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SCL The Underlying Problem. Ground Conditions
SCL The Underlying Problem. Ground Conditions
NEGOTIATING THE
GROUND CONDITIONS ISSUE
A paper presented to the Society of
Construction Law at a meeting in London
on 6th November 2012
www.scl.org.uk
Introduction
The purposes of this paper are:
o
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.
1
2
3
Julian Bailey, What Lies Beneath: Site Conditions and Contract Risk SCL Paper 137
(May 2007) <www.scl.org.uk>
Presentation to SCL Gulf in Abu Dhabi on 12th February 2012.
Presentation to SCL Gulf in Doha on 22nd April 2012.
Nicholas Dennys, Mark Raeside and Robert Clay (editors), Hudsons 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.
constructing a drainage system but when he abandoned the work, he was held
entitled to no remedy for the client Corporations action in seizing his plant
and denying him payment.7 The Whitehaven case was strongly criticised in
later decisions, notably Davis Contractors v Fareham Urban District
Council,8 and hardly represents the general tone even of the early cases.9
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
terms. They did not do so.10
The courts 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 contractors 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.
10
Bottoms v Lord Mayor etc of the Corporation of York (1892) (QB and CA), The Hudson
Fourth Edition Volume 2 Table of Cases Reprint (Sweet & Maxwell, 2001), page 208.
Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 (HL).
The authors are grateful to John Barber, Director of the Centre of Construction Law and
Dispute Resolution, Kings College London, for sending them his unpublished paper
The Foresight Saga which deals usefully with the early cases and other points of
interest.
Worksop Tarmacadam Co Ltd v Hannaby (1995) 66 Con LR 105 (CA), page 108.
FIDIC, Conditions of Contract for Construction for Building and Engineering Works
Designed by the Employer (1st edition, 1999) (The Red Book).
The scope for negotiating the terms of these forms is usually limited,
but in larger projects and depending on the industry, modifications from
standard contract forms may be obtained by the contractor.12
12
13
1.
2.
3.
4.
information
which
contains
Marcus C Boeglin, Michael E Schneider, Fadi Sabsabi and Ramy Saleh, Qatar
Construction, Bloomberg Law: www.bloomberglaw.com.
Julian Bailey, note 1, page 12.
14
15
(b)
The Red Book also provides that unforeseeable means not reasonably
foreseeable by an experienced contractor by the date for submission of the
Tender.19 It should be stated here, for reasons which will become apparent
below, that the FIDIC Yellow Book contains the same 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. FIDICs 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
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19
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(b)
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
21
22
(b)
(c)
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24
25
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(b)
(c)
(d)
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 FIDICs selfproclaimed 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 allocate 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
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Further, however much FIDIC might deplore amendment of its forms, the Abu
Dhabi governments 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 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
and result in some contracts not being commercially viable.29
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 governments revised version of the Yellow 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 Employers requirements for
more risk to be taken by the Contractor are clearly stated.30
He again emphasised:
clearly the contractor will rightly increase his tender price to account
for such extra risks.31
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
contractors should beware! 32
29
30
31
32
Christopher Wade, FIDICs 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 Contractors 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 [subclause 5.1] in a case where the employer has provided him with an
experts report on the ground conditions containing hidden errors which
are not provable within the short tendering period.34
If German law is applicable by the choice of the parties or the rules of
private international law if there is no (valid) choice 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
Act.35
33
34
35
36
13
(b)
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.
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Modern examples
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 Authoritys 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 metres 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
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41
42
15
Abigroup Contractors Pty Ltd v Sydney Catchment Authority [2007] NSWSC 220.
Mitsui, note 14, page 8.
Mirant Asia-Pacific Construction (Hong Kong) Ltd v Ove Arup and Partners
International Ltd [2004] EWHC 1750 (TCC).
Enertrag (UK) Ltd v Sea & Land Power and Energy Ltd (2003) 100 Con LR 146 (TCC).
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the reasonable skill and care exercised by the designers and the action failed in
this respect.47
A case study
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 to depth of Xm. On analysis, 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
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 was 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).
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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 will also need to be aware
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
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the claim stage the possibility of a force majeure claim by the contractor must
be taken into account, which would be virtually unthinkable 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 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.
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.
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tel: 07730 474074
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website: www.scl.org.uk
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