England’s Court of Appeal provides guidance on FIDIC Yellow Book Conditions

Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712 was an appeal by a civil engineering contractor (Contractor) against findings of the court at first instance that the quantity of ground contamination at a construction site was foreseeable by an experienced contractor and that the Employer, the Government of Gibraltar (GoG), had been justified in terminating the Contract between them. England’s Court of Appeal affirmed both findings and dismissed the appeal. The judgment provides useful guidance in respect of the interpretation of several FIDIC Conditions of Contract for Plant and Design Build.

In 2005, GoG had decided to construct a new dual carriageway road and tunnel to ease congestion around Gibraltar airport. GoG engaged consultants to prepare a contaminated land desk study (Desk Study) to review the site history and likely degree of contamination and consultants to carry out ground investigations, involving the sinking of a number of boreholes and trial pits to extract samples for testing for contamination. GoG also commissioned the preparation of an Environmental Statement, which was essentially an interpretation of and commentary on, the information that had been gathered at the site. The Environmental Statement estimated that the project would require excavation of 200,000m³ of spoil and that approximately 10,000m³ of that would be contaminated, which it described as “not significant”.

In November 2007, GoG invited tenders for the design and construction of the road and tunnel. The invitation included copies of the Desk Study, the borehole and trial pit investigations and Environmental Statement. In November 2008, GoG engaged Obrascon Huarte Lain SA (“OHL”) to carry out the design and construction of the road and tunnel. The contract incorporated the FIDIC Conditions of Contract for Plant and Design-Build, first edition, 1999, commonly known as the FIDIC Yellow Book Conditions (Contract).

As the project progressed, contamination was discovered at the site and in the autumn of 2010, OHL requested an extension of time and extra payment in respect of unforeseeable physical conditions, pursuant to Clause 4.12 of the FIDIC Conditions. Clause 4.12 provided that if the Contractor encounters any physical conditions which were unforeseeable and gives notice to the engineer to that effect and suffers delay and/or costs due to those conditions, he is entitled to an extension of time for such delay and extra payment. “Unforeseeable” was defined as “not reasonably foreseeable by an experienced contractor by the date for submission of the Tender”. OHL contended that the level of contamination made it unsafe for its men to proceed with implementing the original design, which led to OHL implementing a re-design and hence their work falling behind schedule.

In July 2011, GoG served a notice terminating the Contract on the ground, amongst others, that OHL had failed to proceed with the works with due expedition and without delay. OHL argued that GoG had repudiated the Contract. At first instance, the judge found in favour of GoG, holding that the amount of contaminated spoil that OHL had encountered was not more than an experienced contractor should have foreseen and that GoG had rightly terminated the contract pursuant to Clauses 15.2(a), 15.2(b) and 15.2(c) (i) of the FIDIC Conditions.

The Court of Appeal dismissed OHL’s appeal, holding as follows:-

1. The judge at first instance had been plainly right to hold that an experienced contractor would make his own assessment of all available data. Clauses 1.1 and 4.12 of the FIDIC Conditions required the Contractor at tender stage to make its own independent assessment of the available information and draw upon his own expertise and experience of previous civil engineering projects. The Contractor must make a reasonable assessment of the physical conditions which it may encounter and could not simply accept someone else’s interpretation of the data and say that is all that was foreseeable. Accordingly, OHL could not rely on the underestimation of contamination in the Environmental Statement and could not establish a claim for unforeseeable ground conditions on the basis of the incorrect estimate of 10,000m³ of contamination. The Court of Appeal upheld the finding that OHL did not encounter physical conditions (contamination) over and above that which an experienced contractor could reasonably have foreseen at the date of tender.
2. GoG had been entitled to terminate the Contract pursuant to Clause 15.2(a) of the FIDIC Conditions and had done so because OHLs lack of activity on the site over six months amounted to a serious breach of Clause 8 of the FIDIC Conditions i.e. a failure to “proceed with the works with due expedition and without delay”. The Court said that the obligation under Clause 8 was not directed to every task on the contractor’s to-do list. Rather, it was principally directed to activities which are or may become critical. Here, the tunnel was on the critical path of the whole project. There was no “reasonable excuse” within the meaning of Clause 15.2 (c) of the FIDIC Conditions for OHL’s failure to proceed with the works.

This case illustrates that it is not easy to succeed with an “unforeseen physical conditions” defence. It also serves as a good reminder to both contractors and employers adopting the FIDIC Yellow Book Conditions. Whilst contractors should not rely blindly on data stated in contractual documents and should make their own assessments in relation to physical conditions at the tender stage, employers should be mindful that they are only entitled to terminate when a contractor has failed to proceed with due expedition and without delay if the works in question are critical.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427