Hong Kong SAR NEC forms hold limits to instructing changes to construction works’ scope

If a project manager were to step outside the limits of their authority, a contractor may be able to avoid complying with the instruction and notify it as a compensation event for a breach of contract by the client.

While the NEC does provide for instances in which a project manager can give instructions to change the scope of the works (‘scope’) to be carried out under the contract, there are some inherent limitations on the type of instructions that can be instructed under the NEC, due to the contract’s wording.

In situations where instructions to change scope have been validly issued, contractors should ensure that the requirements to notify and assess compensation events set out in the contract are complied with by all parties.

The power to issue instructions

The NEC form of contract provides a few bases on which a project manager can give instructions to change the scope to be carried out under the contract.

The first of these is under clause 14.3 which gives the project manager broad powers to give instructions that change the scope or key dates.

Secondly, clause 17.2 requires the project manager to give an instruction to change the scope where the scope includes an illegal or impossible requirement.

Thirdly, under clause 19.1, if the contractor encounters an event which neither party could prevent; which it would be unreasonable for the contractor to have allowed for; and which stops the contractor completing the whole of the works or completing it by the planned completion date shown in the accepted programme, the project manager can give an instruction to state how the event is to be dealt with.

Finally, under clause 34.1, the project manager can give an instruction to stop or not start any work or remove the work from the scope.

After an instruction is given, the obligation on the contractor under clause 27.3 is to obey an instruction given in accordance with the contract. This then gives rise to the question of when it can be said that an instruction is not in accordance with the contract and so does not need to be obeyed.

Read more of our series on Hong Kong SAR NEC forms

• Using the NEC4 standard form contract for construction projects in Hong Kong SAR
• Clarity on compensation events in Hong Kong SAR NEC forms can help to avoid construction disputes
• Impact of potential variations of scope in Hong Kong SAR NEC forms must be thoroughly assessed
• Hong Kong SAR NEC forms encourage proactive communication

Limits on the types of instructions

There may be some inherent limitations on the type of instructions that can be instructed under the NEC contract due to the wording used. For example:

• changes to information about the works that are not specified in the scope will not be capable of being instructed under the above provisions;
• changes required by the project manager to the order and timing of operations set out in the programme may not fall within these provisions - although it could be argued that this would be covered by clause 34.1 (‘instructions to stop or not to start work’);
• ·no instruction could be given to do something that was illegal or impossible, as this would then require a further instruction to be given under clause 17.2 (‘requirements for instructions’);
• it is unclear if the specific reference to changes to key dates in clause 14.3 means that instructions under other clauses cannot result in a change to a key date; and
• ·no instruction can bring forward the completion date - as opposed to a key date by which the work should meet a condition set out in the contract - and this must be done by agreement under clause 36 (‘acceleration’).

In addition, clause 34.1 envisages two instructions:

• ‘stop’ or ‘not start’ works; and
• ‘restart’ or ‘start the works’, or remove the work from the scope.

After the first instruction to stop or not start works, the project manager must then instruct the second instruction at some point, otherwise the contractor may be entitled to terminate the contract under clause 91.6 (‘reasons for determination’).

Also, it seems to be the intention of NEC that removal of work is the only change to the scope that the project manager can instruct under clause 34.1. If the project manager instructs other forms of changes such as addition or substitution to the scope, this may be possible by relying on clause 14.3, but might not constitute the required second instruction under clause 34.1.

Implied restrictions on instructions

The power to instruct changes to the scope is a commonplace feature of construction contracts. Over the years, courts and arbitrators have had many opportunities to consider the scope and effect of ‘instruction’ and ‘variation’ provisions, and to identify their outer limits.

In many instances, the cases establish that if the contract desires to give very broad powers to the project manager, it must contain this in express language. Such express language is lacking for the moment in the NEC contract. Limitations include the fact that there is no power to change the general nature and scope of the works; there is no power to remove works from the scope through an omission, if the purpose of the omission is to take that work and give it to another contractor to carry out at a lower cost; there is no power to order variations after completion of the works; and the contractor does not have an explicit right to object to a change to the scope granted to them in the NEC.

No power to change the general nature and scope of the works

As there is no power to change the general nature and scope of the works – for example, to vary a contract to build a house into a contract to build an airport - any instruction would have to ensure that the contract continues to relate to the same subject matter.

There is nothing in the language of the NEC contract that suggests that this principle would not apply. The NEC4 User Guide seems to accept this limitation as: “…it is important to understand that such changes cannot go outside the definition of the works identified in the Contract Data”. Here, the term ‘works’ is defined by the employer in the contract data, so the scope and extend of any variations allowed in the contract would depend on how the employer drafts the definition of works.

No power to remove works from the scope through an omission

There is no power to remove works from the scope through an omission, if the purpose of the omission is to take that work and give it to another contractor to carry out at a lower cost. 

Identifying the purpose of the omission often requires careful analysis, as it will not be the intention of the NEC contract to prevent the project manager from instructing omissions due to other genuine business reasons. This could include, for example, its lack of funds or a desire to delay certain works to a later stage of the project.

Notably, the Scottish court in a case between Van Oord and Dragados decided this point. Under a contract based on NEC3 subcontract, Dragados employed Van Oord as the dredging subcontractor. During the course of the subcontract, Dragados transferred about one third of the dredging to two other companies. Later, it informed Van Oord that it proposed to instruct a change, and thus a compensation event, and to reduce the sum payable for Van Oord’s remaining work in line with a clause which allows reduction of ‘prices’ – as defined in the contract - when a compensation event reduces the total ‘defined cost’.

Van Oord contested the reduction on the basis it was invalid, as Dragados had breached the subcontract. Van Oord sought payment at the original bill rate. The court found in favour of Van Oord and held that, “… Unless Dragados fulfils its duty to act ‘in a spirit of mutual trust and co-operation’, it cannot seek a reduction in the Prices.”.

Interestingly, while the court expressly referred to a breach of the duty of ‘mutual trust and co-operation’, the court seems to have based its decision on various well-established common law principles that:

• the employer will not be entitled to take advantage of his own breach as against the other party;
• properly construed, a variation instruction applies only to a lawful change and excludes instructions issued in breach of contract; and
• a contractor is not obliged to obey an instruction issued in breach of contract.

No power to order variations after completion of the works

As there is no express power to give instructions after completion of the works, once the contractor has done all the work in the scope and corrected all notified defects, it can be argued that no changes to the scope can be instructed after this point.

There is an argument to be made that clause 61.7 (‘notifying compensation event’) has the effect of allowing compensation events to be notified, and therefore changes can be instructed, up until the issue of the defects certificate, but this does not seem to be the meaning of its plain language which deals with the requirement to give notices rather than dealing with the project manager’s power to give instructions.

No explicit right granted to the contractor to object to a change to the scope

Unlike some other standard form contracts, there is no explicit right to object to a change to the scope granted to the contractor in NEC. Taken literally, the contractor may be obliged to comply with any instructions even though those instructions may not be practicable or commercially possible - unless they are impossible for the purpose of clause 19.1 - or the varied scope is not reasonably foreseeable, provided that the varied scope still falls within the ambit of the defined works. 

In addition, it may be the case that clause 10’s requirement for mutual trust and cooperation would be inconsistent with construing the NEC to make it broad enough to include these powers for the project manager, which is consistent with the Scottish court’s decision in the Van Oord case. It remains to be seen if the courts will ever employ the mutual trust and cooperation clause, in novel situations not already considered in previous case law, to annul an instruction to change the scope that is unfair, made maliciously, or not made in good faith, without the backing of any established common law principles. 

Consequences of ineffective instructions

Where an instruction has been validly issued, or the contractor is content to proceed on the footing that it has been validly issued, the contractor will want to ensure that the requirements to notify and assess compensation events under clauses 61 - 66 are complied with by all parties.

Where an instruction is not valid, the contractor will likely need to argue that the instruction is invalid and there has been breach of contract by the client through its agent the project manager. A breach of contract is a compensation event under clause 60.1(18) and may give rise to an entitlement to additional payment and time for the contractor. Given that the right to have a change made to the prices, the completion date and the key dates are the only rights of the contractor arising out of a compensation event under clause 63.6, it may be that there are no further entitlements for the contractor arising under the NEC.

Contractors may, in appropriate circumstances, need to also contend that the varied works form a separate new contract. The valuation of this new work could then potentially be on a different basis than the original contract rates. Alternatively, the contractor could take the position that the instruction is not a valid variation under the contract and they are not obligated to comply with it.

Co-written by Jason Wong of Pinsent Masons.