Credit: rawintanpin/Adobe Stock

Lyda Bier

Júlio César Bueno
Vice-Chair, IBA International Construction Projects Committee

Adrian Cole
Junior Diversity and Inclusion Officer, IBA International Construction Projects Committee

Douglas Oles
Co-Chair, IBA Project Execution Subcommittee

Sharon Vogel
Co-Chair, IBA Dispute Resolution Subcommittee

Introduction

The natural and geotechnical conditions found in the subsurface of a project site and surrounding areas are often a point of stress for parties during contract negotiation, execution and dispute resolution. From the contractor’s perspective, it can be hard to assume responsibility for a factor that it has little time or opportunity to evaluate when submitting a tender. For the employer, it may be impractical to bear the risk of such conditions, especially when it lacks technical expertise and is constrained by limited project financing.¹

Common examples of unforeseen subsurface conditions include the unexpected encountering of hard rock, flows of pressurised groundwater, or hazardous materials requiring remediation. These difficulties can require changes in the construction schedule, designs, materials and, in some extreme cases, can mean that completion of the work in accordance with the original design is impossible.

The issue gains further relevance, beyond contractual risk allocation between employer and contractor, if, for example, an unexpected condition causes the soil to subside significantly or even collapse. There can be potential liability towards third parties as well, with losses far exceeding monetary compensation and which may go as far as criminal implications, depending on the jurisdiction.²

Although practitioners have devoted considerable energy to this issue worldwide, it seems that no one-size-fits-all solution to the problem has been found. The determination of the party responsible for resulting delays and/or cost overrun can vary across different jurisdictions and may ultimately depend on how subsurface risk is contractually allocated and treated under the governing law. Jurisdictions and contract forms also vary in the ways they allocate responsibility for subsurface testing, the required level of diligence, and the reasonable degree of reliance that can be placed on information, reports and test results provided by the employer or third parties.

This paper compares the legal treatment given to unforeseen subsurface conditions in several jurisdictions and will comment on the FIDIC Emerald Book form of contract.

Risk allocation and responsibility for subsurface conditions in common law traditions

Construction contracts typically identify the scope of works, the time in which they are to be performed and the price the contractor is to be paid for carrying them out. In the absence of express provisions to the contrary, contractors are required by most legal systems to carry out the agreed scope and bear the associated burdens of doing so.

Under English law, for example, an employer does not impliedly warrant that the works undertaken by the contractor are possible (legally or physically). The employer is entitled to rely upon the contract and the expertise of the contractor to carry out the works, and the contractor will generally not be entitled to be compensated (time and/or money) in dealing with more onerous conditions than anticipated. In short, the courts assume that the costs and risks of unforeseen difficulties are included in the contractor’s tender price.

In the 1876 case of Thorn v London County Council,³ a contractor undertook to construct a new Blackfriars Bridge in London. Cast iron caissons forming part of the permanent works were to be used. However, the design of the caissons by the employer’s engineer was found to be deficient, preventing the contractor from working in high tides. This required the contractor to work at low tides only. The House of Lords (acting as England’s most senior court, a role now performed by the Supreme Court) ruled that no warranty was implied from the employer that the works could be done in any particular way, confirming the principle that the contractor is expected to do everything necessary to complete the works.

In 1942, the Supreme Court of Canada applied this principle against a claimant contractor, making the point that it could also benefit a contractor where conditions are more favourable than anticipated. See The King v Paradis & Farley Inc:⁴

‘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.’

The 1942 decision was heavily dependent on contract language indicating that the contractor was liable for any increase in costs of the proposed work.

The above principles of English and Canadian law are reflected in some civil law jurisdictions, such as the United Arab Emirates (UAE). For example, Article 246 of the UAE Civil Code provides that the contract shall not be restricted to an obligation upon the contracting party to do that which is (expressly) contained in the contract, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction. This provision is commonly taken to include unforeseen subsurface conditions which remain the responsibility of the contractor unless expressed to the contrary in the contract.

Case law surrounding subsurface conditions claims has developed significantly, however, as contract forms have evolved to allocate risk to the party best able to bear it. Especially in the United States, there is a perception that employers are likely to be most familiar with their project sites and have the best opportunity to conduct geotechnical investigations that disclose potentially adverse subsurface conditions. In part for this reason, US courts tend to resist efforts by employers to disclaim liability for unforeseen subsurface conditions.⁵  Even a design-build contractor can be entitled to rely on pre-contract geotechnical information from the employer that formed a basis for the contractor’s tender price.⁶

Over the last several decades, a number of contracts have sought to share the risk of encountering unforeseen subsurface conditions. The principal mechanism for doing this is to compensate the contractor for subsurface conditions that are not foreseeable. Clause 4.12 of the FIDIC Red Book 1999 edition, for example, entitles a contractor to claim an extension of time for delay to completion and payment of cost for adverse physical conditions that were not reasonably foreseeable by an experienced contractor, subject to giving appropriately timed notices and meeting other criteria. However, a raft of English law cases show that it remains difficult for contractors to satisfy the necessary requirements, particularly the test of foreseeability.

In Obrascon Huarte Laine SA v Her Majesty’s Attorney General for Gibraltar,⁷ a contractor undertook to design and build a road around the perimeter of the Gibraltar airport. A desk study gave bidders an indication as to the degree of soil contamination likely to be encountered. When the contractor encountered unexpected contamination and stopped work, the government terminated the contract due to lack of progress. The English Court of Appeal upheld a rejection of the contractor’s claim, holding that ‘an experienced contractor at tender stage would not simply limit itself to an analysis of the geotechnical information contained in the pre-contract site investigation report and sampling exercise’.

Likewise, in Van Oord UK Ltd and Others v Allseas UK Ltd,⁸ the contractor asserted various claims for disruption and prolongation due to unexpected subsurface conditions on a gas export pipeline project. The court held that an ‘experienced contractor’ must consider and allow for the possibility that more adverse conditions may exist as ‘every experienced contractor knows that ground investigations can only be 100% accurate in the precise locations in which they are carried out. It is for an experienced contractor to fill in the gaps and take an informed decision as to what the likely conditions would be overall’. Again, the contractor was held liable for an unforeseen subsurface condition.

Two Canadian cases, Opron Construction⁹ and Golden Hill Ventures,¹⁰ are relevant as they examine the employer’s role in respect of issues such as disclosure of information and making a construction site available for inspection.

Opron Construction involved the discovery of waste material from prior construction that was buried in an area hidden from view. Information regarding the placement of this waste material was known to the employer and not disclosed in the bid documents. The court accepted that the waste material significantly disrupted and delayed the construction¹¹ and awarded damages to the contractor on the basis of implying two terms into the contract.¹² In reaching this conclusion, the court looked at whether all material facts had been disclosed by the employer and whether there were facts within its knowledge that had not been disclosed which were inconsistent with other representations of fact made by the employer.¹³

Golden Hill Ventures is another Canadian case which examined an employer’s duty of full and complete disclosure. The court found that ‘owners do not comply with their duty of full and complete disclosure by providing incomplete information on the assumption that the bidders should “ferret out” the information “from clues”…’.¹⁴ The court found that the employer ‘failed to meet its obligation to provide all information in its possession which was relevant to the question of the soils that would be encountered at the Site’.¹⁵ The court further held that because this information was fully within the employer’s control, its failure ‘to provide this information results in damages available to Golden Hill rather than merely an extension of time as is provided under GC 36.2’.¹⁶

An important variable in the extent to which subsurface conditions may be unforeseen is the extent and accuracy of geotechnical and other information supplied to the contractor. Where such disclosure reveals the conditions that are actually encountered, there remains little scope for the contractor to contend that such conditions were unforeseeable.

Compensation for unforeseen subsurface conditions remains more difficult under English law than under the common law in Canada and the US. To the extent recovery is allowed, the contractor must generally prove that it encountered a condition not reasonably disclosed by documents in the tender package or by a visual examination of the project site. Contractors must make an independent assessment of the available information, adding the benefit of their past experience. The contractor’s position may be strengthened if it can show that the employer had actual prior knowledge of the subsurface condition but withheld that information at the time of tendering.

Remediation and risk of pollution and contamination in soil

One type of differing site conditions arises when a contractor encounters unexpected contamination/pollution in soil or groundwater. The contract may anticipate some level of contamination, but the indicated levels may be exceeded, or pollution may be encountered across more of the site than expected. Contract documents may also fail to properly describe the nature of the contaminants, which may add more cost and time to the work than a contractor would reasonably anticipate. Unfortunately, such risks are often not fully, or unambiguously, addressed in the contract documents.

These conditions usually do not imperil the stability of a building being erected on the site. There may be room to argue about whether they render a construction project unsuitable for its purpose. In many countries it was not until the late 1970s that soil and groundwater contamination/pollution were considered to be problems that required attention. In the past 50 years, knowledge of hazardous substances has grown, as has the knowledge of their impact on the environment.

Whether a site is considered to be contaminated/polluted depends mainly on the regulatory framework applying to the site of construction. The site conditions are not only important for projects that involve excavation or foundation work. In many jurisdictions, a regulatory framework limits construction work when the underlying ground is not in its ‘natural’ state. For example, essential permits may be withheld by the authorities until a remediation plan is in place and carried out. In some circumstances, even the ‘natural’ state may be considered to be contaminated/polluted and thus cause problems.

An analysis of possible risks for the contractor begins with understanding the regulatory framework of the jurisdiction of the site. No matter how international the project is, knowledge of the local regulatory framework governing the project site is crucial. Contamination/pollution from historic uses or pollution spills can migrate off-site or on-site for various reasons, and this can make the presence of these substances unexpected and sometimes difficult to remediate. Many types of contaminants/pollutants can migrate significant distances in groundwater and surface water. Construction work, remediation, intrusive investigations, mining or other disturbance of the ground can mobilise existing contamination/pollution or create pathways for the contamination/pollution to escape. Flooding can mobilise residual contamination.

The construction contract may give clear criteria for determining contamination/pollution in – for example – ‘soil and water target values’ for a very wide range of contaminants/pollutants or by referring to relevant regulations, but may also be silent on the topic. The contract may be clear on the consequences and require removal of all material that is contaminated/polluted above the ‘target values’. Some polluted materials may be removed to a landfill or be treated off-site, while others can be treated ‘in situ’. The contract may also include provisions defining target values for materials to be reused on site. If contractual provisions are less strict than the regulatory framework, the regulatory framework (and the local authorities) will be decisive regarding what is required.

Criteria for (re)use of materials on site may be different from the criteria for determining contamination/pollution of the site. Ground water contamination/pollution may cause drainage problems and this risk needs to be allocated. Certain works may make an existing contamination/pollution worse by spreading the contaminants/pollutants within or beyond the site and lead to liability issues within or beyond the site and which may or may not be addressed in the contract.

Using the FIDIC Emerald Book for Underground Works

The contractual models traditionally used for both public and private works – DBB (Design Bid Build), EPC (Engineering Procurement Construction), EPCM (Engineering Procurement Construction Management) and Alliancing have all been criticised for failing to include balanced risk allocation mechanisms aimed specifically at underground works. The criticism is that they tend to allocate risk in a way that causes parties to pay for risks that they could not reasonably foresee and for which they have no adequate budget.

Underground works typically involve excavation and ground support, which will often involve working in conditions that are unknown or at least incompletely known. Physical access to the work site is often limited, which can place severe constraints on both pre-bid investigations and performance of construction works. The underlying ground often belongs to third parties, that has been recently acquired by the project employer. Even if the employer has conducted an extensive geotechnical investigation of the site, it may want the contractor to implement further tests before commencing expensive and risky underground works.

The pressure from governments, multilateral financing organisations, insurance companies, government entities and the parties’ quest for compliance with deadlines and cost controls have intensified. These developments have increased the incentives to adopt contracting practices better suited to underground works. In response to this demand, FIDIC and the International Underground Works Association (ITA) reviewed the FIDIC Yellow Book (Design-Build) and introduced the Conditions of Contract for Underground Works (the Emerald Book).¹⁷ These Conditions are specially tailored for use in underground works. Their use may also be appropriate in other types of works that include a significant geotechnical uncertainty.

The Emerald Book allocates risks based upon the reference design by the employer and the Geotechnical Baseline Report (GBR). The Conditions include extensive guidance for preparing tender documents and provide example forms for a Schedule of Baselines, Completion Schedule and a Schedule of Contractor’s Key Equipment. Also, the Emerald Book defines the GBR as the single contractual source of risk allocation related to the subsurface physical conditions.

The GBR addresses not only the identification of subsurface conditions but also their reaction to planned excavation and support activities under the contractually agreed construction methodology. All subsurface physical conditions not disclosed in the GBR shall be considered unforeseeable. The risks arising out of foreseeable properties of the disclosed ground conditions, including obstacles and adverse reaction to the excavation and ground support processes, are assigned to the contractor, as well as the production rates and cost of performing the Works under those conditions. Conversely, the risks arising from unforeseen physical conditions of the ground, obstacles, and adverse reactions to the excavation and ground support processes are allocated to the employer, warranting extension of time and/or reimbursement of cost to the contractor.

Projects with heavy and complex underground works need a contractual tool to balance the capabilities of those involved so that projects can develop as planned and finish on time and on budget. Indeed, there are still no perfect contract models. However, the experiences gained in using various models resulted in the Emerald Book, which allows the parties to agree on favourable terms and conditions and to better control the final result of the works.

Conclusion

In jurisdictions that tend to uphold contractor liability for unforeseen subsurface conditions, contractors are likely to face a dilemma at the time of tender. Unforeseen conditions may by their nature be impossible to quantify and price. It is therefore difficult for a contractor to include a price contingency adequate to cover unknown problems, and a tender price with a large contingency may well be too high to succeed. An employer’s thorough pre-contract site investigation can help minimise the risk of unforeseen conditions, but contracts assigning risk of unknown conditions to the contractor must be approached with caution.

Notes

1 Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lovers, FIDIC Contracts: Law and Practice (Informa Law from Routledge, 1st edn, 2009), 96.

2 Denis Binder, ‘Criminal Law – The increasing application of criminal law in disasters and tragedies: a global phenomenon’, in: Western New England Law Review, Volume 38 (2016), Issue 3, 326.

3 Thorn v London County Council [1876] 1 App Cas 120.

4 The King v Paradis & Farley Inc [1942] SCR 10.

5 See, eg, Foster Construction CA and Williams Bros Co v United States, 435 F2d 873 (Ct Cl 1970).

6 See, eg, Appeals of Tetra Tech Facilities Construction LLC, 16-1 BCA 36562 (ASBCA 2016).

7 Obrascon Huarte Laine SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712.

8 Van Oord UK Ltd and Others v Allseas UK Ltd [2015] EWHC 3074 (TCC).

9 Opron Construction Co v Alberta (1994) 151 AR 241 (QB).

10 Golden Hill Ventures Ltd v Kemess Mines Inc 2002 BCSC 1460.

11 See note 8 above, at paras 337 and 338.

12 Ibid, at 589.

13 Ibid, at 572.

14 See note 7 above, at para 495.

15 Ibid, at para 517.

16 Ibid.

17 Based on the ITA-AITES Report 006 ‘The ITA Contractual Framework Checklist for Subsurface Construction Contracts’ (April 2011).