise the omission of any work which is to be carried out by others'.

Although the wording in the Red Book is not as precise, it appears to be the clear objective.

The nucleus of the SBD (Standard Bidding Documents) series in Sri Lanka issued by the ICTAD (Institute for Construction Training and Development), has been based on the foregoing thinking and there is no subtle difference in the interpretation.

Reasons

It would appear that this provision is included in FIDIC to prevent the employer from awarding work to others, possibly because they could save money by doing so or because the employer may have some interest, commercial or otherwise.

Among the gamut of reasons may well be the lack of funds as funds many have been fully exhausted allocated in that particular contract. In this type of situation, many employers and engineers fail to realise that the contractor is fully within his rights to bring a claim against him for loss of profit or costs incurred if such an action was taken.

The standard FIDIC conditions do not contain any provisions that will allow the engineer from omitting work from one contractor to give it another contractor during the course of the project.

Unless the parties have agreed to do so, and work is omitted from the contractor, it would clearly be a breach of contract.

Claims

It would, though, be prudent of the employer, that even if such a course of action is open to him, to take care that he does not run foul of other common provisions.

For example, in the Red Book, Clause 12.3, variations in price may be claimed if the reduction in scope causes a change in the quantities of materials of more than 10%, and so forth.

Additionally, some contracts may contain a provision where a change in the total contract price beyond a certain percentage permits either party to renegotiate the contract. Hence, if the removal is not about cause but rather for the employer's convenience, then the employer could most certainly expect a claim for loss of profit, overheads and so forth from the contractor.

In case the Engineer instructs a variation through which a part of the works will be omitted, the 'FIDIC 4th - A Practical Legal Guide - A Commentary on the Internal Construction Contract' by Edward Corbett says that the Contractor can challenge the instruction under clause 67 (Disputes) or can treat it as an abandonment under clause 40.3 (Suspension lasting more than 84 days.

If the contractor has been negligent in performance due solely to reasons attributable to the contractor, then termination is possible under the Red Book Clause 15 (the Silver Book appears to be the same). All law jurisdictions, be it common or codified, need the omission to be genuine and if not, it would be a breach of contract.