October 18, 2021
The complexity of tunnelling and underground construction may impose considerable risks on the parties involved. Risks faced by Contractors (and more importantly risk allocation) must be considered as the primary step to determining the best project execution method.
Allocation of risk
‘Risk’ in a project delivery context, can be defined as an uncertain event or set of circumstances effecting the achievement of the project’s objectives and therefore must be appropriately managed. The terms of a contract can be drafted or amended to provide a particular risk allocation, making it critical for the contracting parties in a tunnel project to diligently review the contract to ensure the risk of allocation is agreeable.
The most common risks faced by tunnelling projects are geological and construction risks.
- Geological Risk
Most geological risks are linked to the uncertainty of geological and hydrological conditions of the ground and groundwater. Such uncertainty and lack of ability to predict and understand the geotechnical profile of the ground, for example the presence of:
- faults;
- thrusts and shear zones;
- pockets of soft material;
- high groundwater pressures;
- highly fractured poor-quality rock; and
- saturated sand deposits,
all present significant risks for a Contractor.
- Construction Risk
Consequently, constructing a tunnel in unknown geotechnical environments can cause numerous failures at the tunnels structure. Common failures can include, inter alia:
- tunnel crown collapse;
- loss of tunnel face stability;
- excessive water inflow resulting in flooding;
- excessive deformation of rock mass causing tunnel squeezing;
- settlement propagated at the tunnel’s surface in shallow tunnels;
- structurally controlled instability; and
- hazardous gases.
The abovementioned risks present common problems faced by Contractor’s in a tunnelling project and the underestimation of these risks may lead to unsafe conditions, high construction costs and delays, not to mention the risk to life and damage to equipment. This potentially leads to a costly dispute, therefore, it is important the contract incorporates appropriate risk allocation to address these issues.
Contractual Considerations
Contracting risk profiles will differ depending on the project itself and a party’s appetite to accept risk. In tunnelling, particular attention should be paid to the following:
- Extension of Time and Delay Costs
Tunneling projects may be prone to time and cost overruns. It is therefore important for Contractor’s to ensure the contract contains an extension of time provision contemplating the adjustment of the completion date in defined circumstances. As part of the risk allocation, common risks including the abovementioned, should be taken into consideration when defining such circumstances to limit the risk of the Contractor becoming liable to pay the Principal liquidated damages in the event of a project delay. Further, in the event a Contractor is granted an extension of time, the Contractor must ensure there is a provision providing the ability to recover delay costs (for example, for remaining on site for a longer duration). At common law there is no automatic right to delay or disruption costs, instead it is only automatic when the contract specifically allows, or costs can be recovered if they are damages caused by a breach of contract. The contract should address not only time but also delay costs.
- Latent Conditions
As unknown ground conditions may be a significant risk to a Contractor in a tunnel project, it is imperative to allow for the ability to claim for latent conditions or other matters related to site conditions differing from those reasonably expected by the parties. While it is reasonable to classify everything outside the Contractor’s control as a latent condition, a Principal will be reluctant to accept such a broad definition. Therefore, from a drafting perspective it is advised the definition of latent condition is broad enough that it will protect the Contractor against the risks identified but is of a balance the Principal will accept.
- Provision for groundwater
Despite difficulties in predicting the location and extent of groundwater conditions, to address the risk of excessive water inflow from the tunnel face or the surrounding rock, a Contractor may wish to specify how these problems can be dealt with. For example, a separate provision could be made by including a separate pay item for the handling of all water with a rate of payment calculated on the basis of the quantity of water being handled.
- Force majeure
Performance of the parties’ obligations can be delayed, impaired or altogether prevented by events outside the parties’ control. Particular attention should be placed on the construction of a force majeure provision as it is often included without consideration, despite the crucial role it plays when unforeseen events occur. A force majeure clause will be strictly construed against the party seeking to rely on it therefore parties should not underestimate the importance of getting this provision right when drafting and negotiating a contract.
- COVID-19
COVID-19 pandemic has placed additional risks on Contractor’s not previously as prevalent including employees, materials, machines, methods, social environment and political pandemic prevention measures. Among these risks, worker availability, site accessibility, shortage of construction materials and inadequate pandemic prevention materials caused by lockdowns are among the fundamental challenges encountered. It is important that COVID-19 is covered either through the force majeure provision, or alternatively, addressed separately under the contract. The clause may include events such as limited supply of critical resources required for the project and government restrictions which suspend works or otherwise limit the number of individuals who can be on site.
- Indemnification
Indemnity provisions help apportion the risk of certain losses between the Principal and Contractor whereby one party will indemnify the risks of another party. Due to the high-risk nature of a tunnel project it is common for a Contractor to indemnify the Principal, however, the Contractor must ensure the provision is drafted to ensure the Principal is not indemnified against ‘all causes of potential losses’. Instead, the Contractor may contemplate including a ‘knock-for-knock’ indemnity clause. A knock-for-knock clause generally maintains that damage and loss to property or personnel suffered by a party’s ‘group’ (as defined in the relevant contract) is borne by that party regardless of fault. Because there is no requirement to show cause, fault or blame the clause would therefore mitigate the complexities of liability allocation between the contract parties and provides a reduced chance of litigation or arbitration.
The LPC Lawyers Team
LPC Lawyers have extensive experience across a wealth of project implementation processes. With an ability to draft agreements to meet the unique requirements of a project and the demands of the participants, or amend and negotiate a contract to achieve an optimal outcome for our clients, LPC Lawyers have the resources to support you on your next project.
If you have any questions about your current or future projects, please do not hesitate to contact LPC Lawyers for a discussion on how we can assist you.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Stephanie Purser
Email: [email protected] or [email protected]