As Sarah Buckingham explains, one of the recurring themes in many of the contract negotiations we have seen this year relates to site conditions and who is to take this risk if they turn out to be unexpectedly adverse.
Where the ground conditions or the physical state of existing structures is found to be different from expected, this can obviously have a significant effect on the project. It may result in: a need to change the working method (e.g. the line and level of a trench may remain the same but different equipment and a different working method may be required); a complete revision of the design (e.g. the design of the foundations may need to be altered due to the unexpected nature of the soil at a certain depth); or, in extreme cases, the works may need to be abandoned altogether. The key question is who bears the consequences of the associated cost and delay?
It appears that not only may the ground yield up some surprises for the parties during the course of a project but the general legal and contractual position may not be what they were expecting either. This is surprising in itself. Given how often unforeseen site conditions can have a negative impact on a project, it is odd that the position is not always clearly delineated at the outset and the parties involved do not know precisely who bears the risk. Often, the party experiencing the biggest shock is the contractor.
In this article, we look at some of the various ways in which different forms of construction and engineering contracts address the issue of adverse site (or physical) conditions and, crucially, where they do not deal with it at all. But first it is necessary to have an appreciation of the general legal position – i.e. in the absence of any express contractual provision, what does the common law say?
The general position – harsh law
The general legal position is that if a contractor promises an employer that he can build a structure then that is what he must do, irrespective of the physical difficulties involved and irrespective of whether the employer produced the design. The employer does not impliedly warrant the feasibility of the design in the contract documents,2 nor the fitness of the site to enable the contractor to complete the work – it is for the contractor to make the call that it is “buildable” and that he can carry out and complete the works in accordance with the contract documents by the contract date and for the price.
In effect, the contractor is regarded as having warranted its possibility and the contract will not be regarded as frustrated unless the impossibility is caused by some supervening event, such as the destruction of the whole site (which makes the project itself impossible).
By way of example, in the case of Wong Lai Ying v Chinachem Investment Co Ltd3, where an unforeseeable landslip above the construction site, destroying the works, meant that the timing and nature of any future development on the site was uncertain. The risk was not contemplated or allocated under the contract and it was found frustrated.
Therefore unless the contract expressly provides otherwise, the contractor is not let off the hook from his contractual obligations by saying that he attempted to build what he promised to deliver but it proved to be too difficult or impossible. It is quite simple – if he fails to build what has been described he is in breach of contract. There is a long line of case law illustrating this very point4 and, in particular, in relation to unforeseen ground or site conditions.5
If no assurances are given by the employer regarding the site conditions (and which employer is going to offer such assurance?), then the law will not imply a qualification into the contractor’s promise to build the works if they are discovered to be worse than anticipated. In effect, the contractor is the expert – it is up to him to decide if the works can be built (and if so, to price them accordingly). If, in his opinion, they cannot be built or there are potential risks, he should not tender or should ensure he qualifies his tender sufficiently. Back in the 1940's, Taschereau J held that:
“Expenses incurred for unforeseen difficulties must be considered as being included in the amount of the tender, and the respondent has the legal obligation to execute the contract for the price agreed upon, in the same way as would have been its indisputable right to benefit, if the soil had been more favourable and easier than foreseen.”6
This is similar to any commercial bargain between a buyer and a seller. For example, a buyer describes something it wants to buy (a screw) and the seller agrees that it will supply the screw for the price and in so doing it is agreeing that it can deliver the screw as described in the buyer’s description.
Note that there are occasions where the “buildability” risk will not be taken by the contractor, but this will be contract and fact specific. In the case of Yorkshire Water Authority v Sir Alfred McAlpine & Son (Northern) Ltd (1985)7, the employer insisted on the work being done in the manner it specified which was held to be subject to a clause providing that the works must be completed in strict accordance with the contract “save insofar as it is legally or physically impossible”.
One reason why this risk allocation can seem unfair in the context of construction projects, however, is because the works are being built on the buyer’s site (not in the seller’s factory) and, at the time of tender, the contractor may have limited knowledge of the site and/or know less about it than the employer. This is no excuse, however, so contractors should beware.
Contractual provisions – allocating the risk
The courts will not look favourably on parties who come unstuck simply because they have failed to address an issue in their contract. As Russell LJ said in Worksop Tarmacadam v Hannaby8 in which a contractor tried to claim additional cost as a result of unforeseen hard rock, “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.”
The judge’s view could not have been more clearly expressed. Where the parties do not proactively insert an express clause but rather enter into a “standard” form of contract, what approach do these contracts take to the allocation of risk for unforeseen site conditions?
Determining the scope of the works is key
In determining whether the contractor is entitled to additional time and money in respect of overcoming unexpected site conditions, it is necessary to consider whether the “additional” work involved was actually part of the original scope. This not only involves an analysis of the description of the works in the technical documents, but also considering what risks the contractor has assumed under the contract – i.e. whether or not it is required to undertake work that is additional to that described in the specification and drawings forming part of the contract. The contractor’s design obligation and its buildability obligation are key factors which need to be considered when interpreting the extent of the scope of works.
The approach in some standard forms
Many of the international forms of engineering contract include specific provisions on ground conditions, offering a compromise position in order to balance the risk between the employer and the contractor.
For example, the IChemE Form of Minor Works Contract (The Orange Book) 2003 provides:9
“The matters entitling the Contractor to apply for an extension of time are delays caused by: ...encountering conditions on the Site which could not, at the date of the Contractor’s tender, have been reasonably foreseen by an experienced contractor on the basis of information in his possession at that time, or by way of a visual inspection of the Site or by way of reasonable enquiry.”10
The FIDIC Short Form of Contract (1999) provides that:11
“Employer’s Liabilities" include: “physical obstructions or physical conditions other than climatic conditions, encountered on the Site during the performance of the Works, which obstructions or conditions were not reasonably foreseeable by an experienced contractor and which the Contractor immediately notified to the Employer.”12
The ICE Design & Build Contract (2001) provides:
“If during the carrying out of the Works the Contractor encounters physical conditions (other than weather conditions or conditions due to weather conditions) or artificial obstructions which conditions or obstructions could not in his opinion reasonably have been foreseen by an experienced contractor the Contractor shall as early as practicable give written notice thereof to the Employer’s Representative.”13
NEC3 provides that where the following occurs, this is considered a “compensation event”:
“The Contractor encounters physical conditions which
- are within the Site,
- are not weather conditions and
- 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.”14
In all of the above contracts, the risk of adverse site conditions is placed with the contractor to the extent that it (or an experienced contractor) ought to have foreseen such conditions.
In a number of these contracts, there is no mention of the contractor’s actual knowledge. However, it is generally accepted that it would not be a sensible interpretation of these clauses to discount what the contractor actually knew. Therefore the contractor’s actual knowledge is deemed to be taken into account too.
Although this approach of foreseeability is a common theme, it is a compromise position involving many grey areas which can inevitably lead to argument as to what the contractor should or should not have anticipated. In two recent cases, the contractors failed to convince the court that an experienced contractor would not have foreseen the ground conditions they encountered. It was held that, in the particular circumstances of each case, an experienced contractor would have anticipated such site conditions and the contractors therefore should have anticipated the risk.
In Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar,15 sub-clause 4.12 of the FIDIC Red Book was considered and showed the risk of the contractor adopting and relying on (without question) information and analysis provided by others.
In Van Oord UK Ltd & Anor v Allseas UK Ltd,16 a bespoke contract but similar in wording to FIDIC, it was held that an “experienced contractor” must consider and make allowance for the possibility that more adverse conditions may exist in parts of the site that have not been tested.
What does JCT say?
Apart from the JCT Major Project Construction Contract (see further comments below), the answer to this question is, quite simply, nothing. The JCT suite of contracts is silent on the issue of adverse site conditions. “Relevant Events”, entitling the contractor to an extension of time, include “exceptionally adverse weather conditions” and “force majeure”17 but there is no such provision in the event of unexpectedly adverse site conditions. There is also no mention of any increased compensation in such circumstances. What does this mean for the parties? As referred to above, in the absence of any express contractual provision to the contrary, the “general law” applies and the contractor takes the risk.18
Therefore any contractor blindly entering into an unamended JCT contract may find themselves metaphorically and literally stuck between a rock and hard place when it comes to overcoming unforeseen site conditions and there will be no helping hand to pull them out.
Note, however, that a contractor may have a claim for misrepresentation if the employer made representations as to the site conditions in the ERs. This may offer a potential route for the contractor to claim compensation. However, this will often be defeated by the insertion by the employer of a “no reliance” clause.
The JCT Major Project Construction Contract is the only JCT contract that includes an express clause dealing with ground conditions.19 This contract is intended for use on large-scale construction projects by experienced and knowledgeable developers and contractors experienced and able to take greater risk than would arise under other JCT contracts. Clause 14.1 of the Major Projects Form provides as follows:
“If the Contractor encounters ground conditions or man-made obstructions in the ground that necessitate an amendment to the Requirements and/or Proposals he shall notify the Employer of the amendments he proposes...” which (if clause 14.2 is stated to apply) “shall be treated as giving rise to a Change to the extent that the ground conditions or man-made obstructions in the ground could not reasonably have been foreseen by an experienced and competent contractor on the Base Date, having regard to any information concerning the Site that the Contractor had or ought reasonably to have obtained.”20
On the face of it, this appears to help the contractor in a similar way to the civil engineering forms of contract, offering a contractor more time and money where he encounters conditions he could not reasonably have foreseen. However, on closer analysis it may only go halfway there. Crucially, the adverse conditions encountered must “necessitate an amendment to the Requirements and/or Proposals”.
As mentioned in the opening paragraph of this article, huge delay and extra cost may flow from the need to change the working method without necessitating a change to the design. For example, a pipe may still be laid in the exact location, from A to B, specified in the Requirements and the Proposals (i.e. no change in design) but there is huge cost and delay involved in using different equipment to break through an unexpected subsurface obstruction which lies in the pipe’s required path. The unexpected difficulty of carrying out the works may, therefore, “impact” the works but not necessarily “change” the Proposals.
If the Proposals also set out the working method then all well and good for the contractor – the unexpected conditions may therefore necessitate a change to the Proposals and he may be entitled to additional time and money.
However, if the Proposals are silent on this, and/or the unforeseen conditions are such that a change in working method is not actually required, there still may be a significant impact on the works – e.g. it may still be possible to use the same or similar equipment specified (or contemplated) in the Proposals but it may take five times as long to deal with the unforeseen conditions.
In the situations described above, clause 14 of the Major Project Construction Contract may not come to the contractor’s aid. The need for there to be a change to the Employer’s Requirements or Contractor’s Proposals is not a hurdle under the engineering contracts referred to above, which entitle the contractor to the cost of and time spent in “encountering” unexpected physical conditions, regardless of whether any of the contract documents have to be changed as a consequence.
Ultimately, it is a matter for the parties to decide between themselves who bears the risk of unforeseen site conditions. They are free to choose the terms by which they are to be bound and are to be regarded as the masters of their own contractual fate in determining which terms are essential.21 The courts have little sympathy for parties who have struck a bad bargain.
It goes without saying that each and every project is different – unforeseen site conditions may be more of a risk in some locations than in others. An ancient sewer has almost certainly played a part in the delay caused to the ongoing works at the Victoria Palace theatre, London, delaying the opening of Hamilton by a fortnight and causing chaos for pre-booked ticket sales. The impresario Sir Cameron Mackintosh has described the refurbishment as “thrilling and fraught” – it would be interesting to know the risk allocation of ground conditions for the project and to hear the contractor’s view!
However, in any project, cognisance of the default legal position means that the parties cannot afford to be complacent. Thought should be given to the potential consequences of adverse site conditions and how this risk should be allocated prior to entry into the contract (whether this be a standard, amended or bespoke form)