Introduction

A Type I differing site condition is typically defined as subsurface or latent physical condition at the site which differs materially from conditions indicated in the contract. As its definition suggests, contractors typically expect Type I differing site conditions to be physical in nature. For example, a contractor may encounter unexpected subsurface rock formations on the project, which should have been but were not disclosed in the contract documents. Or a contractor building a road on the side of a mountain may encounter an undisclosed geological thrust fault, which requires the contractor to spend additional money installing anchors and bolts to stabilize the fault zone to prevent it from collapsing on the road.

It is important to remember, however, that Type I differing site conditions do not always have to involve these types of physical conditions. A Type I differing site condition may arise from incomplete and unfinished work by a previous contractor. Regardless of which type of physical condition gives rise to a Type I differing site condition, the terms of the contract will be the most important factor in determining whether a contractor who has encountered a Type I differing site condition is entitled to additional time or money.

Case Illustration

In Song & Song Corp. v. Fine Art Const. Co., LLC, W2011-01708-COA-R3CV, 2012 WL 2146313 (Tenn. Ct. App. June 14, 2012), a contractor tasked with completing the construction of an unfinished floor in a building started by another contractor encountered an alleged differing site condition when its work was stopped as a result of the previous contractor’s failure to install fire dampers inside the ductwork.

In 2005, Mr. Song, the president of Song & Song Corporation, hired a general contractor to construct a commercial building. The contract was only for the construction of the shell of the building and the completion of its top floor. The interior of the building’s first floor was to remain unfinished. The construction of the building was completed around February of 2007, at which time Mr. Song began operating an office on the second floor of the building.

In May of 2007, Mr. Song obtained a quote from the original contractor for the completion of the unfinished first floor. Mr. Song then asked for a bid from another contractor, Tae Young “Chris” Shin, who was a close friend of Mr. Song’s wife. Mr. Song provided Ms. Shin with the detailed bid from the original contractor in order to identify the scope of the work involved. Ms. Shin agreed to complete the unfinished first floor of Mr. Song’s building for a lower price, and the parties subsequently entered into a written contract on June 20, 2007. Subsequently, the contract was modified to provide incentive compensation if Ms. Shin could obtain an occupancy permit by a specified date.

Several weeks later, a Shelby County Code Enforcement Officer issued a stop work order on the project because the original contractor, who had built the shell of the building, failed to install the fire dampers in the ductwork of the building, as required by the Shelby County Code. Ms. Shin informed Mr. Song about the stop work order and the lack of fire dampers in the ductwork. She claimed that the fire dampers should have been installed by the previous contractor, who constructed the shell of the building and installed the ductwork without fire dampers. Ms. Shin ultimately installed the necessary fire dampers and obtained the necessary approval from the Code Enforcement Officer on September 21.

Ms. Shin completed her work and passed the mechanical, electrical, and plumbing inspections by October 10. On October 11, Mr. Song terminated Ms. Shin before she could obtain the final inspection necessary to obtain the occupancy permit. Mr. Song obtained the permit himself on October 16. Ms. Shin submitted a final invoice to Mr. Song after she was terminated, requesting payment for installation of the fire dampers.

Mr. Song refused to pay Ms. Shin’s final payment and brought suit against her, alleging that Ms. Shin was responsible for the delays in the work stemming from the previous contractor’s failure to install the fire dampers. Mr. Song further argued that Ms. Shin breached the contract by failing to discover that the original contractor failed to install the fire dampers.

Ms. Shin filed an answer and a counterclaim, alleging that she had completed the contract work and the additional work, for which Mr. Song had allegedly promised to pay. Ms. Shin alleged that Mr. Song had improperly terminated her after she completed her work, rendering it impossible for her to obtain the final inspection within the incentive payment period. Thus, Ms. Shin claimed that she was entitled to damages for the outstanding invoice balance, the incentive bonus, and attorney’s fees.

At the conclusion of the two-day bench trial, the trial court dismissed all of the claims in Mr. Song’s original complaint and entered judgment against Song & Song Corporation on Ms. Shin’s counterclaims. In rendering judgment in favor of Ms. Shin, the trial court examined the parties’ contract. The parties’ written contract provided that Ms. Shin would provide the labor, services, and/or materials to perform the construction work described on Exhibit A to the contract, which provided that the “heating and air will be completed by the installation of a five ton condenser, duct-work, and restroom exhaust fan.” It did not mention fire dampers. The written contract also stated, “The work upon the Subject Property will be in accordance with drawings and specifications provided by Owner, which drawings and specifications are hereby made a part of this Agreement.” The trial court noted that those drawings and specifications consisted of the original building plans prepared by the architect, which were used for the construction of the building, and which were provided to Ms. Shin. Thus, the trial court concluded that Ms. Shin was entitled to rely upon the building plans. The court found it undisputed that according to the original building plan, the fire dampers should have already been installed before Ms. Shin started work on the project. The court also found that the ductwork where the dampers should have been located had already been “brought down” to the first floor, and that fire dampers could not be seen after they are installed in the ductwork.

The court next concluded that the Concealed Conditions and Allowances provisions in the contract governed the parties’ rights. These provisions provided that if the contractor encountered concealed conditions that were not reasonably anticipated by the contractor at the time of execution of the agreement, the contractor would notify the owner of the concealed condition and be entitled to additional money needed to remedy the concealed condition. The trial court found that the lack of fire dampers was a concealed condition and that Ms. Shin properly notified the owner of the concealed condition, as required by the contract documents. Consequently, the trial court awarded all of Ms. Shin’s damages, including attorneys’ fees and interest. The Tennessee Court of Appeals affirmed the trial court’s holding on all counts.

Practical Tip

As the Song decision shows, a Type I differing site condition need not always involve project site’s geotechnical conditions. Something as simple as a previous contractor’s failure to build the preceding work in accordance with the applicable building codes, which in turn prevents or hampers another contractor’s performance, could be considered a differing site condition entitling that contractor to an adjustment in the contract price. Regardless of which type of condition is encountered, it is imperative for the contractor performing work on a project to be intimately familiar with the contract documents.

If a dispute arises over whether the contractor is entitled to additional money as a result of a condition that was encountered on the project, the court will resolve the issue by scrutinizing the contract documents. If those documents show that the encountered site conditions were concealed or unforeseeable, as they were in this case, a contractor’s differing site condition claim may well succeed.