Defective and Deficient Contract Documents: Contractor’s Entitlement to Recover Costs

This is the third blog post in a seven-part series that discusses defective and deficient contract document claims.

U.S. courts and boards have often extended or expanded on the tenets of the Spearin ruling—discussed in the second post in this series—to include the following issues:

• Failure to provide “specific information on matters of substance”
• Latent errors
• Adequacy of the specifications to yield satisfactory performance
• Liability for sole source of supply or subcontractor
• Liability for differing site conditions
• Liability for delay as a result of defective specifications

Examples of the cases are summarized below:

Failure to Provide “Specific Information on Matters of Substance”
Helene Curtis Industries, Inc. v. United States¹ extended Spearin to cover methods of production. Thus, if a different and more expensive method of production than the contractor expected is required, and the owner did not disclose this “specific information on matters of substance,” the contractor is entitled to recover its additional costs.

The good faith intentions of the contractor are important in determining entitlement. If the contractor innocently construes the provision in its favor without trying to take advantage of ambiguities, the contractor may be able to recover its increased costs. This is an application of the contra proferentem rule, which finds that in the case of ambiguous or conflicting specifications, interpretations will be in favor of the contractor if the owner or its representative wrote the specifications and the contractor’s interpretation was reasonable.

Latent Errors
The owner may be liable if an error is latent and found only after an extensive investigation. The implied warranty normally cannot be avoided by general contract clauses requiring the contractor to inspect the site, study the specifications, inform itself about the requirements for the work, or assume responsibility for work until completion and acceptance.²

The Bromley board³ ruled that contractors are not expected to uncover all hidden ambiguities or errors and will not be held responsible for overlooking these latent errors in the bid documents. In Bromley, one of the government’s drawing notes read, “Contractor shall verify all dimensions and conditions prior to submission of bid.” When a dimension on a drawing was in error, the government contended that the Invitation for Bid required the contractor to verify dimensions prior to bid. However, the Court of Claims found the contractor’s position to be correct, stating:

Contractors are businessmen usually pressed for time and consciously seeking to underbid competitors. Consequently, they estimate only those costs which they feel the contract terms will permit the government to insist upon in the way of performance. They are not expected to ferret out hidden ambiguities or errors in the bid documents and are protected if they innocently construe in their own favor an ambiguity equally susceptible to another construction or overlook an error.

Information contained in drawings and specifications constitutes a positive representation that the contractor is justified in relying upon. When this information is defective or ambiguous, the contractor may be entitled to recover the additional cost of performance resulting from the defects or ambiguities.

Adequacy of the Specifications to Yield Satisfactory Performance
It is also well settled that an owner implicitly warrants the adequacy of its specifications. In Luria,⁴ the United States Court of Claims defined this as follows:

It is well-settled that when the Government orders a structure to be built, and in so doing prepares the specifications prescribing the character, dimension, and location of the construction work it implicitly warrants that if the specifications are complied with, satisfactory performance will result…. When as here, defective specifications delay completion of the contract, the contractor is entitled to recover damages for defendant’s breach of this implied warranty.⁵

The Luria court also determined that the government had further breached the contract by failing to make timely revisions and by imposing an unreasonable trial and error method of excavation upon plaintiff.⁶

The principal premise of “results” and “performance” contracts is to obtain a specific result. With these contracts, the risk of achieving the result generally lies with the contractor.⁷ However, when the contractor must perform according to detailed plans and specifications, the owner is responsible for the result if the contractor follows those plans and specifications. The underlying premise is that the owner’s knowledge and control over the project are superior to those of the contractor.

Liability for Sole Source of Supply or Subcontractor
When an owner specifies a material or subcontractor for its project, the contractor may have entitlement to recovery of its damages if the material fails or the subcontractor does not perform. The justification is that the contractor did not have the opportunity to evaluate the suitability of the material or the capability of the subcontractor, and that bids would be higher if the contractor retained those risks.⁸

Liability for Differing Site Conditions
The owner may be liable for increased contractor costs that result from site conditions that differ materially from those represented in the contract documents (a Type I differing site condition). The contractor must usually meet the following requirements to successfully recover its increased costs from encountering a Type I differing site condition or changed condition:

1. The contract documents must have affirmatively indicated or represented the subsurface or latent physical conditions that form the basis of plaintiff’s claim;
2. The contractor must have acted as a reasonably prudent contractor in interpreting the contract documents;
3. The contractor must have reasonably relied on the indications of subsurface or latent physical conditions in the contract;
4. The subsurface or latent physical conditions actually encountered within the contract area must have differed materially from the conditions indicated in the same contract area;
5. The actual subsurface conditions or latent physical conditions encountered must have been reasonably unforeseeable; and
6. The contractor’s claimed excess costs must be shown to be solely attributable to the materially different subsurface or latent physical conditions within the contract site.⁹

Contractors may also be entitled to obtain recovery for Type II differing site conditions, which are:

Unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.¹⁰

Liability for Delay as a Result of Defective Specifications
Delay damages resulting from defective and deficient specifications have also been awarded in the following cases:

• Essex Electro Engineers v. Danzig, 224 F.3d 1283 (Fed. Cir. 2000) (delay damages arising from the impact of defective government-provided drawings);
• Public Constructors, Inc. v. New York, 390 N.Y.S.2d 481 (App. Div. 1977) (misrepresenting subsurface condition and failure to disclose boring logs and other subsurface information);
• Chaney & James Construction Co. v. United States, 421 F.2d 728 (Ct. C1. 1970) (defective specifications for elevation of roof leader drain pipe, location of fire pump drains, and roof washdown system);
• H. John Homan Co., Inc. v. United States, 418 F.2d 522 (Ct. Cl. 1969) (defective site survey);
• County Asphalt Inc. v. New York, 311 N.Y.S.2d 650 (Ct. Cl. 1969) (State responsible for damages resulting from its gross misrepresentation of the quantity of select borrow required for the project);
• J.T. Hedin Construction Company Inc., 347 F.2d 235 (Ct. Cl. 1965) (faulty specifications for piles, spread footings, and sewer system); and
• Laburnum Construction Corporation v. United States, 325 F.2d 451 (Ct. Cl. 1963) (improper alignment for proposed 16‑inch pipeline).

¹     Helene Curtis Industries, Inc. v. United States, 312 F.2d 774 (Ct. Cl. 1963).

²     See, e.g., Nat Harrison Assoc. v. Gulf States Utilities Co., 491 F.2d 578 (5th Cir. 1974).

³     Bromley Contracting Company, ASBCA 14884, 16045 72-1 BCA ¶ 9252 (1972).

⁴     Luria Bros. & Co. v. United States, 177 Ct. Cl. 676, 369 F.2d 701, 707, 713 (1966); see also Pennsylvania v. W.P. Dickerson & Son, Inc., 400 A.2d 930 (Pa. Commonwealth Ct. 1979), where the contractor was entitled to recover additional costs and expenses for removing and testing beams constructed in accordance with State specifications.

⁵     Id. at 707-08.

⁶     Id. at 708.

⁷     See, e.g., Lewis v. Anchorage Asphalt Paving & Co., 535 P.2d 1188, 1196 n.19 (Alaska 1975); Kansas Turnpike Auth. v. Abramson, 275 F.2d 711 (10th Cir.), cert. denied 363 U.S. 813 (1960).

⁸     See, e.g., Appeal of Jacksonville Shipyards, Inc., ASBCA No. 32,300 (July 11, 1986); Appeal of Amos & Andrews Plumbing, Inc., ASBCA No. 29,142 (April 23, 1986).

⁹    Youngdale & Sons Constr. Co. v. United States, 27 Fed Cl. 516 (1993).

¹⁰   48 C.F.R. 52.236-2 (2004) (federal differing site condition clause).

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