Risk mitigation through contract conditions

Broadly speaking, there are three main options which define the contractual boundaries (with
possible varying degrees of risk allocation in between) each tailored to cater for project
idiosyncrasies.

Option 1: The contractor is responsible for ground condition risk

Parties may agree that the risk of unforeseen ground conditions is to rest solely with the
contractor. Features of such a clause may include that: (1) the contractor has had the
opportunity to inspect the physical condition of the site, including subsurface conditions, and to
check the presence and extent of any conduits, pipes, cables, services or contamination,
together with any other conditions that might affect the works; (2) a failure on the part of the
contractor to discover or foresee the site condition or risk does not entitle it to additional money
or time; and/ or (3) the contractor is deemed to have obtained all necessary information as to
the risks and all circumstances related to the site which might affect execution of the works.

This is the position that is adopted by the FIDIC Conditions of Contract for EPC/ Turnkey
Projects or "Silver Book" intended for use in Build Operate Transfer or similar projects where
risk is placed largely on the Contractor. Pursuant to Clause 4.12 of this standard form, full
ground condition risk is taken by the contractor with no adjustment to the contract sum if
unforeseeable ground risks occur. Interestingly, there is an "impossibility" clause at sub-clause
19.7 of the Silver Book which discharges the contractor from further performance. This provision
would arguably operate where ground conditions render the works impossible to achieve as
intended.

The effect of such a clause is that the contractor takes the risk of both reasonably discoverable
and unforeseen ground conditions. The contractor must establish for itself that the works are in
fact possible, that its tendered price and contract period are adequate for the purpose of
executing those works and that its working methods are sufficient to ensure completion of the
works.

Arguably, this is not an ideal position for either party. A contractor is unlikely to be able to price
for the risk with any certainty, resulting in a higher project price for the employer. Within the
context of some projects in Qatar, the risks of including such a clause in construction are
potentially open ended for a contractor in terms of cost and time. Pricing is made near
impossible; the contractor is left faced with trying to manage the risk of, and price for, the
unknown. It is also frequently the source of disputes; in the event of late completion due to an
unforeseen ground condition such that performance of the contract is no longer profitable for a
contractor, the contractor's concern will be to cut costs, potentially at the expense of delivering
the requisite degree of quality.

The circumstances in which such clauses may be appropriate are essentially those where
extensive, good quality geotechnical information is available for a contractor who has the
experience, skill and resources to deal with any unexpected conditions. An employer may (and
should) be keen to ensure that its contractor is in receipt of, or obtains, adequate information in
order to reduce the costs of contingencies included in bids and secure a reliable design.
Accordingly, it is not uncommon for an employer to engage environmental/ site investigation
consultants to carry out investigative surveys and reports for inclusion in tender documentation.
In such circumstances, in order for an employer to retain protection against unexpected site
conditions, it may include a provision which disclaims liability for the accuracy or completeness
of any survey, report or document it has provided such that its contractor is not entitled to rely
on such data and is left without contractual recourse against the employer in the event that the
actual conditions vary from the site reports. The intention behind the disclaimer is two fold: (1)
avoidance of arguments from the contractor that there was a representation or warranty by the
employer as to the accuracy and/ or completeness of the information provided; and (2) the
removal of any possibility that, if the employer has prepared and/ or provided a survey or ground
condition report, the contractor may advance an argument for misrepresentation/ negligent
misrepresentation arising from its reliance on the survey/ report. Note that under Qatar law,
liability for fraudulent misrepresentation or "cheating" cannot be excluded - when one of the
contracting parties deceives the other by means of fraud by word or deed which leads the other
to consent to what he would not otherwise have consented to, this is sufficient grounds for
"nullification" of the contract (Article 134 of the Civil Code)).

Option 2: The contractor is responsible for ground condition risk,

except for "unforeseeable" risks
Parties may agree that, whilst the contractor is generally responsible for ground condition risk, it
will be entitled to an increase in the contract price and/ or an extension of time in respect of
"unforeseen" physical conditions which cause cost or delay. This is the position adopted by the
1987 and 1999 editions of the FIDIC Conditions of Contract for Construction of Building and
Engineering Works Designed by the Employer or "Red Book", and the Conditions of Contract for
Plant and Design-Build for Electrical and Mechanical Plant for Building and Engineering Works
Designed by the Contractor or "Yellow Book". In these books, recovery for cost incurred as a
result of the risk can be reduced if more favourable conditions, than could have been expected,
are encountered elsewhere in the slightly ambiguously worded, "similar parts of the works" (sub-
clause 14.2 refers).

On this basis, parties are left with making a judgement call as to what the contractor may have
assessed as being significant and hence whether or not a matter should have been foreseen,
and whether or not the risk is likely to eventuate. In this respect, there should be no distinction
between the terms "unforeseeable" and "unforeseen"; despite the fact that this issue is for the
most part considered after the event, the test is not whether or not the contractor actually
foresaw the risk, or could have foreseen it, but whether or not it was reasonable to foresee the
risk as a likely event. The FIDIC contracts referred to above attempt to provide us with some
certainty by including a definition: "not reasonably foreseeable by an experienced contractor by
the date for submission in the Tender". This is still a difficult issue to determine and, in practice,
parties will give consideration to factors including information provided by the employer and/ or
interpretations of the same, the contractor's own pre-bid site investigations and information in
the public domain at the time of tender.

This option is aimed at achieving a compromise position whereby the contractor is able to price
for site condition risk save for that which is genuinely unexpected a form of mutual "risk
sharing" if you like. Nonetheless, the element of uncertainty entailed in the "unforeseeability"
test may still by a breeding ground for costly disputes.

Option 3: The employer is responsible for ground condition risk

Finally, it is open for parties to agree that the employer shoulders the full burden of site risk. This
is not an option that is commonly selected and probably not a sensible option for large scale
projects. The option does not fully utilise the skill and resources of an experienced contractor (if
at all) with no incentive for that contractor, no matter how experienced, to deal effectively with
ground condition issues as they arise during the project.

RECOMMENDATIONS
The consequences of ground condition risk allocation by the conditions of contract can be
severe and therefore, a shift towards a careful consideration of contractual provisions, by
employers and contractors alike in Qatar, is recommended. Such conditions are certainly
subject to greater scrutiny by contractors than in the past. The risks related to ground conditions
and accuracy of tender data are anticipated by standard forms of conditions of contract.
However, more detailed contractual provisions flowing from thorough investigations by both
parties, and thus the separation, and subsequent allocation, of defined risks, may achieve a
more realistic allocation of risk that ultimately results in a lower overall project cost.

Note: All Qatari Laws (save for those issued by the Qatar Financial Centre (QFC) to regulate its
own business) are issued in Arabic and there are no official translations, therefore for the
purposes of drafting this article we have used our own translation and interpreted the same in
the context of Qatari regulation and current market practice.