Parker A. Lewton | Smith Currie | April 2, 2019
A contractor who has encountered unforeseen conditions will typically rely on the contract’s differing site conditions clause as a means to recovery. Most construction contracts address those issues directly. In ConsensusDocs Standard Agreement and General Conditions between Owner and Constructor, the starting point is § 3.16.2. But what if the contract does not contain a differing site conditions clause? Or, what if the contract does contain such a clause, but the contractor failed to provide adequate notice or satisfy other conditions or requirements of the contract? When reliance on a differing site conditions clause is impractical, a contractor still may seek recovery in certain instances under one or more of the following legal theories: misrepresentation; fraud; duty to disclose; breach of implied warranty; and mutual mistake.
Misrepresentation occurs when an owner “misleads a contractor by a negligently untrue representation of fact[.]” John Massman Contracting Co. v. United States, 23 Cl. Ct. 24, 31 (1991) (citing Morrison–Knudsen Co. v. United States, 170 Ct. Cl. 712, 718–19, 345 F.2d 535, 539 (1965)). A contractor may be able to recover extra costs incurred, under a theory of misrepresentation, if it can show that (1) the owner made an erroneous representation, (2) the erroneous representation went to a material fact, (3) the contractor honestly and reasonably relied on that representation, and (4) the contractor’s reliance on the erroneous representation was to the contractor’s detriment. See T. Brown Constructors, Inc. v. Pena, 132 F.3d 724, 728–29 (Fed. Cir. 1997). These four requirements can be satisfied, for example, through the use of deposition testimony detailing the owner’s representations and the contractor’s reliance thereon. See, e.g., C & H Commercial Contractors, Inc. v. United States, 35 Fed. Cl. 246, 256–57 (1996).
Whereas misrepresentation requires a negligent representation of material fact, recovery under a theory of fraud requires proof that the contractor was intentionally misled. Fraud, sometimes referred to as intentional misrepresentation, typically involves an owner knowingly concealing a difficult or costly condition in an effort to lower fixed-priced bids. Historically, courts looked to contractors for evidence of an express statement made by the owner. This high evidentiary standard has been relaxed over time, allowing contractors to demonstrate that the owner knew one thing but represented another, and the court can then infer the necessary intent from the circumstances.
Breach of Duty to Disclose
Similar to misrepresentation is failure to disclose. Under the duty to disclose, an owner is required to disclose all project-related information in its possession. A contractor can recover for an owner’s failure to disclose if (1) the contractor agrees to perform without knowledge of a material fact that will increase the cost or time of performance, (2) the government knew that the contractor had no knowledge of that material fact, (3) the contract specifications did not put the contractor on notice to inquire about that fact, and (4) ultimately, the government failed to provide the contractor with said information. Typically, the owner’s duty to disclose applies notwithstanding any specific request for information made by the contractor. Some courts, however, have found no liability when the contractor made no specific request. See, e.g., Schmelig Constr. Co., Inc. v. State Highway Comm’n, 543 S.W.2d 265 (Mo. App. 1976).
Importantly, an owner’s duty to disclose sometimes can extend beyond the confines of the specific site. For example, if the owner is aware of another nearby contractor encountering substantial rock in an adjacent area, the duty to disclose will apply. See, e.g., Jacksonville Port Auth. v. Parkhill-Goodloe Co., 362 So. 2d 1009 (Fla. Dist. Ct. App. 1978). Of course, what is considered to be sufficiently “adjacent” to trigger an owner’s duty to disclose is subject to debate.
Breach of Implied Warranty
To recover for a breach of implied warranty, a contractor must demonstrate that a valid warranty existed, the warranty was breached, and the breach caused harm to the contractor. One potential source of a valid warranty famously stems from the United States Supreme Court decision in United States v. Spearin. Under what is commonly referred to as the Spearin doctrine, the government impliedly warrants that the plans, specifications and details included in a solicitation are accurate, complete, workable, and biddable and, if followed, satisfactory results will be achieved. 248 U.S. 132 (1918). Generally, this implied warranty applies only to design specifications detailing the actual method of performance—it usually does not apply when the specifications simply establish an objective without specifying the method of performance to achieve that objective. Nonetheless, a contract’s specifications may be considered defective if a method of construction performance is specified and that method of performance cannot be followed due to an unanticipated site condition. If a contractor cannot achieve satisfactory results because of such a defect, the owner may be liable for breach of implied warranty.
A general disclaimer of responsibility for the accuracy of the owner’s plans or specifications will typically not allow an owner to escape liability for defects contained therein. See, e.g., Baldi Bros. Constructors v. United States, 50 Fed. Cl. 74, 79 (2001); Al Johnson Constr. Co. v. United States, 854 F.2d 467, 468 (Fed. Cir. 1988) (“The implied warranty is not overcome by the customary self-protective clauses the government inserts in its contracts[.]”). But this does not relieve the contractor from its duty to investigate and inquire about a patent ambiguity, inconsistency, or mistake the contractor recognizes—or should have recognized—in the specifications or drawings. Blount Bros. Constr. Co. v. United States, 171 Ct. Cl. 478, 346 F.2d 962, 972–73 (1965). This duty, however, applies only to patent errors—it does not impose on the contractor an obligation to search out hidden or subtle errors in the specifications.
A less frequently followed road to recovery is the legal doctrine of mutual mistake. Under this theory, a party alleges that no valid contract actually exists because of the parties’ mutual mistake concerning the existence of a factual condition that goes to the very essence of the contract (e.g., the parties mistakenly believed the price of steel was lower than it actually was). If successful in having the contract reformed on this basis, the contractor can then seek to recover the actual cost paid on a quantum meruit basis (i.e., the reasonable value of the goods and services furnished). There are, however, two caveats worth noting. First, the doctrine of mutual mistake will not apply if the contract placed the risk of mistake on the party seeking reformation. And second, the mutual mistake must go to an existing fact: “If the existence of a fact is not known to the contracting parties, they cannot have a belief concerning that fact; therefore, there can be no ‘mistake.’” Atlas Corp. v. United States, 895 F.2d 745, 750 (Fed. Cir. 1990).
Typically, responsibility and remedies for unforeseen conditions will be governed by contract. Even when contractual remedies do not exist or the contractor is unable to use them, there are limited avenues to recovery outside the contract. Because these remedies may exist, it is wise to be as detailed and specific in documenting events and costs related to unforeseen conditions, even if contractual remedies are lacking.