With the economy in decline, construction projects will likely experience an increase in claims as parties attempt to mitigate risk and salvage shrinking profit margins. In such an environment, both owners and contractors should get reacquainted with the law that governs one of the most common disputes between owners and contractors: differing site conditions. Generally, construction professionals accept that traditional site condition clauses control the risk associated with differing site conditions. New York case law, however, calls that conclusion into question.
Over 30 years ago, New York courts issued two rulings which imposed liability on owners for their failure to fully disclose information concerning site conditions. In Public Constructors, Inc. v. State of New York, 55 A.D.2d 368, 390 N.Y.S.2d 481 (3d Dep’t 1977), the State’s bid documents for a highway construction contract represented that the soil was made up of material that had the capacity to shed moisture. During construction, the contractor experienced extensive delays due to wet subsurface soil conditions. Years earlier, the State conducted test borings and investigations of the soil at the project site. Some of these test results, which indicated problems with the soil conditions due to excessive moisture, were not disclosed by the State.
In the case of Grow Construction Co., Inc. v. State, 56 A.D.2d 95, 391 N.Y.S.2d 726 (3d Dep’t 1977), the State contracted for the construction of a highway with two bridges. In the proposal, the State indicated that the soil at one of the bridge sites had low permeability, which suggested that it was ideal for constructing and dewatering cofferdams to be used in the construction of piers for the bridges. During construction, the contractor found coarser, more permeable soil than anticipated, which led to difficulties in dewatering certain cofferdams and, therefore, more pumping than anticipated. Although the State disclosed boring information which suggested conditions that might lead to problems with dewatering, the Court found that the State’s failure to present these results in the soil description section for the bridge may have led the contractor to believe that these conditions were incidental, not predominant factors.
In both of these cases, the Court found that the State was liable for extra costs because it failed to disclose relevant information, despite the fact that there was no showing of intent to harm the contractors. Instead, the only evidence of “bad faith” that was needed was that the State had access to information by which it knew, or should have known, that its site descriptions were misleading. Moreover, the State was liable despite the fact that the contracts in both cases contained familiar exculpatory clauses, which provided that the contractor was not entitled to rely on the descriptions being provided by the State. Finally, although these rulings both involved the State, their holdings were not expressly limited to cases in which the owner is a public entity, therefore they can apply to private owners of construction projects as well.
These rulings provide important lessons for both owners and contractors to learn. Owners should be sure to disclose any tests or reports of site conditions to their contractors and engineers, no matter how dated they may be. Second, owners should make sure all disclosures are conspicuously made in sections of the bid documents which would logically call for such information. For example, if a section of the bid documents provides information on soil conditions, owners should make sure that it contains all information known about soil. Finally, owners should not get a false sense of comfort from exculpatory clauses. They may be commonly used, but they do not allow an owner to escape its obligation of full disclosure. The bottom line is that owners should allow the costs associated with difficult site conditions to be priced up front because hiding them will only increase the overall cots of the project.
Contractors should be aware that while they may be able to get around exculpatory clauses, courts will still hold them to account for not conducting their own due diligence. Contractors should perform the inspections and tests required by their contracts and ask the owner and engineer if they have access to any pre-bid inspections. Only a contractor who uses its best efforts to familiarize itself with the project site will be able to prevail on a claim against an owner for differing site conditions.