California Supreme Court Holds Public Entity Responsible For Nondisclosure Of Material Facts That Impact The Contractor’s Performance

California Supreme Court Holds Public Entity Responsible for Nondisclosure of Material Facts that Impact The Contractor’s Performance

By
William C. Last, Jr.
Attorney at Law

California Courts have long held that "[a] contractor of public works who, acting reasonably, is misled by incorrect plans and specifications issued by the public authorities as the basis for bids and who, as a result, submits a bid which is lower than he would have otherwise made may recover in a contract action for extra work or expenses necessitated by the conditions being other than as represented." (Souza & McCue Constr. Co. v. Superior Court (1962) 57 Cal.2d 508, 510.) On July 12, 2010, the California Supreme Court, in a case entitled Los Angeles Unified School District v. Great American Insurance, concluded that a contractor may also recover when the plans and specifications are correct, but the public authority failed to disclose information in its possession that materially affected the cost of performance. The decision also establishes a four element test four determining if relief will be given to the contractor.

This case arises from a contract that the Los Angeles Unified School District (LAUSD) entered into with Lewis Jorge Construction Management Inc. during 1996 for the construction of an elementary school. During 1999, LAUSD terminated the contract and sought proposals from other contractors to fix defects in Lewis Jorge's work and finish the project. As part of the bid package for the completion contractor, LAUSD provided bidders with lists that cataloged defective, incomplete, or missing work. The bid package also indicated that LAUSD intended to make the new contractor responsible for unlisted defects in the work. Hayward Construction Co. bid on the work and subsequently entered into a guaranteed maximum contract to complete the remaining work. After the work commenced, Hayward discovered other latent defects that were not set forth in the bid documents and sought almost $3 million more for repairing those defects.

The trial court found in favor of LAUSD and the appellate court reversed the trial court’s decision. It was then appealed to the California Supreme Court. The California Supreme Court reviewed the prior appellate court decisions that addressed the issue of a contractor’s right to recover additional amounts when it was misled by incorrect plans. There were three prior appellate decisions that concerned the issue. One Appellate Court held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading. A second Appellate Court held a contractor need not prove an "affirmative fraudulent intent to conceal" when disclosure would have eliminated or materially qualified the misleading effect of facts disclosed. The third Appellate Court held that the careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor.

The California Supreme Court reviewed the existing law concerning giving a contractor relief from poor bidding practices. The Court reiterated that “A public entity is not responsible for erroneous assumptions drawn by a contractor from accurate information provided by the public entity…. or for unsupported assumptions drawn from the public entity's silence …, nor does it have any duty to disclose information that is reasonably available or that the contractor knew or had a realistic opportunity to discover. In sum, established law provides public entities substantial protection against careless bidding practices by contractors and forecloses the possibility that a public entity will be held liable when a contractor's own lack of diligence prevented it from fully appreciating the costs of performance.”

The Supreme Court concluded that “protection against careless bidding practices does not require that we allow contractors damaged by a public entity's misleading nondisclosure to recover only on a showing the public entity harbored a fraudulent intent.” The Court than went on to set the following four prong test to determine if a contractor is “entitled to relief for a public entity's nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.

Nonetheless, the Supreme Court also described circumstances that could affect a contractor’s recovery for undisclosed conditions. They included, but are not limited to, “positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor.” The Supreme Court concluded its decision by stating: “The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.”

Conclusion

The California Supreme Court’s decision sets forth clear standards for determining if a contractor will get relief from undisclosed conditions and misleading information that increase the contractor’s cost of performance. However, the last few paragraphs of their decision hints at contract changes that California public entities may make to limit their exposure for the cost of undisclosed conditions and misleading information. Specifically, a public entity may avoid liability for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own. Furthermore, the decision implies that public entity may avoid liability by including specific disclaimers.

This article, ©2010, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California “A” and “B” license. He can be contacted at 415-764-1990 or 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.