CONSTRUCTION LAW UPDATE – No. 605
Latent Conditions ~ Who Bears the Risk?
Introduction
The
Background
A Principal
and Contractor entered into a contract for remediation works to be carried out
on land the Principal intended to develop for residential and commercial
use. The land was contaminated and was
listed on the Environmental Management Register, which meant that the Principal
was required to follow EPA directions on remediation in order to remove the
land from the Register.
The
Principal engaged an independent assessor, who prepared a Remediation Action
Plan (RAP) and the Principal subsequently entered into a contract with the
Contractor to carry out the remediation works.
Once works
commenced, the Contractor discovered that the extent of the contamination was
much greater than anticipated by the RAP, to the extent that the remediation
works would be uneconomical for the Contractor to perform. It was estimated that the additional works
required by reason of the condition of the site would cost a further $2 million
and result in a delay of up to 3 months.
The
Contractor applied to the Court for a declaration as to the extent of its
obligations under the contract, and in particular sought directions of the
Court that the Contractor’s need to discharge its obligations in full arose
only if it was economical to do so.
This
argument was rejected by the Queensland Supreme Court and the Court of Appeal.
The Contract Documents
The written
contract required rendering the contaminated area suitable for any land use,
and stated that the Works included “all
works to remediate the Site”. The
latent conditions clause provided that the Contractor was entitled to an
extension of time and costs if a latent condition was discovered on site, but
the clause specifically stated that any contaminant would not constitute a
latent condition.
The
contract provided that the Contractor was to “make his own determination of the volumes of the various types of
materials requiring treatment and of the extent of treatment required to meet
the remediation objectives”.
The
Principal relied on the fact that nothing in the contract contained any express
or implied mention of the possibility of partial or qualified remediation. As such, the Principal argued that it was not
the parties’ intention that a partial remediation could be permitted.
The RAP,
however, stated:
“The intent of the remediation program is to
clean up soil and groundwater across the entire site to a condition such that
EPA will remove the site from the Environmental Management Register. Failing
this, the intent is to remediate as much of the site as possible so that
the areas remaining with residual contamination have the least possible
on-going management requirements....these
criteria are provided as a contingency in
the event the remediation works cannot economically achieve the desired
remediation criteria.”
The RAP
clearly contemplated that a partial remediation might take place, limited by
what was economical. The Contractor
relied on the RAP to argue that the deal struck was that any works undertaken
by the Contractor were to be limited to what was “economical”.
The Courts’ Decisions
The Supreme
Court and Court of Appeal both held against the Contractor. Both found that the RAP did not form part of
the contract and so its terms were not relevant in assessing the Contractor’s
obligations. The RAP was created by the
independent engineer for the purpose of advising the Principal and the EPA
about the scope of the works required.
The RAP was never directed to or issued for the benefit of the
Contractor.
The Court
held that the contract imposed an absolute obligation which was not eroded by
the informal reference to the RAP. The
terms of the contract were clear – the land was to be rendered suitable for any
purpose and to remove the land from the EPA Register.
Both Courts
held that determining what level of remediation works would be “uneconomic”
would be extremely difficult. Neither
the contract nor the RAP contained any guidelines to assist the Court on this
point. Further, the terms of the
contract clearly indicated that the parties had intended that the risk in
relation to site condition caused by contaminants was to rest with the
Contractor. The contract provided that
the Contractor was to make its own assessment of the extent of treatment
required, and it specifically excluded any warranty or representation by the
Principal as to the existing site conditions.
The Importance of Contractual Drafting
This case
demonstrates the importance of risk allocation in the contracting process. Particular care must be taken in drafting the
latent conditions clause and formulating the definition of ‘latent condition’.
Although
the precise extent of the contractual works was obviously unforeseen at the
time of contracting, the Contractor could have taken steps to protect its
position. If the Contractor was relying
on the information contained in the RAP, the Contractor should have insisted
that the provisions of the RAP be expressly incorporated into the contract between
Contractor and Principal.
If, in
negotiating a contract, you place reliance on another document (whether an
engineers’ or architects’ report or a letter from the Council), do not assume
that the other document will necessarily form part of the contract terms. If there is a comprehensive written contract
that does not refer to this other document, or refers to it only in passing,
chances are the document will not form part of the contract. If you are in fact placing some reliance on
the contents of the other document, you will need to insist that it forms part
of the written terms and that the written contract reflects this.
Use of vague terms such as “economical” should be avoided as they are
liable to fail in Court. Avoid using
terms such as ‘intent’, ‘objectives’, ‘goals’ and ‘preferred options’ as these
are not regarded by the Courts as appropriate for fixing contractual
obligations. The contract needs to
specify what each party’s obligations are, including any conditions or
circumstances when the Contractor can require further money or an extension of
time to complete the works.
Contributor:
Kerry Colmer
Contact Details:
Ph. (08) 8110 8004
Jeanie Elliott – Partner
Ph. (08) 8110 8006
May 2006
This publication is not legal advice. It is for general interest. You should not rely on it without obtaining
legal advice.
Fenwick
Elliott Grace is a law firm that specialises in providing legal services to the
construction and engineering industry.
Office: Level
10, Optus Centre
ADELAIDE SA 5000
Ph: (08) 8110 8000
Fax: (08) 8231 2922
Web: www.feg.com.au