Construction Contract Changed Site Conditions Clauses

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CONSTRUCTION CONTRACT CHANGED SITE CONDITIONS CLAUSES
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Robert P. Wise
Wise Carter Child & Caraway, PA
(c) 2000

A. The Purpose of the "Changed Site Conditions" Clause

1. History

Changed site conditions clauses exist to temper the old rule that fixed price contracts would be rigidly adhered to no matter what the consequence might be for the contractor. For example, in the Mississippi case of Groton Bridge Mfg. Co. v. Alabama & V. Ry Co., 180 Miss. 162, 31 So. 739 (1902), the court refused to grant the contractor relief although in the construction of a railroad bridge across the Pearl at Jackson he had encountered buried logs requiring removal at great expense. The Supreme Court expressed some sympathy that the "contract proved to be an unfortunate one for the appellant, resulting in disappointment and great loss, it is true". Still, the Court noting that someone would have to "bear it", and that the contractor's contract "is silent as to obstructions"that the engineers were not bound to anticipate, found that the loss for the unanticipated condition should go to the contractor. Id. at 740-741.

Such results were not only harsh on contractors, but owners came to realize that they were facing unnecessarily high bids from contractors who were building into their bids a risk premium to deal with the risk of unanticipated site conditions that an ordinary site visit could not reveal. The U.S. Court of Appeals has explained the turn to differing site conditions clauses as follows:

The Differing Site Conditions clause and its similarlyworded predecessor, the Changed Conditions Clause, have been used in government contracts and interpreted by the courts for over half a century. [citations omitted] The purpose of these clauses has been to shift the risk of adverse subsurface or latent physical conditions from the contractor, who normally bears such risk under a fixedprice contract, to the government. The government has feared that without this clause, contractors would inflate their bid prices to account for the costs of investigating unknown conditions, such as subsurface soil conditions.

Olympus Corp. v. U.S., 98 F. 3d 1314, 1316-17 (C.A. Fed. 1996). The Court also cited the language of its earlier opinions approving the concept of differing site conditions clauses:

The government benefits from more accurate bidding, without inflation for risks which may not eventuate. It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.

Id. at 1317, quoting Foster Construction v. U.S.,435 F. 2d 873, 887 (1970). Also, differing site conditions clauses, "'prevent contractors from bidding on a worst-case-scenario basis"'. Id, at 1317, quoting from Jacobelli Constr., Inc. v. County of Allonroe, 32 F. 3d 19, 23 (2d Cir. 1994).

2. AIA Differing Site Conditions Clause

The AIA General Conditions of the Contract for Construction (A201-1997) includes a changed conditions clause entitled "Claims for Unknown or Concealed Conditions." The changed conditions clause sets forth two kinds of changed conditions that if encountered would afford the contractor an equitable adjustment of the contract sum. These are often referred to as Type I and Type 11 conditions. AIA General Conditions A201-1997 section 4.3.4 reads:

4.3.4 Claims for Concealed or Unknown Conditions.

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 for 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. The Architect will promptly investigate such conditions and, if they differ materially and cause an increase or decrease in the Contractor's cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall so notify the Owner and Contractor in writing, stating the reasons. Claims by either party in opposition to such determination must be made within 21 days after the Architect has given notice of the decision. If the conditions encountered are materially different, the Contract Sum and Contract Time shall be equitably adjusted, but if the Owner and Contractor cannot agree on an adjustment in the Contract Sum or Contract Time, the adjustment shall be referred to the Architect for initial determination, subject to further proceedings pursuant to Paragraph 4.4.

(a) Type I Condition: A Type I condition is a subsurface or concealed physical condition that differs materially from those indicated in the contract documents. To prove a type I condition the contractor must prove that the condition could not have been reasonably anticipated from an ordinary site visit or review of the contract documents. A Type I condition involves therefore the representations or indications of the owner in the contract documents. For example, in a federal contract case, Darwin Construction Company, ASBCA No. 26648, 86-1 BCA § 18,645, neither the contract nor the specifications disclosed that the ceiling tiles to be removed contained asbestos or that the ceiling tiles would have to be removed and disposed of in any special way, implying there was no asbestos problem posed by the tile. Further, the government had known of the asbestos but had not divulged that superior knowledge in its specifications. Therefore, the Board of Contract Appeals held that the contractor was entitled to receive an equitable adjustment for its additional costs to remove and dispose of the asbestos material.

By contrast, in Shumate Constructors, VABCA 2772, 90-3 BCA § 22,946 (1990), the Board of Contract Appeals did not grant relief to the contractor who encountered asbestos because the contract documents left no inference that significant asbestos might not be present. Also, the drawings included an architect's note explaining that the the drawings were not definitive as to the amount of asbestos present and that the contractor was required to make its own survey to determine the condition and remove all asbestos encountered. Thus, the drawings put the contractor on notice of the possible existence of the asbestos the contractor was specifically charged with removing.

(b) Type 11 Condition: Unlike a Type I condition, relief for a Type 11 condition does not turn on the owner's implied or express representations in the drawings about the condition's presence. A type 11 condition is an unknown physical condition of an unusual nature which differs materially from coditions ordinarily encountered in the type of work being done. The contractor must prove for a Type 11 condition that it was an unknown, unanticipated, and unusual condition, that a reasonable site visit or the general experience of the contractor would not have revealed it, and that the condition varied from what would normally be expected in similar work.

The requirement that the contractor prove an unusual condition can be a heavy one. For example, in Shumate the Board of Contract Appeals did not grant relief for discovery of asbestos in part because it noted that asbestos-insulated pipe was not unusual in 1920's buildings. Id. at 115,198. Similarly, in Styvesant Dredging Co., 89-3 BCA § 22,222, a dredging contractor dredged up a gas cylinder from the bottom of a bay which promptly exploded on the dredge, causing extensive damage. Even so, no Type 11 equitable adjustment was permitted to the contractor because the board of contract appeals found that the contractor was dredging in a military zone where encountering dangerous debris could not be considered unusual.

(c) Hazardous Materials Clause: However, note that in the 1997 version of the General Conditions a more specific provision now exists to deal with a contractor's encounters with hazardous materials, including specifically but not limited to asbestos and PCBs. A-201-1997, Section 10.3. If the contractor encounters hazardous materials, it is required to stop work and report it to the owner. The owner's duty then is to have a licensed lab determine what the substance is, render it harmless, extend the contract performance time and allow the contractor reasonable costs for shut-down, delay or start-up. A contractor encountering unanticipated hazardous materials should first look to this section and now may not need to use the differing site conditions clause under these circumstances.

B. Contractor's Right to Rely

The contractor can not rely on differing site conditions clauses to shift the risk to the owner or government in every case where an unanticipated adverse site condition is encountered. There are limitations. First, the clause applies only to conditions that existed when the contract was executed, not to those that may later develop during performance. Second, the unanticipated condition must be a physical condition, not an intangible impediment such as a denial of access to the work site due to the interference of a third party. After all, differing site conditions clauses are meant to shift the risk to the owner or government only those physical risks existing at the time of contract that otherwise could have affected the bidding, before any contract performance began. Olympus Corp., 98 F. 3d at 1317.

Thus, for example, in Olympus Corp. the contractor signed the contract to perform work on an industrial site and a month after the issuance of the notice to proceed encountered unanticipated contaminated soil hindering its work. The soil became contaminated when an independent contractor operating the plant accidentally cut an underground oil pipe in the plant yard. Soon after that the contractor discovered the contaminated soil, he also was locked off the site entirely for almost two months due to a strike of the plant's employees. The contractor therefore sought an equitable adjustment under the differing site conditions clause.

The Federal Circuit reviewing the case refused to recognize relief for the contractor. The court noted that neither the oil pipe break nor the strike locking the contractor off the site yet existed at the time the contractor signed the contract. Since those conditions arose during contract performance and did not exist when the contract was made, they did not qualify the contractor for relief under the differing site conditions clause. Further, the strike represented an interference in the contractor's work caused by a third party and was not a physical condition at all. Therefore again the differing site conditions clause had no application because the conditions arose during performance or were not physical conditions. Olympus Corp.,98 F. 3d at 1318.

C. Notice

It is very important to note that the differing site condition clause requires that the contractor leave the site of the condition undisturbed while he gives prompt notice to the owner of the discovery of the unanticipated condition. The AIA clause requires that notice be given within 21 days of the first observance of the condition. The notice period in necessary to allow the owner's architect to make its own investigation of the condition to see if an equitable allowance is justified. See AIA A201-1997 section 4.3.4 recited above. Although giving written notice is important to document one's rights, the AIA General Conditions permit the contractor to give oral notice of the differing site condition to the owner. Further, the owner will be required to prove it was prejudiced by any lack of notice. Shumate, 90-3 BCA § 22,946 at note 14.

D. Contractual and Tort Remedies

Even if there is no differing site conditions clause in the contract, the contractor may be able to achieve an equitable adjustment under alternative contractual and tort theories. Relief may be due for the contractor if the owner misrepresented the condition of the site, the plans and specifications were defective in that they should have but failed to account for the condition, or the owner failed to disclose his superior knowledge of a hidden condition on the site.

(a) Owner's Breach of Implied Warranty as to Plans and Specs

The United States Supreme Court held early in the last century that if the contractor follows the owner's plans and specifications, the contractor will not be responsible for the results of defects in the plans and specs. United States v. Spearin,248 U.S. 132 (1918). Further, the Mississippi Supreme Court has recognized that the owner who furnishes plans and specifications to the contractor for his use automatically provides the contractor an implied warranty against the consequences of any defect in the plans and specs. Employers Insurance of Wausau v. Mississippi State Highway Commission, 575 So. 2d 999 (Miss. 1990). See also, Mayor & City Council, of the City of Columbus v. Clark-Dietz and Associates-Engineers, Inc., 550 F. Supp. 610, 625 (N.D. Miss. 1982). Note that here the owner need not have knowingly provided the defective plans or specs: negligence by the owner is sufficient to the cause of action. Therefore, implied warranty is an alternative theory of recovery for a condition made unanticipated by defective plans or specs furnished by the owner to the contractor.

(b) Negligent or Intentional Misrepresentation

If the owner makes a negligent or knowing misrepresentation of the existing conditions of the site, the contractor who relies on the owner's misrepresentation can sue for his damages. Mississippi recognizes the tort of negligent misrepresentation whose elements are as follows:

1) A misrepresentation or omission of a fact;

2) that is material or significant;

3) a failure to exercise the degree of diligence and care that is generally expected from a similarly situated party;

4) reasonable reliance on the misrepresentation or omission by the injured part;

5) that such reasonable reliance was the proximate cause of damages suffered by the injured party.

Ishee v. Peoples Bank, 737 So. 2d 1011, 1014 (Miss. App. 1998). See also, R.C. Construction Co., Inc. v. National Office System, Inc., 622 So. 2d 1253, 1255 (Miss. 1993), Bank of Shaw v. Posey, 573 So. 2d 1355, 1360 (Miss. 1990).

(c) Superior Knowledge

The government has been held liable for an adjustment when it failed to disclose its superior knowledge of a hidden condition. In Penn Environmental Control, Inc., VABCA 3726, 94-2 BCA § 26,790, the government failed to disclose its knowledge that asbestos tile existed inside of plaster walls and was liable accordingly to the contractor for its removal and disposal. The government knew or should have known that the information was material to the contractor, knew that the contractor was unaware of the condition and that the contractor had not been charged with the responsibility for discovering it. As a result, the government was responsible for the contractor's damages.

E. Conclusion

Differing site conditions clauses are now included in the general conditions for construction of the AIA and other form contracts to temper the old common law rule that stuck the contractor with a fixed price no matter what unanticipated, costly conditions he might encounter during the work, and to discourage bids inflated by an exaggerated risk premium. The unanticipated differing site conditions that can result in an equitable adjustment under the clauses include a Type I condition resulting from the implication of the drawings and specs that the condition, which differs materially from what was shown, does not exist. Relief will be given for a Type 11 condition if the condition was unusual and differed materially from those conditions ordinarily encountered in the type of work performed. If the unanticipated condition involves the discovery of unanticipated hazardous materials, the contractor with an AIA form contract may not need to resort to the differing site conditions clause, but may be able look to the more specific hazardous materials clause for relief. The differing site conditions clauses do not afford relief for unanticipated conditions or events that might occur during performance, only for physical conditions existing at the time of contract. It is very important that the contractor provide timely notice of the discovery of the condition, which is not more than 21 days in the AIA contract. Also, if there is no differing site condition clause in the contract for the contractor to rely on, he may look to the alternative remedies afforded by the owner's implied warranty of the plans and specs or to the tort of negligent or intentional misrepresentation. An owner's failure to divulge to the contractor his superior knowledge of a hidden condition may also justify an equitable adjustment for the contractor.