THE UNDERLYING PROBLEM: NEGOTIATING THE GROUND CONDITIONS ISSUE
A paper presented to the Society Society of Construction Law at a meeting in London on 6th November 2012
Ellis Baker and Michael Turrini
March 2013 181
www.scl.org.uk
THE UNDERLYING PROBLEM: NEGOTIATING THE GROUND CONDITIONS ISSUE Ellis Baker and Michael Turrini
Introduction The purposes of this paper are: o
o
o
To consider the general position in law relating to unforeseen ground conditions; To review contractual provision for unforeseen ground conditions in major standard forms of construction and engineering contracts; To consider the nature of disputes over unforeseen ground conditions.
It is not, of course, suggested that this is the first or only treatment of the subject. The Society of Construction Law itself published a very worthwhile paper by Julian Bailey, based on his 2006 Hudson Prize-winning essay, which is referred to more than once below.1 This paper seeks to bring a different contribution in two main respects. First, a major component deals with the main standard form contracts, particularly those in use in international projects, and their allocation of risk as between employer and main contractor. Second, there is a significant emphasis on how the issue is dealt with in the Middle East. The authors’ practices have for some years featured both project and disputes work in this region, as well as others, and it was felt that this focus would be of additional interest to the many Society members engaged in work connected with it. The authors were pleased to have the opportunity to give earlier versions of this presentation at the invitation of the Gulf Society of Construction Law in Abu Dhabi2 and Doha3 and are grateful to Richard Harding QC, chairman of the Gulf Society, both for agreeing to chair the London SCL event and for helpful comments on the subject matter.
Background: the issue Unsurprisingly, the major construction law texts all deal with the ground conditions issue, to varying varying extents. A good starting point is the latest edition of Hudson:
1 2 3
Julian Bailey, ‘What Lies Beneath: Site Conditions and Contract Risk’ SCL Paper 137 (May 2007)
Presentation to SCL Gulf in Abu Dhabi on 12th February 2012. Presentation to SCL Gulf in Doha on 22nd April 2012.
1
‘It frequently occurs in practice, particularly in engineering contracts, that unexpected difficulties are encountered during construction which may not only necessitate a change from the expected method of working, but in extreme cases may mean that the completion of the 4 work, at least in accordance with the original design, is impossible.’
Two of the main aspects of the issue under discussion are helpfully raised by this passage. First, it refers to the need to make a change from the expected method of working. To put it another way, the product under construction itself is not changed, but the method of its production is. Second, reference is made to ‘extreme cases’ in which completion of the work in accordance with the original design is no longer possible or, to put it another way, the product under construction itself may have to be changed as a result of the ‘extreme’ difficulty unexpectedly encountered.
So, to summarise as briefly as possible: the two principal consequences of unforeseen ground conditions are that the way of producing the product may have to be changed; in extreme cases, the product itself may have to be changed. Either of these consequences may result in the contractor incurring more cost and being delayed. This leads to the heart of this paper: the question as to who bears the consequences of additional cost and delay.
Common law approach In the common law jurisdictions, at the highest level of generality, the answer to the question is that, in the absence of contractual provision to the contrary, the cost and time risks are to be borne by the contractor. If the contractor undertakes a project, the agreed price and completion date bind him. The classic US authority for this is United States v Spearin , where the Supreme Court held: ‘Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforeseen difficulties are encountered. Thus one who undertakes to erect a structure upon a particular site assumes 5 ordinarily the risk of subsidence of the soil.’
Although the English courts had discerned some prospect of relief for the contractor in Bush v Whitehaven Trustees, where construction of a pipeline during the harsh Cumberland winter attracted the award of a quantum meruit on the basis that its laying was intended to be a summer project,6 the English courts have largely supported the general position in Spearin. In Bottoms v Corporation of York , the contractor had encountered poor ground quality in 4 5 6
Nicholas Dennys, Mark Raeside and Robert Clay (editors), Hudson’s Building and Engineering Contracts (12th edition, Sweet & Maxwell, 2010), page 451. United States v Spearin 248 US 132 (1918) (SC), page 136. Bush v Trustees of Port and Town of Whitehaven (1888) (QB and CA), The Hudson Fourth Edition Volume 2 Table of Cases Reprint (Sweet & Maxwell, 2001), page 122.
2
constructing a drainage system but when he abandoned the work, he was held entitled to no remedy for the client Corporation’s action in seiz ing his plant and denying him payment.7 The Whitehaven case was strongly criticised in later decisions, notably Davis Contractors v Fareham Urban District 8 9 Council, and hardly represents the general tone even of the early cases. A principal English authority from the modern era is Worksop Tarmacadam v Hannaby, where the contractor claimed additional cost incurred as a result of encountering hard rock which had not been foreseen. Counsel submitted that the remeasurement clause read literally and in context was sufficiently wide for the additional cost claim to be allowed. The Court of Appeal rejected this argument, Russell LJ saying: ‘I disagree. Had the plaintiffs wished to make such a provision in the event of unforeseen conditions being encountered, it would have been the easiest thing in the world for them so to have provided in specific 10 terms. They did did not do so.’ The court’s emphasis on the absence of contractual provision to the contrary and the consequent imposition of the risk of unforeseen ground conditions on the contractor is clear enough to admit of no doubt.
As well as the distinction between changes in method of working and changes necessitated to the design as a result of unforeseen ground conditions, a further distinction should be made. This is the distinction between the obligation of the contractor to achieve the result and to construct the product, notwithstanding the unforeseen ground conditions, and the contractor’s claim to be entitled to cost and time compensation for overcoming the unforeseen conditions. In the cases mentioned above, the contractor was not discharged by the unforeseen ground conditions from its obligation to complete the works and was required to bear the cost and time consequences of overcoming those conditions. The general common law position, absent contractual provision, is as has been discussed. However, it must not be assumed that the same approach is taken to ground conditions issues in all jurisdictions.
The Middle East and North Africa Here, the laws of many countries are based on civil codes; in particular, they are influenced by the Egyptian Code, itself with antecedents in French law. This is true of the United Arab Emirates (UAE) and Qatar, where the authors 7
Bottoms v Lord Mayor etc of the Corporation of York (1892) (1892) (QB and CA), The Hudson Fourth Edition Volume 2 Table of Cases Reprint (Sweet & Maxwell, 2001), page 208. 8 Davis Contractors Ltd v Fareham Urban District Council [1956] [1956] AC 696 (HL). 9 The authors are grateful to John Barber, Director of the Centre of Construction Law and Dispute Resolution, King’s College London, for sending them his unpublished paper ‘The Foresight Saga’ which deals usefully with the early cases and other points of interest. 10 Worksop Tarmacadam Co Ltd v Hannaby (1995) 66 Con LR 105 (CA), page 108.
3
have significant international construction experience. The codes of those states, speaking generally, take a different approach to ground risk and typically provide for joint and several liability of the architect and contractor in respect of total or partial collapse of a building or fixed works for a period of ten years, even if the collapse is due to a defect in the land itself. Thus Article 711 of the Qatari Civil Code provides that the contractor and engineer (designer) will be liable for any destruction or defect in buildings they have constructed or fixed installations they have erected, even if such destruction or defect is the result of a fault in the actual land or the employer has approved defective buildings or installations. Liability lasts for ten years following handover and covers defects appearing in buildings or installations which threaten their stability or safety. Contracting out of the Article 711 provisions is prohibited. proh ibited. A number of observations should be made about this provision, which is typical of code provisions in other states in the region, and indeed elsewhere in the civil law world. First, the liability is for a long period, namely ten years, years, rather than the relatively short per iod iod of the typical contractual ‘defects liability period’; the concept is normally referred to as decennial liability. However, the scope of the liability is narrow, being limited to risks of total or partial collapse. collapse . Most important of all from the perspective of negotiation, negotiati on, the liability cannot be excluded or restricted by contract. An example will illustrate the point: if a contract for the construction of a high-rise building in Qatar were being negotiated on the basis of the FIDIC Red Book,11 with Qatari law as the governing law, there would be no point in the contractor seeking to have the operation of the liability provision excluded; any particular condition to that effect would be unenforceable under Qatari law. Nor would there be any benefit in this respect in changing the governing law of the contract to, for example, English law, which, as is well known, has no equivalent provision. The Qatari provisions are mandatory and apply on a territorial basis, irrespective of contractual provision. It is not suggested that these provisions are or should be a source of terror to contractors. However, they are an essential part of the legal framework within which construction work is carried out in the Middle East and therefore must be included in the contractor’s evaluation for risk assessment and pricing purposes. The provisions of civil codes imposing decennial liability on the basis of soil conditions do not, however, deal with the issues as between employer and contractor of cost and time consequences of unforeseen ground conditions during the construction period. These are almost always governed by express contract provisions allocating risk. In Qatar, for example, some of the main employers for construction work have their own standard contracts or conditions, which are often developed from international forms of contract. Generally, it can be said: 11
FIDIC, Conditions of Contract Contract for Construction for Building Building and and Engineering Engineering Works Designed by the Employer (1st edition, 1999) (The Red Book).
4
‘The scope for negotiating the terms of these forms is usually limited, but in larger projects and depending dep ending on the industry, ind ustry, modifications modificat ions from 12 standard contract forms may be obtained by the contractor.’
Accuracy of ground conditions information A crucial element in the allocation of risk for unforeseen ground conditions is the question of who is responsible for the accuracy of information provided by the employer to the contractor concerning the site. From a practical point of view, it is generally the owner who provides information about the site and ground conditions relating to it, which is logical enough, since in most cases it will be the employer’s site. This need not be the case inevitably. It would, at least in theory, be possible for the employer to supply nothing, leaving the contractor to obtain its own information and to take responsibility for its accuracy. In practice, this would be unlikely to occur in normal situations. The contractor would not usually be willing to spend money on geotechnical investigations at its own risk prior to signing the contract. But it is not just the view of the contractor which makes this scenario unlikely. unlikely. The employer’s employer’s desire for a competitive price requires certainty and if contractors feel obliged to include large contingencies in their pricing to take account of ground conditions of which they have no knowledge, the effect on tender prices is entirely predictable. Accordingly, and almost inevitably, it is the employer who provides the contractor with information about the site upon which the contractor can then base its tender. Given that it is the employer who provides information, it will be crucial to ascertain the degree of responsibility for it. Julian Bailey has provided a useful analysis of the main possibilities.13 Julian Bailey proposes four scenarios:
12 13
1.
The employer gives a contractual warranty that information provided to the contractor contra ctor is accurate and complete; co mplete;
2.
The employer provides information but gives no warranty that it is accurate and complete, nor any disclaimer as to accuracy and completeness;
3.
The employer provides misrepresentation; or
4.
The employer gives a disclaimer denying liability for accuracy and completeness of the information provided to the contractor.
information
which
contains
a
Marcus C Boeglin, Michael E Schneider, Fadi Sabsabi and Ramy Saleh, ‘Qatar Construction’, Bloomberg Law: www.bloomberglaw.com. Julian Bailey, note 1, page 12.
5
To understand the degree of responsibility as between the contractor and the employer, it is necessary to turn to consider how the parties provide for unforeseen ground conditions in their contract.
Contractual provisions for unforeseen ground conditions Despite Lord Bridge’s warning in Mitsui Construction v Attorney-General of Hong Kong that: ‘... comparison of one contract with another can seldom be a useful aid to interpretation’,14 it is in contract provisions and their application in different jurisdictions that the law on unforeseen ground conditions develops and is found. With all due respect to his Lordship, Lordship, the reality of practice for those engaged in negotiating and drafting contracts is that comparison and bench-marking against the major standard forms is a routine technique and part of the way in which an appropriate contract is produced. Lord Bridge began his analysis in the Mitsui case (concerning tunnelling in Hong Kong) with the finding that: ‘It is obvious that this is a badly drafted 15 contract.’
Such a remark, calculated to arouse sympathy for those whose work is being examined with the benefit of hindsight, particularly in the mind of a fellow draughtsman, begs the question as to how a good contract is to be produced. Of course, in theory, it is possible to start from the beginning with a blank sheet of paper and a mind unhampered by what has gone before and to produce a solution to the eternal et ernal problem of how to give effect to the parties’ bargain. The reality, however, is otherwise. It is by considering what has gone before, and what is current in the market place, that good practice and effective provisions can be adopted and the repetition of errors avoided. ‘Comparison of contracts’ means nothing more, nor less, than a knowledge of how other practitioners or institutions have confronted the problems one is facing, and that is equally true of drafting the clauses and interpreting them. Typically, the outcome of the contractual provision reflecting the parties’ bargain will be a sharing of the risk, although it may be far from an equal sharing. Normally, neither party would be prepared to accept 100% of the risk. The contractor will not wish to be totally responsible in time, money and result for an unforeseeable outcome. The employer will will not wish to bear total responsibility for the information and the condition of the site provided to the contractor. Lord Bridge’s debatable dictum in the Mitsui case is not the first time a common law judge has raised questions about the familiarity of members of the judiciary with the world of construction contract negotiation and drafting. If anything, the evidence of judicial remoteness was even more striking in the old Canadian case of Grace v Osler , where the contract was for the construction of an office building which suffered severe subsidence during construction due to unforeseen ground ground conditions. The contractor’s claim for
14 Mitsui Construction Co Ltd v Attorney-General of Hong Kong (1986) (1986) 33 BLR 1 (PC), page 18. 15 Mitsui, note 14, page 14.
6
relief failed on a general application of the principles already considered above. Cameron JA felt that: ‘Had it been in the minds of the parties to vary the general law, we should surely have found somewhere in the contract a provision whereby it would appear clearly and beyond peradventure that the owners covenanted and agreed that the plans, prepared by the architects, were absolutely sufficient for the purposes for which they purported to 16 be drawn.’ The learned judge concluded with the remarkable assertion that: ‘To state the effect of the plaintiffs’ contention in this way is to show its unt enability. In 17 ]. point of fact owners would not not sign such a covenant ’. ’. [emphasis added ].
‘Owners would not sign such a covenant’ The fallacy of this view, at least so far as is applicable to modern construction contracts, can be demonstrated by reference to a few leading examples. The current FIDIC Red Book contains this provision in part of Sub-Clause 4.12: ‘If and to the extent that the Contractor encounters physical conditions which are Unforeseeable, gives such a notice [to the Engineer ], ], and suffers delay and/or incurs Cost due to those conditions, the Contractor shall be entitled … to:
(a)
an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion] and
(b)
payment of any such Cost, which which shall be included in the Contract 18 Price.’
The Red Book also provides that ‘unforeseeable’ means ‘not reasonably foreseeable by an experienced contractor by the date for submission of the 19 It should be stated here, for reasons which will become apparent Tender’. below, that the FIDIC Yellow Book contains the same s ame provisions.20
It is thus clear that owners could indeed, if disposed to use certain contracts, sign a ‘covenant’ to the effect that they took the risk of sufficiency of the information they supplied to the contractor. These provisions of two of the principal FIDIC forms can create a problem for owners. While favourably disposed to the contract generally, they might decide (or be advised) that the ground risk allocation was not acceptable. FIDIC’s strong aversion to ad hoc amendment of its contracts compounds the problem; it may be observed that this position is seen in the industry as wholly unrealistic, since FIDIC
16 17 18 19 20
(1911) 21 Man R 641 (CA Manitoba), page 688. Grace v Osler (1911) Grace v Osler, note 16, page 688. FIDIC Red Book: note 11. FIDIC Red Book, note 11, Sub-Clause 1.1.6.8. FIDIC, Conditions Conditions of Contract for Plant and and Design-Build for Electrical and Mechanical Mechanical Plant and for Building and Engineering Works Designed by the Contractor (1st edition, 1999) (The Yellow Book).
7
contracts are in practice frequently amended, like other standard form contracts. It was against this background that the Abu Dhabi government decided to review the FIDIC provisions for adoption as their standard form of contract for public works. The results are highly illuminating, the Abu Dhabi version of the Red Book containing the following provision: ‘4.12 Unforeseeable Physical Conditions
If and to the extent that the Contractor encounters physical conditions which are Unforeseeable, gives such a notice [to the Engineer ], ], and suffers delay and/or incurs Cost due to these conditions, the Contractor shall be entitled … to: (a)
an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion] and
(b)
payment of any such Cost, which shall be included in the Contract Price.’
It is immediately apparent that the risk allocation has been left unamended after review. By contrast, the post-review provisions of the Abu Dhabi version of the Yellow Book significantly alter the balance of risk allocation between the parties: ‘4.12 Unforeseeable Physical Conditions
The Contractor has had an opportunity of inspecting the physical conditions (including the sub-surface conditions) and other conditions, of or affecting the Site and shall be deemed to have fully acquainted himself with the same and to have obtained all necessary information as to risks, contingencies and all other circumstances which may influence or affect the execution of the Works or their design insofar as the Contractor has responsibility for such design. No failure on the part of the Contractor to discover or foresee any such condition, risk, contingency or circumstance, whether the same ought reasonably to have been discovered or foreseen or not shall entitle the Contractor to an increase in the Contract Price or to an extension of time …’ The offering of ‘covenants’ accepting ground conditions risk which owners are supposed not to sign is not limited to FIDIC. At first sight, it may not be surprising that in its latest contract the Engineering Advancement Association of Japan (ENAA) has produced an allocation of risk of unforeseen site conditions which could be unattractive to owners: ‘35.1 Unforeseen Conditions ‘If, during the execution of the Works, the Contractor shall encounter on the Site any physical conditions (other than climatic conditions) or artificial obstructions that could not have been reasonably foreseen at the date of the Agreement by an experienced contractor on the basis of
8
reasonable examination of the data relating to the Works provided by the Owner and of information the Contractor could have obtained from a data readily available to it … visual inspection of the Site … or other data ... if the Contractor determines that it will in consequence of such conditions or obstructions incur additional cost and expense or require additional time to perform its obligations … the Contractor shall promptly notif y the Owner …’ 35.2 Any additional cost and expense incurred by the Contractor to overcome such physical conditions or artificial obstructions … shall be paid by the Owner to the Contractor as an a n addition to the Contract Contr act Price 35.3 If the Contractor shall be delayed or impeded in the performance of the Contract due to any such physical conditions or artificial 21 obstructions … the Time for Completion shall be extended …’ ENAA is, after all, principally a contractor organisation and its contracts are generally viewed in the market, at least by owners and their advisors, as contractor-friendl y. However, it should be recalled that this form continues to be recommended for use by the World Bank as its design and build form for projects which it is funding. fundi ng. The New Engineering Contract, a form increasingly used internationally,22 is another major example of a leading form of contract under which owners sign up to a significant level of ground conditions risk. The compensation events provisions of NEC3 contain the th e following: ‘60.1 The following are compensation events …
(12) The Contractor encounters encounters physical conditions which o
are within the Site
o
are not weather conditions and
o
an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them.
Only the difference between the physical conditions encountered and those for which it would have been reasonable to have allowed is taken into account in assessing a compensation event. 60.2 In judging the physical conditions for the purpose of assessing a compensation event, the Contractor is is assumed to have taken into account: o
o
21 22
the Site Information publicly available information referred to in the Site Information
Engineering Advancement Association of Japan, Model Form – International International Contract for Process Plant Construction (Turnkey – Lump Lump Sum Basis) (3rd edition, 2010). Engineering and Construction Construction Contract Contract (Institution of Civil Engineers, Engineers, 3rd edition, June 2005) (NEC3). The authors are aware of usage usage in South Africa as well as on at least one major PFI project in the Middle East.
9
o
o
information obtainable from a visual inspection of the Site and other information which an experienced contractor could reasonably be expected to have or to obtain.
60.3 If there is an ambiguity or inconsistency within the Site Information (including the information referred to in it), the Contractor is assumed to have taken into account the physical 23 conditions more favourable to doing the work.’ All the forms referred to so far – the FIDIC Red and Yellow Books, the ENAA Process Plant edition and NEC3 – give give the contractor an entitlement to time and money on account of unforeseen ground conditions. They treat it as an employer employer risk. The idea in Grace v Osler that Osler that ‘owners would not sign such 24 a covenant’ is simply not an accurate reflection of standard forms of contract in use today, if indeed it was ever accurate. However, it is not a mandatory risk allocation. Reference has already been made to the revised version of the Yellow Book produced by the government of Abu Dhabi. FIDIC itself also produces a principal form of contract which takes a radically different view. The Silver Book contains the following provisions relating to ‘Unforeseeable Difficulties’: ‘Except as otherwise stated in the Contract:
(a)
The Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works
(b)
By signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works and
(c)
The Contract Price shall not be adjusted to take account of any 25 unforeseen difficulties or costs.’
In addition to placing the main responsibility for obtaining information upon the contractor, the Silver Book also seeks to deny the employer’s responsibility for any information supplied to the contractor.26 The ‘Site Data’ provision contains the t he following: ‘The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employer’s possession on subsurface sub surface and hydrological conditions c onditions at the Site ...
The Employer shall have no responsibility for the accuracy, sufficiency or completeness of such data ...’
23 24 25 26
NEC3: note 22. Grace v Osler : note 16. FIDIC, Conditions Conditions of Contract for EPC/Turnkey Projects (1st edition, 1999) (The Silver Silver Book), Sub-Clause 4.12. FIDIC Silver Book, note 25, Sub-Clause 4.10.
10
The General Design Obligations provision of the Silver Book basically reinforces this position: ‘Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor, from his responsibility for 27 the design and execution of the Works.’
Nevertheless, Sub-Clause 5.1 also contains an important element rebalancing the risk, often ignored by the many critics of the Silver Book’s position on ground conditions: ‘However, the Employer shall be responsible for the correctness of the following portions of the Employer’s Requirements and of the following data and information provided by (or on behalf of) the Employer:
(a)
Portions, data and information which are stated in the Contract as being immutable or the responsibility respo nsibility of the Employer
(b)
Definitions of intended purposes of the Works or any parts thereof
(c)
Criteria for the testing and performance of the completed Works and
(d)
Portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract.’
The FIDIC Silver Book is a deeply controversial form of contract from the point of view of contractors and the allocation of ground risk is perceived as one of the principal reasons for this. Contractors see these provisions as departure – betrayal might not be too strong a word – from FIDIC’s self proclaimed policy of producing ‘fair’ contracts, meaning that risks are allocated to the party best able to manage and bear them. An allocation of ground risk to the contractor in the Silver Book was seen by contractors as completely inconsistent with those in the Red and Yellow Books: ‘… the Silver Book seeks generally to all ocate all the risks involved in the successful completion of the Works to the Contractor. As a result, the Contractor will, generally, bear the risk of encountering what would otherwise be Unforeseeable physical conditions in the other Books.’28
There is no doubt that the basic Silver Book allocation of ground conditions risk is severe upon the contractor. To obtain a complete view of this, it is necessary to view it in context. It has already been seen how the possibility of a rebalancing, or at least a reduction in the burden of risk on the contractor, can be found in the latter part of Sub-Clause 5.1. It should also be remarked that this latter form of ‘rely upon information’ provision is often found in bespoke contracts in international projects: a reminder that the Silver Book is not completely at odds with market practice. 27 28
FIDIC Silver Book, note 25, Sub-Clause 5.1. Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers, FIDIC Contracts: Law and Practice (Informa, 2009), para 3.169.
11
Further, however much FIDIC might deplore amendment of its forms, the Abu Dhabi government’s revision of the Yellow Book is a demonstration that not all parties are equally happy with the traditional FIDIC ground conditions risk allocation. FIDIC has robustly defended its Silver Book Book risk allocation. Christopher Wade, former chairman of the FIDIC Contracts Committee, led the defence. He made the point that employers on some turnkey projects are willing to pay more for certainty of price and completion date: ‘… the contractor is often asked to cover such risks as the occurrence of poor or unexpected ground conditions and that what is set out in the requirement prepared by the employer actually will result in the desired objective. If the contractor is to carry such risks, the employer obviously must give him the time and opportunity to obtain and consider all relevant information. The employer must also realise that asking serious contractors to price such risks will increase the construction cost 29 and result in some contracts not being commercially viable.’
He also noted that employers in many countries had been altering the Red and Yellow Books to transfer risks from employer to contractor (as, for example, the Abu Dhabi government’s revised version version of of the Yellow Book). Book). He concluded: ‘… FIDIC has considered it better for all parties for this need to be openly recognised and regularised. By providing a standard FIDIC form of contract for use in such contracts, the Employer’s requirements for 30 more risk to be taken by the Contractor are cle arly stated.’
He again emphasised: ‘… clearly the contractor will rightly increase his tender price to account 31 for such extra risks.’
The view of contractors’ organisations was sharply different, in both substance and tone. The European International Contractors view was expressed by Frank Kennedy at the same time as the Christopher Wade defence, specifically in relation to Sub-Clause 4.12: ‘The language used in this Sub -Clause is uncompromising in the extreme and its scope and application are much more wide-ranging than any previous clause covering unforeseen conditions … It is difficult to imagine a clause which would be more threatening to contractors and which would leave them more open to unscrupulous employers … 32 contractors should beware!’
29 30 31 32
Christopher Wade, ‘FIDIC’s Standard Forms of Contract – Principles and Scope of the four New Books’ [2000] ICLR 5, page 11. Wade, note 29, page 11. Wade, note 29, page 12. Frank Kennedy, ‘EIC Contractor’s Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects (The Silver Book)’ [2000] ICLR 504, page 513.
12
Agne Sandberg of Skanska also gave the view of major contractors of the unforeseeable adverse physical conditions provisions in the Silver Book. ‘Some of the above risks are for matters within the control of the employer and are therefore in contradiction with a fundamental principle of a fair contract.
It is disappointing to realise that FIDIC is in the process of publishing a set of conditions that will be more unbalanced in terms of risk than any other design-build forms that I know of …’33 Given that the FIDIC contracts are not drafted for use in any specific jurisdiction, the question is not merely whether the allocation is fair, but whether it is actually effective and enforceable. It has been suggested in at least one major European jurisdiction that the Silver Book allocation of risk could be ineffective. Kus, Marking and Steding have expressed strong reservations about the position under German law: ‘According to sub -clause 4.12 the contractor bears risk for all unforeseeable ground conditions … it is perfectly in order that the contractor, on the basis of this sub-clause, knows and has taken the risk, if the employer has not given him any information on the ground conditions, and problems suddenly arise later … The reason why this risk-shifting is nevertheless ineffective under the German Standard Form Contracts Act is the fact that … the contractor is also responsible [ sub subclause 5.1] in a case where the employer has provided him with an expert’s report on the ground conditions containing hidden errors which are not provable within the short tendering period.’34
by the choice of the parties or the rules of ‘If German law is applicable – by private international law if there is no (valid) choice – in in the opinion of the present authors [eight Sub-Clauses of the Silver Book, including 4.12 and 5.1 ] are not effective under the German Standard Form Contracts 35 Act.’
Contractual effect of allocation under English law Having considered the different mechanisms possible for different allocations of risk, it is necessary to consider what their effect might be, given that this will vary between jurisdictions, taking English law as a basis. Using Julian Bailey’s classification,36 scenario 1 is of a warranty of accuracy/completeness of site information by the employer. If express, this would normally be enforced at common law. In English law, such a warranty could even be implied in exceptional circumstances, as the Court of Appeal
33 34 35 36
Agne Sandberg , ‘A Contractor’s View on FIDIC Conditions of Contract for EPC Turnkey Projects’ [1999] ICLR 47 , page 50. Dr Alexander Kus, Dr Jochen Markus and Dr Ralf Steding, ‘FIDIC’s New “Silver Book” under the German Standard Form Contract Act’ [1999] ICLR 533, pages 538-539. Kus, Markus and Steding, note 34, page 549. See the main text to note13.
13
held in Bacal Construction v Northampton Development Corporation. 37 Such a possibility may also exist in US law, although Doug Jones has doubted whether such a warranty would ever be implied into an Australian standard form contract.38 Scenario 2 is the neutral situation where the employer gives neither warranty nor disclaimer. Under English law, in principle the risk of adverse site conditions should remain with the contractor if there is no contractual provision to disturb distu rb the position. In scenario 3, there is a misrepresentation by the employer. A positive misrepresentation in site information supplied by the employer could change the risk allocation. The position is clearly stated by Keating : ‘A statement of fact by the employer as to the nature of the soil, or the site or the like is often made in the tender documents and is at that stage a representation. When the contract is signed, such statements are often expressly incorporated into the contract … the contractor may seek damages for breach of contract [or, in English law, under the 39 Misrepresentation Act 1967 ].’
In scenario 4, there are express disclaimers of liability by the employer under the contract. As has been seen, Sub-Clauses 4.10 and 5.1 of the FIDIC Silver Book contain ‘no reliance’ clauses, purporting to deny the contractor the ability to rely on the information provided, or more specifically to exclude the employer’s liability for such reliance. While English English law has the Unfair Contract Terms Act 1977 and other common law jurisdictions have similar statutes, in principle such disclaimers should be effective to prevent contractor claims. This may not be so in civil law jurisdictions, such as Germany, if the provisions offend against ag ainst statute. In summary, it can be said that questions of allocation of risk for unforeseen ground conditions will depend upon: (a)
contractual provision; and
(b)
the general law of the jurisdiction.
The remaining part of this paper concerns situations where contract provisions have been insufficient to prevent disputes arising as to the consequences of unforeseen ground conditions. Its purpose is to offer some insight as to the nature and characteristics of ground conditions disputes.
37 Bacal Construction (Midlands) Ltd v Northampton Development Corporation Corporation (1975) 8 BLR 88 (CA), pages 100-101 (Buckley LJ). 38 Doug Jones, ‘Force Majeure in Australian Construction Law’ [1995] ICLR 296 , page 309. 39 Stephen Furst QC and the Hon Sir Vivian Ramsey, Keating on Construction Contracts (9th edition, Sweet & Maxwell, 2012), para 6·022.
14
Ground conditions disputes: their nature and how they occur From the earliest times, disputes have arisen about unforeseen ground conditions. A recurring feature in the early cases is material supplied by the employer on which the contractor has relied, or claims to have done so. In Munro v Bognor Urban District Council the specification for a sewage works contained the following words: ‘A borehole has been sunk upon the site, and it has been ascertained that the top eighteen feet40 of the subsoil consists of somewhat wet very loose sand and clay and below this depth the strata is of stiff clay.’41 The contractor’s claim for fraudulent misrepresentation was based upon the allegation that no such borehole had ever been sunk. In Trade Indemnity v Workington Harbour and Dock Board , in a project for dock enlargement works, the contract made the contractor wholly responsible for obtaining ground conditions information.42 Despite warnings that their price for excavation was too low, the contractors won the contract on the security of a performance bond. The contractors alleged that they were misled by a representative of the employer about trial hole results, which revealed the presence of water, and the bond guarantors sought to rely on this to resist payment. Lord Atkin pointed out that the contractor was not entitled to rely upon any such representation, even if made.
Ground conditions cases have continued to occur into the modern era and in all the major common law jurisdictions, at least. While ground conditions are not the same everywhere, and the legal position in contract and at law may vary, the basic ground conditions questions are similar. M oder oder n exampl es
A modern Australian case, Abigroup Contractors v Sydney Catchment Authority, shows the recurrent theme of contractor complaints about employer information on ground conditions; the outcome was attributable to Australian statute. Work on a spillway at the Warragamba Dam encountered a significant delay and difficulty, due to the rock level being substantially lower than indicated in the Authority’s specifications. The ‘Concept Design’ had shown a high rock level and a small amount of excavation and replacement required (24,300 cubic metres). The rock level was in fact much lower than that indicated by the ‘Concept Design’ drawings and in the result 204,518 cubic metr es had to be excavated and replaced, an excess of over 180,000 cubic metres. The contractor succeeded in obtaining a finding from the court that the Authority had been
40 A little less than six metres. 41 Munro v Bognor Urban District Council [1915] 3 KB 167 (CA), page 168. 42 Trade Indemnity Co v Workington Harbour and Dock Board [1937] AC 1 (HL), page 15.
15
guilty of a misrepresentation and of misleading and deceptive conduct under the Trade Practices Act, entitling the contractor to damages.43 In the Hong Kong case of Mitsui the client (the Hong Kong government) gave limited geological information to Mitsui (the contractor) in relation to a water supply works project; much of the information could not be obtained or verified until excavation took place. In the end, the engineer exercised his power to grant an extension of time of 784 days on a two-year contract ‘to compensate for the extra time required to cope with ground conditions in executing the tunnel excavation and lining works’. The contractor’s action sought an adjustment of rates to cover the additional sums expended. The bill of quantities had allowed 40 tons of steel for supports, compared with a requirement as executed of 2943 tons and 275 metres of lining material, compared with a requirement as executed of 2448 metres.
The court held that the government estimates based on the geological information had been ‘wildly wrong’ and that the contractor would be entitled to further financial relief under contractual provisions which the court criticised for their imprecision.44 Groun d conditions and other other claims
It should, of course, be recalled that not all unforeseen ground conditions cases concern contractor’s progress and cost claims. In Mirant Asia-Pacific Construction (Hong Kong) v Ove Arup , the basis of the dispute was allegations of designer negligence.45 The owners sued their consultant engineers in respect of negligent foundation design in the construction of a coal-fired power station at Sual in the Philippines, which failed because of the strength and composition of the rock sub-soil. The court held that the design would depend upon assumptions as to the ground conditions and that the designers were under a duty to verify the geological conditions on which these assumptions were based, which they had not done. In Enertrag v Sea & Land Power and Energy , the Technology and Construction Court held that the failure of the erection of a weather mast in the North Sea as part p art of a wind farm project was due to the defendant contractor’s inadequate advice on sub-sea soil conditions and consequent inappropriate installation.46 In Co-operative Group v John Allen the employer brought an action against consultants in relation to their design work, following attempts to treat a layer of very soft clay by vibro compaction and stabilisation work. The outcome was significant differential settlement and sloping floors. The test applied was 43 Abigroup Contractors Pty Ltd v Sydney Catchment Authority [2007] NSWSC 220. 44 Mitsui, note 14, page 8. 45 Mirant Asia-Pacific Construction (Hong Kong) Ltd v Ove Arup and Partners [2004] EWHC 1750 (TCC). International Ltd [2004] 46 Enertrag (UK) Ltd v Sea & Land Power and Energy Ltd (2003) (2003) 100 Con LR 146 (TCC).
16
the reasonable skill and care exercised by the designers and the action failed in this respect.47 A case case stu stu dy
The authors have encountered the ground conditions issue frequently in their Middle East and North Africa practice and the following case study is an example of a dispute from that region. The project was a large petro-chemical facility, including a main site with dimensions of 20km by 17km. The area of the main site which was the subject of the dispute was approximately 4km by 4km. A site survey had been undertaken on behalf of the employer five years previously, involving five cores on the dispute site and two just outside it. The survey was provided to all tenderers. The survey referred to Standard A as the standard used for the core samples: ‘… on encountering of resistance greater than X, further weight added to assist penetration of earth for core samples’. The report concluded: ‘Core sampling undertaken undertaken to depth of Xm. Xm. On analysis, no no hard rock was present on site at depth of Xm. In our opinion, no heavy rock equipment is necessary; backhoes and light excavators are sufficient for any excavation.’
The tenderers were allowed to inspect the site and prior to the final tender, the contractor whose tender ultimately succeeded took eight further core samples in the dispute site area. The contract contained the following provisions: o
o
o
All site investigation reports provided by the Owner are for information only and can in no way be relied upon by the Contractor; The Contractor acknowledges that it has undertaken its own site investigations to ascertain the relevant site conditions; The Contractor is entitled to a Change Order where ground conditions encountered are unforeseeable.
Within the first month of work, the contractor encountered hard rock on 90% of the area needed for foundation excavation within the dispute part of the main site. The equipment brought in by the contractor could not cope with the conditions actually obtaining. The contractor submitted a claim for 14 months of additional time for delay and in excess of $50 million of extra cost, which it alleged resulted from the unforeseen ground conditions. Initially, the contractor seemed to have a strong claim. However, as the claim became a dispute and the full documentation docu mentation was w as reviewed by the legal teams and experts, a fuller and different picture began to emerge.
47
Co-operative Group Ltd v John Allen Associates Ltd [2010] EWHC 2300 (TCC).
17
In particular, two points proved to be of crucial significance. First, the initial report (shown to all tenderers) and the contractor’s own report both contained clear indications of the presence of hard rock, from the number of blows required to penetrate the sub-surface. Second, it became apparent that the contractor’s report had been based on the use of a standard of testing different from that required in the invitation to tender. The picture which emerged was that the failure to adhere to the testing methodology and the failure to interpret the report information had been crucial in the contractor’s contractor’s assessment of the the position. position. This significantly weakened the contractor’s case in the dispute resolution process which it had initiated.
Conclusions At the time of preparing and negotiating the contract, the allocation of ground risk needs to be considered in detail. It is not sufficient to accept standard form provisions without reflection on their appropriateness to the project in question. Specifically, the question must be addressed as to whether the contractor is to be entitled to make a claim for unforeseen ground conditions, along the lines of the FIDIC Red Book, or a version thereof.48 Moreover, part of this consideration will be identifying documents (if any) which the contractor is expressly entitled to rely upon, with the result that the contractor will be able to get time and/or money relief if the information is inaccurate or incomplete. Alternative models of risk allocation may need to be reviewed. The employer may wish to transfer the majority of the ground risk to the contractor, as under the FIDIC Silver Book.49 The question as to the appropriateness of this model has a number of elements. The employer will need to be confident of finding a contractor with the capability to execute the project successfully and who is prepared to accept this risk burden. The employer empl oyer will also need to be aware awar e of, and willing to accept, the implications in terms of time and (especially) cost of such an allocation. Ground conditions provisions, like all risk allocation, are a matter of contract negotiation. However, the outcome will be determined not only by bargaining strength, market conditions and the negotiating skills of the parties and their presentations. Regard must also be had to the applicable law of the contract. Under English law, in the absence of express provision, the risk is generally borne by the contractor, but even in the common law jurisdictions it may be possible to obtain relief through an implied warranty or a claim for misrepresentation, if the facts will support it. It cannot be assumed that all risk allocations will be effective in all jurisdictions. In the civil law jurisdictions, statute may have an impact on enforceability of wholesale risk transfer such as under the Silver Book, and at
48 49
FIDIC Red Book: note11. FIDIC Silver Book: note25.
18
the claim stage the possibility of a force majeure claim by the contractor must be taken into account, which whi ch would be virtually unthinkable unth inkable at common law. Even the most successful negotiations and the drafting of appropriate provisions cannot prevent all disputes. Disputes about cost, time, defects and professional liability arise despite the existence of contracts covering the ground conditions issue. If a dispute does arise, it needs to be managed proactively. The facts need to be analysed fully and early and recorded in correspondence, relating closely to the contractual allocation of risk and the general law. All of these features can be said to apply to contractual provisions and disputes concerning ground conditions conditions in any jurisdiction. It is the authors’ experience that the issue is particularly keenly negotiated and contested in the Middle East and North Africa region.
Ellis Baker MA LLM, solicitor, is a partner and head of the Construction and Engineering Practice Group at the London office of global law firm White & Case; he is also lead author of FIDIC Contracts: FIDIC Contracts: Law and Practice.
Michael Turrini BA LLB, solicitor, is a partner in the Doha office of White & Case.
©
Ellis Baker, Michael Turrini and Society of Construction Law Law 2013
The views expressed by the authors in this paper are theirs alone, and do not necessarily represent the views of the Society of Construction Law or the editors. Neither the authors, the Society, nor the editors can accept any liability in respect of any use to which this paper or any information or views expressed in it may be put, whether arising through negligence or otherwise.
19
‘ The The object of the Society is to promote the study and understanding of construction law amongst all those involved in the construction industry’ industry’
MEMBERSHIP/ADMINISTRATI MEMBERSHIP/ADMINISTRATION ON ENQUIRIES Jill Ward The Cottage, Bullfurlong Lane Burbage, Leics LE10 2HQ tel: 07730 474074 e-mail: [email protected]
website: www.scl.org.uk
20
