It looks like weblogic throws this error when web application is deployed only as WAR. But it doesn't throw any exception when deployed as exploded.
weblogic.management.DeploymentException: Cannot set web app root system property when WAR file is not expanded - with nested exception: [java.lang.IllegalStateException: Cannot set web app root system property when WAR file is not expanded].
There are two ways we can fix this issue when you still want to deploy as WAR.
1. Go to server admin console->Domain-> Web applications. Click the checkbox of Archived Real Path Enabled. This should make an entry into domain config.xml as below. or you can directly edit your domain config.xml and add the below entry.
2. Second option is at webapp level by updating weblogic.xml as below:
The value of <show-archived-real-path-enabled> set in the web app has precedence over the value set at the domain level. The default value of this property is false.