Negotiating the obligations and risks that each party is willing to bear or concede can be one of the most important stages of a successful civil construction project. It is where the parties ideally work out what risks they can properly manage and should take on, and the approach taken during the negotiation can foster goodwill between the parties. But progress towards a successful project for both parties can be short-lived if the same care is not taken to record the outcome of those negotiations and the assumptions made during the negotiations in the written contract.
One category of contract is where the parties enter into a contract immediately, but with the intention that a more formal and fuller expression of the terms of their contract will be prepared and executed in due course.
This scenario is often played out in construction projects by way of one party submitting a tender to perform the works (the offer), and the other party issuing a letter of acceptance of that tender and indicating that the letter of acceptance is authority for the contractor to commence work, but that a formal contract will be prepared in due course.
Where a formal contract is subsequently prepared and entered into, this can be the point where all of the contractor’s hard work in negotiating the deal (resulting in their offer) can unravel. The formal contract will usually supersede the earlier binding contract that arose by accepting the contractor’s offer. If that formal contract does not expressly state the assumptions on which the offer was made without contradiction of any other terms of the formal contract that are given a higher order of precedence, the contractor may end up assuming much more risk than they bargained for. Or, at the very least, they may end up in a dispute with the other party about who bears the risk.
The shifting of risk in unexpected ways can materialise in various scenarios, but common ones include risks associated with site conditions and anything that impacts the contractor’s ability to carry out the works in the manner that it planned and based its offer on.
Unforeseen site conditions – is the contractor entitled to a variation?
It is fairly standard that the unforeseen conditions of the site are at the contractor’s risk, unless and to the extent the contractor can transfer the additional cost associated with those unforeseen conditions up the line to the other party according to a provision in the contract. For example, for an unamended Australian Standard AS4910-2002 contract, this is done via clause 25 which defines a latent condition as follows:
Latent conditions are physical conditions on the site and its near surrounds, including artificial things but excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by a competent contractor at the time of the Contractor’s tender if the Contractor had inspected:
- all written information made available by the Purchaser to the Contractor for the purpose of tendering;
- all information influencing the risk allocation in the Contractor’s tender and reasonably obtainable by the making of reasonable enquiries; and
- the site and its near surrounds.”
Under the AS4910-2002 contract, the effect of the latent condition is deemed a variation, but the contractor is not entitled to costs incurred more than 28 days before it was required to give notice.
Disputes over claims associated with unforeseen site conditions often relate to whether the unforeseen site condition was a ‘latent condition’. It is important that assumptions made about the site are documented in the contract to help avoid such disputes.
In the Queensland District Court decision of Nortask Pty Ltd v Clarke Energy (Australia) Pty Ltd  QDC 268, the finding demonstrates why documenting information about the site is important for contractors, as well as providing some caution to contractors up the line and principals as to representations made about the site.
Nortask Pty Ltd (Nortask) subcontracted with Clarke Energy (Australia) Pty Ltd (Clarke) to undertake civil works (including the excavation and construction of trench piers) associated with the construction of an electricity generating facility at a mine site near Mt Isa. The request for tender included drawings which indicated that the site had been filled with uncontrolled fill.
Having made an initial tender on the basis of a specification and drawings, Nortask issued a revised tender for a lower price based on a new instruction by Clarke for it to tender for the works on the basis that the average depth of the trench piers would be two metres. Nortask did not inspect the site.
While Clarke had a geotechnical report in its possession, the court concluded that it did not provide that to Nortask. In any event, the court held that it only contained sufficient information to come to a very superficial view of the required average depth of the trench piers. For instance, of the nine test pits, six of those pits were not in the area where the trench piers were to be constructed. In addition, other information in the geotechnical report made it difficult to determine what the average depth of the trench piers would need to be.
Clarke accepted Nortask’s revised tender by issuing a letter of acceptance, with a stated intention of a formal contract being subsequently prepared, for the works to commence.
Clarke did attempt to have a formal contract entered into, but in doing so failed to include Nortask’s revised tender or any other information that confirmed the average trench depth assumption. While Clarke signed the formal contract, Nortask did not. The court found that the binding contract between the parties was not the partially signed formal contract, but rather, was comprised of Nortask’s revised tender and Clarke’s acceptance letter. While the instruction to assume the average trench depth of two metres was not referred to or included in the letter of acceptance, the court considered this of no relevance given that Nortask’s revised tender (that is, the offer) stated that it was expressly made on that assumption.
During construction, it was discovered that the trenches collapsed as they were being excavated due to the presence of large rocks under the surface resulting in the average trench depth needing to be more than two metres.
The court considered a latent condition clause similar to clause 25 of AS4910-2002. It noted that there had been no expert evidence to suggest that the reference to uncontrolled fill in the drawings included in the request for tender should have conveyed to a reasonably competent and experienced contractor that the presence of large rocks in the fill should reasonably be anticipated.
As a result, the court found that the presence of large rocks within the fill was not something which should have been reasonably anticipated. Even if the contractor had actually inspected the site before making its offer, the court held that there was no evidence that the presence of large rocks in the fill would have been apparent on any inspection of the site and its surroundings. While not explicitly explained by the court, this suggests that the contractor does not need to actually dig its own test pits during site inspection for the condition to amount to a latent condition.
The outcome may have been different had the parties entered into a formal subcontract which did not include Nortask’s revised tender offer, and otherwise did not confirm the assumed average trench depth was only two metres. In this particular case though, had that been the case Clarke would have engaged in misleading and deceptive conduct by making a misleading representation about a future matter, in contravention of the Trade Practices Act 1954 (Cth).
As it was an alleged representation concerning a future matter, the onus of proof was on Clarke to show that they had a reasonable basis for making the representation. The only material that Clarke could rely on was the geotechnical report, but the court found that the indication (in that report) of trench piers with an average depth of two metres was “a very superficial view” and not sufficient to discharge Clarke’s onus of proof. The court then considered that Nortask had relied on that representation by reducing its tender, with the relevant damages being the extent to which Nortask reduced its tender price based on that representation.
This highlights the importance of the contractor or principal up the line being cautious about any representations they make about the site, and ensuring that they have a reasonable basis for making the representations at the time when they are made.
Is the contractor’s planned construction methodology a risk for the contractor?
A contractor’s tender is often based on a specific method of performing the construction works, which informs the price offered. That method may relate to, for example:
- an understanding of what parts of the site it will have access to and from when
- an understanding that the works will be able to be constructed in a certain sequence (such as from beginning to end)
- the quality of the goods the principal supplies for the contractor to install or the quality of the materials either provided by the principal or existing at the site which the contractor is required to work with.
If any assumptions made in relation to these matters are negated after the contract has been entered and works have commenced, and the contractor is forced to alter its construction methodology, it will likely incur additional costs and suffer a delay in completing the works.
- a contractor who is not granted the particular access to a site to haul materials that they thought would be granted to them may be forced to travel further to haul materials, increasing the haulage time, reducing productivity and delaying the program
- a pipeline contractor who is prevented from constructing a pipeline in a linear sequence due to other works impeding its progress may suffer loss of productivity as a result of having to return and remobilise to parts of the pipeline to complete unfinished sections.
A dispute over the contractor’s entitlement to compensation for changes to its construction methodology can arise where assumptions relied on by the contractor at the time of tender are not clearly set out in its tender, or if they are, that tender and the relevant assumptions are not expressly included in the formal contract that the parties subsequently enter into.
That is not to say that the contractor may not have remedies available in these circumstances, but accessing those remedies is not straightforward.
For instance, the contractor may be able to adduce strong objective evidence of the parties’ actual mutual intention to argue that on proper construction of the contract, the relevant risk had been dealt with in the contract in a particular way. However, such evidence may be futile if the argued construction of the contract cannot be reconciled with the clear terms of the document that the parties executed. In this case, the contractor may apply to the court for the equitable remedy of rectification of the contract. However, this requires the contractor to prove on the balance of probabilities what the parties’ common intention was. While the United Kingdom has determined that the parties’ actual common intention is relevant for this remedy, this has not yet been applied in Australia, with the objective common intention of the parties still potentially the test here.
One thing is beyond doubt – if all assumptions relevant to the contractor’s construction methodology are clearly addressed in the contract, including who bears the risk if those assumptions prove false, the parties will more likely avoid future disputes over the issue. It may also influence that parties’ planning and conduct immediately upon it becoming known that the assumption has proven false and the construction methodology may need to be adjusted.
Assessing how risks are associated with latent conditions and the contractor’s construction methodology is important at all stages of a civil construction project. To help avoid and minimise disputes, contractors should pay careful attention to whether assumptions they make that inform their understanding of the site and their construction methodology are clear in their tender and the eventual contract.