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1
3.
Legal Aspects of Site Investigations
~~ _ A
Unexpected subsurface conditions are the primary cause of disputes and
litigation arising from contracts for underground construction. The
risk of unknown subsurface conditions is a primary concern of contrac-
tors in the pricing of such contracts. Given these pragmatic circum-
stances, the contractual or legal allocation of these risks is vitally
~~ ~~ ~ - - investi-
gation of the geotechnical conditions is important not only to allocate
risks but also to reduce them.
Lacking specific contract terms, owner representations, or unusual
circumstances, in a fixed-price contract the risk of difficult and dis-
ruptive subsurface conditions is imposed on the construction contractor.
Important. More Important, ertectlve preconstruction contract
. · . . . . . . .
_ . . · . · · .
in most recent circumstances Involving major underground construction,
however, a preconstruction geotechnical investigation of the subsurface
materials is conducted, and some or all of the resulting information
becomes a part of the contractual transaction.
contractual documents frequently change ~
specific "Differing Site Conditions" or
-
In these situations, the
the risk allocation through
"Changed Conditions" clauses,
explicit or implied warranties, or other terms which tend to place the
burden of these risks on the owner.
Where the contract terms are not explicit, the owner may unknowingly
assume the risk by failing to disclose or misrepresenting factual infor-
mation yielded by the preconstruction geotechnical investigation. In
either event, the investigation becomes a central element in the defi-
nition and allocation of risk when difficult subsurface conditions are
encountered during performance of the work.
There are strong economic and engineering reasons, presented else-
where in this report, for reducing uncertainty as to subsurface risks
and the allocation of those risks. Preconstruction contract uncertainty
as to risk and post-contract uncertainty as to risk allocation are ready
catalysts for disputes and litigation. In part, this explains the policy
adopted in the federal sector. In the nonfederal sector and certainly
in the commercial world, a range of choices remains open to owners as to
the contract terms.
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RISK ALLOCATION POLICY OF DIFFERING SITE CONDITIONS CLAUSES
It is the policy of most government agencies and many owners to bear the
majority of risk due to subsurface uncertainties (and thus avoid signif-
icant contingencies in pricing by contractors) through specific terms
known as either Differing Site Conditions or Changed Conditions clauses.
These relatively standard clauses permit the contractor an adjust-
ment in contract price where the subsurface conditions actually encoun-
tered in performance differ materially from those "indicated by the
contract documents." Although the drawings and specifications them-
selves may provide indications within the meaning of these clauses, the
"indications" most directly in point lie in the data yielded by the
owner's prior geotechnical investigation.
The standard clauses also provide for an adjustment where the sub-
surface conditions differ materially from those "ordinarily encountered"
and "generally recognized as inhering" in the contract work. This less
precise standard is more difficult for the contractor to meet and has a
less direct relationship to the prior geotechnical investigation.
Nevertheless, disclosure of the pre-bid investigation may protect the
government or owner by broadening the concept of what is ordinarily
encountered in the type of work called for by the contract.
This basic contracting policy is made mandatory in the Federal
Acquisition Regulations (FAR), and thus is operative as a matter of
law. It is perhaps best expressed in the landmark decision of the
United States Court of Claims in Foster Construction, et al. v. United
States, 435 F.2d 873, 887 (Ct. C1. 1970~:
-
Whenever dependable information on the subsurface
is unavailable, bidders will make their own borings or,
more likely, include in their bids a contingency ele-
ment to cover the risk. Either alternative inflates
the costs to the Government. The Government therefore
often makes such borings and provides them for the use
of the bidders, as part of a contract containing the
standard changed conditions clause.
Bidders are thereby given information on which they
may rely in making their bids, and are at the same time
promised an equitable adjustment under the changed con-
ditions clause, if subsurface conditions turn out to be
materially different than those indicated in the logs.
The two elements work together; the presence of the
changed conditions clause works to reassure bidderEs]
that they may confidently rely on the logs and need not
include a contingency element in their bids. Reliance
is affirmatively desired by the Government, for if bid-
ders feel they cannot rely, they will revert to the
practice of increasing their bids.
The purpose of the changed conditions clause is
thus to take at least some of the gamble on subsurface
conditions out of bidding. Bidders need not weigh the
cost and ease of making their own borings against the
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risk of encountering an adverse subsurface, and they
need not cons ider how large a contingency should be
added to the bid to cover the risk. They will have no
windfalls and no disasters. The Government benefits
from more accurate bidding, without inflation for risks
which may not eventuate. It pays for difficult subsur-
face work only when it is encountered and was not indi-
cated in the logs.
All this is long-standing, deliberately adopted pro-
curement policy, expressed in the standard mandatory
changed conditions clause and enforced by the courts
and the administrative authorities on many occasions.
The U.S. National Committee on Tunneling Technology (1974) has
recommended this policy for adoption by all owners. Obviously, the ef-
fectiveness of the Differing Site Conditions clause in achieving the
purposes outlined in Foster Construction is heavily dependent on the
adequacy of the prior geotechnical subsurface investigation.
OWNER'S DUTY TO CONDUCT INVESTIGATIONS
The owner has no legal duty to make a geotechnical investigation of the
subsurface. In the absence of such an investigation, the burden falls
on the contractor to make his own investigation or to assume the risks
of the lack of an investigation.
However, owners usually do conduct investigations. This customary
practice is dictated by the owner's need for geotechnical data for de-
sign purposes. Such information has obvious relevance to construction
as well as design, and is subject to a duty of disclosure, as described
in the paragraphs that follow. Moreover, the failure to conduct an
investigation and to provide its results to the contractor would sub-
stantially defeat the purpose of the Differing Site Conditions clause by
denying the contractor indications of the subsurface conditions through
the contract documents.
oWNER'S DUTY TO DISCLOSE
Where the owner has, through a specific preconstruction geotechnical
investigation related to the project or other relevant prior experience,
obtained information indicating the nature of the subsurface conditions,
U.S. National Committee on Tunneling Technology. 1974. pp. 20-21 in
Better Contracting for Underground Construction. Washington, D.C.:
National Academy of Sciences.
~8
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the question arises whether there is a duty of disclosure to bidders.
Unfortunately, this question is frequently addressed in the post-
construction litigation circumstance, rather than at the time of
contract formulation.
The rule, based on the common-law concepts of misrepresentation and
fraudulent inducements, is that the owner has an obligation to disclose
material information. The rule is clear where the owner is a public
entity. The judicial precedents arising from commercial construction
are not as well developed, but the legal principles have obvious appli-
cations.
If a public entity (federal, state, or local) possesses information
about geotechnical conditions which it knows the contractor does not
possess or have access to, and which is material to the cost or method
of performance, then the public entity must disclose such information.
[See generally Annotation, Duty of Public Authority to Disclose Informa-
tion Affecting Cost or Feasibility of Performing Contract, 86 A.L.R. ad
182, SS 8-12.] A government agency may not knowingly allow a contractor
to follow a "ruinous course" by withholding superior knowledge. [See
Helene Curtis Indus., Inc. v. United States, 312 F.2d 774 (1963~.] This
rule was recently stated by a federal board of contract appeals as fol-
lows:
The government has an implied duty to help, rather
than hinder, performance and is obligated to provide
contractors with special knowledge in its possession
which might aid the contractor in formulating his cost
estimates and his bid.
The courts and boards have taken an increasingly
stringent attitude toward the withholding of such in-
formation. [Flores Drilling, AGBCA No. 82-204-3, 83-1
BCA, 16,200 at 80,486 (1982~.]
This duty to disclose covers all material information about the site
that the government possesses, even if not discovered specifically in
preparation of the bid materials. [See Raymond International, Inc. v.
Baltimore County, 412 A.2d 1296 (Md. Ct. Spec. App.) cert. denied, 449
U.S. 1013 (1980~.] Failure to disclose can constitute misrepresentation
when some, but not all, facts are disclosed. If the owner chooses to
reveal any information from test borings, it has an obligation to dis-
close the information "fully and accurately." [See Robert E. Lee & Co.,
Inc. v. Comm'n of Public Works, 149 S.E.2d 55, 58-59 (S.C. 1966~.] In
Michigan Wisconsin Pipeline Co. v. Williams-McWilliams Co., 551 F.2d 945,
951-53 (5th Cir. 1977), the Corps of Engineers' failure to represent a
subsurface pipeline in bid drawings, contrary to its usual practice,
constituted an affirmative representation that the pipeline was not
there, rather than a mere omission.
However, the owner does not have a duty to disclose judgments and
conclusions which it draws from factual data, as opposed to the raw fac-
tual information itself. [See S&M Constructors v. City of Columbus, 70
Ohio St. 2d 69, 434 N.E.2d 1349 (1982).]
Nor is the government liable for nondisclosure of information to
which the contractor has equal access through its own experience, through
cursory inspection, or through industry data. In Morr icon-Knudsen Co
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v. Alaska, 519 P.2d 834 (Alaska 1974), 86 A.L.R. ad 164, the state was
not required to disclose information it received from other bidders since
this same information obviously could have been acquired by the present
bidder if it had made a reasonable effort. Furthermore, a contractor
will be held responsible for making reasonable inferences about site
conditions from information that the owner does disclose. [See Luke
Construction Co., ASBCA No. 24889, 81-1 BCA, 15,023 (1981~.]
Where the owner discloses data as a part of the contract documents,
the contractor is entitled to rely on such data. Indeed, the contractor
cannot ignore the data. Where the owner discloses information without
incorporating it as a contractual matter, the rights of the parties be-
come less clear. Where the contract documents only call attention to
the information, it is arguable that the contractor cannot ignore it
and, thus, as a matter of fairness, that he is entitled to rely on it.
[See United Contractors v. United States, 177 Ct. C1. 151, 368 F.2d 585
(1966~: "neglect" not to consider data; "illogical" to fault contractor
for having relied on data.] On the other hand, it has been held that
the contractor is not bound by and not entitled to rely on this type of
information. [See Dravo Corp., ENG BCA No. 3901, 80-2 BCA (14,757), and
American Structures, Inc., ENG BCA No. 3408, 75-1 BCA (11,283~.] Where
the owner provides information by a process not explicitly or implicitly
related to the contract, the contractor does not appear to be entitled
to rely on the data as a "contract indication" within the meaning of the
Differing Site Conditions clause. At the same time, he may not be re-
quired to rely on it.
LIABILITY FOR SUBSURFACE INFORMATION DISCLOSED BY OWNER
Where the contract contains a Differing Site Conditions clause, the own-
er assumes the risk of material differences between the actual condi-
tions and those indicated by the geotechnical information which the
owner discloses. Indeed, as noted previously, this is one of the basic
mechanisms for fulfilling the risk allocation policy underlying the Dif-
fering Site Conditions clause. [See generally Annotation, Effect of
"Changed Conditions" Clauses in Public Contracts, 85 A.L.R. 2d 211, 217-
20.]
A more difficult question arises where the owner furnishes informa-
tion which turns out to be materially discrepant from the actual condi-
t~ons, but there is no Differing Site Conditions clause. The contractor,
not having obtained an explicit contractual promise that the price would
be equitably adjusted in such event, is forced to depend on more general
and speculative legal theories. There is no implied right to extra
compensation as a result of changed conditions. Thus, the contractor
discovering geotechnical subsurface conditions that materially differ
from data furnished by the owner must rely on allegations of implied
warranty and f raud or misrepresentation on the part of the owner. [See
Mobile Turnkey Housing, Inc. v. Ceafco' Inc., 321 So. 2d 186, 191 (Ala.
19757.] Such theories are speculative because they depend on detailed
facts of the particular transaction. Contractor recovery on such theo-
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ries, and the attendant thrusting of the risk on the owner, is nonethe-
less possible.
DISCLAIMERS OF SUBSURFACE INVESTIGATION DATA
It is a common practice of owners to disclaim, in varying ways, respon-
sibility for the geotechnical information which they provide to bidders
prior to contract. This is a practice that has been criticized (see,
for example, Better Contracting for Underground Construction, above).
It is widely assumed by contractors that such disclaimers are ineffec-
tive as a matter of law: in most (but not all) circumstances, they are.
Where there is a Differing Site Conditions clause, the disclaimer is
usually seen as being in conflict with the clause's language allocating
the risk based on what is "indicated by the contract documents." Where
the Differing Site Conditions clause is required by law, as in federal
government construction, conflict between the mandatory clause and the
disclaimer has been resolved in favor of the mandatory clause, and the
disclaimers are adjudged ineffective. Thus, a general disclaimer of the
government's responsibility for geotechnical subsurface information is
not enforceable to overcome a Differing Site Conditions clause in a
federal contract. [See, for example, Foster Construction, et al. v.
United States, above.]
Even in the context of public procurement, however, the owner may be
able to avoid responsibility for the results of the geotechnical site
investigation in certain circumstances. For example, the disclaimer may
be so specific that it will be deemed not materially inconsistent with
the standard clause. Or, in nonfederal procurement, the standard Dif-
fering Site Conditions clause may not be required by law or general pol-
icy and thus the disclaimer may be acceptable even where there is a Dif-
fering Site Conditions clause in the contract. [See McHugh Construction
Co., ENG BCA No. 4600, 82-1 BCA, 15,682 at 77,530 (1982).]
Obviously, a disclaimer does not confront the same hurdles when
there is no Differing Site Conditions clause in the contract. In such
circumstances, the exculpatory language will be upheld, unless the con-
tractor can show fraud or bad faith. [See S&M Constructors v. City of
Columbus, 70 Ohio St. 69, 434 N.E. 2d 1349 (1982) . ~ Thus, courts will
seek a way to prevent an owner from making a representation, explicit or
implied, but disclaiming responsibility for it. Exculpatory clauses are
not per se invalid; they can be enforced when the court f inds that the
owner did not make a representation that was later found to be materi-
ally incorrect. [See M~ami-Dade Water and Sewer Auth. v. Inman, Inc.,
402 So. 2d 1277, 1278 n.2 (Flat App. 1981~.]
In sum, the use of disclaimers introduces an ambiguity as to risk
allocation which tends to promote expensive disputes and litigation. In
most circumstances, their use is considered to be inequitable and unen-
forceable.
21
Representative terms from entire chapter:
site conditions
