Significant and unexpected costs and delay are incurred on many construction projects in the Middle East due to adverse ground conditions. It is a common problem that can be addressed by sensibly allocating risk between the parties.
In this post, we consider the apportionment of liability for ground condition risks under the FIDIC forms of contract, which are typically awarded in the Middle East, as well as possible contractual and local law remedies that may be available. We also give guidance on how to manage, minimise, share and transfer the risk.
Allocation of risk
Irrespective of the jurisdiction, one of the main objectives in any procurement process should be removing or minimising the risk of adverse ground conditions. This can be achieved by sensibly allocating risk between the parties.
The FIDIC suite of contracts is used throughout the world and is the most commonly used form in the Middle East. Clause 4.12 deals with the allocation of physical or ground conditions risk:
- In a standard FIDIC Red Book and Yellow Book, a contractor is entitled to an extension of time and cost for encountering adverse physical conditions that were not reasonably foreseeable by an experienced contractor by the date for submission of the tender.
- In a standard FIDIC Silver Book, a contractor accepts total responsibility for foreseeing all difficulties and costs of successfully completing the works. These difficulties include all adverse physical or ground conditions, whether foreseeable or not.
In the Middle East we often see the FIDIC Silver Book approach being adopted in amended FIDIC Red Book and Yellow Book forms. This is often perceived as an unfair allocation or risk transfer, particularly if the employer made available insufficient data as to ground conditions during the tender stage, or if insufficient time was given to the bidders to verify and carry out their own due diligence.
What could be done at tender stage?
Bidders should carry out as thorough ground investigations as time, money and resources will allow. There are four main sources of information available to bidders at tender stage:
- Previous use of the work site.
- Information available in the public domain at the time of tender (such as location of the site and its proximity to any potential pollutants).
- Information provided by the employer (such as ground investigation reports).
- Geotechnical and other investigations undertaken by bidders at tender stage.
Employers should provide adequate ground investigation reports and give warranties and representations in relation to accuracy and adequacy of the reports. Bidders may not have enough time or the relevant permits to undertake ground investigations at tender stage, and may therefore, at best, carry out a visual surface inspection. Employers should also give bidders sufficient time and the opportunity, including relevant permits and access to the worksite, to undertake investigations, particularly if the ground investigation reports are inadequate.
Ground investigations may never fully disclose all underground conditions. For example not all the boreholes installed for testing will necessarily reveal what is underneath the worksite. Therefore, bidders should include adequate contingencies in their tender price and programme. In addition, some of the risks can be transferred to an insurer to the extent possible.
What could be done post contract award?
If adverse ground conditions are encountered on the worksite, contractors could manage and mitigate the risk by:
- Identifying the ground condition issues as early as possible.
- Identifying alternative measures or solutions to overcome these issues for the Engineer’s consideration and approval.
- Implementing the solution as soon as possible to avoid or reduce delay to the works and the risk of incurring liquidated damages for delay.
- Considering any potential claim under the contract or local law (particularly, if the time and cost contingencies are insufficient).
- Issuing all relevant contractual notices and claim documents strictly in accordance with the contract to avoid being time barred or losing their entitlements under the contract.
As noted above, under Clause 4.12 of most of the FIDIC contracts awarded in the Middle East, all ground condition risks are transferred to contractors such that there is no entitlement to claim additional time and money. In these circumstances, the alternative contractual remedies available to a contractor when encountering adverse ground conditions may be force majeure and impossibility under Clause 19 of FIDIC.
To establish that an adverse ground condition constitutes a force majeure event, the contractor must satisfy the five-limb test under Clause 19.1 which will depend solely on the facts and evidence available. It may be difficult for a contractor to establish a force majeure event if an alternative engineering solution to avoid or overcome the adverse ground condition is available (even if this means that the contractor incurs additional costs). If the contractor can establish that a force majeure event exists, it is under a duty to issue a notice and mitigate, and it will be entitled to an extension of time and cost, but no profit.
A final point to note is that some government entities in the Middle East expressly include an additional element by excluding from the definition of force majeure either:
- Ground condition risk.
- Any other risk that has been transferred to the contractor whether expressly or impliedly under the contract.
Contractors should therefore review their force majeure provisions at tender stage to ensure that the standard FIDIC position has not been substantially amended in the employer’s favour.
Alternatively, a contractor could be released or discharged from performance of a contract if the adverse ground condition makes it impossible or unlawful for it to carry out the works. The contract will be terminated and the contractor may be entitled to termination costs.
Potential local law remedies
There is no express definition of what constitutes force majeure and impossibility under UAE or Qatari law, although these legal concepts are broadly recognised. However, it is highly likely that a court would look to and apply the specific terms of the contract.
To the extent that there are delays resulting from adverse ground conditions and a contractor is liable for liquidated damages, the contractor could seek relief under UAE or Qatari law. The court may, in certain circumstances, reduce the amount of liquidated damages or decline to order their payment if the amount of liquidated damages is exaggerated.
In certain circumstances, the UAE and Qatari courts can also reduce the terms of an excessively onerous obligation, even if the obligation is not impossible to perform. This may be an alternative remedy to the strict criteria required to establish impossibility and the existence of a force majeure event under the contract or at law. However, in practice it is difficult to establish the existence of a sufficiently excessive onerous obligation without strong evidence.
Under UAE and Qatari law, a contract could be declared void and a contractor may be awarded damages for any loss incurred if:
- An employer intentionally withholds any adverse site information or data during tender stage with the purpose of deceiving bidders to obtain a lesser price for the works, or includes misleading site information or data; and
- The contractor would not have entered into the contract had it been aware of the withheld site information or data.
On the ground
Ultimately it is in the interests of all parties to construction contracts to consider a balanced risk allocation in relation to adverse ground conditions. This is likely to result in fewer disputes and hence less time and cost expended in dealing with those disputes. On the ground and in practice, a more balanced allocation of risk may be difficult for contractors in the region to negotiate and achieve. In this event it is important to be as informed as possible of the consequences and to strictly follow the terms of the contract, so as to best manage the risk of adverse ground conditions.