Encountering latent conditions

McCullough Robertson Lawyers Partner, Brad McCosker, explains the rights and responsibilities of both the mine owner and the contractor when encountering different ground or latent conditions.

When performing works, a contractor may encounter physical conditions on (or more frequently under) the surface which differ from those conditions which it expected when entering into the contract.

These physical conditions are commonly referred to in industry as ‘latent conditions’.

Factors relevant to the risk of disruption and to whether a latent condition claim arises are the actual physical conditions of the site, the existing information about the site (if any), any and all investigations carried out and to be carried out, by and for whom those investigations are to be carried out, the contractual obligations between not just the owner and the contractor but also the conditions of engagement for consultants, any disclaimer clauses and what the contract describes as opportunities for adjustment of the contract price.

In the absence of express terms in the contract to the contrary, the cost of overcoming adverse physical site conditions that are encountered falls upon the contractor.

When drafting contracts a practice has evolved to impose (or endeavour to impose) the liability on the contractor for the time and cost ramifications of encountering different or unexpected ground conditions.

In response, the practice has developed for the contract to describe the circumstances where the contractor can make claims for time and money dependent on the disruption and difficulties it encountered in overcoming the unexpected.

The rationale for changing the common law allocation of risk by the inclusion of a specific clause in the contract allowing the contractor to claim is commercial.

Contractors, faced with the assumption of risk, price their tenders accordingly.

A latent condition clause is designed to avoid tenderers increasing their prices to take account of an unpredictable risk and a risk which might never eventuate.

In the event of latent site conditions being encountered a contractor may have a claim for compensation on bases or a combination of bases including under the relevant clause in the contract, in negligence against the owner, the engineers or the soil consultants concerning the preparation of site information provided to and relied upon by the contractor and for breach of the Trade Practices Act.

To endeavour to avoid such outcomes, a practice has in turn developed by owners (and their advisers) to try to disown (or disclaim) liability and responsibility for information given by them in the tender package which may be proven to be wrong in so far as the ground conditions expected to be encountered is concerned.

Additionally, disclaimers inserted into the contract package by an owner denying responsibility for information provided by it are often used and just as often hotly contested in negotiations.

Such disclaimer clauses do not themselves carry a guarantee for certainty of claim avoidance (generally speaking the Trade Practices Act provisions for misleading conduct cannot be contracted out of) and complex and ingenious claims can arise to avoid the impact of the disclaimer clause. Some suggest that disclaimer clauses in fact encourage or provoke disputation.

A mine owner faced with a claim for negligent information given by it to a contractor has several possible defences available.

The owner will most often firstly say that it owed no duty of care to the contractor or that the contractor did not in fact rely or act upon the advice in question.

An alternative defence may be that even if the information was inaccurate or misleading, that it was not negligent in compiling the information or that the contractor has contributed to the loss by failing to take reasonable steps to investigate the conditions of the site before submitting its tender. It is in respect to those possible defences that the drafting of firstly the conditions of tender and secondly the conditions of contract is of paramount importance in risk management.

To minimise the risk of ground or latent condition claims occurring, when writing and negotiating contracts, parties should:

• provide bases for the realistic apportionment of risk associated with sub-surface ground conditions between all parties to the project;

• establish broad categories of geotechnical data for the purposes of disclosure in the tender and contract documents and define the difference between them;

• ascertain what geotechnical data should be provided to tenderers and in what manner, if at all, that data should be qualified;

• establish principles and procedures to deal with conditions, if encountered, which vary significantly from those described, and especially for the apportionment of the consequence of encountering those conditions as between the contractor and the owner; and

• as meaningfully as possible in the tender package issued to market, equip the tenderer/contractor to make as informed a risk assessment as possible on critical performance constraints such as its mining methods, costs and rates of progress.

The allocation of risk for latent conditions is one of the fundamental legal and commercial issues involved in any mining operation.

Rather than ‘crossing your fingers’ and hoping that rock, an unexpected void, different material, prior mining remnants or ground water is not encountered, both owners and contractors should evaluate the likelihood of the event occurring and negotiate an appropriate risk allocation to deal with what is to happen if a latent condition is encountered.

History and experience suggests that no contingency in contractor pricing is likely to be enough to avoid claims if such conditions are hit.

As always, procedures written and negotiated into contracts to avoid disputation are preferred to the alternative of parties becoming embroiled in expensive and sometimes relationship damaging litigation or arbitration.

N McCullough Robertson Lawyers

07 3233 8992

bmccosker@mccullough.com.au

www.mccullough.com.au

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