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Unforeseeable ground conditions and proceeding regularly and diligently: the Obrascon case reaches the Court of Appeal

The decision of Mr Justice Akenhead in the Obrascon case featured prominently in last year’s Review, where we reviewed the implications of the judgment in relation to termination by the employer and serving contractual notices.

As Jeremy Glover explains the case has now reached the Court of Appeal,1 where Lord Justice Jackson considered certain discrete elements of the original judgment.

To recap, Obrascon (“OHL”), a Spanish civil engineering contractor, was engaged, under an amended FIDIC Yellow Book, to construct a road around Gibraltar Airport. Mr Justice Akenhead held that, amongst other things, the employer had effectively terminated the contract under clause 15 of the contract. The issues on appeal primarily related to the following conclusions of Mr Justice Akenhead:

(i) The amount of contaminated soil which OHL encountered was not more than an experienced contractor should have foreseen. Therefore OHL was not entitled to an extension of time or additional payment under clause 4.12 of the Conditions in respect of contamination.

(ii) OHL, in breach of clause 8.1, failed to proceed with due expedition and without delay.

(iii) The employer validly terminated the contract pursuant to clause 15.2.

Unforeseeable ground conditions

Under the basic scheme of clause 4.12, if a contractor encounters adverse physical conditions which he considers to have been unforeseeable, then the contractor must give notice to the engineer as soon as practicable.

Physical conditions are defined as meaning:

“natural physical conditions and man-made other physical obstructions and pollutants, which the Contractor encounters at the Site when executing the Works, including sub-surface and hydrological conditions but excluding climatic conditions”.

By clause, “unforeseeable” means:

“not reasonably foreseeable by an experienced contractor by the date for submission of the Tender”.

Here, there was ground contamination which arose from the military activities on the site over previous centuries and from the use of the site as an airfield in the twentieth century. Airfield activities generated further contamination, for example aircraft fuel and substances used for de-icing runways. All these matters were clearly spelt out in the desk study provided to tenderers in 2008. The study included a plan showing a rifle range at the north-east corner of the isthmus, where the tunnel was due to be built. Most of the contamination was confined to the made ground, although some of the hydrocarbons penetrated deeper. In the tunnel area (where the most significant excavation was required) the depth of made ground varied between 1 metre and 5.4 metres, with an average depth of 2.5 metres.

The borehole logs showed that the made ground was not uniformly contaminated. Some areas were free from contamination, while other areas were contaminated at a high level.

The depth to which OHL initially stripped the site was a matter for their choice. They chose to strip the top layer of the whole site to a depth of 2 metres. After that the principal area of excavation was the tunnel and the ramps leading down to the tunnel at both ends. OHL prepared a Construction Environmental Management Plan (CEMP), which stated that there would be “correct separation of wastes” and that contaminated materials would be “removed off site, stored and dispersed to a licensed site”. However, OHL did not adhere to the CEMP and they stockpiled all excavated materials indiscriminately, without any attempt to differentiate between contaminated and inert materials. Inevitably there was cross-contamination. The result was that all the stockpiled excavation materials were progressively being exported to landfill sites in Spain.

This made it difficult for the experts instructed by the parties to estimate the actual quantity of contamination on the site. The preferred report calculated the total volume of contaminated soils to be 15,243m3; this was higher than the figure of 10,000m3 shown in the Environmental Statement.

What contamination would therefore be “reasonably foreseeable by an experienced contractor” at the date of tender (the test under clauses and 4.12 of the Conditions)? The approach of the expert accepted by Mr Justice Akenhead lead was to suggest a figure of 15,000m3. The basic reasoning was that an experienced contractor would not “slavishly” accept the figure. Instead an experienced contractor would make its own assessment of all available data.

Lord Justice Jackson in the Court of Appeal agreed. The FIDIC conditions require the contractor at tender stage to make its own independent assessment of the available information:

“The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else’s interpretation of the data and say that is all that was foreseeable.”

The Court of Appeal also noted that Mr Justice Akenhead had approached the expert evidence critically. He also made his own assessment of all the information that was available. The Court of Appeal said that this was:

“entirely appropriate. The Technology and Construction Court is a specialist court with long experience of cases such as this one. The judges are not prisoners of the expert evidence.”

The Court of Appeal also noted that the historical material provided to the contractor made it clear that very extensive contamination was foreseeable across the site. The contractor needed to make provision for a possible worst case scenario; the contractor should have made allowance for a proper investigation and removal of all contaminated material. The estimate of 10,000m3 of contaminated materials contained in the Environmental Statement was one person’s interpretation of the data. Tenderers were bound to take that assessment into account, but they remained under a duty to make their own independent assessment of the physical conditions likely to be encountered.

What the Court of Appeal was saying was that under the contract, OHL was required to make its own independent assessment during then tender stage of all the available information. OHL then had to use its own expertise and experience to make an assessment of the likely physical conditions it would encounter. What OHL could not do here was do nothing and simply rely on the interpretation of the data and survey information carried out by another and argue that anything else was unforeseeable. This was especially the case where the data in question within the environmental statement, namely on the extent of ground contamination was clearly stated to be an estimate and when clause 4.10 of the FIDIC Yellow book notes that OHL “shall be responsible for interpreting all such data”.

Accordingly, OHL’s claim for unforeseeable ground conditions under clause 4.12 of the FIDIC conditions failed.

Termination: the view of Mr Justice Akenhead

At first instance, Mr Justice Akenhead had made a number of interesting comments about termination. The relevant clauses under the Yellow Book are:

Clause 15.1: “If the Contractor fails to carry out any obligation under the Contract, the Engineer may by notice require the Contractor to make good the failure and to remedy it within a specified reasonable time.”

Clause 15.2: “The Employer shall be entitled to terminate the Contract if the Contractor:

(a) fails to comply…with a notice under Sub-Clause 15.1…

(b) …plainly demonstrates the intention not to continue performance of his obligations under the Contract,

(c) without reasonable excuse fails:

(i) to proceed with the Works in accordance with Clause 8…or;

(ii) to comply with a notice issued under Sub-Clause 7.5…”

The judge considered that clause 15.1 related only to “more than insignificant” contractual failures by a contractor. These could be a health and safety failure, bad work, serious delay on aspects of the work or the like. However it was important to establish a failure to comply with the Contract. For example, something may have not yet become a failure; for instance the delivery to site of the wrong type of cement may not become a failure until the cement is or is about to be used. The specified time for compliance with the clause 15.1 notice must be reasonable in all the circumstances prevailing at the time of the notice. What is reasonable is a question of fact sensitive. Again for example, if 90% of the workforce had gone down with cholera at that time, the period given for compliance would need reasonably to take that into account, even if that problem was the contractor’s risk. It may also be relevant to take into account whether the clause 15.1 notice came “out of the blue” or if the subject matter has been raised before and the contractor has chosen to ignore what it has been told.

Clause 15.1 was therefore designed to give the contractor an opportunity and a right to put right its previous and identified contractual failure. However, given the potentially serious consequence of non-compliance, clause 15.1 notices must to be construed strictly albeit they can be construed against the surrounding facts. The Judge further noted that, generally in relation to termination for fault clauses, courts will construe them “in a commercial way so as to exclude reliance on trivial breaches”. Again, the Judge gave some examples of trivial breaches: one day’s culpable delay on a 730 day contract or 1m² of defective paintwork out of 10,000m² good paintwork . As you would expect, what is trivial and what is significant or serious will depend on the facts.

Mr Justice Akenhead concluded that:

“Clauses 15.1 and 15.2(c) must as a matter of common sense pre-suppose that the Contractor is given the opportunity by the Employer actually to remedy the failure of which it is given notice under Clause 15.1. In that context, termination could not legally occur if the Contractor has been prevented or hindered from remedying the failure within the specified reasonable time. This stems from a necessarily implied term that the Employer shall not prevent or hinder the Contractor from performing its contractual obligations; there is also almost invariably an implied term of mutual co-operation. If therefore the Engineer has served a Clause 15.1 notice to remedy a breach of contract, and to the extent that the Employer hinders or prevents the Contractor from remedying the breach, the Employer could not rely on the Contractor’s failure in order to terminate the Contract. This is because the Employer should not be entitled to rely on its own breach to benefit by terminating (see for instance Alghussein Establishment v Eton College [1988] 1 WLR 587). An example might be the Employer who, following the service of Clause 15.1 notice, denies site access to the Contractor to enable it to put right the notified failure.”

There was no challenge in the Court of Appeal to these findings.

Failure to proceed with due diligence

Under clause 8.1 of the FIDIC Conditions the contractor is obliged to: “proceed with the Works with due expedition and without delay”.

However, as the Court of Appeal noted, this clause is not directed at every task on the contractor’s to-do list. It is principally directed at activities which are or may become critical. Here Lord Justice Jackson referred to the reasoning of Mr Stuart-Smith in Sabic UK Petrochemicals Ltd (formerly Huntsman Petrochemicals (UK) Ltd) v Punj Lloyd Ltd (a company incorporated in India) [2013] EWHC 2916 (TCC) where he said this:

“However, when looking at the other individual elements, two points should be made. First, it is in my judgment most important to look at how SCL reacted to those elements that were thought to be critical during the Warning Period since those were, or should have been, the ones to which SCL should have been giving primacy at the time. A failure to exercise due diligence in relation to the works that were perceived to be critical would tend to support a conclusion that SCL was not exercising due diligence overall. Second, the mere fact that an element was not critical (or not thought to be critical) at a particular moment does not render SCL’s performance on that element uninformative when assessing its attempts to comply with its contractual obligation of due diligence. This is because there were a number of elements at any given time which could have become critical if they had slipped into delay. It is to be remembered that SCL’s obligation to secure EID covered the whole of the works (apart, of course, from category 3 defects, which were those that could be left until after EID).” [emphasis added]

Here, OHL submitted that the critical activity in the period May to July 2011 was obtaining the category 3 check certificate and final approval of the re-design from the Engineer. Therefore other delays, in particular delays on tunnel works, were immaterial. The Court of Appeal did not agree. The tunnel was on the critical path of the whole project. The next stage of work on the tunnel was the PEE excavation, together with cropping and repairing of the diaphragm walls. These tasks were very much on the critical path.

Termination: Court of Appeal

In the view of the Court of Appeal, OHL’s lack of significant activity on site between 21 January and 28 July 2011 was a failure “to proceed with the works with due expedition and without delay”. It was a serious breach of clause 8.1 of the Conditions. That was not the end of the matter as the Court of Appeal went on to consider whether there was “reasonable excuse” for OHL’s failure to proceed with the works. This was a question of fact and having gone through the six issues put forward by OHL in their defence, the Court of Appeal concluded that OHL’s failure over many months to proceed with the works (a failure which continued in defiance of a notice to correct dated 16 May 2011) did “plainly demonstrate” an intention not to continue performance of their contractual obligations. This meant that the employer was entitled to terminate the contract as it did under clause 15.2.

Time bars

It should be noted that the Court of Appeal did not address every aspect of Mr Justice Akenhead’s earlier judgment. In particular this means that the Judge’s interesting comments on time bars have been left untouched. We deal with time bars in more detail in a previous article on pages 17–21.

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  • 1. Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712.

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