Road to litigation and possible bypasses 23 Jan 2020

Traditionally it has been the ground, via differing site conditions, at the heart of disputes. Other causes for contracts ending up in court include non-performance, incompetence, intractability, schedule pressure, cashflow crises, and recovering from natural or accidental disasters.

Another is the effort in recent decades by project clients to transfer all or most risk involved with projects to the contractor. This has been highlighted by the introduction of different types of contract including design-build, EPC engineering, procurement, construction and concessionaire contracts and their variations. These have the contractor and its engineering firm partner in the lead for decisions concerning means and methods, detailed design, end-product performance criteria, and managing programme and schedule.

This transfer does not abrogate the client entirely. In all accepted norms, the ground still belongs to the owner, and it remains a party to the contract and to any disputes that may arise. This has led to development support processes as an arbiter between paymaster (the client) and functionary (the contractor). Geotechnical baseline reports, geotechnical data reports, risk registers, independent expert panels, delivery partner organisations, dispute review boards, and their variations have been developed to mitigate this transfer of risk responsibility.

The transfer of risk is also having an influence on the construction and insurance industry. Contractors are at a point where they refuse to bid projects in certain jurisdictions or under certain circumstances. The accepting of more risk by contractors must drive contract bid prices up and are a contrary measure for increasing competition to drive prices down. For insurers, the industry is again becoming averse to underwriting the perceived growth of risk-taking in the industry and financial institutions are shying away from support of underground construction projects when surface alternatives are available, even if the surface option is more disruptive to urban or green space, or more expensive in long-term life-cycle costs.

The increase in litigation is a concern in itself and while no observer or reporter, or even some closely associated with any project in a dispute, can know of, or be privy to, all the details and circumstances of a case – and while no case verdict can set precedent or guarantee the outcome of a future similar case – the overall situation is leading to serious dilemmas for the industry of underground infrastructure creation. These issues need to be shared and a common framework found for securing support for future projects. A review of case histories over the years highlights the issues that set the parties on the road to litigation and some of the developments that have been implemented subsequently to help deviate from litigation as the last resort.

High-profile litigation cases over the years, in no particular order and for only those reported on by TunnelTalk (References List 1) include:

The case between Seattle Tunnel Partners (STP) and the Washington State Department of Transportation (WSDOT) over the breakdown and recovery of the mega-17.4m diameter EPBM in Seattle and the two year delay it caused in opening the SR99 Alaskan Way highway viaduct replacement tunnel. The verdict by the court case jury was reported by TunnelTalk in December 2019.

The Heathrow Express railway station mined cavern collapse in 1994 with the litigation verdict being handed down in 1998. The verdict in the criminal case went against the defendant, the engineering firm associated with the design-build, self-certifying contract. A landmark case that changed the landscape for design and construction of open face sequential excavation projects around the world and particularly in the UK and North America.

The Glendoe hydro power headrace collapse in Scotland in 2009 with the litigation verdict in 2017 was in favour of the turnkey contract contractor. This was overturned on appeal in favour of the client in 2018 and resulted in an undisclosed out-of-court settlement when the contractor reviewed options to take the dispute to the highest court in the UK.

In Canada, the delays and troubles encountered by the contractor on the Niagara water diversion project avoided going to court in a settlement that adjusted the vertical and horizontal alignment of the mega 14.4m diameter TBM drive, changed the design-build contract from a lump-sum to a target-price formula, pushed the completion date out from Fall 2009 to 2013 and revised the contract price from Can$600 million to about $1.06 billion. Another landmark case that had implications for the appointment of DRBs. The DRB hearings for the Niagara project were effective in setting out the points of dispute on which the contract renegotiation was based and was dismissed once the new terms of contract were agreed.

In 2008, also in Canada, a Supreme Court case ruled in favour of the defendants and against the insurers, finding that the insurers must pay to cover the costs of the TBM main bearing seal problems and consequent delays experienced on the St Clair under-river rail tunnel project in the early 1990s. Costs included the sinking of an emergency shaft to remove the cutterhead and inspect suspected failure of the TBM main bearing sealing system. The insurers denied coverage initially on the basis of the 'faulty or improper design' exclusion.

Several other projects have provided situations in which the industry has had to take collective stock of itself in its procurement practices. These include:

• the failure of several toll highway tunnel projects in Australia where the toll income once opened to traffic proved far lower than original forecast on which the concessions were based and resulted in the inability to pay the construction costs;
• termination and rebid of the Seymour-Capilano twin water conveyance tunnels in Vancouver, Canada;
• major contractual and construction problems experienced on the early Red Line metro tunnels for the Los Angeles Metro that caused a ban on further heavy rail metro tunnelling under Los Angeles until the determination was overturned for the East LA Gold Line LRT tunnels in 2005;
• redesign and rebid of the Arrowhead water conveyance tunnels in southern California to comply with water inflow restrictions, an issue that caused further problems and a contract renegotiation for the new contractor;
• termination and rebid under an Alliance form of contract for the GKI hydropower headrace tunnel in Austria, providing the first application of the Alliance form of contract in Europe and outside of Australia and New Zealand;
• the Brightwater project in Seattle, USA, where a court hearing ruled against the contractor and for the client who claimed that the contractor defaulted on key contractual obligations during excavation of the central section of the conveyance tunnel.

When politics gets in the way

As well as disputes between clients and contracts, there is also the influence of politics and politicians that can knock the industry sideways. The worst aspect of politicians as arbiters of major infrastructure projects is that their terms are limited and subject to the opposition taking over at the next election. Political support and championship of a major project can simply evaporate overnight and result in cancellation of projects, termination of contracts, unnecessary delay to needed infrastructure and the increase in cost that that delay causes.

A famous or infamous example of such a situation was the cancellation of the ARC, Access to the Region’s Core, project between New Jersey and New York States in 2010. Twenty years later, the State Governments are looking at the same project, under a different name, now the Gateway project, and for about the same price of US$11.3 billion to $12.7 billion for the new rail tunnels under the Hudson River into Pennsylvania Station. The commuters have suffered the congestion on trains in the meantime, and the existing 100-year-old rail tunnels that are damaged and in urgent need of repair have continued to operate without upgrade attention.

The Seattle SR99 project also suffered political intervention. The owner of the publicly funded, double deck highway tunnel, the Washington State Governor, who supported and secured the option for the bored tunnel viaduct replacement and had its procurement contract signed in her second term, was replaced by a new Governor in 2013. The new Governor took his own view of the project and its contract. Those close to the project, who wish to remain anonymous, explained that the new Governor took a hard-line approach to the contract, paraphrasing the approach as ‘we have a watertight fixed-price contract and we will hold the contractor to it’. With that approach, any out-of-court settlement was unlikely.

Governments, as owners of tax-payer funded public authority projects, have the power to be persuaded by the general public, or by the self-interest of the administration politicians, to do an about face when acting on promises to the electorate. In Malaysia, a newly elected administration in 2018 threatened cancellation of the Klang Valley Metro Line 2 in Kuala Lumpur, the day was saved only when the delivery partner JV agreed to lower costs by cancelling full scope parts of the Line 2 project – deferments that may well cost substantially more to complete at a later date and under separate contract.

Public authorities also make rules that seem to be able to be overlooked when it suits, frequently leading to objections to the preferred bidder. High profile cases include the objection to the award of the Los Angeles Purple Line contract and the award of the concession contract for the Silvertown highway tunnel under the River Thames in London.

There is also the political machinations that surround the development of the Yucca Mountain nuclear waste repository in Nevada in the USA and so many projects around the world where the underground option, slightly more expensive but feasible and with significant long-term life-cycle advantages, has been overruled for elevated or at surface options. Some examples include the highway project in Dallas, Texas where the subsurface tunnelled option was too rich for taxpayers, the underground alignment for metro link to Dulles Airport on the Washington DC Metro and the suggestion of a tunnel as the new Forth Crossing in Scotland that lost out to a new bridge.

Contract types and tools to support the development

In efforts to take the industry forward there have been many attempts to rewrite the form of contract. There have been design-build and EPC (engineer-procurement-construction) and ECI (early contractor involvement) contracts. There have also been alternatives on existing forms of contract and the most recent is the Emerald Book, a collaboration between FIDIC and ITA to develop a form of contract that is specific to the underground construction industry.

Principle to the endeavour is to address the issues of:

• Allocation of risk
• Disclosure of all available geological and geotechnical information
• Inclusion of a contractual geotechnical baseline
• Inclusion of a tailored 'Unforeseeable Physical Conditions' clause
• Implementation of a ground classification system and of supporting particular conditions that properly reflect the effort of excavation and stabilisation
• Time for completion to be largely influenced by ground conditions
• Provision of a flexible mechanism for remuneration according to ground conditions, foreseen and unforeseen.

It may well be the most advanced consideration of contract set up in recent times and better than the tools that supported earlier forms of contract including:

• Partnerships
• Alliances
• PPPs
• Alternative dispute resolution.

Tools designed to divert the route to litigation

Through the convoluted route of underground infrastructure development, there have been many attempts to develop tools to assist diversions from litigation as a method of resolving disputes.

Principal among these has been the DRB, the Dispute Review or Resolution Board, a vehicle by which the two main parties to the contract – the client and the contractor – agree that a hearing by three DRB industry professionals, will hear any dispute that arises between the parties and provide an avenue by which the dispute can be resolved.

The setup, the authority and the effectiveness of a DRB is according to the terms of its engagement. DRB determinations can be binding or non-binding and the success of DRBs is each according to the circumstances.

In addition to DRBs there is the expert panel concept whereby a panel of industry professionals assists a taxpayer-funded owner to execute a complex underground civil engineering project. Knowing the parameters and agreeing the authority of an expert panel is something that differs from project to project and according to the needs of each owner. The appointment of an expert panel may well become more important as owners become more removed from the planning, design and management of major infrastructure projects, particularly those that involve underground excavation.

The insurance factor

An important but perhaps underestimated party to any underground infrastructure project is the insurance underwriter. It is a business, for sure, but is the business designed to underwrite incompetence or coverup. The premiums for insurance coverage are high, but the pay out, if assured and agreed, is also very high. The consequences of high pay outs for high risk coverage in the tunnelling industry are well known (see The insurance factor Reference list) and it was the impasse between the industry and the insurers after the Heathrow Express collapse in the UK in 1994 that the industry introduced the Risk Register Code of Practice. Initiated by the UK BTS (British Tunnelling Society) and the ABI (Association of British Insurers), the initial Risk Management of Tunnel Works has grown into the International Joint Code of Practice for Risk Management of Tunnel Works that covers the minimum requirements for securing insurance coverage for any underground infrastructure project.

Still, for the insurance industry, underground works are high risk underwrite projects and carry potentially high loss pay outs for highly unexpected (but now frequently encountered) eventualities. Where the first case of the contractor versus the owner of the SR99 mega-TBM drive project in Seattle has extracted a verdict for the owner, the case of the contractor versus the insurance provider is yet to be heard and verdict yet to be known. Whichever way that case is decided, the SR99 verdicts and their appeals will again be landmark decisions that will shape the contracting and project procurement industries for the decades to come.