Managing the risk of latent conditions



One step in managing latent conditions is to make sure that the question of site conditions is addressed in the contract. The conditions which are identified in that process will not be latent conditions but will be site conditions which the contractor must take into account in determining the price and in performing the work.

At the pre-contract or investigation phase it is necessary to:

  • decide who will be responsible for the risk of latent conditions;
  • provide the person responsible for the latent conditions with the opportunity to inspect the site and perform their own investigations (subject to any time limits);
  • provide a mechanism for the person responsible for latent conditions to have input into the design process to allow for conditions which their investigations uncover;
  • decide who will conduct testing of the site, who will pay for testing, what tests will be conducted and how the results will be interpreted and distributed;
  • provide for historical searches about how the site and any adjoining land has been used; and
  • provide a process by which the parties must share knowledge of any conditions which they suspect might exist or which are uncovered during any investigation or testing.


What happens when you find a latent condition?



The contract should deal with the following issues in relation to the discovery of latent conditions:

  • extent of any requirement to promptly tell the other parties about the discovered latent condition;
  • how the parties will decide if the condition is a latent condition;
  • how the parties will decide what action to take to address the latent condition;
  • whether the existence of a latent condition will cause delay;
  • whether an extension of time will be issued because of latent conditions;
  • if an extension of time is granted, whether the contractor is also entitled to delay costs; and
  • whether the contractor is entitled to the additional costs of addressing the latent condition, and if so, on what basis (e.g. a schedule of rates, expert determination etc).


Excluding or limiting liability for latent conditions



Principals often try to shift the risk of latent conditions to the contractor by:

  • excluding the principal's liability for latent conditions and anything contained in or omitted from information supplied to the contractor;
  • a disclaimer saying that the contractor cannot rely on information provided by the principal and must rely on its own investigations; and
  • an indemnity from the contractor that it will pay for the cost of any work which needs to be performed because the contractor relied on the information provided by the principal.

This is often the case where the project is the subject of a tender or where the principal has substantial bargaining power - but principals need to be careful that any exclusion clauses are properly drafted, as was the case in Dillingham Constructions Pty Limited v Downs [1972] 2 NSWLR 49 and Re Phillip & Anton Homes Pty Limited v the Commonwealth of Australia [1987] FCA 445.

For a principal to be able to rely on the transfer of risk for latent conditions to the contractor:

  • it must be possible to say that it is reasonable for the principal to transfer that risk; and
  • provision should be made for the contractor to have the time and opportunity to either fully inform themselves about the conditions on the site or otherwise deal with the risk before committing to the contract.

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Updated 11 July 2014