CACI 4501 Owner’s Liability for Failing to Disclose Important Information Regarding a Construction Project—Essential Factual Elements

New December 2010; Revised June 2011

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Give this instruction if a contractor claims that the owner had important information regarding the project that it failed to disclose, and as a result, the contractor incurred greater costs than anticipated. Also give CACI No. 303, Breach of Contract—Essential Factual Elements, for other contested elements of a breach-of-contract claim.

With regard to undisclosed information, there is liability only if the failure to disclose materially affected the cost of performance and actually and justifiably misled the contractor in bidding on the contract. It is not necessary to show a fraudulent intent to conceal. (See Los Angeles Unified School Dist. v. Great American Ins. Co. (2010) 49 Cal.4th 739, 745 [112 Cal.Rptr.3d 230, 234 P.3d 490].)

This instruction applies principally to public owners awarding fixed price construction contracts to contractors required to submit bids based on information provided by the public owner. Government Code section 818.8 relieves public owners from tort liability for concealment and similar tortious conduct. However, public owners remain liable in contract. (See Warner Constr. Corp. v. L.A. (1970) 2 Cal.3d 285, 294 [85 Cal.Rptr. 444, 466 P.2d 996].) Private owners remain liable in tort for concealment of important facts. (See CACI No. 1901, Concealment.)

•“[A] contractor need not prove an affirmative fraudulent intent to conceal. Rather … 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 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.” (Los Angeles Unified School Dist., supra, 49 Cal.4th at p. 745.)

•“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.” (Los Angeles Unified School Dist., supra, 49 Cal.4th at p. 754.)

•“[E]stablished 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.” (Los Angeles Unified School Dist., supra, 49 Cal.4th at p. 752.)

•“Nondisclosure is actionable … only if the information at issue materially affects the cost of performance … .” (Los Angeles Unified School Dist., supra, 49 Cal.4th at p. 753.)

•“In transactions which do not involve fiduciary or confidential relations, a cause of action for non-disclosure of material facts may arise in at least three instances: (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 Constr. Corp., supra, 2 Cal.3d at p. 294, footnotes omitted.)

•“But this does not mean … that City could be liable simply by failing to supply complete plans and specifications. It does mean that careless 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 … . Thus, … the general rule [is] that silence alone is not actionable.” (Thompson Pacific Construction, Inc. v. City of Sunnyvale (2007) 155 Cal.App.4th 525, 552 [66 Cal.Rptr.3d 175], internal citations omitted.)

•“It would be inequitable to permit defendant to enforce the literal terms of the contract which called for the excavation of ‘all materials’ necessary to complete the job when plaintiffs were induced by defendant’s misrepresentation to submit a bid which was much lower than was warranted by the true facts. If instead of stating in the specifications that [contractor] would excavate to rough grade, defendant had stated the true facts of which it had knowledge—that [contractor] was obligated by contract to excavate no lower than five feet above grade—the present situation would not have arisen. Having failed to impart this knowledge to plaintiffs and having willfully or carelessly misrepresented the true situation, defendant is obligated to plaintiffs for the additional work occasioned.” (Gogo v. Los Angeles County Flood Control Dist. (1941) 45 Cal.App.2d 334, 341–342 [114 P.2d 65].)

•“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. [¶] In a factually similar case, the contractor encountered ‘unusual quantities of quicksand and extensive subsoil water conditions which had not been shown on the plans or specifications … information as to which, although known to it, had been withheld by the city.’ An award of damages was affirmed because … ‘[t]he withholding by the city of its knowledge … resulting in excessive cost of construction, forms actionable basis for plaintiff’s claim for damages.’ ” (Salinas v. Souza & McCue Constr. Co. (1967) 66 Cal.2d 217, 222–223 [57 Cal.Rptr. 337, 424 P.2d 921], internal citations omitted.)

•“Here, the city argues that provisions in the contract specifications requiring that the bidders ‘examine carefully the site of the work,’ and stating that it is ‘mutually agreed that the submission of a proposal shall be considered prima facie evidence that the bidder has made such examination,’ prevents a holding that the city is liable for the consequences of its fraudulent representation. However, even if the language had specifically directed the bidders to examine subsoil conditions, which it did not, it is clear that such general provisions cannot excuse a governmental agency for its active concealment of conditions.” (Salinas, supra, 66 Cal.2d at p. 223, internal citations omitted.)

•“A fraudulent concealment often composes the basis for an action in tort, but tort actions for misrepresentation against public agencies are barred by Government Code section 818.8. Plaintiff retains, however, a cause of action in contract. ‘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.’ As explained in Souza & McCue Construction Co. v. Superior Court, … : ‘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. The fact that a breach is fraudulent does not make the rule inapplicable.’ ” (Warner Constr. Corp., supra, 2 Cal.3d at pp. 293–294, internal citations omitted.)

•“Under general principles of contract and tort law, a party who conceals or fails to disclose material information to another is liable for fraud. In the public construction contract context, however, the conduct of a public agency which would otherwise amount to a tortuous [sic] misrepresentation is treated as a breach of contract. The underlying theory is that providing misleading plans and specifications constitutes a breach of the implied warranty of correctness. (Howard Contracting, Inc. v. G. A. MacDonald Construction Co. (1998) 71 Cal.App.4th 38, 55 [83 Cal.Rptr.2d 590].)

•“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 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 (1967) 65 Cal.2d 777, 786–787 [56 Cal.Rptr. 473, 423 P.2d 545].)

•“Thus, [contractor]’s entitlement to recover for extra work performed in connection with the fire alarm contract does not turn upon the issuance of written change orders. Because the extra work on the fire alarm contract was necessitated by incorrect plans and specifications furnished by the District, under settled law [contractor] was entitled to recover for said work.” (G. Voskanian Construction, Inc. v. Alhambra Unified School Dist. (2012) 204 Cal.App.4th 981, 992 [139 Cal.Rptr.3d 286].)