March 28, 2002
Is this the end of differing site conditions?
By JASON R. WANDLER
Oles Morrison Rinker & Baker
Contractors engaged in the public (and private) arena of construction contracts have historically relied upon differing site condition (DSC) clauses as mechanisms for assuring compensation from the owner in the event unforeseen conditions, not discovered prior to bidding, are encountered.
The DSC clause is important because these conditions often lead to delays and impacts, which can dramatically increase the costs of completing a project.
Unfortunately, Division III of the Washington Court of Appeals, in Basin Paving v. Mike M. Johnson Inc., has arguably vitiated the protections under a DSC clause, shifting the ultimate risk of increased costs due to the discovery of differing site conditions back to the contractor.
The Basin case involved a public contract for the town of Lind’s wastewater and water system project. The bulk of the project was excavation, and as part of the bid documents, Lind had boring tests performed at 50-foot intervals along the project site and drawings were made incorporating the results of the tests.
While these drawings were provided to prospective bidders, several provisions in the bid documents purported to limit the bidder’s ability to rely on them. These “disclaimer” or “exculpatory” clauses contained language such as: “All excavation is unclassified and payment for rock excavation is not authorized. Prospective bidders are advised to examine the pipeline routes carefully and to their own satisfaction determine the likelihood of encountering rock formations.”
Mike M. Johnson Inc. was awarded the contract. Mike M. Johnson Inc. contended that during the course of excavation, it encountered significantly more rock than was indicated in the boring logs and drawings, leading to project delays and increased costs. Mike M. Johnson Inc. then sought recovery of its increased costs based upon the contract’s DSC clause.
The town of Lind denied the claim, and Mike M. Johnson Inc. filed suit in Adams County Superior Court. The trial court denied recovery, finding there was no “changed condition.”
The Court of Appeals upheld the trial court’s decision, finding that “the presence of rock in any amount is not a changed condition entitling (Mike M. Johnson Inc.) to additional compensation.” In support of its holding, the court found that the disclaimer clauses contained in the contract documents effectively shifted all risk of subsurface conditions to the contractor.
Essentially, the protections the owner gave via the DSC clause with one hand were taken away with the other by including inconsistent disclaimer provisions.
The court found that, because of limiting language in the contract, Lind made no representations as to what the contractor would find under the surface, even though the town provided specific boring tests to prospective bidders.
In a somewhat contradictory analysis, the court held that the boring tests could not be relied upon by Mike M. Johnson Inc., finding that “(t)he contract expressly stated that Lind did not warrant the accuracy of the boring tests, and specifically stated that a contractor’s reliance must be limited.”
However, the court found that those same boring tests helped defeat Mike M. Johnson Inc.’s argument because they indicated the presence of subsurface rock along the pipeline routes. Again, the court is supporting the proposition that what an owner gives with one hand, it may take away with another.
Lastly, and perhaps most important to those contractors submitting bids on projects where subsurface conditions are unknown, the court failed to recognize any distinction between what is “foreseeable” and what is “possible” in the context of anticipating differing site conditions.
Mike M. Johnson Inc.’s President, Mike Johnson, was asked during his deposition whether it was possible he would encounter more subsurface rock than what was indicated in the boring tests. Johnson replied, “I think that’s an assumption you could make, yes, that it might be possible.”
Relying on this testimony, the court held that Johnson “knew there could have been more subsurface rock that was indicated.”
The possibility, however, that Johnson testified about is the exact “possibility” that is to be addressed by a contract’s DSC clause. Almost every time a contractor enters into a contract for the excavation of onsite material, there is a possibility that subsurface conditions will be discovered that were not anticipated when the bid was calculated and submitted.
When and if the possibility becomes reality, the DSC clause is triggered, entitling a contractor to an equitable adjustment in the contract amount for the added costs incurred as a result of the unanticipated conditions. This “possibility,” however, does not equate with the common understanding of what is foreseeable, let alone “reasonably” foreseeable.
What is foreseeable?
Under the court’s analysis, the foreseeability of the possibility that certain conditions may exist is the same as the foreseeability that specific conditions do exist. Taking this reasoning and applying it to the everyday world of construction contracts, it would appear that to defend against a differing site condition claim, an owner need only show that the contractor knew that a differing site condition was possible.
What then, is the purpose of a DSC clause, which is designed to compensate a contractor for the possibility of encountering differing site conditions?
The Basin opinion raises several important questions for this state’s contractors. In submitting their bids, should contractors include contingency amounts whenever the possibility of differing site conditions exists? Must contractors contemplating the submission of bids on these types of projects spend considerably more time and money during pre-bid investigation, conducting their own boring tests and/or other subsurface analysis? How do contractors recover these increased pre-bid costs?
Most important is the issue of who is really bearing the costs associated with this transfer in risk.
While public owners may be saving the taxpayers money by defeating claims for differing site conditions in the short-term, the long-term effects may prove to be more costly if contractors are forced to increase the amounts of their bids in an effort to deflect risks that the Court of Appeals’ reasoning so squarely would place upon them. The public will then be paying additional funds for public construction projects, whether those costs are needed or not. After all, while the Court of Appeals may believe something that is possible is a foreseeable reality, out on the job site, possibilities and realities are at opposite sides of the risk-taking spectrum.
The ultimate impact of the court’s decision in Basin on the public (and private) contracting community is not yet known. The Washington Supreme Court recently declined to review the Court of Appeal’s decision, yet Basin appears to be directly inconsistent with prior Washington Supreme Court opinions, as well as with precedent in other jurisdictions.
Until the Supreme Court has occasion to review the validity of the Basin analysis in some other future case, the trial courts and contractors will just have to do as best they can to deal with the resulting uncertainty in Washington law, and the troublesome issues raised by Basin.
Jason R. Wandler is an attorney at Oles Morrison Rinker & Baker LLP specializing in construction law. He may be reached at (206) 623-3427 or firstname.lastname@example.org.
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