Obrascon Huarte Lain SA v HM Attorney General for Gibraltar

Under the FIDIC Conditions, a contractor claiming for unforeseeable physical conditions must independently assess all available information at tender stage, using the expertise and experience of an experienced contractor. It cannot simply adopt an employer’s estimate or interpretation. Statements of opinion in an Environmental Statement are not binding, although contractual criteria and obligations remain binding.

A proposed redesign and approval in principle do not suspend work required under the approved design unless the employer has clearly elected to abandon that design. Sustained failure to progress critical works, without reasonable excuse and despite a notice to correct, may justify termination under clauses 15.2(a), (b) and (c)(i).

Obrascon Huarte Lain SA contracted with the Government of Gibraltar to design and construct a road and tunnel around Gibraltar Airport under the FIDIC Yellow Book Conditions. The project fell substantially behind schedule. OHL stopped substantial tunnel work and pursued a redesign, relying on ground contamination, stockpiling difficulties and design-approval issues.

Following preliminary-issue proceedings, Akenhead J held that the contamination was foreseeable, the relevant Engineer’s communications were not variations, and the Government had lawfully terminated under clause 15.2. The appeal challenged those conclusions, including the application of clause 4.12, the alleged variations, and termination under clauses 15.2(a), (b) and (c)(i). The central issues were whether the contamination was unforeseeable and whether OHL had reasonable grounds for failing to progress the critical tunnel works.

The Court of Appeal, in the judgment of Jackson LJ with which Gloster and Floyd LJJ agreed, dismissed the appeal.

1. Unforeseeable physical conditions. Under clauses 1.1.6.8 and 4.12, the contractor had to make an independent assessment at tender stage of the physical conditions that an experienced contractor could reasonably foresee. It had to use the available desk study, investigations and Environmental Statement, together with its own expertise. It could not simply adopt the Environmental Statement’s estimate of contaminated material. The judge’s finding that the contamination encountered was no more than could reasonably have been foreseen was open to him on the evidence. The Court of Appeal would not interfere with that finding, applying the approach in Watson Farley and Williams v Itzhak Ostrovizky [2015] EWCA Civ 457 and Yorkshire Water Services Ltd v Taylor Woodrow Construction Northern Ltd [2005] EWCA Civ 894; [2005] BLR 395. The judge’s misreading of the 10,000 m³ estimate did not affect the result.
2. Variations. The draft fill guidelines did not constitute a variation because OHL was never required to remove material by reference to their stricter thresholds. The withdrawal of permission to use Aerial Farm, land outside the site, was withdrawal of a concession rather than a variation. The 8 June letter merely required compliance with OHL’s existing CEMP and contractual obligations.
3. Redesign and notice to correct. Approval in principle of OHL’s proposed redesign did not amount to an election by the Engineer or the employer to abandon the fully approved original design. The election principles stated in Tele2 International Card Company SA v The Post Office Ltd [2009] EWCA Civ 9 did not assist OHL. The Engineer had expressly maintained that the original design remained satisfactory. OHL therefore had to perform work required under either design, including PEE excavation and cropping and repairing the diaphragm walls. Its failure to comply with those requirements was a serious breach supporting termination under clause 15.2(a). The judge’s reference to non-compliance with the de-watering requirement was immaterial because the termination notice did not rely on that breach.
4. Progress and termination. The clause 8.1 duty to proceed with due expedition principally concerned activities on, or capable of becoming, the critical path, as explained in Sabic UK Petrochemicals Ltd (formerly Huntsman Petrochemicals (UK) LTD) v Punj Lloyd Ltd (a company incorporated in India) [2013] EWHC 2916 (TCC); [2014] BLR 43. The tunnel works were critical. OHL’s prolonged inactivity was a serious breach. The alleged excuses, including stockpiling space, groundwater concerns, EI 20, foreseeable contamination and the absence of the checker’s certificate for the unnecessary redesign, did not provide reasonable excuse. The same sustained failure plainly demonstrated an intention not to continue performance under clause 15.2(b) and also justified termination under clause 15.2(c)(i).

• Court of Appeal (Civil Division): dismissed OHL’s appeal and upheld the conclusions that the contamination was foreseeable, the relevant communications were not variations, and the contract was lawfully terminated under clauses 15.2(a), (b) and (c)(i).
• High Court of Justice, Queen’s Bench Division, Technology and Construction Court: Akenhead J decided the preliminary issues in favour of the Government of Gibraltar in [2014] EWHC 1028 (TCC).