Los Angeles Unified School District v. Great American Insurance
49 Cal. 4th 739, 112 Cal. Rptr. 3d 230, 234 P.3d 490 (2010)
Rule of Law:
A public entity may be liable in a contract action for extra compensation if it knew material facts affecting a contractor's bid or performance, failed to disclose them, and those facts were not reasonably discoverable by the contractor, even without proof of affirmative misrepresentation or fraudulent intent.
Facts:
- 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.
- In 1999, the District terminated Lewis Jorge's 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, including Hayward, with copies of the original plans, specifications, and 108 pages of 'pre-punch lists' cataloging visible defective, incomplete, or missing work.
- Hayward conducted a site inspection and submitted a proposal to do the work with a 'guaranteed maximum price' of $4.5 million, which the District accepted.
- Shortly after beginning work, Hayward discovered numerous latent defects and nonconformities in the existing construction that were not noted on the pre-punch lists and could not have been detected by simple observation (e.g., extensive stucco and tile issues).
- These latent defects significantly increased the cost of the remedial work, as they required more extensive repairs than anticipated.
- Hayward sought extra compensation in the amount of $2,847,592 for the additional work necessitated by these undisclosed latent defects.
Procedural Posture:
- The District disputed Hayward's entitlement to extra compensation but paid an additional $1 million under an express reservation of rights.
- The District then instituted an action against Hayward and Great American Insurance Company (Hayward's performance bond issuer).
- Hayward cross-complained, asserting entitlement to additional compensation due to extra work, breach of contract by misrepresentation or nondisclosure, and breach of express or implied warranty by the District.
- The trial court granted the District summary adjudication on contract interpretation (rejecting Hayward's claim that its responsibility was limited to pre-punch list defects).
- The trial court granted the District judgment on the pleadings for Hayward's claims of breach of contract by misrepresentation/nondisclosure and breach of warranty, reasoning that Hayward had not alleged facts showing active concealment or intentional omission as required by Jasper Construction, Inc. v. Foothill Junior College Dist.
- The trial court entered judgment in favor of the District for $1,133,696.38.
- The Court of Appeal reversed both the grant of summary adjudication and the judgment on the pleadings, holding that Hayward could maintain a cross-action if the District knew material facts affecting Hayward’s bid or performance and failed to disclose them.
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Issue:
Does a public entity's failure to disclose material information that affects a contractor's bid or performance create liability for extra compensation, even if the public entity did not affirmatively misrepresent or intentionally conceal the information?
Opinions:
Majority - Werdegar, J.
Yes, a public entity may be required to provide extra compensation even without proving affirmative misrepresentation or intentional concealment. The Supreme Court affirmed the reversal of the judgment on the pleadings, holding that liability for nondisclosure is appropriate if the public entity knew, but failed to disclose, material facts that would affect the contractor's bid or performance. The court disapproved the stricter 'active misrepresentation or fraudulent concealment' standard previously applied by some Courts of Appeal, such as in Jasper Construction, Inc. v. Foothill Junior College Dist. This ruling is in line with the court's prior recognition in cases like City of Salinas v. Souza & McCue Construction Co. and Warner Constr. Corp. v. City of Los Angeles, which identified instances where nondisclosure could be grounds for relief, and aligns with the federal 'superior knowledge doctrine' from Helene Curtis Industries, Inc. v. U.S. The court explained that while a contractor cannot recover for errors stemming from its own lack of diligence or unreasonable assumptions, a public entity should not be allowed to benefit from a blameless contractor's work when it withheld material, non-discoverable information. The court established a four-part test for nondisclosure liability, emphasizing that the public entity is liable when the totality of circumstances indicates it knew or had reason to know a diligent contractor would be unlikely to discover the condition materially increasing performance costs.
Dissenting - Corrigan, J.
No, a public entity should not be liable on a breach of warranty claim based on unintentional misrepresentation or nondisclosure of material facts. Justice Corrigan argued that existing precedent, including Souza & McCue Constr. Co. v. Superior Court, Wunderlich v. State of California, Warner Constr. Corp. v. City of Los Angeles, and Jasper Construction, Inc. v. Foothill Junior College Dist., consistently required proof of some intentional wrongdoing—either an affirmative misrepresentation or an intentional failure to disclose material facts—to establish liability for a breach of implied warranty. The dissent contended that previous cases made it clear that contractors could not rely on merely 'suggestive' or 'honest statements' and were responsible for expenses due to unforeseen conditions if there was no misleading intent. By eliminating the requirement for affirmative misrepresentation or intentional concealment, the majority's holding shifts an 'inordinate amount of risk' to public entities, encourages careless bidding by contractors, and exposes public entities to 'needless and protracted litigation,' thereby blurring the line between affirmative misconduct and negligence.
Analysis:
This case significantly broadens the scope of public entities' liability for nondisclosure in public works contracts in California. By rejecting the requirement of fraudulent intent or affirmative misrepresentation, the court shifts the burden more towards public entities to proactively disclose information that might materially affect a contractor's performance costs, especially when the information is uniquely within the entity's possession and not reasonably discoverable by the contractor. This ruling has the potential to encourage greater transparency from public agencies and provide contractors with stronger recourse for unforeseen costs due to hidden information, but it may also increase litigation and administrative burdens for public entities, as highlighted by the dissenting opinion.
