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SMC Corporation, Inc. v. New Jersey Water Supply Authority

334 N.J. Super. 429, 759 A.2d 1223 (App. Div. 2000)

PUBLIC CONTRACTS; SUB-SURFACE CONDITIONS—Absent an express contract condition allocating the risk of unknown conditions to the contractor, a determination must be made as to whether a later discovered condition was reasonably ascertainable by the contractor, where this was the standard expressed in the contract.

The winner of a public contract was required, as part of the contemplated work, to reconstruct a culvert. This required dewatering of a stream bed and installation of certain dams. As it was about to begin the work, it discovered a “scour hole,” reaching much deeper than the bed of the river, at the point where two waterways met. As a result, the dams could not be installed where indicated on the plans. This resulted in substantial additional work and expense. The public authority refused to pay the additional cost, claiming that the risk of sub-surface conditions fell on the contractor. Unlike the federal government, New Jersey does not have a standard “changed conditions clause” in its contracts. In fact, an earlier case held that the risk of unknown conditions fell on the contractor. However, in reviewing the earlier case, the Appellate Division found that the contract there in question contained a strong clause imposing the risk of sub-surface conditions on the contractor. In this case, however, the Appellate Division held that the contract neither contained the “strong clause” found in the earlier case nor did it contain an explicit changed conditions clause of the kind found in federal contracts. The contract did contain a provision in which the contractor acknowledged that it satisfied itself as to the general conditions, including physical conditions, topography, and ground conditions, “and all other matters upon which information is reasonably obtainable.” The contractor similarly acknowledged that it had satisfied itself as to the general conditions of the site to the extent that they could be “reasonably ascertainable from an inspection of the site.” Further, the contract stated that any failure by the contractor to acquaint itself “with all of the available information” would not relieve the contractor from responsibility for “estimating properly the difficulty or cost to successfully perform the work.” Both the lower court and the Appellate Division ruled that the public authority made no “affirmative representation” regarding the existing conditions, but the Appellate Division disagreed with the lower court’s holding that the contractor “assumed the risk contained in the contract.” It was persuaded that the contract established standards “regarding allocation of risk for sub-surface conditions.” Those standards, however, contained the phrases “information ... reasonably obtainable” and “information ... reasonably ascertainable from an inspection of the site.” The Court found that those standards implied that “conditions not known to the authority or to the contractor, information regarding which is not ‘reasonably’ obtainable or ‘ascertainable’ by the contractor, may be the basis of a claim for extra work.” Therefore, the matter was remanded to determine whether the information regarding the scour hole’s existence was “reasonably obtainable” or “ascertainable.”

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