Ryan Fordham compares approaches to the risk of encountering unforeseen ground conditions

Legal 2 main image

Key risks in construction contracts are being closely examined as a result of the ongoing Brexit uncertainty so that they can be effectively managed and priced accurately to ensure the commercial viability of projects. One of these is the risk of encountering unforeseen ground conditions. Standard forms differ greatly in their approach to allocating this risk, including one that does not expressly deal with it at all. A number have also released new editions of their design and build contracts over the past couple of years, and with construction activity falling last month and insolvencies on the rise across the industry, it is a good time to take stock so that the legal consequences of this risk (at least) are foreseeable.       

ICC Design and Construct Version 2018

The new DCV contract (unlike its predecessor) requires the employer to warrant to the contractor that it has included all data in its possession or control relating to the site within the site information (a contract document), but this warranty does not cover the accuracy of any such information and the contractor would be wise to validate it.

The contractor is deemed to have inspected the site, obtained all reasonably available information in relation to it, satisfied itself as far as practicable as to the form and nature of the site including the subsoil and hydrological conditions and obtained all necessary information as to the risks that may affect its tender.  Save for these qualifications, the contractor is responsible for interpreting all such information (even if provided by the employer).  

The contractor may claim for time and money if a ground condition that could not reasonably have been foreseen by an experienced contractor delays the works. What is capable of being reasonably foreseen will depend on the information the contractor was required to obtain and to have satisfied itself of as part of its investigation of the site.

JCT DB 2016

Despite it being the most commonly used form of contract for commercial developments in the UK, this contract (like its previous iterations) is silent on the risk of unforeseen ground conditions.  As a result, this risk generally sits with the contractor under common law, which could be detrimental to a contractor because the express terms in other standard forms seek to balance this risk between the parties.  

FIDIC Yellow Book 2017

The second edition of the FIDIC Yellow Book (like the first edition) has detailed provisions regarding the risk in unforeseen ground conditions. It applies a test of foreseeability (like the ICC DCV) from the base date (28 days before the latest date for submission of the contractor’s tender) rather than the date for submission of the tender (unlike the first edition) in determining whether the contractor takes the time and money consequences of this risk. In most cases, this will result in an earlier date for assessing foreseeability in the contractor’s favour.  

The employer must also provide the contractor with all of its site data before the base date, but the contractor is not able to rely on it. The contractor is then deemed to have inspected and examined the site and to have satisfied itself as to various matters affecting the site (like the ICC DCV) including subsurface, hydrological and climatic conditions. The contract price is further expressed to have taken account of the site data and the contractor’s own inspections and examinations of the site.  The contractor therefore is responsible for the risk of any foreseeable ground conditions and will be awarded time and money for those that are unforeseeable subject to a more detailed notice regime in this second edition.

NEC4 ECC 2017

The NEC4 ECC expressly deals with encountering unforeseen ground conditions (like the NEC3). However, the test on who bears this risk is not strictly one of foreseeability (as in the ICC and FIDIC). Instead, the chance of adverse ground conditions existing must be so small at the date of the contract that it would have been unreasonable for an experienced contractor to have allowed for the event in its prices and programme. The NEC guidance clarifies that the contractor is only entitled to the effects of the difference between what was found and what it would have been reasonable to expect. 

The project manager then assesses the compensation event, which assumes the contractor has taken into account the site information, publicly available information in the site data and information obtainable from a visual inspection. Although the contractor can rely on the information supplied to it and on its own inspections, it must also crucially obtain information that it would be reasonable for an experienced contractor to investigate and obtain.     

The clear allocation of the risk of unforeseen ground conditions benefits projects by enabling the risk to be managed more effectively and reducing the chances of disputes. Parties therefore need to be mindful of the varying and updated approaches to dealing with this risk because common practices under one standard form will not likely be of any use under another.

In high-value projects, parties will also invariably amend these standard provisions for even greater clarity as the consequences of misunderstanding the allocation of this risk and its associated liabilities can be severe.

Ryan Fordham is head of construction and engineering at Travers Smith