When a project hits the unexpected, who should be picking up the bill?

In a building and construction context, liability will usually fall on the party who is responsible for the loss arising from a latent condition. A latent condition is a hidden physical condition on or below the site that could not reasonably have been anticipated prior to the work being commenced. This differs from a condition simply being unexpected.

This distinction arose in BMD Major Projects Pty Ltd v Victorian Urban Development Authority [2009] VSCA 221 (BMD) which involved a dispute concerning works at a former quarry. When a drilling contractor discovered natural surface levels materially lower than what was anticipated from the tender information, substantially more excavation, processing and placement were required than had originally been accounted for.

When ascertaining who was liable, and whether the contractor was entitled to additional payment as a result, the Supreme Court of Victoria considered what a competent and suitably qualified contractor should reasonably have anticipated at the time of the tender. If the condition could have reasonably been anticipated from the information available and appropriate due diligence conducted by the contractor, prior to commencing the job, the contractor may be held liable.

In other contexts, this is similar to a force majeure clause, in which an event that was beyond the parties’ control somehow prevented or substantially hindered the performance of obligations under a contract. Usually, force majeure is applicable where unforeseen external events occur, such as a pandemic, which could never have been reasonably anticipated at the time of entering the contract. There may also be operational or background issues that were unforeseeable for the parties involved.

The relevant contract may define what constitutes a latent condition or a force majeure, in the context of the specific project, allocate particular risks and specify what due diligence and investigations are expected of the parties. When looking at the building and construction sphere, contracts may also explicitly limit responsibility for the accuracy of the information provided in a tender and require the contactor to verify it themselves.

It is vital for all parties to a contract to acknowledge the extent of the risk they are accepting, and potential liability they are being exposed to, in order to fully understand the commerciality of the contract they are entering.

Procedural requirements under contracts

These unforeseen circumstances are only one part of a much larger equation. The contract may provide an entitlement to additional time or payment where a project is significantly impacted by unforeseen conditions, subject to the required party following specific processes pursuant to the contract.

In BMD, according to the contract, the contractor was required to provide written notice upon becoming aware of a latent condition, and where possible, before it was disturbed. The contract set out specific requirements as to the timing and adequacy of this notice, and hence an allegation of failing to adhere to these requirements subsequently became a point of contention in the dispute.

These procedural requirements may seem straightforward and therefore easy to overlook, especially when the immediate priority is dealing with the unexpected issue in order to keep the project moving successfully. However, a delay or deficiency in providing the appropriate notice can develop into a much vaster and more complex contractual dispute.

We help clients know and understand their obligations under specific clauses and notice requirements, before they need to rely upon them. Where a project is disturbed by unforeseen circumstances or conditions, it is important that all parties know what to do and how to do it, to limit their legal risks and exposure to liability.

A claim is only as good as the evidence behind it

Advising on and ensuring compliance with procedural requirements is one thing, however proving a claim is another. Evidentiary difficulties often arise when parties cannot adequately establish the additional work that was performed, why it was required and the increase in costs as a result.

It is often that by the time a dispute arises, trying to retrace what happened months or years earlier can be increasingly difficult. Creating clear contemporaneous records of any unexpected conditions or issues arising, whilst working on a project, are likely to become important evidentiary sources later down the track, should a dispute arise. We encourage clients to keep and update industry-specific reports and records as necessary. This can be especially constructive when establishing the link between an issue occurring, additional work subsequently performed and finally the amount being claimed.

We recommend keeping these internal records as they may be invaluable when it comes to explaining why a project has incurred additional work, substantial delays and increased costs.

Crucial first steps when unforeseen circumstances arise

It is vital for all parties to a contract to set themselves up on the front foot. Ensure the contract adequately addresses the appropriate processes to be implemented when unexpected events or circumstances arise, before it becomes a live issue. Committing time to understanding the clauses of the contract from the outset, particularly in relation to allocation of legal risk and liability, due diligence obligations and notice requirements, can pay off considerably when a dispute arises.

Encountering difficult and unexpected circumstances is one problem, however not reacting swiftly and appropriately, in accordance with contractual obligations is a much bigger one.

Obtaining advice early can prevent issues from evolving into a dispute later, especially if parties are unsure where risk lies or what they are obligated to do under a contract.

Pragma’s Business Law & Commercial Team can help in ascertaining risk, certain contractual obligations and liability under all different types of industry-specific contracts, including building and construction, property and real estate and mining and resources. Where clients seek and rely on this advice, it is unlikely they wind up in a complex dispute later down the track. However, if they do, Pragma’s Dispute Resolution and Litigation Team can also assist, where necessary, to facilitate a swift and pragmatic resolution.

For more, contact Aaron McDonald at Pragma Lawyers: aaron@pragma.law or +61 401 919 456.