Chapter 6 Latent conditions
What are latent conditions?
Generally, latent conditions are those that cannot be identified during site inspection and following reasonable investigation. Latent conditions cover not only those things which are obvious on the surface of the land and the soil itself but also utility services, mine shafts, contamination and other subsurface features.
The question of whether a particular feature is a latent condition or not will often depend on the terms of the contract. Each of the Australian and New Zealand standard form contracts contain similar definitions of latent conditions (see, for example, AS4000-1997, AS4902-2000, AS4300-1995 and the ABIC suite of contracts). The terms of those standard form contracts and construction contracts generally govern which party bears the risk for those latent conditions.
Claims and disputes about latent conditions have become more common as projects become increasingly complex and innovative.
Who is responsible for latent conditions?
Latent conditions are usually dealt with by a process of shifting or sharing the risk. In the past, the principal often shouldered the risk of latent conditions, because they often had more knowledge of the site. In recent years the practice has been to shift that risk to the contractor. Along with this shift, there are now increased expectations of the contractor’s expertise.
When decisions are made about the allocation of risk for latent conditions at the site, consideration needs to be given to:
- the physical conditions of the site;
- the existing information about the site;
- whether there are any existing investigations into the site (including the brief to the entity who investigated the site and the outcome of the investigations); and
- the level of expertise of the person who carried out the investigation
A good approach to allocating risk from a principal’s perspective is to provide the contractor with as much information as possible without providing a warranty as to the accuracy of that information and include an obligation on the contractor to make its own investigations in relation to the site and any information regarding the site provided by the principal. Where this occurs it is necessary to determine in what manner, if at all, any geotechnical data provided to potential contractors should be or is qualified, noting in particular any limited scope of the reports which are provided.
When deciding who can best shoulder the risk of latent conditions at the site, it is useful to ask:
- who is best equipped (ie has the most information or the better expertise) to bear the risk?
- what disclosures or disclaimers have been made in the tender documents?
- should there be any special principles or procedures to deal with latent conditions?
Despite efforts put into drafting clauses for latent conditions and disclaimers of reliance, principals still need to consider potential for non-contractual claims.
In the Australian Standard contracts, there are similar provisions for extensions of time for latent conditions and for variations for the increased cost of dealing with latent conditions.
Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3)  NSWCA 282
- The principal, Sydney Catchment Authority (SCA) went to tender for the construction of a spillway for Warragamba Dam. Abigroup was the successful contractor and entered a contract which required them to take the risk for any latent conditions at the site.
- Abigroup’s tender was based on information disclosed by SCA, which contained a representation that no plans existed for a particular outlet pipe, which, if the plan had existed, would have provided information for Abigroup to determine an accurate drill depth. In fact, plans for this pipe did exist.
- The question for the court was: did the failure to provide the plans amount to misleading and deceptive conduct?
- Abigroup was successful on this issue upon appeal.
SCA’s representation was misleading and deceptive and had been relied upon.
- The express contractual terms of allocating risk of latent conditions to the tenderer provided no protection to SCA for that incorrect representation.
- Abigroup was entitled to damages for the extra costs of the additional work required because the plans were not made available at tender.
- As a result, it is important for principals who are seeking to pass on the risk of latent conditions to the contractor to make sure they locate and then provide the contractor with all information the principal has on the site. By not handing over all the available information it is possible that the principal may be found to have engaged in misleading and deceptive conduct.
- A subsequent application by SCA to the High Court for an appeal of this decision was refused.