2010

CALIFORNIA SUPREME COURT AFFIRMS PUBLIC ENTITY LIABILITY FOR FAILURE TO DISCLOSE/SUPERIOR KNOWLEDGE OF MATERIAL FACTS

Los Angeles Unified School District v. Great American Insurance Company & Hayward Construction Company

Case: S165113, Supreme Court of California

The California Supreme Court recently held that a contractor may recover extra costs from the public entity without the need to prove that the public entity affirmatively and fraudulently intended to conceal facts from the contractor.  If a public entity knew and failed to disclose material facts that would affect the contractor’s bid or performance, the public entity may be required to pay extra compensation to the contractor.

In Los Angeles Unified, the District terminated the original contractor and sought proposals from others to correct deficient work-in-place and complete the project.  Prospective bidders were given the original plans and specifications plus “pre-punch lists” that identified defective, missing, and incomplete work by the original contractor.  The new contractor ultimately sought extra compensation for latent defects (those not apparent by reasonable inspection), alleging that the District failed to disclose the full nature and extent of the defects and failed to disclose information, including consultant reports, that would have provided notice that the contractor needed to investigate the necessary scope of work further.

The Court held that four factors must be satisfied before the public entity is required to pay extra compensation for nondisclosure:

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.

Circumstances that will affect the contractor’s recovery include, but are not limited to:

1. Positive warranties or disclaimers made by either party;
2. Information provided by the plans, specifications, and related documents;
3. Difficulty detecting the condition in question;
4. Time constraints imposed on bidders by the public entity; and
5. Unwarranted assumptions made by the contractor.

Noting earlier California cases, which recognized a contractor’s right to compensation based on non-disclosure by a public entity and the federal “superior knowledge doctrine,” the California Supreme Court found that public entities are protected against careless bidding by contractors and most tort and quantum meruit claims.  

The Court concluded, “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.”

Public entities therefore need to carefully examine the information they possess regarding a project before it goes out to bid and should establish practices and procedures to ensure that all pertinent information is provided to bidders.  Public entities must also carefully draft contract provisions, where appropriate, to put contractors on notice of the need to investigate prior to submitting bids.

If you need specific guidance or have questions relating to this article please call Barbara R. Gadbois, Esq. or Sara H. Kornblatt, Esq. at (310) 552-3400. 

by Barbara R. Gadbois, Esq. and Sara H. Kornblatt, Esq. 

Gibbs, Giden, Locher, Turner & Senet LLP 
1880 Century Park East, 12th Floor
Los Angeles, CA 90067 
310.552.3400
www.gibbsgiden.com

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