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Public Entities Held Liable for Full Project Disclosure

Tuesday, July 20, 2010

Public entities "may be required to provide extra compensation" to a contractor if they withhold facts that would affect the contractor's project bid or performance, the California Supreme Court has ruled.

The ruling, in Los Angeles Unified School District v. Great American Insurance Company and Hayward Construction Company, clears the way for contractors to seek relief in certain circumstances against a public entity for failing to disclose relevant project information, even if the failure was not fraudulent.

In the Los Angeles case, Hayward signed a guaranteed-maximum-price contract to complete punch list work on an elementary school left unfinished by a terminated contractor. After starting work, the contractor notified the district that the unfinished work required an additional $2 million, which the school district approved.

However, after completion, the school district sued to recover $1 million from the contractor and its surety, contending that the punch list covered the change order work.

The contractor argued that the district could not recover because it had failed to share information about the project, including defects in the original construction, that impacted the scope and costs of the work. A lower court sided with the school district, but an appeals court partially agreed with the contractor.

'Profound impact' on subcontractors

A number of California specialty trade groups and the American Subcontractors Association filed an amici curiae brief in the case. The brief said that undermining a contractor's right to rely on the information provided by the owner to bidders would have "a direct and profound impact on the fiscal atmosphere in California's public works industry and on the ability of subcontractors … to conduct their subcontracting businesses."

In its ruling, the high court noted that it had long recognized a contractor's right to recover additional expenses when a public authority provided incorrect plans or specifications that led the contractor to submit a bid that was too low. However, in this case, the court examined situations in which the specs and plans were correct, but other relevant project information was omitted.

Although public entities enjoy "substantial protection against careless bidding practices" that may be traced to a contractor's lack of due diligence, that protection does not apply when the contractor has been "damaged by a public entity's misleading nondisclosure," the high court ruled. Furthermore, it found, the contractor need not show that the public entity "harbored a fraudulent intent" in withholding the information.
 
"Rather," the court ruled, "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 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."

Public entities may not be held liable "for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own," the court said, but is liable when it "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."