Latent Conditions, Building Work and Legal Liability

Latent Conditions, Building Work and Legal Liability

7 Mar 2018

By Justin Cotton, Director, Lovegrove & Cotton.

The risk of sub-surface conditions being different to what was expected, particularly in larger commercial contracts, is enough to make many building contractors jumpier than any cinema viewer of a scary thriller.

And in the past the courts have only provided limited relief to contractors when encountering this problem. In a 1972 case, Justice Hardie opined that a party who has contracted to carry out building work on or under land is duty bound to satisfy themselves of the nature and characteristics of the land both on the surface and below it (Dillingham Constructions Pty Ltd v Downs [1972] NSWLR 49).

Traditionally, where building contractors have tried to claim damages for site conditions being different than what they expected, they have not been successful in their claims against the principal, if in fact there are contractual provisions compelling the contractor to make their own inquiries about site conditions and dimensions. This of course includes sub-soil conditions, that can be disclosed by a geotechnical report or foundations data either obtained by the contractor or supplied to them.

This tradition goes back a long way. In the case of Pakenham v Board of Land and Works (1874) 5 AJR 37 at 38, the Court stated: “We think that the statement [in the contract] that ‘the contactor is to satisfy himself as to the correctness of the levels and dimensions’ sufficiently indicate (sic) the intention of the parties that each was to take his own risk of the accuracy or inaccuracy of the plans.”

The law of ‘negligent mis-statement’ has developed in more recent times to be of more assistance to contractors surprised by site conditions differing from what was represented (eg in plans). Some recent cases have allowed compensation in damages where a party has been induced into a contract in reliance on certain representations made before the contract was signed. However, for a contractor to seek to rely on ‘negligent mis-statement’ as a general principle in these matters is an unreliable course indeed.

Most standard contracts used in commercial building in Australia are a source of some assistance to building contractors, as they will have a ‘latent conditions’ clause and a mechanism to claim for variations to the contract price if certain matters are satisfied and a correct procedure is followed. It is better therefore to follow the contract procedure rather than rely on the uncertain state of the common law.

For instance, in the AS-2124-1992 building contract, clause 12 defines latent conditions and gives a procedure for the contractor to notify the contract superintendent of the particular latent condition encountered and any extra cost and extra time occasioned to the contractor in dealing with it.

Latent conditions are basically defined at clause 12.1 as physical conditions on or under the site or its surroundings which differ materially from the physical conditions which should reasonably have been anticipated by the contractor at the time of tender, if the contractor had:

  • examined all information made available by the principal;
  • examined all information relevant to the risks, contingencies and other circumstances that is obtainable by reasonable inquiry; and
  • inspected the site and its surroundings.

This therefore is only a limited protection to the contractor as the interests of the principal are also balanced into the mix. The contractor is obliged to make all reasonable inquiries before agreeing on a price and that includes a proper examination of such materials as soil reports and properly inspecting the site.

There is then a requirement for the contractor to give written notice of the latent conditions encountered, where possible before they are disturbed, to the superintendent who is responsible for valuing variation and extension of time claims under the contract. The notification must be given in a timely way as per the clause and needs to set out why the situation meets the definition of ‘latent conditions’.

If the contractor can convince the superintendent that a latent condition has caused the contractor to perform additional work or incur extra costs that the contractor “could not reasonably have anticipated” when the contract price was committed to, then there will be a variation in the contractor’s favour. The amount of the variation is then to be valued under clause 40.5.

Different commercial construction contracts will have similar systems for awarding extra cost or time to the contractor in these circumstances. But take note that the design and construct contract AS 4300-1995 provides that a latent condition will not entitle the contractor to any extra cost or extension of time, though they must still give written notice of any latent condition to the superintendent.

In domestic building, there is a legal requirement on builders to procure the ‘foundations data’ for a site before entering into a contract, in the event the works will involve the construction or alteration of footings or may adversely affect the footings of a building. There is in fact a penalty applying to a builder if they do not obtain this data, which includes any reports, surveys, plans or specifications relating to the footings design.

This obligation is found in section 30 of the Domestic Building Contracts Act 1995 (Vic), but note that the builder is forgiven the duty to acquire the foundations data to the extent such data already exists and it is reasonable for the builder to rely on it. For example, if the owner has the required geotechnical report or soil report and has supplied that to the builder.

For more advice on your rights and responsibilities in this area of law, or if you are perchance in a dispute yourself, do not hesitate to take prompt legal advice now.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.