Latent conditions in civil construction: Does a latent condition exist? (Part 1)

Unforeseen site conditions are a frequent concern and a recurring type of claim in civil construction projects, and the risks associated with the site vary depending on the type of works involved and of course, the site. Generally, the contractor assumes all risks associated with the site, with the economic burden of that risk transferred to the principal upon applying a latent condition clause.

A latent condition clause often provides that:

a latent condition exists where the physical conditions found on the site or in its surroundings differ materially from the physical conditions which the contractor should have reasonably anticipated at the time of tender if the contractor had:
examined all information made available in writing by the principal to the contractor for the purpose of tendering
examined all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by making reasonable enquiries
inspected the site and its surroundings
the contractor will be entitled to the costs incurred for dealing with the latent condition as a variation plus an extension of time, subject to the contractor providing notice of the latent condition to the principal in accordance with the contract.

Disputes often arise as to whether a latent condition does in fact exist, and if so, whether the contractor has given notice of the latent condition in accordance with the contract.

In this two-part series, we will consider some of the guiding principles as to how a latent condition clause applies by revisiting the dispute between BMD Major Projects Pty Ltd and the Victorian Urban Development Authority from 2007. This case resulted in a trial in the Victorian Supreme Court that took 36 days with 23 witnesses, was appealed to the Victorian Court of Appeal, and involved two latent conditions claims to the value of approximately $7 million in total.

This first article will focus on the existence of a latent condition, and the second article will cover the notification issue.

Does a latent condition exist?

The crux of many latent condition disputes is not about whether an unforeseen site condition exists, but whether that unforeseen site condition is something that the contractor should have reasonably anticipated at the time of tender if they had done all the things noted in the first dot point above (or any other requirements specified in the particular contract).

The operation of a latent condition clause was considered in BMD Major Projects Pty Ltd v Victorian Urban Development Authority [2007] VSC 409 (BMD v VicUrban), where it was held that:

the clause should operate objectively – that is, the question of what should reasonably have been anticipated by the contractor at the time of tender needs to be determined by an objective assessment of the facts rather than by what the particular contractor may have done or not done
it is necessary for the clause to operate objectively because the purpose of the clause is to shift the economic burden of a risk that has been contractually assumed by the contractor, in circumstances where the parties have agreed to make that change by reference to a neutral standard or measure which depends on independently verifiable factors beyond the reasonable diligence or control of the party that will otherwise be relieved of the burden
the enquiry required by the latent condition clause requires a determination of the following questions of fact:
what conditions have been encountered?
were those conditions physical conditions?
did those conditions differ materially from those ascertainable?
what could reasonably have been anticipated?

What was the argument?

The dispute in BMD v VicUrban arose from a project to develop a site that had been formerly used as a quarry. BMD tendered to undertake extensive excavation, filling and rehabilitation works to the site, and claimed that it did so upon an expectation about the site’s physical conditions which differed materially from the physical conditions that were in fact encountered.

The physical condition of the site that BMD claimed differed materially from its expectation was the natural surface levels at certain stockpiles, which were lower than expected on site. BMD claimed that this was a latent condition which caused it to carry out additional works, use additional and different construction plants and incur additional costs of almost $7 million.

VicUrban contended that this was not a latent condition because BMD had failed to make the enquiries it ought to have made, because, amongst other things, it did not examine the information contained in a file of information that had been provided to BMD and all other tenderers.

More precisely, while BMD did make reasonable enquiries at the time of tender which resulted in the file of information being made available to BMD, it did not then (it was alleged) examine the information in that file. VicUrban argued that if BMD had done so, it would have concluded that there was a discrepancy between the plans provided for tender purposes and the quarry as it had been excavated over 30 years earlier.

The evidence of BMD was that it did review the information in that file, but in doing so was not then prompted by its contents to undertake any further analysis.

The Victorian Supreme Court considered that reasonable enquiries that a contractor would, and should, make include:

enquiries which may be prompted by any previous enquiry it has reasonably undertaken and which it ought reasonably to have undertaken
enquiries about things known or discovered by the contractor, even if those matters came to be known some other way.

In this instance, it was determined that the previous enquiry that resulted in the production of the file of information, did not prompt any further enquiry. This was on the basis of expert evidence that you would need to be a geotechnical engineer in order to realise this discrepancy, and that nothing within the file of information would have alerted a reasonable contractor that a geotechnical engineer would be required in order to understand the information.

This was also in circumstances where VicUrban had expressly not warranted the accuracy of the information on the file, and positively urged tenderers to satisfy themselves about the accuracy of the information that had been supplied to them to assist them in the tender process.

As the court noted, the entitlement to a latent condition does not depend upon a contractor establishing error in the information conveyed by a principal or fault on the part of the principal. Rather, the test to determine what BMD should reasonably have anticipated was judged by what a competent and suitably qualified contractor would expect by way of physical conditions in the execution of the works. VicUrban was not able to point to any particular fact or matter on the face of the file of information it provided to tenderers, which would cause a non-expert in the position of a contractor to seek the assistance of a geotechnical engineer. The court therefore determined that the fact that the natural surface level was lower than the levels described by the drawings was a latent condition.

The appeal

VicUrban appealed this finding in the Court of Appeal.^[1] In the appeal, VicUrban relied on evidence given by BMD’s estimator during cross-examination, where he was taken through the information file by VicUrban’s Counsel step by step, by the end of which BMD’s estimator conceded that it wasn’t too difficult an exercise to ascertain from the information file that the conditions of the site were not as represented in the drawings. VicUrban took this as a concession that BMD should have reasonably anticipated that the site conditions would differ materially from that shown on the drawings.

The Court of Appeal rejected this for the following reasons (in summary):

BMD’s estimator gave evidence under re-examination during the trial, that while it was not difficult for him to follow the significance of the drawings in the information file as he was led through them by VicUrban’s Counsel, it would have been otherwise if he had not known what to look for
VicUrban’s witnesses had already conceded that unless one had expertise in geotechnical engineering or hired a geotechnical engineer to look at the file, one would not have been able to determine the geotechnical significance of its contents
during the course of the contract when the latent condition claim was made, VicUrban never suggested that the information file provided at the time of tender should have caused BMD to anticipate that the site conditions were not as represented in the drawings
BMD’s expert witness (a geotechnical engineer) gave evidence that it was only with the benefit of hindsight that even he detected the significance of the information file given to tenderers.

The Court of Appeal endorsed the lower court’s application of the objectivity test. While the court took into account the evidence of a geotechnical engineer, the point of doing so was to demonstrate that “if someone as skilled in the examination and assessment [of] geophysical plans as a geotechnical engineer is of the view that one would need geotechnical expertise to derive anything of significance from the [file], it is a fair indicator that the ordinary reasonable earthworks contractor would not reasonably anticipate as a result of examining the file that the conditions were otherwise than as represented in the documents provided by [VicUrban]”.

In relation to the fact that VicUrban gave no warranties as to the accuracy of documents given to the tenderers, the Court of Appeal held that “the fact it gave out the documents [to tenderers] as the basis for a fixed-priced tender was something significant to weigh in the balance in determining how far a reasonable contractor should be expected to go in comprehending the effects of any other possibly relevant material in its possession or which it might obtain on reasonable inquiry.”

An unsuccessful claim

By way of contrast, BMD had made a separate latent condition claim that was unsuccessful. That latent condition claim was for oversized rock. More specifically, BMD claimed that the particle size composition of the stockpile material differed materially from that which could reasonably have been anticipated at the time of tender, causing it to have to carry out additional work, namely the crushing of oversized rock.

BMD’s understanding of the site’s physical conditions (relevant to the particle size composition of the stockpile material) was derived from geotechnical reports provided to tenderers by VicUrban.

The court rejected this latent condition claim, finding that one of the geotechnical reports showed significant variation in the expected percentages of oversized rock and a reasonable contractor in BMD’s position would not have treated the information in those reports with the level of precision that BMD was contending to form the basis of its latent condition claim. Furthermore, there was evidence that BMD had included some contingency in its tender price to deal with oversized rock, and that BMD had therefore not actually relied on the accuracy of the geotechnical reports. BMD’s appeal of that decision was dismissed.

Key takeaways

Key takeaways from this case on whether a latent condition exists are that:

the question of whether a latent condition exists is whether the contractor should reasonably have anticipated the unforeseen site condition at the time of tender
reasonable enquiries that a contractor needs to make include those prompted by any previous enquiry, and about things known or discovered by the contractor even if those matters came to be known some other way
if a reasonable contractor cannot understand the significance of the information provided by the principal, and would not determine from review of the information that someone with a particular skill will be required to understand the significance of the information, the provision of that information to a tenderer will not prevent a latent condition existing (regardless of the principal not warranting the accuracy of the information)
evidence that the contractor did not rely on information about the site provided by the principal may be fatal to a latent condition claim.

In the second part of this series, we discuss the notification requirement for latent conditions.

If you require assistance with understanding your latent condition clause or assessing the merit of your latent condition claim, or a claim submitted to you, contact us below or send in your enquiry here.

Author: Kirsty Smith

^[1] BMD also appealed the court’s findings on quantum, making VicUrban a cross-appellant in BMD Major Projects Pty Ltd v Victorian Urban Development Authority; Victorian Urban Development Authority v BMD Major Projects Pty Ltd [2009] VSCA 221

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Kirsty Smith