Expect the Unexpected

Last year saw two judgments which were highly critical of contractors’ claims based on allegedly unforeseen ground conditions.  The first was that of the Court of Appeal in Obrascon Huarte Lain SA v Attorney General for Gibraltar , and the second was Van Oord UK Ltd and Sicim Roadbridge Ltd v Allseas UK Ltd in the TCC.  Both cases illustrate the need for contractors to act on contractual terms which require them to satisfy themselves of the site conditions in which they will operate, and demonstrate that a failure to do so will preclude successful claims for variations based on unforeseen ground conditions.  They also contain lessons to be learnt about the preservation of evidence and case presentation. 

In Obrascon, the Government of Gibraltar (‘GoG’) had engaged Obrascon to design and construct a road and tunnel close to Gibraltar airport under FIDIC Conditions of Contract for Plant and Design-Build terms. Cl.1.1.6.8 defined “Unforeseeable” to mean not reasonably foreseeable by an experienced contractor by the date for submission of the Tender.  An environmental statement, which formed part of the contract, identified the contaminants as lead, hydrocarbons and unexploded ordnance, and included an estimate of ground contamination to a soil volume in the region of 10,000m3, and set out certain ‘soil target values’.  After excavation work for the tunnel began, GoG required Obrascon to apply stricter criteria than the soil target values, through its draft guidelines on non-hazardous fill for land reclamation and general backfilling purposes within Gibraltar.  Obrascon agreed, and proposed to remove the stockpiled contaminated material to landfill sites. However, Obrascon subsequently stopped work on the tunnel, and sought to have the contract varied because the level of soil contamination exceeded the estimate in the environmental statement and, Obrascon maintained, could not have been foreseen. The contract engineer appointed by GoG ordered the removal of contaminated material from the site and sent a notice to correct under cl.15.1 of the FIDIC conditions, requiring work to be re-started in accordance with the contract. Obrascon failed to comply, so GoG served notices under cl.15.2, terminating the contract because of Obrascon's lack of progress.

Obrascon claimed that GoG had repudiated the contract and brought a claim in the TCC, including under cl. 4.12 for its losses arising from supposedly unforeseen ground conditions. Evidence indicated that the volume of contaminated material was in the region of 15,000m3, while GoG’s contamination expert indicated that an experienced contractor would not have simply accepted the estimate in the environmental statement, and would have made its own assessment based on all the available material.  Obrascon’s method of excavation had resulted in stockpiles which contained a random mixture of contaminated and uncontaminated soil, which was itself a breach of contract, as well as obliterating much of the relevant evidence.  Akenhead J rejected Obrascon’s claim; the level of contamination was no greater than should have been foreseen by an experienced contractor; no variation instructions had been given; and GoG had validly terminated the contract.

Obrascon appealed but the CA upheld Akenhead J’s judgment. The environmental statement clearly indicated the presence of ground contamination, and the expert evidence indicated that the amount of contamination did not exceed that which was foreseeable. The FIDIC conditions required a contractor to make its own assessment of the conditions it might encounter, drawing on its own experience and expertise, rather than simply accept someone else's interpretation of the data and say that that was all that was foreseeable. Akenhead J had rightly found that Obrascon were obliged to make their own independent assessment, rather than simply adopt the 10,000m3 estimate in the environmental statement, so the variance from that figure was immaterial.  The draft landfill guidelines did not affect that, no variation instructions had been issued and nothing had prevented the contractor from performing the contract. Obrascon’s lack of significant activity after December 2010 was a serious breach of contract, as was their failure to comply with the FIDIC cl 15.1 notice, and GoG had been entitled to terminate the contract.

In the second case, Total E&P UK Limited (‘Total’) engaged Allseas UK Ltd (‘AUK’) as principal contractor to carry out offshore and onshore construction work ancillary to the laying of gas pipelines at Sullom Voe, Shetland, part of the Laggan-Tormore Gas Field development.  In 2010 AUK subcontracted much activity including certain onshore works and their design to Van Oord UK Ltd and Sicim Roadbridge Ltd (together ‘OSR’).  OSR intended to install the pipe into untreated ground to the side of a newly built road.  However, OSR maintained that because peat was encountered at greater depths than they could reasonably have foreseen, it was necessary to build a wide stone embankment and lay the pipe within that instead.  This took greater cost and time than they had allowed for in the contract price so, after completion, OSR raised a claim for £10 million against AUK for disruption and prolongation due to alleged unforeseen ground conditions.

OSR issued proceedings in the TCC, which had to decide how the subcontract should operate in relation to (a) unforeseen ground conditions and (b) claims notification.  The subcontract said OSR accepted all responsibility for properly evaluating all costs, risks and contingencies associated with the works (including all site information supplied by AUK).  That was subject to an exception in respect of subsurface conditions, which would require OSR to satisfy a threefold test before it could be entitled to a ‘change order’ (i.e. a variation) and, therefore, further time and money.

To obtain those, OSR would have to establish that those subsurface conditions (a) were different from those in the subcontract documents, (b) could not reasonably have been foreseen by an experienced contractor which had examined the contract documents and pre-site surveys or other data available, and (c) would substantially modify the scope of work and the contract price and/or the programme and/or the completion date.

Coulson J rejected OSR’s claim on a variety of grounds, and his judgment is damning in parts.  The sole responsibility for determining the manner of performing the ground works lay with OSR, so it must be presumed that they allowed for design development when the lump sum contract price was fixed.  An experienced contractor would not limit its risk analysis to considering the information contained in the pre-contract information as OSR had.  OSR contended that it had priced the ground works on the basis of the pre-contract information, but the evidence indicated that they had actually provided their quotation before they had received it! They could not demonstrate reliance on the pre-contract information, and nor did they seek to revise their quote before contracting either.  OSR also failed to deploy an expert engineer to demonstrate that the subsurface conditions could not reasonably have been foreseen by an experienced contractor (although it has to be said that after hearing lamentable oral testimony from OSR’s lay witnesses, the damage had already been done and their case was in tatters). OSR’s only expert witness focused on quantum, and since he had never prepared a CPR compliant report before, let alone given oral evidence, it was a baptism of fire and he crashed and burned.  Coulson J made 12 distinct criticisms of his evidence, condemned him as biased, and disregarded his evidence entirely. 

There was another reason why OSR’s claim failed, which was unrelated to reliance on contract documents, pre-tender site surveys or expert evidence.   OSR simply failed to comply with the subcontract’s claims notification procedure.  That required ‘notice one’ to be given within 5 days of the relevant event, then ‘notice two’ within 12 days of that event.  Notice two had to include an evaluation of the consequences of a requested change, substantiated by supporting documents.  OSR took 8 days to present its first notice to AUK, and even then, on the face of it, it did not appear to be request for a change order. No claim would be entertained.  This type of requirement is known as a condition precedent.  If these are sufficiently explicit yet not met, they are fatal to claims – between commercial parties, ‘big boys’ games, big boys’ rules’ applies.

What are the salutary lessons from these contractors’ debacles?  Firstly, never forget that when entering into any type of contract you are effectively saying ‘This can be built’ for the agreed price, whether the employer has already delivered the design, or you are to develop it under design and build terms.  If you approach each contract with that in mind, it does not seem so strange that you should take all reasonable steps to verify the ground conditions before you agree to be bound (a precaution which seems alien to the ‘big boys’ in these cases, to their cost).  One approach would be to ask the employer to warrant the accuracy and completeness of its pre-contract information; most will be reluctant to do so, but if they say the pre-contract information can be assumed to be correct, there may be a remedy in misrepresentation. Where a proposed contract contains terms concerning unforeseen ground conditions like those encountered in these cases, obtain your own survey; your consulting engineer will have professional indemnity insurance which should respond if they miss something which a court subsequently decides was foreseeable.  Should the worst happen, ensure that any notices required by the contract are served on time; these need not be perfect - it’s a case of 80% of content, on time, is better than 100% of content, late.  Don’t allocate staff who may end up out of their depth to jobs with potentially difficult site conditions; these situations can become ‘contractual’ very quickly, and presenting your claims requires accuracy, judgement and often good contacts with consulting engineers.  As with any kind of claim, the ability to recover the true cost of a change will depend on systematic record keeping, so that your claims have credibility and can more easily be verified by an expert quantity surveyor or engineer.   Lastly, if it looks like you’re going to end up in court then ensure you get the expert evidence you need from an experienced expert witness.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.