Physical conditions, suspension and termination under the FIDIC Conditions

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

In the recent case of Obrascon Huarte Lain (OHL) v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712, the Court of Appeal was asked to overturn the previous decision of Mr Justice Akenhead in the Technology and Construction Court (TCC), which had found in favour of the Government of Gibraltar’s (GoG) right to terminate the contract and had rejected OHL’s arguments that it had been hindered in its completion of the works by unforeseeable ground conditions and that the termination had been unlawful under the terms of the contract. It was these claims which formed the basis of OHL’s appeal.

The Court of Appeal unanimously dismissed OHL’s appeal in its entirety. Although the judgment for the most part simply reconfirms the decision of Mr Justice Akenhead, it sets out some important lessons for contractors in tendering for works and administering construction contracts, especially under the FIDIC standard forms.

Unforeseeable physical conditions

While Clause 4.12 of the FIDIC Yellow Book sets out the key provisions on unforeseeable physical conditions, including the method by which the contractor can make its claim for the resultant time and cost impact of such conditions, the key question before both courts was whether the conditions encountered by OHL were “unforeseeable”, as defined by Clause 1.1.6.8. In his first instance judgment, Mr Justice Akenhead had held that OHL had failed to undertake sufficient analysis of the data in respect of contaminated soil as would be expected of an “experienced contractor” as required by Clause 1.1.6.8.

Given the historical activity that had taken place on the site in question, it was clear that there would be a significant degree of contamination. In 2007, an environmental statement had been prepared estimating that 10,000 cubic metres of contamination was contained within the total amount of spoil to be excavated. This statement would or should have been considered by contractors when tendering for the works. In the first instance hearing, a number of surveys and expert reports were produced, the more favoured of which assessed that the extent of the ground contamination was in the region of 15,000 cubic metres, some 50 per cent greater than indicated in the environmental statement. Despite this, Mr Justice Akenhead decided:

“In terms of the quantities of contaminants to be foreseen, it is difficult to put any precise figure on what should have been foreseen but in my judgement the amount would be very substantially above 10,000 cubic metres…I find that the quantities actually encountered and present were likely to have been less than could have been reasonably foreseen by an experienced contractor and it has certainly not been established otherwise.”

In its appeal, OHL claimed that Mr Justice Akenhead had “failed in his duty to make findings about the amount of contamination present and the amount which was foreseeable”. This argument was flatly rejected by the Court of Appeal. It was stated definitively that a claim for unforeseeable physical conditions could not be established on the basis of the incorrect estimate in the environmental statement. Further the estimate contained in the environmental statement was not binding on the contractor and there was a clear requirement that tenderers make their own independent assessment of the physical conditions.

Although largely expected, the Court of Appeal’s decision on this point reconfirms the approach taken to the interpretation of Clauses 1.1.6.8. and 4.12 of the Yellow Book.

Termination

Another key point the Court of Appeal was asked to consider was whether the termination of the contract by GoG had been lawful. This involved detailed consideration of some of the key termination provisions in Clause 15.

In his first instance judgment, Mr Justice Akenhead decided that a notice served by GoG complied with Clause 15.1 and that GoG had a corresponding right to terminate under Clause 15.2(a). He rejected OHL’s argument that it had a “reasonable excuse” under Clause 15.2(c)(i) for not proceeding with its works “with due expedition and without delay” as required by Clause 8.

In its appeal, OHL challenged both the validity of the notice served under Clause 15.1 and the application of the sub-clauses in Clause 15.2. In respect of the notice served under Clause 15.1 (and the corresponding right of the employer to terminate under 15.2(a)), OHL said that it had to cease works until its redesign of the tunnelling works had been completed. It had not therefore “failed to proceed” with its works, consequently the GoG’s notice of termination was invalid.

This was rejected by the Court of Appeal. Jackson LJ decided that “OHL should have proceeded with the tunnel work which was required in any event as specified in the notice to correct”.

The Court of Appeal dealt with Clauses 15.2(b) and 15.2(c)(i) together, being “closely linked”. OHL argued that the critical activity in respect of the delays was the final approval of the re-design by the engineer. Accordingly, OHL said it had neither failed to continue performance of its contractual obligations nor failed to “proceed with [its] works with due expedition and without delay”. Alternatively, OHL said it had “reasonable excuse” for not proceeding with its works, including the difficulties caused by the unforeseeable ground conditions and the lack of final approval for the re-design from the engineer.

Again, these arguments were rejected by the Court of Appeal. While it was acknowledged that the obligation in Clause 8 does not apply to “every task on the contractor’s to do list”, but is principally directed to activities that are or may become critical, it was considered that the tunnelling works suspended by OHL were very much on the critical path of the project.

As to whether a “reasonable excuse” existed, the Court of Appeal rejected OHL’s argument that the GoG and the engineer had elected to redesign the works. To the contrary, it was found that the engineer “made it plain that the original design was perfectly satisfactory”.

The Court of Appeal went on to reject OHL’s argument that if the redesign was unnecessary, the engineer should have rejected it because it would delay the works:

“When the engineer is reviewing the contractor’s design under Clause 5.2 of the FIDIC conditions, he is considering whether the design is technically acceptable and whether, if the design is implemented the completed works will accord with what the contract requires. If the redesign is satisfactory in all these respects, it is not for the engineer to reject the design because he thinks it will take too long to build.”

Accordingly, GoG was entitled to terminate due to OHL’s failure to proceed with the tunnelling works.

Contractors should not therefore take the decision to suspend under FIDIC conditions lightly. Unless there is either a reasonable excuse for such suspension, or it can be shown that the suspended works were not on the critical path of the project, the contractor is very much exposing itself to the risk of termination.

Conclusion

Given the Court of Appeal’s wholehearted endorsement of the judgment of Mr Justice Akenhead in the TCC, this latest decision provides us with an opportunity to assess the lessons that are to be learned from both courts’ application of the relevant provisions of the FIDIC Red, Yellow and Silver Books.

In respect of the question of unforeseeable ground conditions, it is impossible to stress enough the need for the contractor to undertake its own thorough, impartial study of the relevant conditions at tender stage. In spite of OHL having been provided with several surveys of the ground conditions, they had failed to undertake the level of study expected of “an experienced contractor” under Clause 1.1.6.8, and were therefore unable to claim that the conditions that hindered the completion of their works were “unforeseeable” under Clause 4.12.

In addition, when it comes to the application of the relevant termination provisions, it is clear that a contractor will need to be certain when suspending works that it has no clear obligation to proceed (under Clause 8 or generally under the terms of the contract and/or pursuant to a notice to correct), or in the alternative that they have either a reasonable excuse for not doing so or the suspended works are not on the critical path of the project. In the present case, in spite of the fact that the approval process for a redesign of the works was ongoing (albeit an unnecessary redesign), this did not relieve OHL of their obligation to proceed with the tunnelling works, and as a result the employer was entitled to terminate under all three grounds in the sub-clauses of Clause 15.2 referred to above.

Finally, Jackson LJ made clear that “the Court of Appeal is reluctant to overturn findings of fact made at first instance” and that “This is particularly true in the case of appeals from the Technology and Construction Court”. The reasons for this approach are relatively straightforward: the TCC is composed of a judiciary extremely well versed in the factual and technical issues which arise out of construction and engineering disputes. It is clear, then, that the Court of Appeal will be extremely cautious when it comes to overturning the analysis and assessment of such issues undertaken by the lower court.