Navigating the rocky (contractual) path on ground conditions

Mark joins us to provide a mini-series of articles focused on key contractual issues, and this week's focus is risk allocation for ‘ground conditions’.

Introduction

For the purpose of this article, the term ‘ground conditions’ is adopted in a broad sense, but each project will need to identify and assess the relevant risks that need to be addressed.

This is often a key battleground for contract negotiations and can have a significant impact on the risk assessment and management for a project.

The standard form contract position(s)

The general position (at common law) is that the contractor bears the risk for ‘ground conditions’. This is because the contractor is responsible for doing whatever is necessary to construct the works required.

Some industry standard form construction contracts alter that risk allocation. For example:

JCT:

• The JCT (2016) suite of contracts generally includes a provision that the Employer is required to issue an instruction in respect of any action required from the contractor upon discovery on the site of fossils, antiquities, and other objects of interest or value (clause 3.15). That instruction is a Relevant Event (clause 2.26.4) (relevant to extensions of time), and a Relevant Matter (clause 4.21.3) (relevant to the assessment of loss and expense). Otherwise, all other ‘ground condition’ risk would lie with the contractor.
• The JCT (2024) suite of contracts has an additional provision in relation to the discovery on site of any asbestos, contaminated material or unexploded ordnance (clause 3.15.3). This is also a Relevant Event (clause 2.26.4) and Relevant Matter (clause 4.21.3).

NEC4:

The NEC suite of contracts contains a compensation event in relation to ‘physical conditions’ that are: (a) within the site; (b) not weather conditions; and (c) an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable to have allowed for them. There is also guidance about the approach to carrying out this assessment.

FIDIC:

The FIDIC Silver Book (2017) provides that the contractor will be deemed to have obtained information as to risks, contingencies, and other circumstances which may influence or affect the works and the Contract Price shall not be adjusted to take account of any Unforeseeable or unforeseen difficulties or costs.

Amendments to the standard form (s)

The industry standard forms are frequently amended, often by the employer to expressly address the risk allocation in relation to ‘ground conditions’.

For example, the JCT suite of contracts may include a new clause similar to that below.

“The Contractor shall be deemed to have inspected the physical and other conditions (including the sub-soil and sub-surface conditions) of or affecting the site, its surroundings and access to the site and shall be deemed to have fully acquainted and satisfied itself with the same and to have obtained all necessary information as to any risks, contingencies, restrictions and all other circumstances in relation thereto which may influence or affect the execution of the Works.

No failure on the part of the Contractor to discover or foresee any such condition, risk, contingency or circumstance, whether or not the same ought reasonably to have been discovered or foreseen by a competent and careful contractor, shall entitle the Contractor to make any claim for an extension of time under clause 2.25 or for loss and/or expense under clause 4.19 (or otherwise) or to any adjustment of the Contract Sum.”

Contract negotiations often focus on the appropriate balance of risk in clauses such as this (e.g. the clause may be amended to address the extent of any inspection). However, as noted above, if the clause is deleted, then the standard form position applies (most of the risk onto the contractor). For a contractor to secure the benefit of an adjusted risk profile, the contract terms need to be positively amended to set out what new/additional risks the contractor would benefit from.

Preparing the contract

It is also important to ensure continuity of the appropriate risk allocation in the contract documents. This is aptly illustrated by the two cases summarised below.

1. John Sisk and Son Ltd v Capital & Centric (Rose) Ltd [1]. In this case:

Sisk was engaged under a JCT D&B (2016) (as amended). The Schedule of Amendments included new clauses which sought to impose the risk of ground, sub-soil and other physical conditions, including in relation to existing buildings, onto Sisk, but with the caveat that “this clause 2.42 shall be subject to item 2 of the Clarifications”.

The clarifications contained this provision:

A dispute arose regarding the interpretation of certain contract documents and the risk allocation in relation to existing structures. C&C argued that the clarification was limited to insurance of the existing structure, whereas Sisk said that the clarification altered the risk for the existing structure.

The TCC decided (amongst the issues to be addressed) that the risk for existing structures was carved out from Sisk’s risk profile:

“the far more likely meaning of these words [Employer’s Risk] … is that C&C was the ‘risk owner’, i.e. it held the contractual risk as to the suitability of the existing structures including their suitability to support and facilitate the contract works.”

2. Clancy Docwra v EON Energy Solutions Ltd [2]. In this case:

The subcontract conditions (JCT D&B Subcontract (2016)) included a clause similar to that noted above which expressly stated that Clancy Docwra adopted the risk for the ground, sub-surface and sub-soil. Clancy Docwra included its tender clarification in the Numbered Documents. This set out an exclusion in relation to ground risk.

A dispute arose regarding risk allocation. EON said that the subcontract conditions took priority, and as such, Clancy took the risk.

The TCC held that there was no inconsistency or conflict between the subcontract conditions and the Numbered Documents. Clancy’s work was defined by reference to the Numbered Documents, which made clear that Clancy would not carry out certain works in relation to the ground.

Key takeaways

• The general position is that the contractor bears the risk for ‘ground conditions’.
• Industry standard contracts may alter that position, but absent an express alteration to the risk profile, the contractor continues to bear the risk (e.g. deleting a contract amendment in a JCT in relation to ground conditions does not transfer that risk to the Employer).
• Each project needs to assess the key risks and ensure that those risks are expressly addressed in the contract conditions.
• The contract documents also need to be consistent with the agreed risk profile to avoid scenarios such as those set out above where there is an argument about the interpretation between the contract conditions and the contract documents.

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