Law: How is the risk of ground conditions allocated and what impact does this have on contractors?

16 December 2024

Pinsent Masons summarises how the risk of ground conditions is allocated per English law and the impact this has on contractors.

the role of law in ground conditions “Under common law, absent any special treatment in a contract, the risk of unforeseen ground conditions rests with the contractor” (Photo: AdobeStock)

So long as buildings do not float in the sky, construction projects will involve some interface with the unknown conditions in the ground. In construction projects, ‘ground conditions’ (or sometimes defined as ‘physical conditions’) are a genuine concern for employers and contractors because of the potential time and cost implications. It is imperative, therefore, that contracting parties understand how the risk of ground conditions is allocated. This article seeks to summarise how English law and a selection of standard form contracts do so.

How does the law and standard form contracts allocate ground risk?

Under common law, absent any special treatment in a contract, the risk of unforeseen ground conditions rests with the contractor. However, many standard form contracts depart from the standard position. Accordingly, care must be taken to ensure that parties understand how the risk is allocated in their specific contract.

FIDIC

Clause 4.12 of the FIDIC Red and Yellow books entitles a contractor to additional time and money if the contractor encounters unforeseeable adverse physical conditions. Under the FIDIC conditions, ‘unforeseeable’ is defined as something that is not reasonably foreseeable by an experienced contractor by the date for submissions of the tender.

In Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar1, the courts expected that an experienced contractor would not have simply relied upon the information in the tender documents when determining whether certain conditions had been foreseeable. A similar approach was taken in Van Oord UK Limited v Allseas UK Limited, in which the court acknowledged the limitations of ground investigations and that it is commonsense for an experienced contractor to fill in the gaps and take an informed decision as to what the likely overall conditions would be.

The FIDIC Emerald book is designed to be used for underground works. It includes a Geotechnical Baseline Report (GBR) that seeks to set out the allocation of risk between the parties for such subsurface physical conditions – that is, subsurface physical conditions described in the GBR are deemed to be foreseeable.

Infrastructure Conditions of Contract (‘ICC’)

The ICC allows the contractor to recover additional time and costs incurred as a result of physical conditions or artificial obstructions that could not reasonably have been foreseen by an experienced contractor. This shares similar concepts of ‘physical conditions’ and foreseeability as in the FIDIC contracts.

NEC4

The NEC4 provides that it is a compensation event where the contractor encounters physical conditions which (1) are within the site, (2) are not weather conditions, and (3) 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. A compensation event could entitle a contractor to additional cost and time. It is noteworthy that the test in the third limb is one of reasonableness, rather than foreseeability as is more commonly found in other standard forms.

JCT 2024

The JCT 2024 contract provides that the presence of ‘fossils, antiquities and other objects of interest or value’ and also ‘asbestos, contaminated materials or unexploded ordnance’ (excluded to the extent that these conditions were identified in the contract documents or brought to the site by the contractor) are Relevant Matters and Relevant Events that could entitle contractors to additional time and cost. However, although the recent inclusion of asbestos etc. in the JCT forms is welcome, the contractor remains exposed to other types of ground condition risks.

The risk of relying on ground condition risks

When a dispute crystalises and is argued before a tribunal, the tribunal will often need to look back at the time of tender, with the benefit of hindsight, to determine whether certain ground risks ought to have been foreseeable. In an ideal world, a hypothetical, experienced contractor would always err on the side of caution when pricing risks in its bids.

However, in reality, contractors will have to price tenders attractively enough to be awarded the job in the first place. Ultimately, it is for the contractor to strike a balance in this exercise and then manage the risk apportioned to it under the contract. The only thing that is certain, out of all the uncertainty inherent within ground risk, is that contractors who are too reliant on the tender information, without carrying out their own investigations, are likely to be disappointed if they subsequently encounter less favourable ground conditions.

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