Omitting Works Due To Lack of Funds
Posted on May 24th, 2015

By Dr. Chandana Jayalath

With the suspension of many large scale projects, its effect on the supply chain is colossal. Projects have been functioning on a given scope of work within which the parties are geared, and indeed contractually obliged, to meet the mutual obligations. Few may be knowing that any decision as to whether the engineer or the employer, as the case may be, can wish to omit part of the contract works saying that there is no funds and get the same subsequently done by another contractor whose allocation is capable of meeting this omitted part is more stringent than termination.

Many projects in Sri Lanka run on FIDIC based amended versions. These versions define and spell out the rights and obligations of the parties, inter-alia recommending how omissions can be made in a contract. The position is clear in the Yellow, Silver and Gold Books in the FIDIC series widely used internationally. 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 adopted in Sri Lanka issued by the ICTAD (Institute for Construction Training and Development), has been based on the foregoing thinking and there finds no subtle difference in the interpretation.

It would appear that this provision is included in these standard forms in order to prevent the employer from awarding works to others, possibly because they could save money by doing so or because the employer may have some interest, commercial or otherwise. Amongst the gamut of reasons may well be the reason of lack of funds as the funds many have been fully exhausted allocated in that particular contract. In this type of situation, few would realise that the contractor is fully within his rights to bring a claim 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 for doing so, and work is omitted from the contractor, it would clearly be a breach of contract. I wonder whether how this could be convinced for the politicians who are at the forefront in decision making.

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 afoul 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, Edward Corbett, a world renowned contracts specialist who authored the book FIDIC 4th – A Practical Legal Guide – A Commentary on the Internal Construction Contract” 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).

Notably, 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, require the omission to be genuine and if not, it would be a breach of contract. In common law countries, there is sufficient case law under “stare decisis” (obligation of courts to honour past precedents) to make it a breach. In USA, it would possibly be covered under “Rules of Equity” (being a civil law jurisdiction). In UAE, it would be covered under Article 246 (1) of the Federal Law No: 5 of 1985 where “good faith” is absolutely an essential part of a contract. We find no exception in Sri Lanka. It is therefore high time our politicians and those who administer contracts think twice on the possible commercial and contractual repercussions associated with the decisions they take in suspending projects or omitting works from the existing contracts.

One Response to “Omitting Works Due To Lack of Funds”

  1. Ratanapala Says:

    I have been listening to some of the Sri Lankan political discussions on public media – TV, digital media and newspapers. Our politicians haven’t a clue about how projects are run. The politicians think nothing of contracts and contractual obligations. They think they are all powerful. Even those who are in the ‘know’ the professionals don’t speak out probably in collusion or in fear of repercussions. It is indeed a sad state of affairs.

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