Underground construction claims

(PHOTO: © ARTINUN / ADOBE STOCK)

On construction projects, contractors commonly encounter site conditions that are different from what they expected. What should contractors and owners bear in mind when this situation occurs? How is this situation addressed in contract documents, and which party assumes the risk?

With underground works, there is a risk for owners and contractors that actual conditions may vary from what is anticipated. Sometimes a contractor’s means and methods need to be modified or completely changed. This may increase the cost and duration of the work. When this situation occurs, it may result in costly delays.

Construction contracts may contain provisions for dealing with unknown site conditions. For example, the 2020 CCDC 2 standard form of contract identifies two types of events arising from concealed or unknown conditions.

The first is subsurface or concealed physical conditions that existed before the work commenced that differ materially from those indicated in the contract documents. The second type is where non-weather-related physical conditions differ materially from those ordinarily found to exist, and that are generally recognized as being inherent in the types of construction activities required for the project.

Concealed or unknown conditions are sometimes called Differing Site Conditions (DSC). These differ from project to project, as do the contract provisions to deal with them and the allocation of risk to each party. Allegations that DSC exist usually relate to the availability, reliability and completeness of information provided by the owner.

Construction contracts may include provisions for risk transfer stating that the owner will not pay claims related to DSC, and/or that it is the contractor’s sole responsibility to determine site conditions. These types of provisions do not always prevent claims or legal actions.

For example, in Cranbrook (City) v. Gabriel Construction (Alberta) Ltd (2014 BCSC 2280) the contractor, Gabriel, alleged subsurface soil and other conditions constituted “concealed or unknown conditions.” The court found that the contract expressly disclaimed any responsibility for geotechnical information provided to the contractor and cited that Gabriel was responsible for its own assessment of soil conditions. When its geotechnical investigations identified the presence of cobbles, Gabriel claimed the discovery was concealed or unknown conditions, however the court did not view it to be a “concealed or unknown condition” within the meaning of the contract. It held that Gabriel willingly took on the risk.

Parties may have different views of what a DSC actually is. The more vague the contract is on this issue and the more room there is for interpretation, the more likely there could be a dispute. However, even when contract documents appear to be “crystal clear” regarding risk allocation, a dispute can still occur.

In a New Brunswick Court of Appeal Case in a contract to construct a new courthouse, the general contractor and subcontractor encountered “stronger” rock than expected, requiring mechanical breaking using hydraulic rock-breakers. The trial judge concluded that there was a change in soil conditions from those reasonably assumed to exist at the time of the bid and awarded damages. The province appealed on the question of liability.

The NB Court of Appeal concluded that the Change in Soil Conditions clause was not engaged, explaining that the clause would have required either a substantial difference between the information relating to soil conditions provided and the actual conditions encountered, or a substantial difference between the respondents’ reasonable assumptions and conditions encountered.

The court concluded that a summary review by a geotechnical engineer or someone with experience in the field could have informed the GC about the meaning and impact of the soil information provided.

This case is instructive about the use of all information available, the extent on which to rely on information provided, and how assumptions need to be informed. It is vitally important for owners and contractors to think about site and the soil conditions at bid stage, and to understand their risk and potential liability.

Robert Poole is the senior managing director at FTI Consulting. Juan Cortes is a senior consultant. The views expressed are those of the author(s) and not FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.