Denmark needs to replace a large part of its infrastructure. The state and local authorities are therefore investing in infrastructure development, including underground infrastructure such as water lines and sewer pipes. The majority of infrastructure investments are “green” which promotes renewable energy and makes them as long-term as possible. The policy of renewing Danish infrastructure has, however, raised a number of legal problems regarding the relationship between owners and contractors. In our experience, the main reason for legal problems relating to the construction of underground conduits is imprecise drafting of tender documents. This article looks at some of the specific challenges in this area and ways of safeguarding against them.
For the owner, engaging in larger construction projects calls for some preliminary actions. In Denmark, traditionally, the owner’s first step is to put the project out to tender, giving contractors the option to make an offer on the project. The tender process involves the exchange of documents and sometimes quite protracted negotiations, meaning that it may well last for several months.
Under Danish law, the tender documents must be unambiguous and clarify the scope and content of the work to be undertaken. The owner bears the legal risk in respect of the content of the tender documents, including any errors and defects. This means that, as a general rule, it is the owner who will be held accountable for any vagueness or inadequacies in the tender documents.
The more precise the tender documents are, the more exact the contractor’s offer will be, thus ensuring the least possible number of unforeseen obstacles during the construction itself.
The tender documents may therefore be seen as the owner’s most important tool in curtailing unforeseen obstacles. When preparing these documents, however, the owner’s focus is sometimes in the wrong place.
There are examples of recent construction contracts regarding conduits in which the owner has overlooked some details which have led to disputes once construction has been completed. In practice, these are rarely solved by settlement or mediation and must therefore be brought before a court or arbitral tribunal.
While the owner must provide clear and unambiguous tender documents and bears the risk of defects in the documents, the contractor must carry out the work according to the contract entered into. This means that the contractor bears the risk of economic loss if its expenses are higher than stated in the contract (usually referred to as the risk of quantity). At the same time though, the contractor also has the prospect of a higher profit if its expenses are lower than stated in the contract.
The contractor’s offer usually contains a total price for the construction. However, when dealing with construction projects of a more complex nature, where the extent of the project is difficult to determine beforehand, the parties will often agree on a standard unit price, thus making the total contract price a result of a unit price multiplied by the work extent.
The legal effect of unit price contracts is that the risk as to quantity is placed on the owner as the contractor only binds itself to a certain unit price, with no certainty as to work extent.
The specific challenges
One of the most significant characteristics of construction projects is that unforeseeable obstacles are inevitable. Where the contractor becomes aware of unforeseeable obstacles along the way making it impossible for it to perform the agreed work, it must inform the owner and follow its instructions. The contractor’s duty of notification is more stringent if it is obvious that the owner will incur inconvenience or loss as a result of the obstacle identified.
Even though the Danish position seems straightforward enough, real life is different. The owner and the contractor often hold different views on these matters, for example, when is it obvious that the owner will incur inconvenience or loss? Precisely when during the contract must the contractor notify the owner of such matters? Are the challenges mainly caused by insufficient tender documents, or should the contractor have predicted the challenges when inspecting the construction site during the preparation of his offer?
In different forms, the questions raised above have been part of various disputes. In particular, three common issues can be identified:
- Storage of soil: where is the excavated soil to be stored?
- Quantity variations in the contractor’s work: to what degree must the owner bear the economic risk where the work extent turns out to be greater than initially anticipated?
- Lack of information regarding restrictions to the construction site: for example, are there any specific rules relating to the construction site, or protected parts of the site, that the constructor should have been aware of before starting the construction?
As discussed below, these issues constitute considerable risks for the owner who can, however, keep these risks to a minimum by being thorough when tendering his construction project.
Storage of soil
The owner and the contractor often assume that the contractor can store the excavated soil at the site, customarily beside the excavated area. Occasionally, however, during the project it turns out that the site cannot contain the volume of excavated soil. In order to meet construction deadlines the contractor may decide to transport the soil to one or more deposit sites, often resulting in significant costs in truck hours and deposit expenses which neither of the parties wishes to pay for. This can lead to a dispute between the parties.
On one hand, the owner believes that the contractor should have foreseen these obstacles when inspecting the construction site during the preparation phase, while on the other hand, the contractor considers the obstacles unforeseeable and submits that the fault lies in ambiguities and defects in the tender documents.
Given that the owner bears the legal risk of matters not regulated in the tender documents, ultimately the owner is most likely to suffer the economic loss of this sort of dispute. This is one of the reasons why thoroughness in the preparation of the tender documents is of crucial importance for the owner.
As noted earlier, the risk of quantity variations generally lies with the contractor unless the parties have agreed to a unit price contract, in which case the risk of quantity variations lies with the owner.
However, even under total price contracts, it is of utmost importance to be aware that the contractor’s risk is not unlimited.
Under Danish construction law, the contractor may claim compensation from the owner if its obligation turns out to be disproportionately burdensome, notwithstanding that the risk of the extent of the work originally lay with the contractor.
There are no specific conditions which govern when the contractor can make such a claim as this depends on an overall assessment of all circumstances and facts of the matter.
In cases governed by unit price contracts, there have been instances where the quantity of the contractor’s work has grown much larger than first assumed, resulting in an equivalent increase in the total price.
To avoid such cases, it is vital that the owner ensures that the unit price stays the same regardless of changes in the quantity of the contractor’s work. A non-negotiable fixed unit price must also apply to changes in work method which may also affect the contractor’s costs.
In addition, it is important for the owner to include an upper limit for the extent of the contractor’s work thereby limiting his own risk.
Such precautions have been shown to be particularly useful in relation to pipe line and sewer construction as the risk of unforeseen obstacles seems higher when operating in the ground than above the ground, thus increasing the owner’s risk.
Restrictions at the construction site
Occasionally, the construction site includes areas that are preserved or protected by public regulation, for example, municipal plans or environmental protection rules regarding planting and existing trees.
If the contractor has not been informed of the relevant restrictions, and if the areas in question are being affected in any way by the construction, the duty to remedy the damage caused or alternatively to pay damages to the authorities lies with the owner.
Therefore, a thorough examination of the construction site and the public regulations affecting it is a necessity for the owner. This can ensure that the owner is not met with any claims from public authorities during the term of the contract, or subsequent to its completion. Furthermore, the owner should always impose on the contractor a duty to inspect the construction site early on in the process. Such an obligation will not only prevent later uncertainties, but it will also make it easier for the owner to intervene if the contractor acts in a way that is inconsistent with the project description.
Settle the dispute before it arises
By seeking to deal with as many potential obstacles as possible during the tendering process, the parties can keep the risk of subsequent disputes to a minimum.
As noted earlier, it is a basic premise for engaging in construction contracts that unforeseen obstacles cannot be avoided completely. However, the parties can reduce their risk by taking precautions and following the advice given in this article.
The procedures concerning performance of construction contracts are generally complex and usually contain a number of issues that must be decided at the outset. Note that this article does not mention all the issues that could arise, for example, legal remedies against supervisors and advisors.