49 Cal. 4th 739, 234 P.3d 490, 112 Cal. Rptr. 3d 230
Filed 7/12/10
IN THE SUPREME COURT OF CALIFORNIA
LOS ANGELES UNIFIED SCHOOL
DISTRICT,
Plaintiff, Cross-defendant
and Respondent,
S165113
v.
Ct.App. 2/2 B189133
GREAT AMERICAN INSURANCE
COMPANY,
Los Angeles County
Defendant and Appellant;
Super. Ct. No. BC247848
HAYWARD CONSTRUCTION
COMPANY,
Defendant, Cross-
complainant and Appellant.
We have long recognized 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.) In
this case we decide whether a contractor may also recover when the plans and
specifications are correct, but the public authority failed to disclose information in
1
its possession that materially affected the cost of performance. The question has
divided the Courts of Appeal.
One Court of Appeal, followed here by the trial 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. (Jasper Construction, Inc. v. Foothill Junior
College Dist. (1979) 91 Cal.App.3d 1, 10-11.) Another Court of Appeal 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. (Welch v. State of California (1983) 139 Cal.App.3d 546, 556.)
A third suggested that the careless failure to disclose information may allow
recovery if the public entity possessed superior knowledge inaccessible to the
contractor. (Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155
Cal.App.4th 525, 552.) And the Court of Appeal in the instant case broadly held a
contractor need show only that the public entity knew material facts concerning
the project that would affect the contractor?s bid or performance and failed to
disclose those facts to the contractor.
We hold a contractor need not prove an affirmative fraudulent intent to
conceal. Rather?with the qualifications stated below?a public entity may be
required to provide extra compensation if it knew, but failed to disclose, material
facts that would affect the contractor?s bid or performance. Because public
entities do not insure contractors against their own negligence, relief for
nondisclosure is appropriate only when (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
2
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.
BACKGROUND
In 1996, the Los Angeles Unified School District (District) entered into a
contract with Lewis Jorge Construction Management, Inc. (Lewis Jorge) to
construct an elementary school for approximately $10.1 million according to plans
and specifications developed by the District. In 1999, the District terminated the
contract, declaring Lewis Jorge to be in material breach and default. The District
then sought proposals from other contractors, including Hayward Construction
Company (Hayward), to correct defects in Lewis Jorge?s work and complete the
project. The District provided prospective bidders with copies of the original
plans and specifications and also with 108 pages of what the parties characterize
as a ?current correction list? or sometimes as ?pre-punch lists,? cataloging work
by the previous contractor that the District?s inspectors and subinspectors found to
be defective, incomplete or missing.
Although the pre-punch lists appear to refer only to defects visible by
simple inspection, they include language indicating the District also intended to
make the contractor awarded the job responsible for unlisted defects in existing
work. A list provided by the District?s chief inspector accordingly recited:
?Corrections or comments made in regard to the pre-punch list during this review
do not relieve the Contractor from compliance with the requirements of the
drawings and specifications. This review is only for General Conformance with
the design concept of this project and general compliance with the information
given in the Contract Documents. . . .?
After receiving the plans, specifications and pre-punch lists, and conducting
a site inspection, Hayward submitted a proposal to do the work on a time and
materials basis, stating a ?guaranteed maximum price? of $4.5 million. The
3
District accepted Hayward?s bid, and in June 1999 the parties entered into a
contract to complete the project. The written agreement recites that Hayward
agreed to ?correct deficiencies in the work performed by the former contractor,
without limitation, as noted on the current correction list issued by the District.? It
also recites that the maximum amount payable by the District for the cost of the
work plus Hayward?s fee would not exceed $4.5 million. And, ?[a]s to any
warranties in the Contract Documents, including those as to defective
workmanship and materials, the Contractor assumes responsibility for his own
work, materials, equipment and services and the work, materials, equipment and
services done by subcontractors and supplied by material men and suppliers
working under such subcontractors, including patent (evident) defective work
done by the former contractor that the Contractor is required to correct to complete
the Project.? Great American Insurance Company (Great American) issued a
performance bond for $4.5 million, guaranteeing Hayward?s performance of the
contract.
Shortly after beginning work, Hayward informed the District it had
significantly underestimated the cost of the remedial work, explaining that the
existing work had nonconformities and deficiencies that had not been noted on the
pre-punch lists and could not have been detected by simple observation. For
example, the pre-punch lists called for repairing and cleaning portions of the
exterior stucco, but Hayward reported that upon removing some of the plaster
surfacing, it discovered it could make acceptable repairs only by removing and
replacing the entire exterior surface plus portions of an underlying material. The
pre-punch lists also called for fixing tiles at a few locations, but Hayward reported
that after removing selected tiles for repair, it determined the entire installation of
tile was unacceptable. In the end, Hayward sought extra compensation in the
4
amount of $2,847,592 for work necessitated by what it characterized as latent
defects.
The District disputed that Hayward was entitled to any sum above the $4.5
million guaranteed maximum, but paid Hayward an extra $1 million under an
express reservation of rights to take action to recover the additional compensation.
It then instituted this action against Hayward and Great American. Hayward
cross-complained, asserting it was entitled to the additional compensation because
it had been required to perform work that had not been specified in the contract
and the pre-punch lists, that the District had breached the contract by
misrepresenting and concealing material facts and conditions, and that the District
had breached an express or implied warranty that the plans and specifications it
provided were complete and accurately depicted the work required to complete the
project. In support of these theories, Hayward alleged the District had failed to
disclose the full nature and extent of the defects in the existing construction, and
had failed to disclose information that would have put Hayward on notice that
some of its assumptions about the scope of the work required were faulty. For
example, Hayward asserted the District had failed to disclose a consultant?s report
that would have alerted Hayward to the defects in the stucco work and further
asserted that the District was aware Hayward?s intended method for curing stucco
discoloration would not be effective.
The trial court first granted the District summary adjudication on the issue
of contract interpretation, rejecting Hayward?s claim that the contract, properly
interpreted, limited Hayward?s responsibility for correcting defects to the defects
listed on the pre-punch lists. Then, as relevant here, it granted the District
judgment on the pleadings, rejecting Hayward?s claims of breach of contract by
misrepresentation or nondisclosure, and breach of warranty, reasoning that under
Jasper Construction, Inc. v. Foothill Junior College Dist., supra, 91 Cal.App.3d at
5
page 10, Hayward could not recover because it had not recited facts that would
allow a conclusion that the District either actively concealed or intentionally
omitted material information. The court entered judgment in favor of the District
in the amount of $1,133,696.38.
The Court of Appeal reversed both the grant of summary adjudication1 and
the judgment on the pleadings. As relevant here, it held: ?Hayward may maintain
a cross-action for breach of contract based on nondisclosure of material
information if it can establish that the District knew material facts concerning the
project that would affect Hayward?s bid or performance and failed to disclose
those facts to Hayward.?
DISCUSSION
It has long been the rule that a contractor that has agreed to a particular
performance at a specified price may not avoid its contractual obligations or seek
additional compensation for performing them because unanticipated difficulties
are encountered. (United States v. Spearin (1918) 248 U.S. 132, 136; Wunderlich
v. State of California (1967) 65 Cal.2d 777, 782-783.)2 But as we observed at the
outset, it is also settled 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
1
The Court of Appeal found that the trial court had improperly excluded
evidence supporting Hayward?s interpretation of the contract. We are not here
concerned with that ruling.
2
The Legislature has altered the common law rule of contractor liability
when the unanticipated difficulty results from subsoil conditions. Public Contract
Code section 7104 thus requires public contracts to include a provision allowing
for change orders in response to such conditions. There is no statute providing for
change orders for difficulties resulting from other kinds of unanticipated
conditions.
6
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, supra, 57 Cal.2d at pp. 510-511.) Consequently,
although in such cases a contractor may not be entitled to quantum meruit
recovery for work performed beyond the contract requirements (see Amelco
Electric v. City of Thousand Oaks (2002) 27 Cal.4th 228, 234), and Government
Code section 818.8 bars tort actions for fraudulent misrepresentation,3 the
contractor retains a cause of action in contract (Warner Constr. Corp. v. City of
Los Angeles (1970) 2 Cal.3d 285, 293-294; E. H. Morrill Co. v. State of California
(1967) 65 Cal.2d 787, 793-794). As we explained in Souza: ?When the state
makes a contract with an individual it is liable for a breach of its agreement in like
manner as an individual, and the doctrine of governmental immunity does not
apply.? (Souza, at p. 510.)
The plans and specifications furnished by the District to Hayward were
developed in connection with the original construction project awarded to the
previous contractor, and Hayward does not suggest that its difficulties were in any
way affected by some misrepresentation or omission in them.4 Hayward contends,
3
Government Code section 818.8, part of California?s Government Claims
Act (Gov. Code, ? 810 et seq.), provides: ?A public entity is not liable for an
injury caused by misrepresentation by an employee of the public entity, whether or
not such misrepresentation be negligent or intentional.?
4
Because Hayward?s claim is not brought on a theory that the plans and
specifications were inaccurate and Hayward does not assert that the District was
required to develop new plans and specifications in connection with the
completion project, we have no reason to consider Public Contract Code section
1104, which generally prohibits public entities from requiring bidders to assume
responsibility for the completeness and accuracy of architectural or engineering
plans and specifications on public works projects.
7
rather, the District breached the implied warranty by failing to impart information
in its possession that would have put Hayward on notice of latent defects in the
work done by the previous contractor. We have not had occasion to resolve a case
brought solely on a theory of nondisclosure. We have, however, recognized there
are instances when a public entity?s nondisclosure may provide grounds for relief.
In City of Salinas v. Souza & McCue Construction Co. (1967) 66 Cal.2d 217, 222-
223, we upheld a judgment for the contractor entered after the trial court found a
city had actively concealed its knowledge of site conditions, but we more broadly
observed: ?It is the general rule that by failing to impart its knowledge of
difficulties to be encountered in a project, the owner will be liable for
misrepresentation if the contractor is unable to perform according to the contract
provisions.? (Id. at p. 222.) And in Warner Constr. Corp. v. City of Los Angeles,
supra, 2 Cal.3d at page 294, we described ?at least three instances? in which a
contractor may have a cause of action against a public entity for nondisclosure of
material facts: ?(1) the defendant [public entity] makes representations but does
not disclose facts which materially qualify the facts disclosed, or which render
[the] disclosure likely to mislead; (2) the facts are known or accessible only to
defendant, and defendant knows they are not known to or reasonably discoverable
by the plaintiff [contractor]; (3) the defendant actively conceals discovery from the
[contractor].? (Fns. omitted.) Although we affirmed a judgment against the city
after finding all three instances to be present, we viewed each instance as an
independent basis for liability.
The Courts of Appeal have also recognized that a public entity?s
nondisclosure may support an award of damages without a showing of intentional
misrepresentation. The court in Welch v. State of California, supra, 139
Cal.App.3d 546, reversed a judgment in favor of the state entered after the trial
court found the contractor had failed to prove the public entity had ? ?actively and
8
intentionally? ? concealed information. (Id. at p. 556.) It explained that our
decision in Warner Constr. Corp. v. City of Los Angeles, supra, 2 Cal.3d 285,
made it clear that liability might be imposed in the absence of an intentional
failure to disclose when the disclosure ?would have eliminated or materially
qualified the misleading effect of [the public entity?s positive representation].?
(Welch, at p. 556.) And in Thompson Pacific Construction, Inc. v. City of
Sunnyvale, supra, 155 Cal.App.4th at page 552, the court observed: ?[C]areless
failure to disclose information may form the basis for an implied warranty claim if
the defendant possesses superior knowledge inaccessible to the contractor or
where that which was disclosed is likely to mislead in the absence of the
undisclosed information.?
The Restatement Second of Contracts is in accord that nondisclosure may
be actionable, explaining: ?A person?s non-disclosure of a fact known to him is
equivalent to an assertion that the fact does not exist in the following cases only:
[?] (a) where he knows that disclosure of the fact is necessary to prevent some
previous assertion from being a misrepresentation or from being fraudulent or
material. [?] (b) where he knows that disclosure of the fact would correct a
mistake of the other party as to a basic assumption on which that party is making
the contract and if non-disclosure of the fact amounts to a failure to act in good
faith and in accordance with reasonable standards of fair dealing. [?] (c) where he
knows that disclosure of the fact would correct a mistake of the other party as to
the contents or effect of a writing, evidencing or embodying an agreement in
whole or in part. [?] (d) where the other person is entitled to know the fact
9
because of a relation of trust and confidence between them.? (Rest.2d Contracts,
? 161.)5
Other jurisdictions have accepted that nondisclosure may be a basis for
public entity liability. Most notably, the federal courts employ a standard
developed out of the decision in Helene Curtis Industries, Inc. v. United States
(Ct.Cl. 1963) 312 F.2d 774. The plaintiff in that case was the low bidder on a
project to produce quantities of a disinfectant for the United States Army. It was
established the army possessed information that would have alerted bidders that,
contrary to their reasonable expectations, one of the required components of the
disinfectant could not be simply mixed into the finished product, but required
grinding?a process that substantially increased production costs. The United
States Court of Claims acknowledged that ?[w]here the Government has made no
misrepresentations, has no duty to disclose information, and does not improperly
interfere with performance, the fixed-price contractor of course bears the burden
of unanticipated increases in cost . . . .? (Id. at p. 777.) The court held, however,
5
The District asserts that a standard allowing recovery in the absence of
intentional misrepresentation or fraudulent concealment is inconsistent with the
tort of fraudulent concealment, which as usually formulated includes elements of
intentional concealment or suppression with an intent to defraud. (See Linear
Technology Corp. v. Applied Materials, Inc. (2007) 152 Cal.App.4th 115, 131.)
Hayward?s claim is contractual. Moreover, tort law recognizes a claim for
negligent misrepresentation, which allows recovery in the absence of scienter or
intent to defraud (Civ. Code, ? 1710, subd. 2; Small v. Fritz Companies, Inc.
(2003) 30 Cal.4th 167, 173-174) and attaches liability to ?[t]he suppression of a
fact, by one who is bound to disclose it, or who gives information of other facts
which are likely to mislead for want of communication of that fact? (Civ. Code,
? 1710, subd. 3). And tort law also recognizes that a party having exclusive
knowledge of information materially affecting the value of a transaction may have
a duty to disclose that information to the other party even in the absence of a
fiduciary relationship. (5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts,
? 796, pp. 1151-1152.)
10
that when the government ?possess[es] vital information which it was aware the
bidders needed but would not have, [it] could not properly let them flounder on
their own. Although it is not a fiduciary toward its contractors, the Government?
where the balance of knowledge is so clearly on its side?can no more betray a
contractor into a ruinous course of action by silence than by the written or spoken
word.? (Id. at p. 778.) Following Helene Curtis, the federal courts adopted the
?superior knowledge doctrine,? which allows relief when (1) a contractor
undertakes to perform without vital information or knowledge of a fact that affects
performance costs or duration, (2) the government was aware the contractor had
no knowledge of and had no reason to obtain such information, (3) any contract
specification misled the contractor or did not put it on notice to inquire, and (4) the
government failed to provide the relevant information. (E.g., AT&T
Communications, Inc. v. Perry (Fed.Cir. 2002) 296 F.3d 1307, 1312; American
Ship Bldg. Co. v. United States (Ct.Cl. 1981) 654 F.2d 75, 79; see also Annot.,
Public Contracts: Duty of Public Authority to Disclose to Contractor Information,
Allegedly in Its Possession, Affecting Cost or Feasibility of Project (1978) 86
A.L.R.3d 182 [collecting cases].) The superior knowledge doctrine thus requires
the public entity to have been aware it possessed material information unknown to
the contractor, but does not require that the entity have an affirmative intent to
deceive.
The District argues that to allow recovery without a showing of fraudulent
intent would force public entities to act as insurers for contractors, encourage
underbidding, and relieve bidding contractors from the necessity of conducting
their own investigations into the conditions of performance. The argument fails to
acknowledge the limitations on liability inherent in the superior knowledge
doctrine and also recognized by California law.
11
The point is illustrated by our opinion in Wunderlich v. State of California,
supra, 65 Cal.2d 777. The state there had reported the results of tests conducted at
a particular site for the presence of sand and gravel that might be used in a
construction project. The contractor assumed from the state?s report that the site
would produce all the sand and gravel needed for the project; when that
assumption proved incorrect, the contractor sued for damages. We found in favor
of the state, thus impliedly concluding the state had no obligation to obtain and
report information that would enable the contractor to accurately estimate its costs.
Liability turned on whether the reports the state had furnished were misleading.
We held: ?[T]he question is whether, under the circumstances of the indefinite
nature of the statements and the existence of exculpatory provisions, the bidder
could justifiably rely on the statements. It does not appear that plaintiffs could
have done so, and the state is not responsible for the subjective interpretation
placed upon the information by bidders.? (Id. at p. 786.)
In Wiechmann Engineers v. State of California ex rel. Dept. Pub. Wks.
(1973) 31 Cal.App.3d 741, the court held a contractor was not entitled to assume
from the absence of information about subsurface conditions in a bid package that
the state had no knowledge of conditions that might be inconsistent with the
contractor?s cursory inspection of the site. As relevant here, the court explained:
?[K]nowledge of the boulderous condition was not known or accessible only to the
state, nor did the state have such facts as were not known or reasonably
discoverable by plaintiff, if plaintiff had made what would have been admittedly a
reasonable and prudent inquiry.? (Id. at p. 752.)
Thus, existing law holds that public entities have no obligation to
investigate the costs of performance independent from the obligation to provide
prospective bidders with correct plans and specifications. A public entity is not
responsible for erroneous assumptions drawn by a contractor from accurate
12
information provided by the public entity (Wunderlich v. State of California,
supra, 65 Cal.2d at p. 786) or for unsupported assumptions drawn from the public
entity?s silence (Wiechmann Engineers v. State of California ex rel. Dept. Pub.
Wks., supra, 31 Cal.App.3d at p. 752), 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 (John Massman Contracting Co. v. United States
(1991) 23 Ct.Cl. 24, 32).6
Moreover, although Public Contract Code section 1104 prohibits public
entities from requiring bidders to assume responsibility for the completeness and
accuracy of architectural or engineering plans and specifications, public entities
retain the power to contractually disclaim responsibility for assumptions a
contractor might draw from the presence or absence of information. As we
explained in Wunderlich: ?It is obvious that a governmental agency should not be
put in the position of encouraging careless bidding by contractors who might
anticipate that should conditions differ from optimistic expectations reflected in
the bidding, the government will bear the costs of the bidder?s error. . . . When
there is no misrepresentation of factual matters within the state?s knowledge or
withholding of material information, and when both parties have equal access to
information as to the nature of the tests which resulted in the state?s findings, the
6
As noted earlier, the Restatement Second of Contracts explains that a
nondisclosure is deemed the equivalent of an assertion in only a few cases, all of
which require that the nondisclosing party have actual knowledge that the other
party is not in possession of the true facts. (Rest.2d Contracts, ? 161.) Comment
b to section 161 further explains: ?[O]ne is expected to disclose only such facts as
he knows or has reason to know will influence the other in determining his course
of action.? (Id., com. b, p. 432, italics added.) Thus the Restatement Second also
supports the conclusion that a party has no obligation to disclose information the
other party would be expected to obtain on its own.
13
contractor may not claim in the face of a pertinent disclaimer that the presentation
of the information, or a reasonable summary thereof, amounts to a warranty of the
conditions that will actually be found.? (Wunderlich v. State of California, supra,
65 Cal.2d at pp. 786-787.)
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. This being so,
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. We therefore disagree
with the reasoning in Jasper Construction, Inc. v. Foothill Junior College Dist.,
supra, 91 Cal.App.3d at page 10, that a showing of active misrepresentation or
fraudulent concealment is needed to prevent burdening ?public entities with
liability where the contractor underbids due to lack of diligence in examining
specifications and plans which are themselves accurate.? Accordingly, we
disapprove that court?s holding ?that there must be an affirmative
misrepresentation or concealment of material facts in the plans and specifications
in order for the contractor to recover . . . .? (Ibid.)7
7
Although we disapprove the stated rule in Jasper, we agree with the
Jasper court that, under the circumstances presented there, the trial court erred by
providing the jury with instructions suggesting a contractor, knowing it lacks
information, is entitled to proceed on its own assumptions and will be entitled to
recover additional compensation from the public entity if those assumptions prove
to be wrong. (Jasper Construction, Inc. v. Foothill Junior College Dist., supra, 91
Cal.App.3d at pp. 11-13.) Nothing we say here should be construed to provide
support for such a theory of recovery.
14
The District asserts that allowing actions for nondisclosure will lead to
burdensome practices and costly litigation by compelling public entities to
disclose every scrap of information that might relate to a project and encouraging
contractors to comb through the entity?s files for material that might be used to
support an actionable nondisclosure. The danger, we think, is overstated. As
explained earlier, significant restrictions already exist on the ability of contractors
to recover from public entities on theories of tort or quantum meruit. And in
actions for breach of contract, contractors can recover neither for extra work that
would have been bid had they exercised due diligence nor for work occasioned by
unanticipated conditions either unknown to the public entity or which the public
entity had no reason to believe the contractor would not itself discover.
Nondisclosure is actionable, moreover, only if the information at issue materially
affects the cost of performance, reducing the possibility that a public entity
soliciting bids on a project might easily overlook it. Given these limitations on
recovery, as between a truly blameless contractor and the nondisclosing public
entity that received the benefit of the contractor?s work, requiring the public entity
to pay for that benefit is hardly unjust.
For the reasons stated, we agree with the Court of Appeal that the trial court
erred by granting judgment on the pleadings based on the rule stated in Jasper
Construction, Inc. v. Foothill Junior College Dist., supra, 91 Cal.App.3d at page
10, but we conclude the Court of Appeal?s rule was, in turn, overbroad in
suggesting that recovery may be had for any failure to disclose material
information. Rather, we hold that a contractor on a public works contract may be
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
15
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. The circumstances affecting recovery
may include, 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 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.
DISPOSITION
The judgment of the Court of Appeal is affirmed. The matter is remanded
to that court to remand to the superior court for further proceedings in accordance
with our opinion and with the Court of Appeal?s resolution of the appellate issues
not addressed here.
WERDEGAR, J.
WE CONCUR:
GEORGE, C. J.
KENNARD, J.
BAXTER, J.
CHIN, J.
MORENO, J.
16
DISSENTING OPINION BY CORRIGAN, J.
The question presented is whether a public entity can be liable on a breach
of warranty claim based on an unintentional misrepresentation or nondisclosure of
material facts. The majority holds that, generally, a public entity may be liable ?if
it knew, but failed to disclose, material facts that would affect the contractor?s bid
or performance.? (Maj. opn., ante, at p. 2.) The majority then sets forth a four-
part test to make this determination modeled after the federal ?superior knowledge
doctrine.? (Id. at pp. 15-16.) I believe the majority?s holding is contrary to
existing precedent.
In Souza & McCue Constr. Co. v. Superior Court (1962) 57 Cal.2d 508,
510, we said, ?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.? (Italics added.)
?This rule is mainly based on the theory that the furnishing of misleading plans
and specifications by the public body constitutes a breach of an implied warranty
of their correctness.? (Id. at pp. 510-511.) Thus, some intentional wrongdoing on
the part of the public entity (e.g., the furnishing of misleading plans) was required
to hold it liable for a breach of warranty.
We elaborated on this concept in Wunderlich v. State of California (1967)
65 Cal.2d 777 (Wunderlich). Plaintiffs sued the state for a breach of implied
warranty when ground conditions at a project site were different than represented
by test data provided to project bidders. We noted that ?[t]he crucial question is
1
thus one of justified reliance. If the agency makes a ? ?positive and material
representation as to a condition presumably within the knowledge of the
government, and upon which . . . the plaintiffs had a right to rely? ? the agency is
deemed to have warranted such facts . . . . [Citation.]? (Id. at p. 783.) We also
distinguished between affirmative representations that were intended to mislead
and honest statements. While stating that a public entity would be liable for the
former, we held that a contractor cannot rely on a public entity?s statements when
the public entity makes honest statements relating to the property?s condition that
are ?suggestive only.? (Id. at p. 783.) We stated, ?[I]f statements ?honestly made?
may be considered as ?suggestive only,? expenses caused by unforeseen conditions
will be placed on the contractor . . . .? (Ibid.)
We again addressed this general principle in Warner Constr. Corp. v. City
of Los Angeles (1970) 2 Cal.3d 285. There, a contractor alleged a breach of the
implied warranty of correctness in plans and specifications. The contractor also
sued for fraudulent concealment based upon the city?s alleged misrepresentations
and nondisclosures of subsurface soil conditions. We identified three instances
where a cause of action may arise for a public entity?s non-disclosure of material
facts: ?(1) the defendant makes representations but does not disclose facts which
materially qualify the facts disclosed, or which render his disclosure likely to
mislead;[] (2) the facts are known or accessible only to defendant, and defendant
knows they are not known to or reasonably discoverable by the plaintiff;[] (3) the
defendant actively conceals discovery from the plaintiff.[]? (Warner, supra, 2
Cal.3d at p. 294 (footnotes omitted).) With respect to plaintiff?s claim of non-
disclosure, we held all three instances of liability were present because the
defendant affirmatively misrepresented and intentionally failed to disclose
information relating to inaccuracies in the soil test logs prepared by the city and
provided to the contractor in the bid package. (Id. at pp. 294-295.)
2
The lower courts have followed our precedent in similar cases. (See Jasper
Construction, Inc. v. Foothill Junior College Dist. (1979) 91 Cal.App.3d 1, 10
(Jasper); Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155
Cal.App.4th 525 (Thompson.)
Jasper involved a breach of implied warranty claim. The court considered
the propriety of a jury instruction that did not require evidence of
misrepresentation or intentional concealment. The court held that ?there can be no
liability of a public entity for extra work caused by plans and specifications that
are merely ?incomplete.? [R]ecovery on this theory cannot be maintained upon a
showing of a ?defect? unless that defect consists of intentional concealment or
positive assertions of material facts which prove to be false or misleading.?
(Jasper, supra, 91 Cal.App.3d at p. 11.) Thompson also involved jury instructions
in an implied warranty claim. The Thompson court reached a result similar to
Jasper stating, ?In order to recover on such an action, the contractor must prove
that the agency affirmatively misrepresented, or actively concealed, material facts
which rendered the bid documents misleading, and that the contractor reasonably
relied on such representations in preparing its bid [citation.].? (Thompson, supra,
155 Cal.App.4th at p. 551.)
Both of these cases properly relied on our precedent requiring proof that a
public entity affirmatively misrepresented or intentionally failed to disclose a
material fact to establish a breach of warranty claim.
Here, relying on Jasper, the trial court resolved all of Hayward
Construction Company?s (Hayward) claims in favor of the Los Angeles Unified
School District (District), specifically finding that Hayward could not establish a
claim for breach of contract based on misrepresentation, because Hayward failed
to show that the District actively concealed or intentionally omitted any material
information. I believe the trial court?s decision correct. Jasper is firmly grounded
3
in our precedent and sets forth a rule that is clear, straightforward and easy to
apply. It also promotes integrity in the public contract bidding process by
discouraging underbidding1, while providing contractors protection from improper
behavior by a public entity. The Jasper rule also punishes public agency
misconduct, but avoids blurring the line between affirmative misconduct and
negligence.2
The majority?s holding shifts an inordinate amount of risk to public entities
in public construction contracts and exposes them to needless and protracted
litigation.
I would reverse the Court of Appeal?s judgment.
CORRIGAN, J.
1
We have stated, ?[A] governmental agency should not be put in the position
of encouraging careless bidding by contractors who might anticipate that should
conditions differ from optimistic expectations reflected in the bidding, the
government will bear the costs of the bidder?s error.? (Wunderlich, supra, 65
Cal.2d at p. 786.)
2
Welch v. State of California (1983) 139 Cal.App.3d 546, does not support
the majority?s holding. In Welch, the state provided inaccurate tide data that
resulted in increased costs for construction of a pier. Welch was decided on the
?limited ground? that a public entity can be liable for intentionally withholding
information that would ?cast doubt? on the truth of facts that were disclosed. (Id.
at pp. 556, 558-560.) The court expressly refused to reach the contractor?s
argument that former Government Code section 14270 (now Pub. Contract Code,
? 10120) ?impose[d] a broader obligation on the State to disclose ?complete?
information irrespective of whether the State has affirmatively made misleading
representations or partial disclosures.? (Id. at p. 559.) Accordingly, Welch was
decided on the narrow ground that a public entity may be liable ?for nondisclosure
in combination with [its] affirmative and misleading representation.? (Id. at p.
550.)
4
See last page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Los Angeles Unified School District v. Great American Insurance Company
__________________________________________________________________________________
Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 163 Cal.App.4th 944
Rehearing Granted
__________________________________________________________________________________
Opinion No.
S165113
Date Filed: July 12, 2010
__________________________________________________________________________________
Court:
Superior
County: Los Angeles
Judge: Wendell Mortimer, Jr.
__________________________________________________________________________________
Attorneys for Appellant:
Wilson, Elser, Moskowitz, Eidelman & Dicker, John J. Immordino and Susannah M. Dudley for Defendant
and Appellant.
Montelone & McCrory, Joseph A. Miller, Leighton T. Brown II, John M. McGowan and Scott R. Lane for
Defendant, Cross-complainant and Appellant.
Miller, Morton, Caillat & Nevis and Stevan C. Adelman for Associated General Contractors of California
as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.
Crawford & Bangs, E. Scott Holbrook, Jr., and Kelly A. Sze for American Subcontractors Association and
American Subcontractors Association of California as Amici Curiae on behalf of Defendant, Cross-
complainant and Appellant.
Law Offices of Lawrence H. Kay, Lawrence H. Kay; Rutan & Tucker, William T. Eliopoulos, John L.
Antracoli and Kaveh Badiei for Construction Employers? Association as Amicus Curiae on behalf of
Defendant, Cross-complainant and Appellant.
Kamine Collings & Phelps, Bernard S. Kamine, Michaelbrent Collings and Daniel J. Phelps for
Engineering Contractors? Association and Southern California Contractors Association as Amici Curiae on
behalf of Defendant and Appellant and Defendant, Cross-complainant and Appellant.
__________________________________________________________________________________
Attorneys for Respondent:
Roberta M. Fessler, Mark Fall; Jones Day, Ellwood Lui, Daniel D. McMillan, Katie A. Richardson;
Bergman & Dacey, Gregory M. Bergman, John P. Dacey, Jorge J. Luna and Mark W. Waterman for
Plaintiff, Cross-defendant and Respondent.
Charles F. Robinson and Stephen P. Morell for The Regents of the University of California as Amicus
Curiae on behalf of Plaintiff, Cross-defendant and Respondent.
Page 2 ? S165113 ? counsel continued
Attorneys for Respondent:
Richard L. Hamilton for California School Boards Association and its Education Legal Alliance as Amici
Curiae on behalf of Plaintiff, Cross-defendant and Respondent.
Lemiuex & O?Neill and Steven P. O?Neill for West Basin Municipal Water District as Amicus Curiae on
behalf of Plaintiff, Cross-defendant and Respondent.
Scott Twomey for Hospital Association of Southern California as Amicus Curiae on behalf of Plaintiff,
Cross-defendant and Respondent.
Stubbs & Leone and Gregory E. Stubbs for The League of California Cities, The California State
Association of Counties, The California Special Districts Association and The California Association of
Sanitation Engineers as Amici Curiae on behalf of Plaintiff, Cross-defendant and Respondent.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Joseph A. Miller
Montelone & McCrory
725 South Figueroa Street, Suite 3200
Los Angeles, CA 90017-5446
(213) 612-9900
Elwood Lui
Jones Day
555 South Flower Street, 50th Floor
Los Angeles, CA 90071-2300
(213) 489-3939