Jordan ... analysing the effectiveness of apex clauses.
Blunt instruments in site conditions risk
STUART JORDAN* looks at how contracts tackle core risks and the role played by apex clauses.
01 June 2019
Contracts in the Gulf are known to be tough on core risks such as site conditions. If we wanted to place site conditions risk definitively and unconditionally with the contractor, we might write something like:
- A) The contractor shall be deemed to have inspected and examined the site and its surroundings and to have satisfied himself before the date of this 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 works and in general to have obtained for himself all necessary information as to risks, contingencies and all other circumstances influencing or affecting the works.
If that wasn’t enough, we might add an “apex” or overriding clause which begins with those seven magic words, much used in Gulf contracts:
- B) Notwithstanding any other provision of this contract, the contractor shall not be entitled to an extension of time or to any additional payment, damages or direct loss and/or expense on the grounds of any misunderstanding or misinterpretation of any matter set out in Clause A 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 works.
Finally, we might include a general provision that gives priority to the contract conditions (including A and B) above other contract documents, in the event of conflict.
That’s about as tight as it can get, we’d agree? Well, a contractor (in fact, a subcontractor) working under, essentially, these contract terms to excavate trenches, was found to be entitled to recover its costs arising from finding (and working through or around) adverse ground conditions including rubble, underground brick walls and a concrete structure.
This was because the scope of works made reference to a specific path for the trenches and it expressly excluded the breaking out of rock or dealing with obstructions. This was the decision of the Technology and Construction Court in England, in the recent case of Clancy Docwra Limited (CDL) Versus E ON Energy Solutions Limited.
But surely, this is a clear conflict within the contract? What about the seven magic words? What about the priority clause? The key parts of the decision, in summary, were:
• The scope of works was set out only in the “numbered documents” so the works scope was defined separately from the contract conditions;
• The numbered documents included tender clarification or qualification emails in which CDL stated that it had “not allowed for” the breaking out of obstructions. This did not mean (as E ON argued) that CDL accepted the risk but were choosing not to price for it. CDL’s clarifications excluded breaking out, etc from the scope of works.
So the conflict issue was dealt with by deciding that there was effectively no conflict within the contract: if the task of dealing with obstructions is excluded from the works, then the works scope extends only to excavation of ground containing no obstructions. The situation covered by contract conditions A and B above simply does not arise. The work done to deal with obstructions was therefore a variation – additional work.
We can see the logic of that, although difficult decisions on interpretation usually leave a few question marks. In working to make sense of the contract, the court, correctly, looked to establish the reason for the parties’ inclusion of every document – including the tender qualifications. At the same time, the decision appears to mean that prominent clauses A and B above were included for no reason as they can have no force. If there is no conflict here, there does at least appear to be redundancy.
This case is a good illustration of the limits to the effectiveness of devices such as priority clauses and apex/overriding clauses. The whole point of an apex clause is to be all-powerful: to ensure that it will be applied regardless of whatever the rest of the contract says. And yet they can be defeated by a more targeted provision which excludes their application.
Apex clauses have their uses in (usually) bringing clarity, although that can be lost – as we sometimes see – when a contract is littered with apex clauses, which conflict each other. In any event, they should not be used as a substitute for doing the work to exclude conflicts through cross references which precisely control the interplay between individual provisions.
The above case is extreme, in that the site risk allocation is so clearly at odds with the scope exclusion. Any party seeing that problem before entering into the contract should surely remove it and not seek to rely on interpretation devices to win the inevitable dispute later on.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.
