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Los Angeles Unified School Dist. v. Great American Insurance Co.

July 12, 2010

LOS ANGELES UNIFIED SCHOOL DISTRICT, PLAINTIFF, CROSS-DEFENDANT AND RESPONDENT,
v.
GREAT AMERICAN INSURANCE COMPANY, DEFENDANT AND APPELLANT; HAYWARD CONSTRUCTION COMPANY, DEFENDANT, CROSS-COMPLAINANT AND APPELLANT.



Ct.App. 2/2 B189133 Los Angeles County Super. Ct. No. BC247848. Judge: Wendell Mortimer, Jr.

The opinion of the court was delivered by: Werdegar, J.

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 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 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 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 non-conformities 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 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 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 adjudication*fn1 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.)*fn2 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 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,*fn3 the contractor retains a cause of action in contract (Warner Constr. Corp. v. City of Los Angeles (1970) ...


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