Many construction contracts contain some version of a
“differing site conditions” clause. AIA’s A201
general conditions, as well as in the EJCDC equivalent, contains a
changed site condition clause. It also appears in most state DOT
specifications and federal government construction contracts.
Generally, this provision provides for a change order (subject to
procedural compliance) when the contractor encounters (i)
subsurface or other concealed conditions that differ materially
from the conditions indicated by the contract documents or (ii)
unknown physical conditions of an unusual nature differing
materially from those ordinarily encountered and recognized as
inherent to the work provided for in the contract documents. But,
as they say, “timing is everything.”
In Olympus Corp. v. United States, 98 F.3d 1314
(Fed. Cir. 1996), the United States Federal Circuit Court of
Appeals decided that delays caused by a government caused
hazardous materials spill are not compensable under the
federal Differing Site Conditions clause. The court reasoned
that to be considered a differing site condition, the
condition must exist at the time the contract was formed.
Olympus entered into a fixed price contract with the United
States to pave the plant yards at the Stratford Army Engine Plant
located in Stratford, Connecticut. The contract contained a
standard Differing Site Conditions clause (as required by the
Federal Acquisition Regulation, 48 C.F.R. § 52.236-3 (1995))
which provided, in part, for an equitable adjustment, upon notice
of “subsurface or latent physical conditions at the site which
differ materially from those indicated in [the] contract.”
The plant site was managed under a separate contract
between the United States and Textron Lycoming.
Shortly after receiving its Notice to Proceed,
Textron cut open an oil pipe in the plant yard that caused a
spill that contaminated soil in the yard and prevented Olympus from
paving. The clean-up effort delayed Olympus, so Olympus sought
additional compensation under the Differing Site Conditions clause.
After rejecting an offer of additional compensation as inadequate,
Olympus filed suit in the U.S. Court of Federal Claims (Olympus had
an additional claim for delay caused by a strike of Textron
employees). That court found, in part, the Differing Site
Conditions Clause only provided compensation for delays caused
by conditions which existed at the time the contract was formed.
Olympus
appealed.
The Court first focused on the purpose of the Differing Site
Conditions clause, explaining its historical use to shift risk to
the government of adverse subsurface or latent physical conditions
that would be normally born by the contractor in a fixed price
contract. Through inclusion of the clause, the government
encourages “more accurate bidding”
by discouraging contractors from including contingencies in
their bids to cover the risk of differing site conditions. However,
according to the Court, the clause only shifts those risks which
are consistent with the policy of the clause — encouraging
more accurate bidding. But, it does not shift the risk of all
unanticipated conditions. As such, the Court implied the clause did
not operate to transfer the risk of nonexistent conditions since
such conditions do not affect the accuracy of bidding.
Next, the Court explained that its “precedent has long
imposed a temporal limitation on the applicability of the Differing
Site Conditions clause.” Particularly, it cited John
McShain, Inc. v. United States, 179 Ct. Cl. 632, 375 F.2d 829
(1967) and Arundel Corp. v. United States, 96 Ct. Cl. 77
(1942) for the proposition that for “half a
century,” federal courts have interpreted the clause as not
applying to conditions which “come into being only after the
contract has been executed or the work commenced.”
Finally, the Court dismissed Olympus’s argument that there
was no express provision in the clause that limited its operation
to conditions existing at execution of the contract. Olympus
specifically argued that adoption of the government’s
interpretation inappropriately gave effect to the government’s
“subjective intent” over the clear terms of the contract.
The Court acknowledged its obligation to interpret the
contract according to its “ordinary and commonly
accepted meaning.” However, the Court also
stated it was obliged to interpret the contract from the
perspective of a “reasonable and prudent contractor”
and is bound by precedent. Based on precedent, the court
found a “reasonable and prudent
contractor…would have been familiar with
the long-standing limitation on a Differing Site Conditions
clause to conditions existing when the contract was
executed.” Since the soil was not contaminated by the
oil spill at the time of execution of the contract, the Court
rejected Olympus’s claim in its entirety.
Comment
Olympus is still good law. See Extreme Coatings,
Inc. v. United States, 109 Fed. Cl. 450 (2013). However,
Olympus only discussed compensability under the
federal Differing Site Conditions Clause. Other avenues may
well have been available for recovery of the damages caused by
the spill, including change, breach of warranty, suspension of
work, and/or breach of duty not to hinder or delay. The Court even
implied as much.
A case awarding compensation to the Contractor under
similar circumstances but using a different theory is Shea v.
City of Los Angeles, 6 Cal. App. 2d 534, 45 P.2d 221 (1935).
There, the contractor sought costs of extra work created when a
sewer leaked into a drainage excavation. The leak caused
flooding of the excavation and its collapse. The contract
purported to place the risk of “any unforeseen obstruction or
difficulties, either natural or artificial, which may be
encountered in the prosecution of the work…on the
Contractor.” The court found, however, that “the contract
did not contemplate that [the Contractor] should bear the
burden of the city’s negligence in doing or permitting acts
which would constitute an obstacle to the [Contractor’s]
fulfilling the obligations imposed by the Contract.”
Similar logic applies to the oil spill encountered by
Olympus. The government should not have permitted
activities which would jeopardize Olympus’ ability to
perform the work.
It is unclear why other theories were not before the
Olympus court. The court hinted that it considered
the actions of the plant manager, Textron, as the actions of a
third-party for whom the government was not responsible. Such
an argument may have affected the trial court’s ruling on the
other possible theories, if such theories were before the
court.
More significantly, however, the Appellate Court seemed to
ignore the fact that Textron was acting in its capacity as a
separate government contractor. As such, the government should
have had some sort of duty to coordinate Textron and
Olympus’ work such that Textron did not interfere with
Olympus. The government could better control Textron and its
performance than Olympus. It follows that the government could
more easily bear the risk of damages caused by Textron’s
actions. Many government contracts are indeed written to place
risks on the shoulders of the party best able to control them.
In order to fairly allocate risks, many state and local
government contracts, as well as private ones, now place the
risk of unforeseen hazardous conditions on the government (or owner
in the private context). We have seen this accomplished in a
separate contract clause or via modifications to standard
differing site conditions clauses. Absent such a modification
or reallocation of risk, “reasonable and prudent
contractors” need be aware that while the government may
shoulder the burden of hazardous conditions at a work site which
exist prior to contract formation under the traditional Differing
Site Conditions clause, as interpreted by the Federal Circuit,
that clause does not place the risk of unforeseen subsurface or
latent physical conditions created after contract formation.
That is a harder, but not unwinnable, argument dependent on the
contract language and circumstances of the case. Contractors also
should also pay close attention to notice requirements contained in
changed conditions clauses that may impact their ability to
recover.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
#Timing #Matters #Differing #Site #Conditions #Government #Contracts #Procurement #PPP
