Orange County Branch Newsletter

May 2011

Law and Civil Engineering

Extra Pay to the Contractor For Non-Disclosure by the Public entity

A School District entered into a contract  to construct an elementary school according to plans and specifications developed by the District. Three years after the start of construction,  the District terminated the contract, declaring that the contractor was in material breach and default. The District then sought proposals from other contractors to correct defects in the original contractor's work and to complete the project. The District provided prospective bidders with copies of the original plans and specifications.  It also provided over 100 pages of what the parties characterized as a "current correction lists" or as "pre-punch lists," cataloging work by the previous contractor that the District's inspectors found to be defective, incomplete or missing.

Although the pre-punch lists appeared to refer only to defects visible by simple inspection, they included language indicating that the District also intended to make the contractor that was awarded the job responsible for unlisted defects in the existing work. A list provided by the District's chief inspector accordingly recited: "Corrections or comments made in regards to the pre-punch lists 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, the completing contractor 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 the bid, and the parties entered into a contract to complete the project. The written agreement recited that the completing contractor 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 recited the guaranteed maximum price recited in the bid.

Shortly after beginning work, the completing contractor informed the District that it had significantly underestimated the cost of the remedial work, explaining that the existing work had nonconformities and deficiencies that had not been noted on the pre-punch lists and could not have been detected by simple observation and that the “not to exceed” amount would have to be increased by at least 50% for the “latent defects.” The District disputed that the contractor was entitled to any sum above the originally bid “guaranteed maximum.”  A lawsuit ensued which eventually ended up before the State Supreme Court.  The main issue in the case was whether a contractor may recover any perceived losses 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 Court held 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.

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 Court further held that a public entity may not be held liable for failing to disclose information that a reasonable contractor in similar 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.

This case further clarifies the circumstances where a contractor may be receive extra pay for unexpected conditions encountered during construction.

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