Abstract
De-scoping is a contentious and controversial concept in the area of construction contracts. It is the mother of multiple disputes between contractors and employers. De-scoping, which is a “negative variation”, basically reduces the scope of the work of the contractor from what had originally been laid down in the contract. Usually, this concept is viewed from the lens of a “variation clause” in common parlance; but it can result from partial termination as well.
If, instead of referring to the modification or variation clause, the employer or the parties together reduce the scope of work through the “termination clause”, the resultant rights and liabilities drastically change. On the other hand, when the same is done through the variation clause, the contract still remains in existence. However, in case de-scoping is carried out through partial termination, it inevitably affects the encashment of damages, including the treatment of bank guarantees, security deposits, and so on. Therefore, it becomes pertinent to be cautious of the method using which such a reduction is undertaken. This can be done through a careful drafting of the contract – in a way that leaves no room for the drawing of a distinction between termination and modification.
Introduction
Under construction contracts, determining the scope of work to be done by a contractor, i.e., the party appointed to execute the construction project, is an extremely meticulous and important job. This scope would determine what work will be done by the contractor and how, within the stipulated timeline of the construction project. If, during the period of construction, the employer, i.e., the party appointing the contractor to execute the project, decides to reduce the scope of the work initially agreed upon/awarded to the contractor, that would be termed as De-scoping. This act may also bereferred to as negative variations or omissions of work under the provisions of the contract. The employer may remove, omit, or deduct, some or all parts of the work done by the contractor. These deductions can be relatively small at first; however, they may lead to substantial chunks being deleted from the overall work. This is one of the most contentious issues to arise in disputes related to construction contracts. Having understood the importance of de-scoping, it is also pertinent to understand where it emerges from.
Variation under Construction Contracts
Similar to all other contracts, construction contracts are subject to changes. However, unlike other contracts, construction contracts contain a dedicated provision for giving way to changes in an orderly manner. This provision, present in most of these contracts, is known as the “variation clause”.
Under this, the employer or its representative has the right to issue instructions to the contractor to vary the work that is to be completed under the contract. These variations could be anything – design changes, extension of time for the completion of some piece of work, and so on. The following variation clause has been reproduced from theFIDIC Red Book.
“13.1 Right to Vary
Variations may be initiated by the Engineer at any time prior to issuing the Taking-Over Certificate for the Works, either by an instruction or by a request for the Contractor to submit a proposal.
The Contractor shall execute and be bound by each Variation, unless the Contractor promptly gives notice to the Engineer stating (with supporting particulars) that the Contractor cannot readily obtain the Goods required for the Variation. Upon receiving this notice, the Engineer shall cancel, confirm or vary the instruction.
Each Variation may include:
a) changes to the quantities of any item of work included in the Contract (however, such changes do not necessarily constitute a Variation),
b) changes to the quality and other characteristics of any item of work,
c) changes to the levels, positions and/or dimensions of any part of the Works,
d) omission of any work unless it is to be carried out by others,
e) any additional work, Plant, Materials or services necessary for the Permanent Works, including any associated Tests on Completion, boreholes and other testing and exploratory work, or
f) changes to the sequence or timing of the execution of the Works.
The Contractor shall not make any alteration and/or modification of the Permanent Works, unless and until the Engineer instructs or approves a Variation.”
Sub-section (d) of the above clause is used while de-scoping work from the contractor. The importance of this clause cannot be stressed enough, because in its absence, the contractor may either refuse to carry out the variations/changes altogether, or would ask for money to carry out the work so desired to be varied by the employer. This could prove to be costly for the employer since it has the potential to derail the whole project altogether, and he may have to ask for an inflated price to carry out the work if the changes are essential for the employer. Therefore, this clause is generally used to give effect to de-scoping.
De-scoping vis-à-vis Termination
Through an analysis of various cases decided in forums throughout the world, it has been identified that the employers have atendency to use de-scoping instead of terminating the whole contract. Now, the question arises as to why this happens – why are employers choosing to de-scope rather than terminating the contract altogether when they do not want the contractor to carry out the work, or are stuck with a bad deal. There are no definite reasons that have been made out. It could be that de-scoping is done mainly for the purpose of salvaging the relationship between the employer and the contractor. Another possible reason can be the amount of money involved in a construction contract, and the fact that changing the scope would make the project all the more expensive. However, this is just speculation – the actual reason still remains a mystery.
De-scoping through Partial Termination
It is essential to understand whether the act of de-scoping is an act of variation or partial termination. In order to determine the same, one has to read the termination clause. The termination clause can be drafted in different manners; the termination may take place if the contractor abandons the work, does not submit the bank guarantee, fails to adhere to the “Notice to Correct”, and so on. The clause may also contain a provision known as “termination for convenience”.
Under the provision of termination of convenience, neither party is required to cite any reason before terminating the contract. They may carry out the termination of “convenience”. It is extremely difficult nowadays to negotiate for such a provision to be included under the termination clause of a construction contract.
De-scoping through partial termination can be interpreted under this provision of termination for convenience. Under this provision, the employer may give notice to the contractor, laying down parts of the scope that have been deducted for convenience. However, a substantial change in the scopemay result in a breach of the contract.
A question that may be asked here is why one should care about whether the right to vary or partial termination is used for de-scoping. The answer to this question lies in the amount reduction that the employer is making. This reduction can be minor or major, depending upon the facts of the given contract.For a major reduction, one needs to use partial termination.
It is also important to identify the provision that the employer will use since the choice of provision will determine the procedure to be followed for the reduction of work – such as the timing, price calculation, how the reduction would take place, etc. The employer cannot abuse the “termination for convenience” provision solely because it is present in a contract. Before going ahead with the reduction of work, the employer has to make sure that the contract allows the scope to be reduced in the first place.
InM/s. Baba Builders v. Ircon International Ltd., the Delhi High Court was faced with a conundrum of deciding whether the de-scoping of work was a result of variation or of termination. It so happened that the respondent, IRCON International Limited, had invited tenders for the construction of dwellings, and the appellant had succeeded in being awarded the contract. As per the contract, a deadline was set for the completion of the project. However, after a couple of months, a notice was issued by the respondent to the appellant, addressing their concern over slow work progress, which was followed by a show-cause notice. After several other communications, finally, a letter was issued for “partially withdrawing works”.
The matter was taken to arbitration and the learned arbitrator held that the contract was not partially terminated but rather, merely ‘modified’ under Clause 55 of the General Conditions of Contract (GCC). Thereby it was held that the respondent, IRCON, was not entitled to recovery of the cost since the contract had not been terminated under Clause 50 of the GCC, but modified. The case was heard by a single judge bench which reasoned that the withdrawal of a “substantial” chunk of work would constitute termination, and that the arbitrator had erred in holding otherwise. The bench held that the source of confusion was the similarity between the two clauses. While clause 50 deals with termination, clause 55 deals with enlargement, extension, diminution, reduction, alteration or addition. However, a more thorough reading of Clause 55 reveals the intent of the clause, which is that the contemplated modifications have be related to design, position, character, dimension, quantity, and so on. It does not extend to the withdrawal of a ‘substantial portion of work’. The court agreed with the reasoning applied by the single bench. It is important to remember the significance of the consequences that arise out of de-scoping through modification/variation and part-termination. In the above case, the arbitrator awarded the appellant a refund of the security deposit, the release of a performance bank guarantee, as well as the amount that had been held back from the RA bills because the arbitrator had held that the de-scoping of work was merely a modification.
Voestalpine Texas LLC v. Bilfinger Westcon Inc. was also a case of de-scoping through partial termination. In the matter Voestalpine had contracted Westcon to construct an iron facility in Texas. Within weeks of its existence, the contract was dramatically modified, with gigantic additions being made to the scope of work. This addition resulted in delays by other contractors, which ultimately delayed Westcon. The overall project suffered delays and increased expenses. Voestalpine refused Westcon’s request for change orders considering the variations, and further terminated the contract with Westcon. Thereafter, it appointed another contractor in its place. The termination resulted in the reduction of the scope of work as given in the contract. While some part of the de-scoped work had already been performed, other parts had not been performed by Westcon. Voestalpine was accused of not adequately quantifying the value of the work done under the de-scoped items. The dispute was taken to the International Chambers of Commerce for resolution.
The tribunal held that, though Voestalpine had provided Westcon with a revised schedule for the completion of the additional works, that schedule was not part of the original contract. The increased work scope could not have been completed within the deadlines set out in the original contract, which in turn made it effectively impossible for Westcon to achieve the completion milestones. Therefore, it was held that the partial termination by Voestalpine was a “material breach of the agreement”. Voestalpine further denied adequate payment for the works that had been completed under the de-scoped items, stating that no progress reports had been shared by Westcon. However, in reality, Westcon had been ordered to not make progress reports, unless change orders were approved – which again, were a result of the additional modifications. Regarding the question of reduction of work not having been performed, the tribunal held that the final termination of the contract was by Voestalpine, since it had materially breached the contract with Westcon. This in turn meant that Westcon was not liable to perform any further acts under the contract. Therefore, Westcon cannot be held liable for the damages incurred by Voestalpine due to the partial termination. In conclusion, the tribunal ruled in favour of Westcon.
From the cases above it can presumed that partially terminating the contract is not a cake walk!
What after De-scoping?
Once an employer has decided to use partial termination or variation to de-scope the work, is it allowed to re-tender the work? Generally, an employer may not use the power to omit the work and hand the same to an alternative contractor or perform the same itself. Without the power of re-tendering being granted through the contract, doing itwould amount to repudiation of the contract. The contract must clearly and expressly empower the employer to do re-tendering. In the absence of such a clear and express provision, the employer must reach a different agreement with the contractor for re-tendering. In the case ofVan Oord UK Limited v. Dragados UK Limited, the contractor de-scoped the work falling within the scope of the sub-contractor and transferred the work to another sub-contractor. The court relied onAbbey Developments Ltd. v. PP Brickwork Ltd. and followed the principle that the Contract not only puts a duty on the contractor to execute the corresponding work but also a right to complete the work it contracted. The court held that the contractor did not have a ‘Clear Contractual Entitlement’ to de-scope the work and transfer the same to another contractor/sub-contractor.
Disclaimer
The information contained in this article is for general information purposes only. The views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to their employers, organizations, committees or other groups or individual to which they are affiliated.
About the Authors
Mr. Mridul Gupta is an Advocate at the Chambers of Adv. Sujit Ghosh, Delhi.
Ms. Harshita Tyagi is a 3rd Year, B.L.S LL.B student at SVKM’s Pravin Gandhi College of Law, Mumbai. She is also an Associate Editor at IJPIEL.
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Akanksha Goel
Senior Editor: Gaurang Mandavkar
Associate Editor: Harshita Tyagi
Junior Editor: Ria Goyal
Preferred Method of Citation
Mridul Gupta and Harshita Tyagi, “De-scoping through the Lens of Partial Termination: An Enquiry” (IJPIEL, 30 May 2022)
<https://ijpiel.com/index.php/2022/05/27/de-scoping-through-the-lens-of-partial-termination-an-enquiry/>
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