20 April 2018

The 5 key elements of a latent condition clause

A latent condition clause regulates the contractor's ability to make claims for unexpected site discoveries. There are 5 key elements to any latent condition clause.


The 5 key elements of a latent condition clause

A latent condition clause should answer the following questions:

  1. What types of condition are covered?
  2. What level of pre-contract due diligence is expected?
  3. What is the reference point for assessment?
  4. How and when must a claim be made?
  5. What relief will be available?

These questions are explained below.

What types of condition are covered?

Some contracts allow virtually anything to be treated as a latent condition, whereas others are exceptionally narrow.

For example, the definition of ‘latent condition’ in clause 25.1 of AS 4000 refers to physical conditions, including artificial things but excluding weather conditions.

In contrast, PC-1-1998 (issued by the Property Council of Australia) and HC-1 2003 (issued by the Department of Defence) both limit the definition to 'ground conditions', excluding ground conditions resulting from inclement weather. Anything that is not a 'ground condition' cannot be claimed as a latent condition.

Whether the clause should be broad (like AS 4000) or narrow (like PC-1 or HC-1) should be determined by the nature of the project and the extent of pre-contract (or at least pre-tender) inspections that have been possible.

You can find out more about AS 4000 here.

What level of pre-contract due diligence is expected?

A site condition will only be treated as a latent condition if the contractor cannot reasonably be expected to have anticipated it.

However, what should have been anticipated will depend on the level of pre-contract due diligence the contractor is expected to have undertaken.

This question is typically answered in one of two ways.

The first is by reference to an objective standard. The second is by reference to specific investigations or tests the contractor has carried out or is assumed to have carried out.

For example, clause 25.1 of AS 4000 refers to the conditions that should have been anticipated by a competent contractor, had it inspected:

  • all written information made available by the principal 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.

Some contracts will expand on this, and others will narrow it.

For example, if the contractor has not been permitted to carry out any site investigations, or if it has not been permitted to access all areas of the site, the contract might refer to the specific inspections that have been allowed. This way, the contractor is not taken to carry the risk of site conditions in parts of the site it has not been allowed to see.

Conversely, if the contractor has been given access to the site for the purposes of conducting testing or performing early works (such as under an ECI engagement), the clause may specifically refer to this so that the scope for claiming latent conditions will be narrowed. In addition, the contract may contain warranties about the extent of the contractor’s knowledge of the site, the purpose of which is to again limit the circumstances in which a claim for a latent condition can be made.

Either way, a good latent clause should reflect the level of inspection or investigation (if any) that was in fact expected and allowed prior to contract. A clause that transfers excessive risk to the contractor is likely to result in increased pricing. Conversely, a clause that is too open could leave a principal exposed in respect of site conditions that the contractor should have allowed for.

What is the reference point for assessment?

To determine whether a particular condition is a latent condition, an assessment will need to be made about what the contractor should have anticipated, at a particular point in time.

Typically, this point in time will be one of three things:

  • the time of the contractor’s tender (or the closing of tenders);
  • the date of the contract; or
  • a date after the date of the contract, with the contract containing a specific regime to enable the contractor to conduct detailed site investigations before starting work.

The most appropriate reference point will depend on the nature of the project, the extent of pre-contract (or pre-tender) inspections that have occurred, and the types of latent condition that could arise and the disruption they may cause if they do.

A latent condition encountered during the course of the project may have the potential to cause significant disruption and extra cost. Some principals attempt to mitigate this risk by requiring the contractor to conduct extensive testing at the beginning of their engagement.

If a problematic site condition is discovered before work starts in earnest, it can often be addressed in a more orderly and cost efficient way than would be the case if it is discovered in the middle of the project.

How and when must a claim be made?

Assuming the contractor is permitted to claim relief, the clause will usually require certain notices to be given.

For example, clause 25.2 of AS 4000 requires a notice of a latent condition to be given 'promptly'. If the superintendent requests, the Contractor must then provide a statement identifying the latent condition encountered, the additional work, resources, time and cost that is likely to be necessary.

Some contracts will be more prescriptive and contain time bars for non-compliance.

The purpose of these provisions is to ensure the principal is informed of anything unexpected that arises during the project, so that it can react and make fast decisions to mitigate the impact. Contractors should pay attention to the notice regime, as a failure to comply could result in their claim being barred.

What relief will be available?

The latent condition clause should prescribe the relief that will be available for the contractor.

Often the effects of the latent condition will be treated as a variation (such as under clause 25.3 of AS 4000), with the result that the contractor can claim an extension of time as well as the additional cost involved in overcoming the latent condition.

Sometimes, the clause will be more prescriptive. For example, some might limit the contractor’s entitlement to costs to direct third party costs and they might expressly exclude any entitlement to margin or profit.

The extent of the available relief for latent conditions will be a material consideration for both parties at the time of tender.

Although principals may be tempted to transfer as much risk as possible to the contractor, this will often be a false economy. This is because contractors will often make allowances for that risk in their pricing – which could result in the principal paying a premium for risks that never eventuate.

Read more about construction contracting here.

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About the Author

Greg Henry | Principal

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Greg Henry | Principal

Author

Greg Henry | Principal

greg.henry@turtons.com

Greg is a principal at Turtons and a senior commercial lawyer who acts for a range of clients mainly in the construction and technology sectors. Greg advises on both transactional and contentious matters.


greg.henry@turtons.com | (02) 9229 2904

Senior construction lawyer

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