Risk allocation and unforeseen ground conditions
Following the popularity of the ‘what you need to know’ articles for construction professionals, we have decided to extend this to topics that may arise when a contract is being carried out. Over the coming months we will look at themes including: concurrent delay, extension of time/time at large, practical completion, valuation of variations, retention of title and payment notices.
This article will consider one of the important risks that occur in many construction contracts: the risk that ground conditions on site will be less favourable than those envisaged when the contract was entered into.
Common Law
The common law position dates back to a 19th century case (Bottoms v York Corporation (1892)). In this case Bottoms had undertaken to construct sewerage works near the River Ouse and had intended to use poling boards for the excavation. No boreholes were sunk prior to excavation but a price had been agreed. When carrying out the works, Bottoms found that the ground conditions required more extensive measures than previously thought and tried to claim additional payments. It was held that the York Corporation did not give any representation or guarantee as to the condition of the soil and that Bottoms were not entitled to additional payment.
The case above established that if a contractor promises an employer that he can build a structure, then this is what he must do. It is for the contractor to decide on whether or not it is “buildable” and that they can complete the works by the contract date and agreed price.
It will be very rare for an employer to give assurances regarding site conditions, the contractor is the expert and it is up to them to decide if the employer’s requirements can be met, if they are unsure on elements such as ground conditions, they need to tender sufficiently.
Standard form contracts
Many standard form contracts include specific provisions on ground conditions. However, the JCT contracts (apart from the Major Project Construction Contract) adopt the same approach as the common law position. There is no express clause dealing with ground conditions and unforeseen ground conditions do not constitute a Relevant Event giving rise to entitlement to an extension of time or additional payment. Since the JCT contracts are silent on the matter of ground conditions, any dispute will follow the common law and the Contractor will bear the risk of unforeseen ground conditions.
The NEC contracts are founded on a more risk sharing principle compared to the JCT. NEC Clause 60.1(12) provides that the discovery of physical conditions (not including weather conditions), which an experienced Contractor would have judged, at the date of the contract, had such a small chance of occurring that it would have been unreasonable to allow for them, constitutes a Compensation Event. Contractors should be aware of the Employer trying to get rid of this Compensation Event by deleting clause 60.1(12) when signing up to a new contract.
For FIDIC, under the Red and Yellow Books, at clause 4.12, the Employer bears the risk of physical conditions which could not have been reasonably foreseen by an experienced Contractor at the date of tender. Saying this however, during pre-tender, the Employer is required to provide all relevant data it has in its possession about ground conditions. For a more detailed look at ground conditions under a FIDIC Yellow Book, turn to Anna Wood’s July 2014 article on the case of Obrascon -v- AG of Gibraltar [2014].
On the other hand, the FIDIC Silver Book is more employer friendly. Clause 4.11 and 4.12 provide that, by signing the contract, the Contractor accepts total responsibility for having foreseen all difficulties and cost of successfully completing the works. The effect of this clause is to hold the Contractor liable even where the conditions were unforeseen by the most experienced contractor.
It is important to note that under both NEC and FIDIC, there are conditions precedent to claiming relief for unforeseen ground conditions. Most importantly, under NEC if the Contractor fails to notify the Project Manager within 8 weeks of becoming aware of the event, he loses the right to claim any additional time or money. Under FIDIC, the notice should be given as soon as practicable and no later than 28 days after the Contractor became aware of the unforeseen ground conditions, otherwise, the Contractor will not be entitled to an extension of time or additional payment.
Thinking beyond the contract conditions, it is important to remember that the project specific information that forms the contract (Employer’s Requirements, Contractor’s Proposals, Scope etc) can allocate risk relating to ground conditions. Anna Wood considered this in her January 2019 article on the case of Clancy Docwra -v- E.On [2018].
Letters of reliance for ground conditions
Geotechnical and environmental reports are often commissioned by purchasers when buying a site to establish whether or not the site needs any remediation works and to calculate the necessary depths of the foundations.
It may already be the case that the seller of the site has commissioned the report and will pass it on to the buyer (Employer). If this is the case, the Employer will need to be aware that should he wish to rely on the contents of the report, they may request that a letter of reliance from the author of the report confirming that the Employer may rely on their original contractual rights as if it were the seller. There will then be a direct contract between the author and the Employer. Similarly, if the Employer wishes to put the ground risk onto the Contractor and a ground condition report exists, it is commercially reasonable to obtain a Letter of Reliance from the relevant surveyor for the benefit of the Contractor. The potential need for Letters of Reliance should always be discussed at the time of commissioning a report to avoid any issues later.
Conclusion
Modern best practice is to place any type of risk to the party best able to manage or control it, but it is common for ground condition clauses to be either deleted or amended to place more risk on the Contractor. Ultimately it is a matter for the parties to decide between themselves who bears the risk of unforeseen site conditions and amendments should be made to the contract to reflect this.
Dealing with the risk of unforeseen ground conditions is a matter of bargaining power. Contractors should take the site information, in conjunction with other experienced contractor information, and form a considered opinion on what physical conditions are likely to be encountered. They should then include appropriate tender allowances and maintain detailed records of these.
Employers should undertake detailed site investigation works, where time and budget allow, presenting clear, accurate and relevant information to prospective tenderers. Where significant groundworks are anticipated, they should consider setting baseline reference conditions that practically and precisely set out the parties’ risk allocation.
It may be best for the parties involved to have an honest discussion on risk allocation at the time of entering into the contract and for the contract to be amended to reflect this, so it is clear about what risk is allocated where.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.