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3. Legal Aspects of Site Investigations 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 important. More important, effective preconstruction contract 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 unusua~ circumstances, in a fixed-price contract the risk of difficult and dis- ruptive subsurface conditions is imposed on the construction contractor. 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. In these situations, the contractual documents frequently change the risk allocation through specific â¢oiffering Site Conditionsâ¢ or â¢changed Conditionsâ¢ 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. 16
RISIC ALLOCATI011 POLICY OP DIFFBRIRG SITE COHDITIOHS CLAUSES It is the policy of moat 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 â¢indicated by the contract documents. â¢ Although the drawings and specifications them- selves may provide indications within the â¢aning of these clauses, the â¢indicationsâ¢ 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 â¢ordinarily encounteredâ¢ and â¢generally recognized as inheringâ¢ 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. Cl. 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 Governâ¢nt 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 bidder [s] 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 17
risk of encountering an adverse subsurface, and they need not consider 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. <MNER 1 S DUTY '1'0 CONDUCT IIJVESTIGATIONS 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. 0W11BR 1 S DUTY '1'0 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. 18
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. [2!! generally Annotation, Duty of Public Authority to Disclose Informa- tion Affecting Cost or Feasibility of Performing Contract, 86 A.L.R. 3d 182, SS 8-12.) A government agency may not knowingly allow a contractor to follow a â¢ruinous courseâ¢ 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 â¢fully and accurately.â¢ [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~cWilliams 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 Morrison-Knudsen Co. 19
v. Alaska, 519 P.2d 834 (Alaska 1974), 86 A.L.R. 3d 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. Cl. 151, 368 F.2d 585 (1966): â¢neglectâ¢ not to consider data; â¢illogicalâ¢ 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 â¢contract indicationâ¢ 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 anum 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 â¢changed Conditionsâ¢ 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- tions, 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 fraud or misrepresentation on the part of the owner. [See Mobile Turnkey Housing, Inc. v. Ceafco, Inc., 321 So. 2d 186, 191 (Ala. 1975).) Such theories are speculative because they depend on detailed facts of the particular transaction. Contractor recovery on such theo- 20
ries, and the attendant thrusting of the risk on the owner, is nonethe- less possible. DISCLAIMERS OF SUBSURFACE IIIVESTIGA'l'ION 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 â¢indicated by the contract documents.â¢ 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). 1 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 finds that the owner did not make a representation that was later found to be mat~r i- ally incorrect. (See Miami-Dade Water and Sewer Auth. v. Inman, Inc., 402 so. 2d 1277, 1278 n.2 (Fla. 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