Public Entities May Be Liable For Failing To Disclose Material Information To Contractors

Los Angeles Unified School District v. Great American Insurance Company, Hayward Construction Company, No. S165113 (July 12), is a 6-1 decision from the California Supreme Court defining the conditions under which a contractor may recover when a public entity knows, but fails to disclose, material facts that would affect the contractor’s bid or performance.  It has long been recognized that a public entity’s misleading plans or specifications justify additional compensation.  See Souza & McCue Construction Co. v. Superior Court (1962) 57 Cal. 2nd 508, 510.  In this case, the Court answered what happens when the public entity simply  fails to disclose facts within its knowledge affecting the cost of performance.

There is a district split on the issue.  One Court of Appeal, like the trial court here, held that the contractor must demonstrate affirmative misrepresentation or intentional concealment on the part of the public entity.  See Jasper Construction, Inc. v. Foothill Junior College District (1979) 91 Cal. App. 3rd 1, 10-11.  Other appellate courts have said affirmative fraudulent intent  need not be shown, Welch v. State of California (1983) 139 Cal. App. 3rd 546, 556, or that careless failure to disclose where the public entity has superior knowledge, Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155 Cal. App. 4th 525, 552, is enough.  The Court of Appeal below offered the view that failure to disclose facts of which the public entity is simply aware is enough.

The Supreme Court ruled that extra compensation may be allowed if the public entity failed to disclose facts that would affect the contractor’s bid or performance.  Because public entities do not insure contractors against their own negligence, such compensation is available only when there is an absence of material information, the public entity had the information and was aware the contractor did not, the contractor was misled, and the public entity failed to provide the information it knew the contractor did not have and did not have any reason to obtain.

Justice Corrigan dissented, expressing the view that Jasper states the law accurately and that the majority decision inordinately shifts risk to public entities.

July 12, 2010   Posted in: Blog