30 November 2018

What is the meaning of 'latent condition'?

This article explains the meaning of 'latent condition' and looks at the relevant definitions in some of the more commonly used forms of construct contract.


A typical definition of ‘latent condition’ will be along the following lines:

A latent condition is a physical condition on or near the site that could not reasonably have been anticipated by a competent contractor at the time of tendering.

However the meaning of ‘latent condition’ and the availability of relief for the contractor will vary from contract to contract, and from project to project depending on the level of information available to the contractor before entering into the contract.

Even small differences in wording can result in very different outcomes.

Latent condition examples

Depending on the circumstances and the wording of the contract, common examples of potential latent conditions include:

  • hazardous materials, such as asbestos;
  • contaminated soil;
  • below ground conditions (eg soil density, rocks, cavities, underground structures)
    underground utility services, such as power, water and drainage;
  • concealed building services, such as electricity, data, air-conditioning ductwork, cabling or other features (whether active or redundant) hidden behind walls, above ceilings or below floors; and
  • any other physical features of the site that could not reasonably be anticipated.

In each case, you will need to consider the wording of your contract carefully to determine whether the condition in question is in fact a ‘latent condition’.

A condition that is treated as a latent condition in one contract may not be a latent condition for the purposes of another.

Differences between latent condition clauses

Although they may initially appear fairly similar, latent condition definitions can vary significantly between contracts. Some of the differences relate to, and some of the things you should look for, include:

  • the type of conditions covered by the definition (eg ground conditions versus any physical conditions);
  • the location of the condition (eg on the site, or on the site or its near surrounds);
  • the level of inspection or examination the contractor is expected to have undertaken; and
  • the time the assessment is to be made (eg the closing of tenders versus the date of the contract).

The only way to determine whether a particular type of condition is a ‘latent condition’ for the purposes of your contract is to carefully consider the wording of the relevant clauses.

Read more about latent condition clauses here.

Below are some examples of latent condition definitions in commonly used contracts.

Meaning of latent condition in AS 4000

Clause 25.1 of AS 4000 defines latent conditions as:

Physical conditions on the site and its near surrounds, including artificial things but excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by a competent Contractor at the time of the Contractor’s tender if the Contractor had inspected:

a) all written information made available by the Principal to the Contractor for the purpose of tendering;
b) all information influencing the risk allocation in the Contractor’s tender and reasonably obtainable by the making of reasonable enquiries; and
c) the site and its near surrounds.

Clause 25.2 requires the contractor to notify the Superintendent (in writing) if it becomes aware of a latent condition. Clause 25.3 provides that the effect of a latent condition will be a deemed variation, priced without regard to costs incurred more than 28 days before the contractor first gives written notice of the latent condition.

You can read more about the process for dealing with latent conditions under AS 4000 here.

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Definition of latent condition under AS 2124

Perhaps not surprisingly, the definition of latent condition AS 2124 is very similar (but not identical) to the corresponding definition in AS 4000. Clause 12.1 of AS 2124 refers to:

(a) physical conditions on the Site or its surroundings, including artificial things but excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by the Contractor at the time of the Contractor’s tender if the Contractor had –

(i) examined all information made available in writing by the Principal to the Contractor for the purpose of tendering; and
(ii) examined all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by the making of reasonable enquiries; and
(iii) inspected the Site and its surroundings; and

(b) any other conditions which the Contract specifies to be Latent Conditions.

Clause 12.1 requires the contractor to notify the Superintendent of the latent condition ‘forthwith and where possible before the Latent Condition is disturbed’.

Clause 35.5 entitles the contractor to claim an EOT for a latent condition, and clause 12.3 contemplates an adjustment made to reflect the value of any additional work carried out, any additional Constructional Plant used, or any extra cost incurred by the contractor that is caused by the latent condition.

You can read more about the process for dealing with latent conditions under AS 2124 here.

Meaning of latent condition in ABIC SW 2018 and MW 2018

The approach taken by the ABIC forms of contract, jointly published by published by the Australian Institute of Architects and Master Builders Australia, is similar to the approach in AS 4000 and AS 2124.

Clause F5.2 of each of ABIC SW 2018 and MBW 2018 (- this clause is the same in both contracts) defines latent condition as follows:

A physical condition, on, underlying or adjacent to the site which a competent contractor would not have anticipated if the contractor had examined the site information and inspected the site before executing this contract.

Clause F5.1 requires the contractor to notify the architect in writing and seek instructions within 5 working days of the discovery of a latent condition.

Clause F6 requires the architect to promptly give a written instruction regarding a latent condition. This requirement for a direction by the architect is an important difference between the ABIC form of contract and the Australian Standards discussed above.

Clause F7 permits the contractor to make a claim to adjust the contract (for both time and cost) in respect of a written direction given by the architect regarding the discovery of a latent condition.

Meaning of adverse Site Conditions in GC21

Unlike the Australian Standards and ABIC forms of contract, the contractor’s ability to claim relief for a latent condition under GC21 will depend how the contract particulars are completed. (See clause 37.2 and item 37 in the Contract Information.)

Clause 37 of GC21 does not refer to ‘latent conditions’, but instead refers to:

adverse Site Conditions that differ materially from those it should reasonably have expected at close of tenders.

‘Site conditions’ are defined in clause 79 to mean:

Any physical conditions of the Site (including sub-surface conditions, but excluding weather conditions or physical conditions which are a consequence of weather conditions) encountered in carrying out work in connection with the Contract.

Clause 37.3 requires the contractor to notify the principal of the adverse site condition in writing as soon as possible and in any event within 7 days of becoming aware of it, and this notice is required to include certain prescribed information. Clauses 37.3 to 37.8 then set out a procedure for dealing with the site condition and determining the contractor’s entitlements.

Definition of latent conditions in Department of Defence
HC-1

The Australian Government Department of Defence Head Contract HC-1 2003 defines latent condition to mean:

Any ground condition at the Site, excluding a ground condition resulting from inclement weather wherever occurring, which differs materially from that which should have been anticipated by a prudent, competent and experienced contractor if it had done those things that the Contractor is deemed to have done under clause 7.1.

Clause 7.1 of HC-1 2003 states that the contractor is deemed to have done:

everything that would be expected of a prudent, competent and experienced
contractor in:

(a) assessing the risks which it is assuming under the Contract; and
(b) ensuring that the Contract Price contains sufficient allowances to protect it against any of these risks eventuating.

Like GC21, whether relief is available to the contractor will depend on how the contract particulars are completed. (See clause 7.3.)

Clause 7.3(a) requires the contractor to immediately give the contract administrator and the Commonwealth notice in writing if it considers it has encountered or found a latent condition.

Clause 7.3(b) states the contract administrator must notify the contractor whether it agrees that a latent condition has been encountered, and instruct the contractor how to proceed.

Clause 7.4 entitles the contractor to claim an extension of time and any extra costs reasonably incurred by the contractor which arise directly from the latent condition and the contractor’s instruction, and which are incurred after the contractor has given its written notice of the latent condition.

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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

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