Differing site conditions: liability precautions for design professionals.

• Author: Hatem, David J.

CONCEALED and differing site conditions encountered both above and below ground during the construction process pose liability concerns and precautions for design professionals. These concerns and the need for adequate and effective precautions usually arise in the context of claims by owners, contractors, subcontractors and construction lenders. Although a substantial amount has been written on the subject of differing site conditions, there has not been the same focus on the potential liability concerns of design professionals. This topic is of current importance because of the increasing number of these claims, especially in difficult economic times when owners tend to establish inadequate project construction budgets and contractors tend to carry insufficient cost contingencies.

DIFFERING SITE CONDITIONS

1. In General

   By definition, genuine concealed or differing site conditions, referred to generically as "differing site conditions," are occurrences or events that, when encountered, were not actually or reasonably anticipated by one or more parties involved in the construction process. Generally speaking, they are physical conditions on the site that either are not indicated in the contract documents for a construction project or in varying degrees are different from conditions normally encountered on a project of the character under construction. They usually are subsurface physical conditions, such as a ledge or other unsuitable soils materials, but they may arise above ground as well.

   Typically, when differing site conditions are encountered, additional (read, unanticipated) time and cost for completion of the construction project results. Even if a contractor is entitled to additional time or money, or both, on the basis of a valid differing site conditions claim, owners often have a difficult time accepting any obligation to pay or grant a time extension.

   Owners react this way because the payment of a differing site conditions claim usually increases the cost and time of performance of the construction contract, but it will rarely, if ever, increase or add to the value of the project. In addition, contractors may seize on alleged differing site conditions claims as an opportunity to make up for profitability deficiencies arising from a low-ball bid.

   But whether a differing site conditions claim is valid or not, economic tensions arise between owners and their lenders, on the one hand, and contractors and subcontractors, on the other, when these claims are made. Those tensions, increasingly pronounced during times of difficult economic conditions, may manifest themselves in a widening of the liability net in an attempt to reach design professionals. While the risk of liability for design professionals cannot be entirely eliminated, there are contractual and professional practice precautions that can reduce the risk or mitigate the consequences of liability.

2. Meeting the Claim

   The primary issue whenever a differing site condition is encountered is whether the owner or contractor, at least in the first instance, bears the economic and temporal performance risks.

   1. Common Law Rule

      Under the so-called common law rule, the contractor bears the risk that performance of its obligations may be more time consuming or costly than it had anticipated, even reasonably, when it submitted its bid. In Eastern Tunneling Corp. v. Southgate Sanitation District the Colorado federal district court, citing Colorado precedent,(2) stated the common law rule:

      It is conceded that, under the common-law

      rule, a contractor who undertakes an entire contract

      for erecting a building is presumed, in the

      absence of an expressed provision to the contrary,

      to have assumed the risk of unforeseen

      contingencies arising during the course of the

      work, unless performance is rendered impossible

      by the act of God. the law or the other party.(3)

      In the absence of a specific provision in the contract documents providing for relief from the general common law rule, a number of legal theories have been posited by contractors with relative success. These theories have been surveyed in detail elsewhere,(4) and they generally include mutual mistake, unjust enrichment, breach of warranty of the plans and specification by the owner, fraud or misrepresentation, and breach of a duty of the owner or its representatives to disclose information critical to the performance of the contract.

      This article will focus on the applicability of some of these legal theories to the potential liability of design professionals.

   2. Contract Provisions

      Differing site conditions clauses are the most effective and generally accepted exception to the common law rule. These are provisions in the contract documents recognizing a right of the contractor under certain prescribed and limited conditions, and subject to various requirements, to additional time or compensation when certain differing site conditions are encountered. In fact, to a greater or lesser degree, most of the standard contract forms in use in the construction industry contain clauses providing, on satisfaction and proof of varying requirements, for some degree of time and cost relief to a contractor when certain defined differing site conditions are encountered.

      For example, differing site conditions clauses are contained in the Standard General Conditions of the Contract for Construction, published by the Engineers Joint Contract Documents Committee (No. 1910-8, 1990 edition) and in the General Conditions for the Contract for Construction, published by the American Institute of Architects (AIA Document A201, 1987 edition). Paragraph 4.3.6 of AIA Document A201 provides:

      If conditions are encountered at the site which

      are (1) subsurface or otherwise concealed physical

      conditions which differ materially from those

      indicated in the contract documents or (2) unknown

      physical conditions of an unusual nature,

      which differ materially from those ordinarily

      found to exist and generally recognized as inherent

      in construction activities of the character

      provided in the contract documents, then notice

      by the observing party shall be given to the other

      party promptly before conditions are disturbed

      and in no event later than 21 days after first

      observance of the conditions.

      Differing site conditions clauses shift or reallocate the time and economic risks from the contractor, who would bear them under the common law rule, to the owner. On the other hand, if the contractor must assume the risk of increased time and cost arising because of differing site conditions, a prudent and cautious contractor would include in its bid a contingency to ensure (or at a minimum provide some level of economic comfort) that the work could be profitably performed if differing site conditions were found. Since this cannot be predicted precisely, the contractor might err on the high side in establishing the contingency. Worst yet, from the standpoint of the owner, the contractor might include a contingency never actually realized. In order to avoid this, many owners include differing site conditions clauses in order to avoid inflated prices.

3. Types of Differing Site Conditions Clauses

   Differing site conditions and contractual provisions allocating economic and time risks have been characterized by the descriptions "Type 1" and "Type II." Type I includes those subsurface or otherwise latent concealed conditions that differ materially from those indicated in the contract documents. Type 11 are those subsurface or otherwise latent concealed conditions of an unusual nature that differ materially from those ordinarily encountered and generally recognized as inhering in work of the character contemplated and/or provided for in construction of similar projects.

   Despite the distinctions, "Claims based on either Type I or Type 11 changed conditions require proof of a material variation between the contractor's expectations and what was actually encountered, plus proof that the contractor reasonably relied upon the indications available to it."(5)

   1. Type I Claims

   Generally, a contractor will not prevail on a claim seeking recovery for Type I changed conditions if the indications in the contract documents "are incomplete, irrelevant to the site, or otherwise so deficient that a reasonable and prudent contractor would not rely on them ... except in cases where no other conflicting information is available to the contractor."(6)

   In addition, if the contract documents admonish or otherwise direct the contractor to visit the site to become familiar with the site conditions (see, for example, Paragraph 1.2.2 of AIA Document A201), and the contractor fails to do so, or to make a reasonable site inspection as determined...