Allocation of responsibility for unforeseeable obstacles in construction works

When they are discovered, the contractor usually bears the initial financial burden. Whether and how that financial burden, and the common burden of delayed progress, is then shifted to – or shared with – the developer depends on the laws governing the situation, unless the parties’ can and have agreed otherwise. As a result, three basic questions often arise:

• Would an ‘experienced contractor’ have, at the time of tender, reasonably foreseen the actual condition encountered?
• Who is the ‘experienced contractor’?
• What reasonable enquiries would the ‘experienced contractor’ have made at the time of tender?

The nature of the test that applies in the particular case to resolve inter-party responsibility for adverse physical conditions is knowable with the right legal advice. It ought to influence the precautions that the parties take before they enter into their work contract. As for the underlying ‘governing law’, there is a useful comparison to be drawn between the approach of the traditional English common law and that of major civil law systems.

The common law perspective

The common law of most countries in the Commonwealth has long refused to recognise an implied warranty on the part of the landowner as to the nature of the soil, the practicality of a specified mode of construction or the actual quantities required to complete the work. There have, however, been notable exceptions, for example where the common law tort of misrepresentation, or statutory relief, plays a role in redressing materially false statements as to the true character of physical conditions.

Clause 12 of the highly influential Fourth Edition of the Institution of Civil Engineers Conditions of Contract, a British standard form published in the 1950s, was doubtless aimed at allaying the concerns of civil engineering contractor as to unforeseeable risk. During the booming post-war era such risks were emerging in contingency pricing and speculative bidding as a market response to the unsympathetic stance of the common law. 

Clause 12 is an ancestor of Clause 4.12 of the current Second Editions of the FIDIC model form, published in 2017. Its basic elements, including the central figure of the hypothetical ‘experienced contractor’, remain a feature of modern construction and engineering industry forms across the Commonwealth and beyond.

The civil law perspective

Under Article 1792 of the French Civil Code “builders” are strictly liable for ground defects which compromise the solidity of the works or which render them unfit for purpose. In the Civil Code, “builders” are widely defined to include, among others, architects, contractors, technicians and more generally persons who have entered into a works contract with the employer. According to Article 1792-5, this is a mandatory principle that parties cannot contract out of. Builders may only be exempted from such liability where the defect may be attributed to “an extraneous cause”.

Read more on construction and engineering risk management

• Economic turbulence backdrop to sharp rise in global construction disputes
• Fitness for purpose responsibilities
• Managing liquidated damages
• Extracontractual relief from economic hardship
• Termination and suspension of construction contracts

“Extraneous cause” is not defined in the French Civil Code. However, French case law provides several illustrations of this concept, including that the intervention of a party with design responsibility, such as the architect, can amount to an extraneous cause rendering the architect liable for ground defects to the exclusion of the contractor. Similarly, climatic conditions like droughts or natural disasters may amount to an extraneous cause provided they qualify as a force majeure event. 

Germany takes a different approach, placing the ground conditions risk on the employer. Section 644 of the German Civil Code specifies that the contractor is not liable for any accidental deterioration or destruction in the “materials supplied by the customer”. German courts have interpreted “materials” here to include the subsoil, with the risk of unforeseeable defects in the subsoil remaining with the employer. If the work deteriorates or is destroyed because of a defect in such materials, the contractor can demand compensation from the employer under Section 645. The right to compensation is limited if the contractor is responsible for any circumstance which contributed to the defect.

Areas of common ground

The approach of these major legal systems to the risk of adverse ground conditions differs in important ways. However, consistently, the risk is treated by means of a transfer mechanism.  Whereas in the case of the English common law and the French Civil Code, the transfer arises in exceptional cases only, under the German Civil Code, the risk transfer represents the starting position which is itself subject to the exception of contributory acts or omissions leading to defective subsoil that has in turn caused the deteriorating or destruction of works.

Whereas the general incidence of responsibility under French laws are immune from contractual modifications, the English common law may readily be contracted out of. German law also recognises contractual modification provided it is ‘individually negotiated’ by the parties – rather than imposed on the contractor in general terms and conditions put to them by the employer – which, in practice, sets a high threshold. These comparisons illustrate the diversity of available policy solutions to the risk of adverse ground conditions. 

Basic tips

A works’ contractor will hesitate to enter a contract governed by laws that are based on the English common law without an adequate express ‘ground conditions clause’, unless that risk is reliably assignable to its subcontractors. Contracts of this sort do exist, for instance, in the Malaysian and Hong Kong public works sectors. Where the contract contains something akin to Clause 12 then the approach of an experienced contractor comes to the fore.

An experienced contractor will critically assess all available information concerning existing physical conditions and will make further reasonable enquiries or investigations if it is apprehensive about the accuracy, completeness or ambiguity of information supplied by the developer. The actual knowledge of the contractor is relevant, yet it is only one facet of what the experienced contractor would have reasonably foreseen. Enquiries relating to the accuracy, completeness or ambiguity of information should be raised prior to tender submission – the experienced contractor would not remain silent.  

If it would be impossible for a bidding contractor with limited time and means to undertake thorough site investigations at the tender stage, then at the very least it should include a contingency sum in its bid price to deal with adverse latent conditions should they manifest themselves. Where the contractor’s undertaking is governed by the law of any of the three major legal systems discussed here, the experienced contractor will refrain from having any involvement in the supply of fill material that is of questionable suitability.  

This article was co-written by Toshima Issur and Nicholas Brown of Pinsent Masons.