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That wasn’t what I expected: Managing latent conditions for contractors

What are latent conditions?

Latent conditions in a construction project refer to those conditions which cannot be identified prior to entering into a contract.  Usually this means the conditions that cannot be identified by review of the relevant project documentation, in other testing or investigations, or during a routine inspection prior to undertaking works.

Latent conditions off include conditions like contamination, underground structures or rock, soil density, stability of the site, and in the case of renovations or fit outs, poorly constructed parts of the existing building.

Whether or not a particular site condition will constitute a latent condition affecting the works will depend on the definition in your contract.

Standard form contracts usually define latent conditions.  These are usually broadly defined as conditions to site or its surrounds that are materially different from those that should have been anticipated by the contractor, having mind to the documentation and necessary investigations.

Who is responsible for latent conditions?

At common law, a contractor would usually assume all the risk for latent conditions.  However, most construction contracts address the responsibility of unknown and latent conditions.

The party that bears the risk of latent conditions is another question which will ultimately be determined by reference to your contract. It is becoming increasingly common for contractors to assume the majority of the risk as comprehensive site investigations such as geotechnical surveys are becoming common practice during the tender process.

What to include in my contract to cover latent conditions

Whether you are tendering for a project with a particularly difficult site, expecting some hidden horrors beneath the surface or elsewhere in the site and surrounds, or just want to ensure you aren’t on the hook to pay for any extra works made necessary by unavoidable and unforeseeable conditions, it is critical that the latent conditions clause in your contract covers a few key elements:

  1. The types of latent conditions covered by the Contract;
  2. The degree of due diligence expected of you as the contractor; and
  3. The process of making a claim for a variation due to a latent condition.

Types of conditions considered “latent”

Ensure your contract details what will and won’t be considered a latent condition. The standard form contracts available in Australia differ greatly in this regard, for example:

  • The AS4000-1997 allows contractors to claim a broad range of conditions; and
  • The HIA NSW Residential Cost Plus Building Contract only allows for surface or sub-surface conditions or if rock is found on site.

The definition for latent conditions varies significantly from contract to contract.

Due diligence to be undertaken

The usual position is that a site condition will only be considered latent if the contractor could not reasonably have anticipated its existence.

The main variable in this equation is the lengths to which the contractor was expected to go (under the contract) to inspect the site for such conditions.

Two factors will provide guidance on the level of inspection expected of a contractor; contractual provisions, and specific instructions or negotiations regarding certain types of investigations to be performed. The contractual provisions will likely detail the level of care and effort that is required (i.e. “reasonable” or “discoverable by a competent contractor), while your tender documents and written instructions should detail the specific searches and tests that are to be undertaken.

As always, ensure you get any instructions regarding testing and site investigation in writing signed by both parties.

Claiming a variation for a latent condition

Once an unforeseen site condition is uncovered, extra work usually follows. It is crucial that your contract details the builder’s rights in this situation.

Standard form contracts typically cover this issue and allow the contractor to claim both a variation to the works and an extension of time, but only where they have followed a particular process which must be understood and followed closely to avoid disputes.

Be aware that failing to claim in a timely manner can lead to part of all of the claim being barred.

Timing your investigations

Site conditions, particularly those relating to soil density or stability, can be constantly varying. Therefore, the particular point in time at which your assessment of the site is taken to have been performed can be central to your claim for a variation to the works.

This point in time will usually be one of the following:

  • The date of tender submission;
  • The date of the contract; or
  • A date after the contract, which is specifically detailed as the assessment date.

Ensuring you undertake your investigations as close to the relevant date as possible will help you avoid some of the risk of not noticing a particular site condition.

How and when should I make a claim regarding a latent condition?

The short answer is: in writing and as soon as you notice a condition which may affect the works. However, depending on your contract, you may be required to provide certain details in your notification or take further steps in respect of the condition.

When you notify an owner of a latent condition, ensure you request written instructions as to how the condition is to be dealt with.

What if the site condition is so difficult or dangerous that works cannot continue?

In the event the site condition you discover makes the performance of the works impossible, it is critical you understand your rights. Some standard form contracts entitle the contractor to walk away from the job and receive payment of the costs incurred up to that point. However, it is crucial that you adhere to your notification obligations in order to solidify your right to those costs.

If you require advice on latent conditions or contract preparation please do not hesitate to contact Morrissey Law + Advisory.

This article was prepared by Michael Morrissey and Pat Ireland.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.