In this article, we will describe:

  • what latent conditions are;
  • their importance in building and construction contracts; and
  • how to best draft a latent conditions clause.

What are Latent Conditions?

If you are a contractor or builder conducting a site inspection, you will often immediately see:

  • the condition of the site; and
  • any potential risks or hazards that will impact your work.

This inspection assists you in planning how you will carry out your work and helps you factor in any additional costs. However, more often than not, it is nearly impossible to predict every factor that could affect the work. There are almost always:

  • site conditions that are not visible during the first inspection; or
  • events and occurrences beyond your control.  

These are known as latent conditions. Latent conditions are those that may not be evident during an inspection or on plans. For example, common latent conditions include:

  • soil contamination;
  • asbestos;
  • mine shafts; or
  • hidden services, such as old plumbing systems.

Why Are Latent Conditions Clauses Important?

Unknown latent conditions can have a significant impact on the work that you, as the contractor or builder, need to do. To avoid confusion about who is responsible for the latent conditions, it is essential to have a latent conditions clause in your construction contract. The main issues to consider when drafting the latent conditions clause are:

  • what should be regarded as a latent condition?;
  • what happens if there will be a delay in completion?; and
  • who is responsible for the costs of latent conditions?

What Should Be a Latent Condition?

As a contractor or builder, what you would like to be considered a latent condition will be everything that:

  • you did not expect;
  • is outside of your control; and
  • will lead to an increase in your costs of carrying out the work.

While it is reasonable to classify everything that is outside of your control as latent conditions, you may find that your principal is reluctant to accept such a broad definition of latent conditions. From a principal’s point of view, latent conditions may also be things outside of their control. Further, they may consider that as the contractor with the experience in the type of work, you should be able to identify the risks and issues upon inspection.

To address this from a drafting perspective, you will need to have a definition of latent conditions that is both:

  • broad enough that it will protect you; and
  • balanced enough that your principal will be happy to accept it.

The best way to do this is to draft the definition of latent condition with regards to “reasonableness”. Essentially, this means having a definition that broadly defines latent conditions as anything that:

  • could not have been reasonably foreseen or anticipated by you at the time you provided the price; and
  • will, or is likely to, result in additional cost or delay.

To ensure that the latent conditions clause protects your interests, it is best to have a construction lawyer assist you in preparing the contract.

What Happens if There is a Delay in Completion?

Usually, the presence of a latent condition is likely to lead to a delay in the completion of the work. If latent conditions are drafted as being ‘conditions which could not have been reasonably foreseen or anticipated’, then it is reasonable that you should be able to claim an extension of time to complete the work.

If you cannot claim an extension of time and you encounter a latent condition, then it will likely mean that you will bear the costs of any delay.

Who Should Bear the Cost and Risks of Latent Conditions?

Often, the biggest issue with latent conditions is whether should they be:

  • treated as a variation and therefore a cost to the principal; or
  • a cost absorbed by the contractor.

Usually, they are costs borne by the principal on the basis that the latent condition arose due to the nature of their site and that they would have more knowledge about their site. However, it is becoming more common for this cost to shift to the contractor or builder on the basis that the principal is relying on their expertise.

Ultimately, it is a commercial decision to be agreed between the parties. As a contractor or builder, if you decide to accept a latent conditions clause that shifts liability and cost onto you, then you should consider having a:

  • provision requiring the principal to provide you with all necessary information; and
  • disclaimer that you are relying on the information provided by the principal.

Key Takeaways

Latent conditions can result in the agreed price for a contract increasing significantly. As a contractor or builder, it is essential to consider how you want to approach latent conditions before entering into a contract. You should ensure that your contract has adequate provisions dealing with latent conditions and that you understand your responsibilities. If you have any questions, contact LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Tuhina Mukhraiya

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