What Does the Contract Say?: Part 3 – Latent Conditions

Generally, a latent condition is a physical condition (including a sub-surface condition) at a site or its surrounds (usually excluding ground conditions resulting from inclement weather), that differs materially from that which a Contractor should have anticipated at the time of tender.

While the definition of a latent condition may seem straightforward, the operation of the clause, in practice, may not always be. Critically, the wording of the relevant clause/s must be carefully considered in order to understand the rights and responsibilities of parties to a contract when it concerns latent condition. Does your construction contract contain a latent conditions clause? What does it say?

The final article of this series will provide an overview of a common approach to contractual risk allocation of latent conditions, the process which must be adopted in dealing with them, and the contractual pre-conditions that must be satisfied in order for an entitlement to accrue.

Allocation of Risk

The allocation of risk for latent conditions in a construction project often takes the following form:

1. The Principal may make available to a Contractor documents and information about the site at the pre-contract (i.e. tender), excluding liability for the relevance, completeness, accuracy, or adequacy of the information provided to the Contractor;
2. The Contractor may be obliged to examine the information provided to it by the Principal, and undertake its own site investigations and inspections, and examine all the information it obtains by the making of reasonable enquiries, to inform itself when assessing the risk of latent conditions at the site; and
3. In the event a latent condition is encountered or found and where it is of a kind that should have been contemplated by a Contractor at tender, it usually follows that a Contractor will not be entitled to make a claim in respect of the latent condition.

This approach has been adopted in Australian standard form contracts (including AS 2124, AS 4000, AS 4300, and AS 4902) and Commonwealth Defence contracts (including HC-1 2021 and MW-2 2021).

Process for Dealing with Latent Conditions

Upon encountering or becoming aware of a latent condition, a Contractor may be required to:

1. Immediately or promptly notify the Principal;
2. Provide detailed particulars of:
   1. The latent condition (including the description, location, and nature) and how it differs materially;
   2. Additional work, resources, time, and cost the Contractor estimates is required to deal with the latent condition; and
   3. Other details as may be reasonably requested by the Principal or its agent.

Contractor’s Entitlement

Assuming the latent condition is, in fact, of a type which the Contractor has not assumed the risk for, and if the Contractor has complied with the relevant contractual provisions concerning notification and timing of such notice, a Contractor may be entitled to an extension of time and/or additional costs.

Strict compliance with the notice and timing provisions of a construction contract may be required as a pre-condition to the actual accrual of an entitlement, particularly when it comes to latent conditions. As discussed in the previous article in this series, where a Contractor fails to strictly, or substantially, adhere to these timeframes, a Contractor may lose its entitlement to an otherwise legitimate claim (i.e. the claim is time barred).

Latent Conditions and Australian Standard Form Contracts

Latent conditions are contemplated in some of the widely used Australian standard form construction contracts. Although the relevant clauses enshrined in these contracts largely reflect each other, it is worth noting the nuances between them (there are some) in terms of the operation of each provision (see summary in Table 1 below):

Table 1

Australian Standard Form Contract	Clause	Summary of Operation of Clause
AS 2124	12	Contractor may claim an extension of time and cost where the physical conditions on the site (or its surroundings) differ materially from the physical conditions which should reasonably have been anticipated by the Contractor at the time of tender if the Contractor had: a. examined all information made available to it (by the Principal); b. examined all information from making reasonable enquiries; and c. inspected the site (and its surroundings).
AS 4000	25	Contractor may claim an extension of time and cost (incurred within 28 days of notification) where the physical conditions on the site or its near surrounds differ materially from those which should reasonably have been anticipated by a competent Contractor at the time of tender if it had inspected: a. all information made available to it (by the Principal); b. all information from making reasonable enquires; and c. the site (and its near surrounds).
AS 4300	12	Contractor may claim time and cost where the physical conditions on the site (or its surrounds) differ materially from those which should reasonably have been anticipated by the Contractor at the time of tender if the Contractor had: a. examined all information made available to it (by the Principal); b. examined all information from making reasonable enquiries; and c. inspected the site (and its surrounds).
AS 4902	25	Contractor may claim an extension of time and cost (incurred within 28 days of notification) where the physical conditions on the site or its near surrounds differ materially from those which should reasonably have been anticipated by a competent Contractor at the time of tender if it had inspected: a. all information made available to it (by the Principal); b. all information from making reasonable enquires; and c. the site (and its near surrounds).

Lamont Project & Construction Lawyers

We have the industry knowledge and experience to assist both Principals and Contractors in all major construction projects. If you would like to discuss any of the matters raised in the above article or the forthcoming series as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.

The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.

Contact: Peter Lamont or Kristopher London

Email: [email protected] or [email protected]

Phone: (07) 3248 8500

Address: Suite 1, Level 1, 349 Coronation Drive, Milton Qld 4064

Postal Address: PO Box 1133, Milton Qld 4064