Construction arbitration from a client's perspective
Out-Law Guide | 12 Oct 2017 | 5:15 pm | 5 min. read
This guide was last updated in October 2017
Before contracting, parties should take care to analyse the precise terms of the contract to find out how the risk of encountering adverse conditions is allocated. The common sense principle that risk should be allocated to the party best placed to manage it is not always observed when it comes to ground conditions. This false economy during the procurement phase often provides fertile ground for future disputes.
This guide looks at are the most important legal issues to be aware of under UAE law in relation to disputes about adverse ground conditions.
Who is liable if adverse conditions are discovered prior to completion of the project?
If the contract between the parties does not contain provisions apportioning this risk, the starting position is that the contractor will be liable for the costs of overcoming any adverse ground conditions. Whilst UAE law does not contain any direct provisions dealing with the apportionment of risk in this situation, it is likely that a Court or Tribunal would refer to Article 53 of the UAE Civil Code. This requires the contractor to provide that which is 'ancillary' to the contract, even if not specified within it. Overcoming adverse ground conditions may well be considered ancillary to, and therefore part of, the contractor's obligations to complete the project in accordance with the contract in some circumstances.
If the contract does contain provisions dealing with the risk of adverse ground conditions encountered prior to completion of the project, those agreed contractual terms will govern which party is liable. The majority of projects in the region are based on standard forms, often containing complex provisions dealing with the apportionment of the risk of encountering adverse ground conditions.
Risk allocation under FIDIC Red and Silver Books
The most common form of contract in the region is the FIDIC Red Book 4th Edition. It apportions the risk, and therefore the cost, of encountering adverse ground conditions on the basis of what would be foreseeable to an experienced contractor. The test of this is not what is foreseeable to the contractor itself, but instead what would have been foreseeable to an objectively experienced contractor who was in possession of any geotechnical information which had been provided by the employer, and which had carried out any other ground investigations required of it under the contract, whether it in fact carried them out or not.
If the conditions are found to be foreseeable following this analysis, the contractor will be liable. If, following its own analysis, the contractor still considers that the conditions are unforeseeable, the FIDIC Red Book 4th Edition and a number of other standard forms say that it must notify the engineer of this as soon as possible in order to preserve its entitlement to extensions of time and additional cost.
Of course, provisions in standard forms are often heavily negotiated and amended. We have seen and dealt with relatively minor amendments but have also seen the wholesale incorporation of the FIDIC Silver Book ground conditions provisions into the FIDIC Red Book. The effect of these provisions is to hold the contractor liable even where the conditions are unforeseeable by an experienced contractor and where they are totally outside the contractor's control. So the parties' bespoke amendments can radically alter the apportionment of risk between them in relation to this issue.
Potential defences available to contractors
Both where contracts contain provisions apportioning the risk of encountering adverse ground conditions and where they are silent, defences are potentially available to contractors that would otherwise be at risk for dealing with the consequences of those conditions. For example article 106 of the UAE Civil Code says that the exercise of a right, for example by an employer requiring a contractor to overcome adverse ground conditions at its own cost, may be unlawful if its interests in requiring the remediation are disproportionate to the harm that would be suffered by the contractor. Article 246(1) of the UAE Civil Code, which obliges parties to a contract to observe the requirements of good faith, may assist a contractor otherwise facing the burden of overcoming adverse ground conditions.
Articles 185 and 186 of the UAE Civil Code say that an employer who provides limited or misleading geotechnical information as part of the tender documentation may be liable for misrepresentation if the contractor is able to prove that the employer either was aware of the true nature of the ground, or had deliberately withheld information which would have allowed the contractor to become aware of its true nature and the contractor relied upon the information provided in entering into the contract. This defence would not of course assist the contractor in every situation. For example the FIDIC Red Book 4th Edition standard form explicitly requires the contractor to carry out its own investigations of the land prior to entering into the contract, putting in doubt any reliance it could place on the geotechnical information provided to it by the employer.
In reality, if a dispute arises during the build period of a project, the parties must in every case analyse the precise terms of the contract to decide how they apportion the risk of encountering adverse conditions and whether any defences are available which could reduce or eliminate their liability.
Decennial liability for adverse ground conditions
Whilst the majority of ground condition disputes arise during the course of a project, it is possible for these issues to arise at a later date. For example subsidence which affects the structural integrity of the completed structure, or water leakage from a swimming pool which threatens the safety and stability of adjoining structures.
If adverse ground conditions cause serious problems with a building or other structure after the works have been handed over, the contractor and the designer will be primarily liable under the mandatory decennial liability provisions of the UAE Civil Code.
Article 880 of the UAE Civil Code is a mandatory provision which overrides any provisions in the building contract, or the professional appointment. Article 880(2) requires the employer to be compensated for any defect in the land which results in the total or partial collapse of a building, or even any defect threatening the stability or safety of the structure. The liability exists for a period of 10 years from the date on which the works were handed over. However, in practice, the contractor's and designer's exposure to liability may be longer or shorter than the 10 year period as the employer must commence proceedings within three years from the collapse or discovery of the defect.
Whilst Article 880 imposes strict liability, there are limits placed on this. If a designer has only prepared the design, Article 881 of the UAE Civil Code expressly limits its liability to defects caused by its design. That said, if the designer acted in a supervisory capacity during the build period, its liability will not be limited in this way.
Article 878 of the UAE Civil Code says that contractors are only responsible for defects arising from their execution of the works unless they prepare the design; the designer is a subcontractor to the contractor, or an experienced professional in the same position as the contractor would have been aware of such design defects.
Construction arbitration from a client's perspective