What's Lurking beneath the Surface?

Balancing predictability and fairness, in my view, is the principal objective of construction contract law. For example, a contract states that a claim for delays must be submitted in writing within “x” number of days or it is “waived.” (Legal translation: Waiver is the “voluntary relinquishment of a known right.”) But the delays are so obvious—everybody is aware of them. Predictability mandates: No written notice, no claim. Fairness pulls the other way: “Actual notice” may substitute for the formality of a letter. Nowhere is this dichotomy more apparent than with the “differing conditions” clause. What does the clause do? At common law, a contractor is fully at risk for subsurface or other concealed conditions at a job site. If trenching uncovers unexpected rock, water, or dinosaur bones, the contractor is responsible for resolving the problem, unless there is a differing conditions clause. There have been endless articles and seminars on this issue. In a nutshell, the discussion divides differing conditions into two types. Type I: The contract documents affirmatively show a site condition, and what is encountered is different. This circumstance, some say, is analogous to a misrepresentation of the facts, whether intentional, negligent, or innocent. Type II: The contract documents are silent about field conditions, and what is encountered is substantially different from what a reasonable contractor would have anticipated. Type II is a difficult standard to meet. There is not always a clear distinction between Type I and Type II. It can be argued, for example, that the absence of information in the bid drawings amounts to a representation that a particular condition does not exist. In that case, the distinction between Type I and Type II blurs. For both Types I and II, the contractor is generally entitled to a time extension, it may potentially recover suspension of work costs pending a redesign, and it should also receive extra costs for any redesign under the changes clause. The important relationship between the differing conditions clause and other contract terms, such as site inspection, no damages for delay, and force majeure, is often overlooked by contractors. It has been believed, for example, that because a site inspection would have disclosed facts about the job site, which were not shown on the drawings, the contractor could not have reasonably relied on the drawings in making its bid. In another set of cases, a court found that heavy rains on a site with poor drainage was a force majeure event, while another court held that the owner’s drainage plan increased flooding and so supported a differing conditions claim. What does this clause cover? Earlier versions of the clause were limited to changed subsurface conditions, interpreted as underground. The modern versions cover almost any concealed condition (i.e., hidden asbestos, contaminated soil, rotten roof joists). The condition must be a “physical” one, which is present on site. The clause does not apply to labor shortages, weather, delays in transportation, embargoes, etc. A typical site conditions clause reads: Should concealed conditions encountered in the performance of the Work below the surface of the ground or should concealed or unknown conditions in an existing structure be at variance with the conditions indicated by the Drawings, Specifications, or Owner-furnished information or should unknown physical conditions below the surface of the ground or should concealed or unknown conditions in an existing structure of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in work of the character provided for in this Agreement, be encountered, the Lump Sum and the Contract Time Schedule shall be equitably adjusted by Change Order upon claim by either party made within a reasonable time after the first observance of the conditions. It’s a difficult read, I agree. But let’s break it down and see what it means. The first part of this clause defines Type I (“at variance with the conditions indicated”); the second part defines Type II (“differing materially from those ordinarily encountered”). This clause is interesting because it further divides changed conditions into subterranean (presumably for a new structure) and those in an existing structure (presumably “existing” at the time of contracting). Another version of this clause creates a heavier burden of proof. “If conditions ... encountered at the site ... are (1) subsurface or otherwise concealed physical conditions, which differ materially from those indicated ...” then notice shall be given. The underlined words require a greater degree of difference. So, how do you approach an understanding of these types of clauses? First, you need to determine the contract documents. Often, an owner will make available soil borings or other site studies without attaching them to the contract. There are even instances where the owner expressly states that the contractor should not rely on this data! If you have made assumptions concerning site conditions, make them part of your bid documents, and have them included as part of the contract. More importantly, make certain that there is a differing conditions clause in your agreement. If the owner makes studies available without making them part of the contract, the prudent thing to do is review them. If the studies differ from the contract plans, raise the issue at bid. Protecting your rights At the heart of the differing conditions clause is the need to prove that the condition encountered was unexpected. How do you do this? Here are steps you can take. • Perform a reasonable site inspection before submitting your bid, and keep notes of what you did. • Examine any contract disclaimer for expected site conditions. • Stop work as soon as you believe a changed condition has been encountered, and give immediate written notice to the other contracting party. • Develop a file on the condition using photographs, written reports, and regular cost data updates. • Analyze the difference between your planned approach to the work and the actual (number of men, type of equipment and tools, original assumptions made, and differing quantities of materials). • Review the job schedule to determine any time impact, and send written notice of your conclusions. • Maintain continuing cost records, and send regular written notices until the problem is resolved. All of these suggestions are important. They revolve around one main task—reading the differing conditions clause carefully. There can be major differences in the coverage of the clause, and in required record keeping, from contract to contract. When in doubt, seek expert assistance, preferably before the problem escalates into a big expenditure. Differing conditions clauses are not easy to understand or apply, but they can save you from having to pay for unexpected work. ITTIG, of Ittig & Ittig, P.C., in Washington D.C., specializes in construction law. He can be contacted at (202) 387-5508, e-mail: USBuildlaw@aol.com, or his Web site, www.ittig-ittig.com.

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