When robust legal terms are not enough - Site condition risk and the danger of commercial clarifications

It is a situation all too familiar to those involved with the preparation of building contracts: the contractor's tender clarifications conflict squarely with the client's intended risk profile reflected in the legal terms and conditions, but (due to commercial time pressures, a lack of legal awareness and understanding, or both) the clarifications nevertheless make the final cut of the technical contract documentation.

In this type of scenario, clients are often quick to assume that they will be saved in a dispute situation by the contractual "precedence clause", which will invariably state that the legal terms and conditions "trump" the technical schedules in the event of a conflict. The recent case of Clancy Docwra Limited v E.ON Energy Solutions Limited [2018] EWHC 3124 (TCC) is a salutary reminder of the dangers of such an approach.

The facts

E.ON, the main underground heating contractor for the Barts Square residential development in central London, engaged CDL as a sub-contractor to excavate certain trenches and then install the underground heating pipework. During the carrying out of the excavation works, CDL encountered unexpected brick walls and brick rubble which had to be cleared. A dispute arose as to whether the additional work associated with removing the underground obstructions constituted a variation, entitling CDL to additional time and/or money under the terms of the sub-contract.  

The sub-contract included the following clause regarding adverse site conditions, which E.ON argued "clearly placed on CDL" the time and cost risk of unforeseen ground issues:

"2.1.7 The Sub-Contractor shall be deemed to have inspected and examined the site and its surroundings and to have satisfied himself before the date of this Sub-Contract as to the nature of the ground, the sub-surface and sub-soil, the form and nature of the site, the extent, nature and difficulty of the Sub-Contract Works […] and in general to have obtained for himself all necessary information as to risks, contingencies and all other circumstances influencing or affecting the Sub-Contract Works.

2.1.8 Notwithstanding any other provision of this Sub-Contract, the Sub-Contractor shall not be entitled to any extension of time or to any additional payment […] on the grounds of any misunderstanding or misinterpretation of any matter set out in clause 2.1.7, or his failure to discover or foresee any risk, contingency or other circumstance (including, without limitation, the existence of any adverse physical conditions or artificial obstructions) influencing or affecting the Sub-Contract Works.

2.1.9 The Sub-Contractor shall not be released from any of the risks accepted or obligations undertaken by him under the Sub-Contract on the ground that he did not or could not have foreseen any matter which might affect or have affected the execution of the Sub-Contract Works."

As is evident from the above extracts, however, the clause (as one would entirely expect) was peppered with references to "the Sub-Contract Works". CDL capitalised on this and submitted the following argument:

• CDL's tender submissions (and the subsequent post-tender minutes) stated that CDL had excluded from its tendered scope of work:
  • removal of soft spots;
  • any ground conditions which did not permit the use of mechanical plant and which instead required hand digging;
  • diversion of mains and services;
  • breaking out of obstructions; and
  • the unavailability of a clear and unrestricted corridor in which to carry out the Sub-Contract Works,

(referred to in this article as the "Excluded Matters").

• The Excluded Matters were detailed within the "Numbered Documents" comprising the technical sub-contract documentation. The "Sub-Contract Works" were defined as "the works […] described in the Numbered Documents".
• In other words, the Excluded Matters (or the work that might arise if they were encountered) did not, in CDL's view, form part of the Sub-Contract Works because they were clearly specified in the Numbered Documents as being "out of scope" and the Sub-Contract Works were defined by reference to the Numbered Documents. On that basis, CDL asserted that the site conditions clause was simply irrelevant because it was couched in such a way as to apply only in respect of adverse site conditions "influencing or affecting the Sub-Contract Works".

The decision

Declining to follow the earlier adjudication decision, the High Court ruled in favour of CDL. Whilst accepting that the intention of clauses 2.1.7 to 2.1.9 was clearly to transfer to CDL the risk of adverse site conditions likely to affect the Sub-Contract Works, the Court found that this risk profile had to be read in the context of what those works were. If, for example, the Sub-Contract Works expressly excluded clearing underground obstructions, then to say that the site conditions clause had the effect of placing the risk of underground obstructions on CDL would be to expand the agreed scope of the Sub-Contract Works. That, said the Court, is not risk allocation - it is ignoring the definition of the Sub-Contract Works that both parties have freely signed up to.

E.ON had submitted that the effect of CDL's interpretation would be to render the site conditions clause almost pointless. The Court did recognise that excluding underground obstruction clearance from the work scope for a trench excavation project in Central London does indeed mean that a substantial risk is not imposed on the sub-contractor. However, the Court found that this was the natural consequence of the express exclusion from the Sub-Contract Works detailed in the Numbered Documents. Whilst this greatly narrowed the operation of the site conditions clause in the particular circumstances, the clause still had potential relevance where, for instance, CDL was inhibited by the nature of the ground (e.g. hard clay, voids and the water table).

It followed that the breaking up and clearing of the underground brick walls and rubble was a variation within the meaning of the sub-contract (specifically an addition to the Sub-Contract Works), entitling CDL to additional time and money. In the Court's view, there was no conflict between the drafting of the Excluded Matters and the site conditions clause and, as such, the contractual precedence provision was not engaged.

In practice

The case highlights the inherent and significant risks for clients that fail to:

• undertake comprehensive due diligence on the technical aspects of the contract documentation (particularly tender and post-tender exclusions, clarifications and the like prepared by the contractor); and/or
• promote early and continued engagement between the various personnel engaged by them to compile the legal and the technical aspects of the contract respectively, with a view to identifying and addressing actual and potential conflicts between the two.

E.ON, in its submissions, sought to dismiss the significance of the Numbered Documents as "a diffuse collection of […drawings, e-mails, procedures, meetings notes and so on] relating to a wide range of matters" and "not […] the place where a reasonable recipient of the Sub-Contract would expect to find CDL's rights to extra time and money". Somewhat ironically, this apparent self-confessed failure to duly scrutinise the technical aspects of the sub-contract (and their interplay with the legal terms) ultimately resulted in the Court finding in CDL's favour.

Parties that neglect to properly examine all contract documents both individually and holistically, relying blindly on their own requirements trumping other "less significant" aspects, do so at their peril  As E.ON discovered in this case, the contractual precedence clause will not always come to the rescue.