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Introduction

Traditionally, a contractor took responsibility for any additional cost and time when that contractor encountered actual site conditions that were more adverse than expected during the tender stage. An experienced contractor would be expected to calculate and include allowances within a bidding price. The fundamental drawback of this approach is that, during the tender stage, a cost estimator cannot accurately estimate a true unknown, which may lead to enormous amounts of contingencies and to a costly project.

This is a critical issue in major projects, such as large-scale civil and plant projects. Therefore, some standard forms of contract have a differing site condition clause¹ to minimise contingency costs in pursuit of financial effectiveness. In the United States, the use of contractual provisions allocating the site-related risks is very common, even required under the law in some public works contracts, contrary to the United Kingdom default position where the risk of adverse site conditions still rests largely with the contractor.

In general, most differing site condition clauses, which allocate the site-related risks, differentiate between two main types of differing site conditions: Type 1, concerned with the material difference between the information in the contract documents, or the employer furnished information during the tender stage, and the actual site condition; and Type 2, concerned with the unusual or unknown physical conditions different from those reasonably anticipated for a similar project. Risk allocation on Type 1 and 2 varies in the standard forms of contract most often used in building and construction, such as the contracts under the Joint Contracts Tribunal (JCT);² FIDIC;³ New Engineering Contract (NEC);⁴ and standard forms⁵ in the US such as the Federal Acquisition Regulations (FAR), ConsensusDOCS, the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC).

Although many contracts provide a differing site condition clause, not all construction contracts provide one, and the risks as to site conditions are mostly allocated to the contractor. In this instance, the law may provide grounds for the contractor to claim for the additional cost and time caused by differing site conditions if the contractor suffered from serious financial loss as a result of the employer’s misrepresentation, a breach of an implied term or a breach of the duty to disclose. The application of these legal principles to differing site conditions are not the same in the UK and US.

This article will explore the various approaches related to differing site conditions under the standard forms of contract and the legal positions as to differing site conditions in the UK and US.

Definitions

A ‘differing site condition’ (which can also be referred to as a changed condition, an adverse physical condition, an unforeseeable physical condition, a concealed condition or a latent physical condition)is a physical condition encountered during the performance of a contract of work that was not visible and not known to exist at the time of bidding, and that materially differs from the condition envisaged at the time of pricing the contract.⁶ This could include: soil with inadequate bearing capacity; unsuitable filling materials; unanticipated groundwater conditions (static or permeable); quicksand; muck; rock formations (that are either excessive or insufficient); and artificial (manmade) subsurface obstructions.⁷ A ‘differing site condition clause’ is the parties’ agreement of who should bear the risk arising from a differing site condition.

The necessity of differing site condition clauses

Under a traditional contract risk-allocation mechanism, it is expected that an experienced contractor will include contingencies in its bid price to protect themselves against unforeseen conditions.⁸ The basic drawback to this approach is that a contractor cannot accurately estimate an unknown.⁹ Major construction projects usually involve such massive earthworks (excavation and backfilling), foundation works, tunnelling works, boring works, dewatering works and the like that the contingencies related to site conditions are the critical factor in determining the project costs.

Experience shows that up-to-date quantitative risk analysis techniques, such as the Monte Carlo simulation, frequently fail to provide the appropriate contingency costs in major projects.¹⁰ Although contingency costs are included, the contingency may end up being underestimated or grossly overestimated. In instances where overestimation is an issue, bid prices end up becoming too high, and thus the employer bears the costs of unnecessary financial expenses if adverse conditions are not encountered. This places a redundant financial burden upon employers.

Even with contingencies, the estimate for the differing site conditions may prove wholly inadequate to cover the contractor’s actual costs.

A differing site condition clause may be beneficial for the employer as it allows contractors to lower contingencies and the project to be delivered at lower cost to employer. From the contractor’s perspective, the contractor can better mitigate the unknown risks with the knowledge that costs for unforeseen risks can be recovered. Even with contingencies, the estimate for the differing site conditions may prove wholly inadequate to cover the contractor’s actual costs. Even if the contractor can rely on common law and statute to recover increased costs under certain circumstances, the costs related to dispute and recovery can be high. (These legal remedies will be discussed later.) In light of this, many standard or bespoke contracts provide the differing site condition clause to resolve the fundamental drawback for estimating site-related contingencies.

The default position for differing site conditions in the UK and US

Hess and Bailey¹¹ contrasted the position as to site conditions in the US and English law and concluded that the English and American legal systems have taken very different paths concerning the allocation of risk for differing site conditions.

The UK

Hudson¹² summarises the English position in relation to the adverse site conditions:

‘A great weight of authority exists showing that an Employer, in the absence of an actionable misrepresentation or deliverable concealment, or of some express warranty, owes no implied duty to a Contractor, whether of disclosure or otherwise, in either contract or tort in regard to the pre-existing state of the site.’

In the UK, as a basic principle, it is clear that the risk of adverse site conditions rests with the contractor.¹³ When parties have reached no express agreement on the risk of adverse site conditions being encountered, the English law is clear that, for a fixed-price contract, it is the contractor who bears the risk of being delayed, disrupted or incurring additional costs because works are more difficult or expensive to perform than anticipated.¹⁴ As a matter of practice in the UK, it is observed that the JCT suites (the most frequently used standard forms of the construction contracts in the UK) do not entitle the contractor to time or monetary relief if adverse conditions are encountered.¹⁵

The US

The American position is different to that of the UK. The US seems to adopt a risk retention strategy from the perspective of the employer.¹⁶ This strategy accepts the gain and pain from a risk when an incident occurs and sets up a budget to prepare for the risk. Differing site condition clauses have become a common feature in virtually all construction contracts in the US.¹⁷ The rationale for the use of the differing site condition clause was elucidated by the US Court of Appeal in Foster Construction v United States:¹⁸

‘The purpose of the changed conditions clause is thus to take at least some of the gamble on subsurface conditions out of bidding […] Bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse subsurface condition, and they need not consider how large a contingency should be added to the bid to cover the risk. There will be no windfall and disaster. The Government benefits from more accurate bidding, without inflation for risks which may not eventuate[emphasis added].’

It is clear that the US and English approach to a differing site condition is not the same. Table 1 shows the contradictory approaches in two jurisdictions.

 

Table 1: Default risk allocation for differing site conditions in the UK and US

	UK	US
Allocation of risk	The Contractor takes responsibility arising from adverse site conditions with some exceptions.	The standard forms of contract in the US make contractual provisions regarding adverse site conditions.
Risk allocation to	Contractor	Usually Employer; or Employer and Contractor
Necessity for Contingencies	Must be necessary	Unnecessary or minimal

 

Type 1 and Type 2

In the US, the FAR, ConsensusDOCS, AIA and EJCDC contract provisions identify two distinct types of unanticipated conditions that may be compensable.¹⁹ These are usually designated as Type 1 and Type 2 changed conditions. Type 1 refers to the changed conditions that ‘differ materially from those indicated in the contract’²⁰ or ‘differ materially from that shown or indicated in the Contract Documents’.²¹ Type 2 refers to unusual or unknown physical conditions at the site that differ materially from those ordinarily encountered and recognised as inherent in work of the character provided for in the contract.²² The approach in the US to the Type 1 and Type 2 distinction can also be found in the international standard forms such as the 1999 version of the FIDIC contract.²³

Risk allocation in the standard form of contract

Each standard form of contract has a characteristic contractual risk-allocation mechanism regarding differing site conditions. In the US, most of the standard forms of contracts contain differing site conditions, the effect of which is to put the risk of unexpected or unforeseen site conditions on the shoulders of the employer by allowing the contractor a contractual entitlement to extension of time or price increase. I explain later the contractual risk-allocation mechanism for some standard forms of contract and analyse the deciding factor for allocation. As discussed previously, most US contracts provide a differing conditions clause and the effect of that is to pre-allocate the risk between employer and contractor, but mostly on the employer.

JCT SBC/Q 2016²⁴

The major standard form in the UK, the JCT form of contract, does not entitle the contractor to time or monetary recovery if adverse conditions are encountered,²⁵ which is in accordance with the English common law position where, in the absence of express contract provisions, the risks for physical conditions principally lie with the contractor.²⁶

JCT MP 2016

The JCT Major Project Construction Contract (MP) is the only JCT contract that includes an express clause dealing with ground conditions.²⁷ This form is designed for large-scale construction projects where major works are involved. It seems the employer adopts the risk retention strategy. The employer takes responsibility for:

‘… a change to the extent that the ground conditions or man-made obstructions in the ground could not reasonably have been foreseen by an experienced and competent contractor on the Base Date, having regard to any information concerning the Site that the Contractor had or ought reasonably to have obtained’.²⁸

FIDIC Red/Yellow 1999

Clause 4.10 and 4.11 of FIDIC Red/Yellow 1999 are concerned with Type 1 provisions and do not provide a contractual entitlement to Type 1 conditions. Clause 4.12 makes provision for Type 2 and provides the contractual grounds for the contractor’s entitlement for additional time and money for Type 2.

FIDIC Silver 1999

The FIDIC Silver Book 1999 maintains that a contractor takes responsibility and risk in situations where the contractor is required to obtain or verify site information for themselves and not to rely on information furnished by the Employer.²⁹ Thus, there is no warranty regarding the accuracy or completeness of any such provided information. The contractor is further considered to be responsible for taking into consideration unforeseen conditions, which is the equivalent of Type 2, that may pose a risk to a project, which is contrary to the position in the Red and Yellow.³⁰ The contractual mechanism in the Silver Book seems to have a connection with the frequent usage the form. The Silver Book is frequently used with project financing, which requires the certainty of the project costs from inception and hedging the financial uncertainty.³¹

NEC4

Clauses 60.1(12), 60.2 and 60.3 cater for provisions as they pertain to adverse site conditions.Unlike other standard forms (such as FIDIC, and the standard contracts in the US), NEC4 does not make Type 1 and 2 distinctions. It provides the contractual grounds for compensation for time and money for both conditions. NEC4 seems to adopt a risk retention approach as seen in the standard forms in the US, by which a contractor is not obliged to include potentially significant contingencies within its tender, and the employer pays for the costs based on the difference between the actual conditions and the envisaged conditions by an experienced contractor.³²

Comparison

Table 2 provides a summary of the distinctive risk allocations in standards forms of contract. On analysis, the decisive factors with regard to allocation seem to be connected with:

• the scale of the project and whether it is small-scale works or large-scale infrastructure projects;³³

• private contract or public works contract;³⁴

• financial purpose for seeking either certainty or efficiency;³⁵ and

• the common law position in the legal jurisdiction.³⁶

Roadblocks to recovery

Despite the existence of the differing site condition clause, it is not always a guarantee that the contractor will get a price adjustment or time extension.

 

	JCT SBC/Q 2016	JCT MP 2016	FIDIC Red/Yellow 1999	FIDIC Silver 1999	NEC4 ECC	EJCDC C-700 (2007 ed)
Major use of the forms	The UK building works	The UK large-scale construction projects	International civil works, electrical and mechanical plant	International process plant procured by project financing	Public sector contracts in the UK	Public works in the US
Responsibility on	Contractor	Contractor and Employer	Shared	Contractor	Contractor and Employer	Contractor and Employer
Type 1	Silent	Compensable	Practically non-Compensable	Practically non-Compensable	Compensable	Compensable37
Type 2	Silent	Compensable	Compensable	Non-Compensable	Compensable	Compensable38

Table 2: Various site related risk allocations in the standard forms of contract

 

Standard of ‘experienced contractor’

Even with a differing site condition clause, the contractor should be aware that the court’s approach to interpretation of differing site condition clause is affected by the standard of the experienced contractor. In the case of Obrascon v Gibraltar,³⁹ the English court in examining the FIDIC Yellow Book clause 4.12 regarding Type 2 held that the experienced contractor should have considered the worst-case scenario when he evaluated the ground condition. The judge in the case ruled that ‘the [experienced] contractor needed to make provision for a possible worst case scenario. The contractor should have made allowance for a proper investigation and removal of all contaminated material.’⁴⁰

The question is on what a reasonable bidder at that time of preparing its bid would have expected to encounter.

In the UK, the standard for what an experienced contractor should have known was held to be very high, as was shown in the decision in Van Oord v Allseas,⁴¹ which is consistent with the decision in Obrascon. These cases in the UK illustrate that it is not easy to succeed with an ‘unforeseen physical conditions’ claim and with the condition of experienced contractor clause.

The US position for experienced contractor appear to be somewhat different. The objective standard applies to a Type 2 differing site conditions – the question is on what a reasonable bidder at that time of preparing its bid would have expected to encounter.⁴²

The contractor should also recognise the associated obligations in relation to the differing site conditions. The primary contractor’s obligations may be a site investigation obligation and verification obligation of the information provided by the employer. Exculpatory or disclaimer clauses may make the provision that contractors agree and acknowledge that it has not relied upon any information furnished by the employer, nor does it make a claim on the ground of the inadequacy and inaccuracy of any information provided by the employer. Furthermore, it is clearly understood that the employer does not make any promise or representation as to the accuracy of that information.⁴³

Inspection or site investigation obligations

In the US, the term ‘site investigation’ is generally interpreted to mean, essentially, ‘sight investigation’ and does not extend to the making of independent subsurface investigations.⁴⁴ However, the contractor is deemed to have a reasonably sound knowledge of the site as well as access to all information that could be gained by a ‘reasonable’ site inspection under the circumstances.⁴⁵ To determine whether the contractor conducted a reasonable site investigation, what a reasonable and experienced contractor would have discovered in light of the time and access allowed for a site investigation should be considered.⁴⁶ This standard of an experienced contractor does not expect that the contractor should discover what a trained engineer or geologist would discover in the performance of a site investigation, only what a reasonable contractor would discover in the US.⁴⁷

These limitations of the contractor’s responsibility are also found in NEC4 clause 60.2 as follows:

‘In judging the physical conditions for the purpose of assessing a compensation event, the contractor is assumed to have taken into account: The Site Information; Publicly available information referred to in the Site Information; Information obtainable from a visual inspection of the Site; and Other information which an experienced contractor could reasonably be expected to have or to obtain.’

The standard for an experienced contractor for measuring the additional compensation is also found in clause 14.1 of JCT MP 2016.⁴⁸ The standard is what ‘an experienced contractor could reasonably be expected to obtain or have been foreseen’, but as discussed, the standard for what an experienced contractor should have known is very high in the UK.

Disclaimer clauses

Exculpatory clauses⁴⁹ offering the proviso that a contractor agrees that it has not relied upon any employer furnished information may also be a hindrance to recovering costs from differing site conditions. For example, clause 4.10 of FIDIC states:

‘The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employer’s possession on subsurface and hydrological conditions at the Site, including environmental aspects. The Employer shall similarly make available to the Contractor all such data which come into the Employer’s possession after the Base Date. The Contractor shall be responsible for verifying and interpreting all such data. The Employer shall have no responsibility for the accuracy, sufficiency or completeness of such data, except as stated in Sub-Clause 5.1 [General Design Responsibilities] [emphasis added].’

In the UK, provisions of this nature, which are often referred to as ‘non-reliance’ clauses or disclaimers, will generally be given contractual effect so as to preclude a contractor from claiming based on any pre-contractual misrepresentation by the employer or its agent.⁵⁰ However, this is subject to: (1) the Misrepresentation Act 1967; (2) the Unfair Contract Terms Act 1977; and (3) the contractor’s ability to investigate a site or check the accuracy of information pertaining to that site.⁵¹ It is worth noting that exclusion clauses will not relieve the employer from the results of their negligence unless liability for negligence is expressly excluded.⁵² In the US, many decisions by the courts have held that these clauses do not have sweeping effects.⁵³ The courts, in general, will not allow such clauses to override the relief provided to the contractor by the differing site conditions clause.⁵⁴

 

	Standard of ‘experienced contractor’	Inspection/cite investigation obligations by the contractor	Disclaimer Clause
Issue facing the contractor	The standard for experienced contractor is high, and the contractor may need to make provision for a possible worst-case scenario in the UK.	The contractor has limited time and access for site investigations during the tender process.	The employer provides incorrect information but does not want to take responsibility for the information.
Potential arguments by the contractor	The objective standard test applies to the Type 2 differing site conditions in the US.	A site investigation obligation may be limited to a ‘sight’ investigation, or investigation works carried out by an experienced contractor (not a geological specialist) considering the time and access allowed for a site investigation in the US.	A disclaimer clause may not be valid under certain circumstances if deceit, fraud, or negligence is committed by an employer. In the US, a disclaimer clause may be interpreted narrowly.

Table 3: Limitation to recovery

 

Legal grounds in the absence of a contract provision

In the event that a differing site conditions clause is absent in a contract, the contractor may rely on legal principles to recover time and money under certain situations or circumstances. Those are where there is an occurrence of the employer’s: (1) misrepresentation; (2) a breach of duty as it pertains to disclosure of available information; or (3) a breach of warranty.

Misrepresentation

Pre-contractual representations in general

It is inevitable that, before entering into a construction contract, the parties to a contract will make representations of fact and/or law, which will influence the other party’s behaviour.⁵⁵ If a pre-contractual representation turns out to be incorrect, the question is whether the representee has a remedy against the representor for loss or damages suffered as a consequence of reliance on the misrepresentation.⁵⁶

Misrepresentation in the UK

An employer may be liable for fraudulent misrepresentation pursuant to Pearson and Son v Dublin Corporation.⁵⁷ Under the law of obligation,employers were not liable for negligent misrepresentation until the landmark case of Hedley Byrne v Heller.⁵⁸ The present position is that negligent misrepresentation may give rise to claim for liability either under the Hedley Byrne rule or the Misrepresentation Act 1967. However, in general and in most construction and engineering contracts, where an employer provides inaccurate or partial information to a contractor carelessly before a contract is entered into, a duty of care will not usually be imposed by law.⁵⁹

Negligent misrepresentation may give rise to claim for liability

Exceptions to this do exist. In Howard Marine and Dredging v Ogden,⁶⁰ where Howard (the employers of a barge) provided an inaccurate capacity of the barge to Ogden (the contractor) who had hired the barge for construction works, Howard was held liable for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967.⁶¹ In Turriff v Welsh National Water Authority,⁶² the employer carelessly and erroneously represented to the contractor that a particular specification was ‘buildable’, and the contractor was not expected to check whether it was in fact ‘buildable’, therefore, the employer was held to owe a duty of care to the contractor, whose duty it had breached.⁶³

Misrepresentation in the US

The position in the US differs from that of the UK.⁶⁴ Three Supreme Court cases have established the principle of misrepresentation in relation to site information furnished by the government.⁶⁵

First, in Hollerbach v US,⁶⁶ Hollerbach was contracted to rebuild a dam on the Green River in Kentucky. As Hollerbach conducted the work, it encountered an old dam that had used timber and stone as (unsuitable) backfill materials. However, the contract documents indicated the old dam had used broken stone, sediment and sawdust as backfill. The Court noted that the contract obliged the contractor to investigate the site and ‘to make [its] own estimates of the facilities and difficulties attending the execution of the proposed contract’. However, these broad requirements did not override the employer’s specific representation regarding the material used as backfill for the old dam. The Supreme Court said that:

‘We think this positive statement of the specifications must be taken as true and binding upon the government, and that, upon it, rather than upon the claimants, must fall the loss resulting from such mistaken representations. We think it would be going quite too far to interpret the general language of the other paragraphs as requiring independent investigation of facts which the specifications furnished by the government as a basis of the contract left in no doubt. If the government wished to leave the matter open to the independent investigation of the claimants, it might easily have omitted the specification as to the character of the filling back of the dam. In its positive assertion of the nature of this much of the work, it made a representation upon which the claimants had a right to rely without an investigation to prove its falsity.’

Second, in Christie v US,⁶⁷ there was a misleading representation in the specifications as to the material to be excavated, which actually misled the bidder who obtained the contract, and the government admitted that the contractor did not have time to make borings to verify the representations. The Supreme Court held that the contractor was entitled to an allowance for the actual amount expended over what would have been the cost if the boring sheets had been accurate, notwithstanding there was no fraudulent purpose.

Last, in Atlantic Dredging v US,⁶⁸ where the government declined to guarantee the accuracy of the information but expressed its belief that the government furnished information was trustworthy, the Court elucidated the implied warranty for the accuracy of representation by the government and held that the contractor was to be relieved if he was misled by erroneous statements.⁶⁹

The employer’s tactical method to secure financial certainty by allocating site-related risk to the contractor and reducing the time allowed for tendering by providing various site information, usually a lengthy and costly period, thus inducing the contractor to use the employer furnished information, is not unusual.⁷⁰ In these circumstances, the US courts seem to take into account various factors, such as the time and access allowed for a site investigation, the employer’s conduct, the knowledge of the employer and contractor, and the employer’s objective intention for providing the site information, instead of omitting the specifications and information.

Duty to disclose

Position in the US

The second ground of recovery from the contractor, which is closely related to misrepresentation or good faith, is the failure of the employer to disclose all available information.⁷¹ In a number of cases, it has been held that the employer may have a duty to disclose vital information in their possession where the contractor is unlikely to obtain it.⁷² In Morrison-Knudsen v State of Alaska,⁷³ the Supreme Court of Alaska said that:

‘It is well settled in this court that where the Government possesses special knowledge, not shared by the contractor, which is vital to the performance of the contract, the Government has an affirmative duty to disclose such knowledge. It cannot remain silent with impunity.’

In a subsequent case, D Federico v Bedford Redevelopment Authority,⁷⁴ it was stated that when the governent agency was in possession of information that may be relevant to the work to be undertaken by the contractor, there was a duty to disclose the information to the contractor fully. Interestingly, in Pinkerton & Laws Co v Roadway Express,⁷⁵ the courts recognised the duty of disclosure by a private employer, which is unlike most cases where a public employer or government authority has been held liable under a duty of disclosure. It is worth noting that clause 4.10 of FIDIC provides for an employer’s duty to disclose.⁷⁶

UK and Commonwealth position

The doctrine of the duty to disclose in the US would not seem to accord with ordinary contractual principles in England or the Commonwealth.⁷⁷ In general, the employer or the project owner does not have a duty, implied or otherwise, to disclose any pre-existing site condition. However, there have been exceptional authorities that support the duty to disclose. In the Australian case of Dillingham Construction v Downs,⁷⁸ it was recognised that the employer could owe the contractor a duty of care and this would include disclosure of relevant information, though the decision went against the contractor due to there being no reliance on the information provided by the employer.⁷⁹

In the Canadian case of Opron Construction v Alberta,⁸⁰ the court took into account lack of time, the opportunities available for the tenderer to acquire the information, whether the information was indispensable and the degree of technicality of the data. There has been no legal authority in the UK on this matter.⁸¹

Implied warranty by law

The UK

The employer gives no implied warranty of the nature or suitability of the site or subsoil, or as to the practicality of the design in general in the UK.⁸² In Thorn v London Corporation,⁸³ where the contractor agreed to build a new bridge over the Thames using caissons according to the engineer’s design, it was held that there should be no implied warranty for information provided by the employer or engineer and thus the engineer and employer could not be sued when the work proved much more expensive than the contractor anticipated. Lord Chancellor and Lord Cairns observed the mere fact that because an employer provided tendering information, it did not mean that its accuracy was guaranteed; it may exceptionally be possible for a warranty of accuracy to be implied.⁸⁴ In Bacal Construction v Northampton Development Corporation,⁸⁵ where the contractor was directed to design foundations on the basis of ground information supplied by the employer, it was held there was an implied warranty that the ground would accord with the information provided.⁸⁶

It may exceptionally be possible for a warranty of accuracy to be implied.

The US

There generally is an implied warranty by law for employer’s plans and specifications including site information in the US. The position is articulated by Brandeis J in the landmark case by the Supreme Court of United States v Spearin⁸⁷ as follows:

‘… if the contractor is bound to build according to plans and specifications prepared by the employer, the contractor will not be responsible for the consequences of defects in the plans and specification. This responsibility of the employer is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work.’

Table 4 makes a summary of the contradictory approach as to a differing site condition in the US and UK. It is worth noting that the leading cases regarding the employer’s furnished information, duty to disclose are developed by the public works contracts whereas the English law has been developed under private contracts. Also, the implications of a good faith obligation during the tender stage,⁸⁸ which is closely related to the duty to disclose, may be a decisive factor in determining the employer’s liability.

 

	UK	US
Misrepresentation	Unlikely with some exceptions	Likely
Duty to disclose	No case law	Likely
Implied Warranty	Unlikely with some exceptions	Likely
Good faith	Not implied	Implied

Table 4: Basis for a claim in the absence of an adverse site condition clause

 

Conclusion

In the absence of a differing site condition clause, contractors must incorporate contingency costs into their bids, which is an extremely difficult undertaking. It may result in huge amounts of contingency costs in large-scale projects, particularly where the site conditions are a critical factor in determining the project costs. This may place an unnecessary financial burden upon the employer. Without a differing site condition clause, the contractor bears the burden of underestimating the effects of differing site conditions and may have to go through the complex process of making claims on the basis of legal principles such as misrepresentation, breach of duty to disclose and implied warranty. Therefore, a differing site condition clause is beneficial for both contractors and employers to minimise bid contingency costs, disputes and accompanying legal costs.

The English and American legal systems have taken very different paths concerning the allocation of risk for differing site conditions. The English position is that the risk of adverse site conditions rests with the contractor. The US law has encouraged the use of a differing site condition clause to allocate the site-related risks.

Several standard forms of contract provide different mechanisms to deal with differing site conditions. The differences in the proposed mechanisms depend on factors such as:

• the scale of the project;

• whether the contract is private contract or public works contract;

• financial purpose for seeking either certainty or efficiency; and

• the common law position in the legal jurisdiction.

Despite the existence of a differing site condition clause, the contractor may have obligations to investigate the site conditions or verify the site information furnished by the employer. The employer may provide a disclaimer provision that contractors cannot rely on the employer furnished information. In the UK, the standard for what an experienced contractor should have known by their own investigation without relying on the employer-furnished information appears to be very high.

In the absence of a differing site condition clause, the law may prohibit an employer’s attempt to transfer all the site condition-associated risks to a contractor, depending on the circumstances. These may include when:

• the employer fraudulently or negligently makes representations about the site information;

• the employer breaches the duty to disclose; and

• the employer provides an implied warranty and breaches it.

The positions in the US and UK are dissimilar with regard to these legal grounds. The US courts seem to consider various factors such as the time and access allowed for a site investigation, and the employer’s conduct, their knowledge and purpose of providing the site information instead of omitting the information. With some exceptions, English law does not provide remedies when the contractor’s cause of action relies on the employer’s negligent misrepresentation, breach of duty to disclose and implied warranty.

 

Notes

1  A‘differing site condition clause’ is the party’s agreement on who should bear the risk arising from a differing site condition. A‘differing site condition’ (which can also be referred to as a changed condition, an adverse physical condition, an unforeseeable physical condition, a concealed condition, and a latent physical condition)is a physical condition encountered during performing a contract work that was not visible and not known to exist at the time of bidding, and that materially differs from the condition to be envisaged at the time of pricing the contract.

2  The author will explore the conditions in the Joint Contracts Tribunal (JCT) Standard Building Contract with Quantities (SBC/Q) 2016, and the JCT Major Project Construction Contract (MP) 2016.

3  The author will explore FIDIC1999.

4  The author will explore the New Engineering contract (NEC)4 Engineering and Construction Contract (ECC).

5  The Federal Acquisition Regulations (FAR), ConsensusDOCS, the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC) will be examined by the author.

6  Thomas J Kelleher and G Scott Walters, (4th ed) Common Sense Construction Law (New Jersey: John Wiley & Sons, 2009) p 249.

7  Ibid, p 250.

8  Ibid, p 249–250.

9  Ibid.

10  See Association for the Advancement of Cost Engineering International (AACEI), Recommended Practice 57R-09, Integrated Cost and Risk Analysis using Monte Carlo Simulation of a CPM model, AACEI, Morgantown, WV, (latest revision).

11  S Hess and J Bailey, Delay Damages and Site Conditions: Contrasts in US and English Law (Society of Construction Law paper 181, 2015).

12  Nicholas Dennys, Robert Clay, Alfred A Hudson and Atkin Chambers (13th ed) Hudson’s Building and Engineering Contracts (London: Sweet & Maxwell, 2015) p 480.

13  W Hughes, R Champion and J Murdoch (5th ed) Construction Contracts: Law and Management (London: Routledge, 2015) p 194.

14  Hess.

15  Ibid; JCT 2016 are silent on a differing site condition except JCT Major Project Construction Contract 2016.

16  Risk management techniques fall into one or more of these four main categories: (1) avoidance; (2) reduction; (3) sharing; and (4) retention.

17  See Federal Acquisition Regulations (FAR), ConsensusDOCS, the American Institute of Architects (AIA) and the Engineers Joint Contract Documents Committee (EJCDC); see also Kelleher, p 250.

18  435 F.2d 873 ,887 (Ct.Cl.1970).

19  Kelleher, pp 249–250; FAR, ConsensusDOCS, AIA and EJCDC.

20  FAR (1984 ed) cl 52.236-2.

21  EJCDC (2007 ed) C-700.

22  Kelleher, p 257.

23  See FIDIC Red/Yellow 1999 cl 4.10 and 4.12.

24  Joint Contracts Tribunal Standard Building Contract with Quantities 2016

25  JCT 2016 are silent on a differing site condition except JCT Major Project Construction Contract 2016

26  See chapter 4.1.

27  See JCT Major Project Construction Contract 2016 cl 14.1:

                ‘If the Contractor encounters ground conditions or man-made obstructions in the ground that necessitate an amendment to the Requirements and/or Proposals he shall notify the Employer of the amendments he proposes […] shall be treated as giving rise to a Change to the extent that the ground conditions or man-made obstructions in the ground could not reasonably have been foreseen by an experienced and competent contractor on the Base Date, having regard to any information concerning the Site that the Contractor had or ought reasonably to have obtained.’

28  Ibid.

29  See FIDIC Red, Yellow, Silver 1999, cl 4.10 and 4.11.

30  Dennys, p 469.

31  S H Kim, International Construction Contracts: Law and Practice (Seoul: Park Young-sa, 2015) chs 4.2 and 4.3.

32  See NEC4 Engineering and Construction Contract cl 63.1.

33  See JTC SBC/Q 2016 and JTC Major Project Construction Contract 2016 in Table 2.

34  Ibid.

35  See JTC Major Project Construction Contract 2016 and FIDIC Silver 1999 in Table 2.

36  See JTC SBC/Q 2106 and EJCDC C-700 (2007 ed) in Table 2.

37  See GC-4.03 (Differing Subsurface or Physical Conditions) sub-cl A(2) and (3).

38  Ibid, sub-cl A (4).

39  [2015] EWCA Civ 712.

40  Obrascon v Gibraltar[2015] EWCA Civ 712, para 94.

41  [2015] EWHC 3074 (TCC).

42  M Beutler and E Gentilcore (2nd ed) Model Jury Instructions: Construction Litigation (Chicago: ABA, 2015) p 122.

43  See FIDIC 1998 Silver cl 4.10.

44  Kelleher, p 267.

45  Ibid.

46  Christie v US 237 US 234 (1915); Opron Construction v Alberta (1994) 151 AR 241 (QB).

47  Beutler, p 124.

48  See n 27 above.

49  They are sometimes referred to as information-only clauses; disclaimer clauses; no reliance clauses; exculpatory clauses; exemption clauses; or limitation clauses

50  J Bailey (2nd ed) Construction law (London: Informa Law, 2016) pp 329–330.

51  Bailey, pp 329–330.

52  R Knowles, 200 Contractual problems and their solutions (London: Wiley-Blackwell, 2012) p 37.

53  Kelleher, p 268.

54  Ibid.

55  Bailey, pp 319–320.

56  Ibid.

57  [1907] AC 351. 

58  [1964] AC 465.

59  Bailey, p 321.

60  [1978] QB 574.

61  Knowles, pp 35, 45.

62  [1979 EWHC].

63  Bailey, p 321.

64  Ibid, p 331.

65  Kim, p 175.

66  233 US 165 (1914).

67  237 US 234 (1915).

68  253 US 1 (1920).

69  Robert F Cushman, John D Carter, Paul J Gorman and Douglas F Coppi (3rd ed)Proving and Pricing Construction Claims (New York: Aspens Publishers, 2000).

70  Kim, pp 176–179.

71  Kelleher, p 272.

72  J Uff (12th ed) Construction Law: Law and Practice Relating to the Construction Industry (London: Sweet & Maxwell, 2017) p 292.

73  519 P 2d 834 (1974).

74  (1983) 9 Mass App Ct 141.

75  650 F Supp 1138 (ND Ga 1986).

76  ‘The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employer’s possession on sub-surface and hydrological conditions at the Site, including environmental aspects. The Employer shall similarly make available to the Contractor all such data which come into the Employer’s possession after the Base Date.’

77  Dennys, p 480.

78  [1972] 2 NSWR49.

79  Knowles, p 45.

80  (1994) 151 AR 241 (QB).

81  Knowles, p 46.

82  Hess.

83  (1876) 1 App Cas 120.

84  Uff, p 191; R Wilmot-Smith (3rd ed) Wilmot-Smith on Construction Contracts (London: OUP, 2014) p 194.

85  (1975) 8 BLR 88.

86  Uff, p 292.

87  248 US 132 at 136 (1918).

88  See Yam Seng v ITC [2013] EWHC 111(QB) paras 123–130;Leggatt J compares and contrasts the good faith obligations in the UK and other jurisdictions, para 123–130.

 

JB Kim is a managing consultant at Blackrock Expert Services in London and can be contacted at jbkim@blackrockx.com.

 

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