by Laura Warren and Alexa Hall

Site condition risk is not static. All too often, during the course of construction, contractors encounter subsurface conditions that differ from those set out in information provided by its employer or anticipated in their bids, or come across unforeseeable or undetected site conditions in the field. Such discoveries can cause schedule delays, cost increases and dangerous working, invalidate design assumptions and ultimately pave the way to litigation. One size does not fit all and the site condition risk is unique for each and every project. In the context of site risks, there is no substitute for signing a clear contract which, where possible, identifies such risks, and particularises precisely what the parties should do if they eventuate.

POSITION UNDER LOCAL LAW

As a basic principle of local law, contracts have the force of law subject to a limited number of caveats. In particular, Article 171(1) of Law No 22 of 2004 (the “Civil Code”) states: “A contract is the law of the contracting parties and so cannot be revoked or modified except with the agreement of the parties or for such reasons as prescribed by law.” Article 172(1) reiterates this principle by stating that: “A contract must be executed in accordance with the contents thereof and in a way that is consistent with the requirements of good faith”. The principle enunciated in Articles 171 and 172 of the Civil Code is known as the “General Principle” and is akin to the common law freedom of contract principle. Accordingly, any provisions allocating site condition risk between the parties would likely be upheld in local law unless such provisions are contrary to public order or morals.

Qatari law itself does not contain specific provisions which explicitly govern the allocation of the risk of discovering and dealing with adverse site conditions. This differs from the position in most common law jurisdictions that, without an express provision to the contrary, ground condition risk lies with the contractor like any other physical condition or buildability issue. This potentially leaves a legal void where a construction contract is silent on the allocation of site risk.

In the absence of contractual risk allocation for site condition and in the absence of specific statutory provisions, parties to a construction contract may, in some circumstances, refer to various wider provisions of the Civil Code which deal with, amongst others, concepts of impossibility and force majeure.

For instance, with respect to the concept of impossibility, Article 148 of the Civil Code states: “If the object of the obligation is impossible in itself, the contract is null and void.” Similarly, Article 188 of the Civil Code reads: “In contracts that are binding on both sides, if the execution of the obligation of one of the parties to the contract becomes impossible for some external reason in which he played no part, this obligation terminates, and the obligations that correspond to it terminate with it, and the contract is annulled automatically.”

The law of force majeure may equally assist. Parties may refer to Article 402 of the Civil Code which states:“The obligation terminates if the debtor proved that performance of it has become impossible for him for an external cause in which he has played no part.” Additionally, Article 256 may be useful: “If the debtor does not execute the obligation in kind, or delays in executing it, he is obliged to pay compensation for the detriment sustained by the creditor, unless he proves that failure to execute, or delay in execution, was for an external cause in which he played no part.” Equally, Article 204 reads: “If a person proves that the detriment has arisen from an external cause in which he played no part, such as force majeure, or unexpected event, or fault on the part of the person harmed, or fault of a third party, he is not bound to pay compensation, unless there is a provision that rules otherwise.” Interestingly, Article 258 of the Civil Code states that “An agreement may be made that the debtor will bear the consequences of force majeure or unexpected event” and thus parties may pre-empt the risk in their contractual terms.

The law of impossibility, therefore, relies on proof that the particular unexpected or unforeseen ground condition renders the performance of the contract impossible, the consequence of which is termination. The law of force majeure may relieve a party from having to pay compensation (additional monies or liquidated damages depending on the claimant) in circumstances where the site condition was unexpected and in which “he played no part”. The question is then: would the concepts of impossibility or force majeure include unforeseeable ground conditions? This is essentially a question for determination by the courts (or arbitral tribunal) in the context of all the circumstances of the case.

Whilst we are unaware of binding precedent under local law on the point, the issue is likely whether or not it is reasonable for the contractor, who is engaged to provide a service for the employer in return for payment, to accept certain risks relating to ground conditions In determining this issue, the objective should be to maximise value from the contractor’s skill and resources. Whilst it is not sensible to allocate risks to the contractor which it cannot properly assess, manage or price, it is likely that an experienced contractor (and particularly one that has a general duty to inspect the site while working) would be found by the courts (or tribunal apply local law) to hold responsibility for unforeseeable physical conditions related to the ground and for carrying out any additional works caused by such conditions provided that such works are necessary and do not affect the object and general “economy” of the contract.

Risk mitigation through contract conditions

Broadly speaking, there are three main options which define the contractual boundaries (with possible varying degrees of risk allocation in between) each tailored to cater for project idiosyncrasies.

Option 1: The contractor is responsible for ground condition risk

Parties may agree that the risk of unforeseen ground conditions is to rest solely with the contractor. Features of such a clause may include that: (1) the contractor has had the opportunity to inspect the physical condition of the site, including subsurface conditions, and to check the presence and extent of any conduits, pipes, cables, services or contamination, together with any other conditions that might affect the works; (2) a failure on the part of the contractor to discover or foresee the site condition or risk does not entitle it to additional money or time; and/ or (3) the contractor is deemed to have obtained all necessary information as to the risks and all circumstances related to the site which might affect execution of the works.

This is the position that is adopted by the FIDIC Conditions of Contract for EPC/ Turnkey Projects or “Silver Book” intended for use in Build – Operate – Transfer or similar projects where risk is placed largely on the Contractor. Pursuant to Clause 4.12 of this standard form, full ground condition risk is taken by the contractor with no adjustment to the contract sum if unforeseeable ground risks occur. Interestingly, there is an “impossibility” clause at sub-clause 19.7 of the Silver Book which discharges the contractor from further performance. This provision would arguably operate where ground conditions render the works impossible to achieve as intended.

The effect of such a clause is that the contractor takes the risk of both reasonably discoverable and unforeseen ground conditions. The contractor must establish for itself that the works are in fact possible, that its tendered price and contract period are adequate for the purpose of executing those works and that its working methods are sufficient to ensure completion of the works.

Arguably, this is not an ideal position for either party. A contractor is unlikely to be able to price for the risk with any certainty, resulting in a higher project price for the employer. Within the context of some projects in Qatar, the risks of including such a clause in construction are potentially open ended for a contractor in terms of cost and time. Pricing is made near impossible; the contractor is left faced with trying to manage the risk of, and price for, the unknown. It is also frequently the source of disputes; in the event of late completion due to an unforeseen ground condition such that performance of the contract is no longer profitable for a contractor, the contractor’s concern will be to cut costs, potentially at the expense of delivering the requisite degree of quality.

The circumstances in which such clauses may be appropriate are essentially those where extensive, good quality geotechnical information is available for a contractor who has the experience, skill and resources to deal with any unexpected conditions. An employer may (and should) be keen to ensure that its contractor is in receipt of, or obtains, adequate information in order to reduce the costs of contingencies included in bids and secure a reliable design. Accordingly, it is not uncommon for an employer to engage environmental/ site investigation consultants to carry out investigative surveys and reports for inclusion in tender documentation.

In such circumstances, in order for an employer to retain protection against unexpected site conditions, it may include a provision which disclaims liability for the accuracy or completeness of any survey, report or document it has provided such that its contractor is not entitled to rely on such data and is left without contractual recourse against the employer in the event that the actual conditions vary from the site reports. The intention behind the disclaimer is two fold: (1) avoidance of arguments from the contractor that there was a representation or warranty by the employer as to the accuracy and/ or completeness of the information provided; and (2) the removal of any possibility that, if the employer has prepared and/ or provided a survey or ground condition report, the contractor may advance an argument for misrepresentation/ negligent misrepresentation arising from its reliance on the survey/ report. Note that under Qatar law, liability for fraudulent misrepresentation or “cheating” cannot be excluded – when one of the contracting parties deceives the other by means of fraud by word or deed which leads the other to consent to what he would not otherwise have consented to, this is sufficient grounds for “nullification” of the contract (Article 134 of the Civil Code)).

Option 2: The contractor is responsible for ground condition risk, except for “unforeseeable” risks

Parties may agree that, whilst the contractor is generally responsible for ground condition risk, it will be entitled to an increase in the contract price and/ or an extension of time in respect of “unforeseen” physical conditions which cause cost or delay. This is the position adopted by the 1987 and 1999 editions of the FIDIC Conditions of Contract for Construction of Building and Engineering Works Designed by the Employer or “Red Book”, and the Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant for Building and Engineering Works Designed by the Contractor or “Yellow Book”. In these books, recovery for cost incurred as a result of the risk can be reduced if more favourable conditions, than could have been expected, are encountered elsewhere in the slightly ambiguously worded, “similar parts of the works” (sub-clause 14.2 refers).

On this basis, parties are left with making a judgement call as to what the contractor may have assessed as being significant and hence whether or not a matter should have been foreseen, and whether or not the risk is likely to eventuate. In this respect, there should be no distinction between the terms “unforeseeable” and “unforeseen”; despite the fact that this issue is for the most part considered after the event, the test is not whether or not the contractor actually foresaw the risk, or could have foreseen it, but whether or not it was reasonable to foresee the risk as a likely event. The FIDIC contracts referred to above attempt to provide us with some certainty by including a definition: “not reasonably foreseeable by an experienced contractor by the date for submission in the Tender”. This is still a difficult issue to determine and, in practice, parties will give consideration to factors including information provided by the employer and/ or interpretations of the same, the contractor’s own pre-bid site investigations and information in the public domain at the time of tender.

This option is aimed at achieving a compromise position whereby the contractor is able to price for site condition risk save for that which is genuinely unexpected – a form of mutual “risk sharing” if you like. Nonetheless, the element of uncertainty entailed in the “unforeseeability” test may still by a breeding ground for costly disputes.

Option 3: The employer is responsible for ground condition risk

Finally, it is open for parties to agree that the employer shoulders the full burden of site risk. This is not an option that is commonly selected – and probably not a sensible option for large scale projects. The option does not fully utilise the skill and resources of an experienced contractor (if at all) with no incentive for that contractor, no matter how experienced, to deal effectively with ground condition issues as they arise during the project.

RECOMMENDATIONS

The consequences of ground condition risk allocation by the conditions of contract can be severe and therefore, a shift towards a careful consideration of contractual provisions, by employers and contractors alike in Qatar, is recommended. Such conditions are certainly subject to greater scrutiny by contractors than in the past. The risks related to ground conditions and accuracy of tender data are anticipated by standard forms of conditions of contract. However, more detailed contractual provisions flowing from thorough investigations by both parties, and thus the separation, and subsequent allocation, of defined risks, may achieve a more realistic allocation of risk that ultimately results in a lower overall project cost.

Note: All Qatari Laws (save for those issued by the Qatar Financial Centre (QFC) to regulate its own business) are issued in Arabic and there are no official translations, therefore for the purposes of drafting this article we have used our own translation and interpreted the same in the context of Qatari regulation and current market practice.

 
Mondaq

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