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In construction projects it is not uncommon for a contractor
to encounter site conditions that differ from what was originally
anticipated, resulting in increased costs for the performance
of the contractor’s work. The party responsible for
such increased costs will likely be determined by the terms
of the parties’ contract. A typical clause used in construction
contracts to shift the risk for unknown site conditions from
the contractor to the owner is called a “differing site conditions”
clause. A standard construction contract, such as the
American Institute of Architects, A201-2007, General Conditions,
contains a differing site
conditions clause that entitles a contractor
to an equitable adjustment to
the contract time and/or price upon
the presence of “(1) subsurface or
otherwise concealed physical conditions
that differ materially from
those indicated in the Contract
Documents or (2) unknown physical
conditions of an unusual nature that
differ materially from those ordinarily
found to exist and generally recognized
as inherent in contract activities
of the character provided for
in the Construction Documents.”
Without a differing site conditions
clause, however, a contractor may be found to bear all of the
additional costs associated with performing its work, despite
the presence of unexpected site conditions.
Such was the case in Sunland Constr. Co. v. City of Myrtle
Beach, 2008 U.S. Dist. LEXIS 103049 (D.S.C. Dec. 22,
2008), in which the United States District Court for the District
of South Carolina denied recovery to a contractor for
costs associated with the performance of work due to allegedly
unknown and/or different site conditions. In Sunland
Constr. Co., the City of Myrtle Beach contracted for the
construction of three stormwater drainage pipes beneath the
floor of the Atlantic Ocean in the Deephead Swash area in
Myrtle Beach, South Carolina. The contractor employed a
method of construction known as horizontal directional
drilling which utilized a series of lateral drills with each
subsequent drill increasing the size of the hole until pipes
were able to be pulled through the hole. Due to the complexity
of horizontal directional drilling, it is necessary to have
accurate geotechnical information of the composition of the
subsurface material through which the drilling will occur
and the pipe will be pulled.
In Sunland Constr. Co., an engineer made five soil borings
and issued its report based upon this testing. This engineer’s
report was incorporated into the contract specifications upon
which the contractor relied. During the performance of its
work, the contractor encountered numerous issues which it
believed were related to the presence of boulders and pressurized
fresh water aquifers not identified in the engineer’s
report. Due to the lack of a differing site conditions clause in
the contract, the contractor conceded that the city had intended
to shift the risk of unknown site conditions to the
contractor. Nonetheless, the contractor believed that an
“errors and omissions” clause in the contract actually
shifted the risk of the unforeseen conditions back to the
city.
The court, however, found the testimony of an expert witness
for the engineer credible and
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agreed with the witness that the “errors and omissions” clause related only to design
specifications, such as the type of pipe to be used. Hence, if
the contractor’s work failed due to deficiency in the type of
pipe specified, the contractor would be
protected through the “errors and
omissions” clause. By seeking protection
owing to changed site conditions,
a “differing site conditions” clause
would have been necessary for the
contractor to prevail.
Another central issue in Sunland
Constr. Co. was whether the contractor
was entitled to rely upon the accuracy
of the engineer’s report. The contractor
sued the city and the engineer
on several counts including a breach
of the implied warranty that the plans
and specifications would be sufficient
for the performance of the contractor’s work, arguing that,
under Supreme Court precedent, “if the contractor is bound
to build according to plans and specifications prepared by
owner, the contractor will not be responsible for the consequences
and defects in the plans and specifications.” The
court in Sunland Constr. Co., however, determined that the
contractor was unable to meet its burden of proof that the
conditions encountered during the project constituted materially
different site conditions from the conditions reflected
in the engineer’s report. As such, the contractor failed to
establish its breach of warranty claim.
While the contractor in Sunland Constr. Co. was unable to
recoup its costs for attempting to perform the work, it was
able to avoid having to pay breach of contract damages to
the city. Specifically, the court found that, because the contractor’s
bid was so much lower than all other contractors it
could not have reasonably believed that it bore the risk for
differing site conditions. The court determined, therefore,
that the parties did not have a meeting of the minds on all
material contract terms.
In such circumstances, the contract would usually be rescinded,
consideration would be returned, and damages may
be awarded on a quantum meruit basis. Sunland Constr. Co.
is instructive, as the contractor could have potentially
avoided its financial loss had a differing site conditions
clause been included in the contract, entitling him to an
equitable adjustment to the contract, as it may have continued
the project to completion, confident that it would be
paid for the unanticipated differing site condition.
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