Nondisclosure Of Material Information

Law Talk

Sam K. Abdulaziz
Attorney at Law

This case deals with plans and specifications that were issued by the public authorities, which were inaccurate. They were used as the basis for bids. As a result, the contractor submitted a bid, which was lower than he would have otherwise bid because the public authority neglected to provide information that it had which materially affected the cost and performance.

Various authorities were used, including ones where the contractor had to show that the public entity misrepresented or intentionally concealed material facts leading to misleading information. Another case held that the contractor did not need to prove an "affirmative fraudulent intent to conceal" when disclosure would have eliminated or materially qualified the misleading effect of facts disclosed. Another authority stated that the thoughtless failure to provide information may allow recovery if the public entity had knowledge inaccessible to the contractor.

In this case, the Court of Appeal decided that a contractor does not need to prove there is an "affirmative fraudulent intent to conceal." Instead, a public entity may be required to provide extra compensation if it knew, but did not disclose, material facts that would affect the contractor's bid or performance.

The main facts of this case are that Hayward Construction Company (Hayward) successfully bid a project to the Los Angeles Unified School District (District) to complete work that was left unfinished by a previous contractor that had been fired. The contract between Hayward and the District for this project was a guaranteed maximum priced contract. Almost immediately after starting the work, Hayward found deficiencies that were not on the pre-punch lists and could not have been known by simple observation. Therefore, Hayward asked for extra compensation above the maximum contract amount for work they described as latent defects. The District disputed the sum, but paid Hayward additional money under an express reservation of rights to take action to recover the additional compensation.

Hayward Cross-Complained stating that the District did not disclose the full extent of the defects in the existing construction.

The Court of Appeal stated that, "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."  Hayward was not asking for additional monies based on "careless bidding practices" but based it on the District's "misleading nondisclosure to recover only on a showing the public entity harbored a fraudulent intent."

There was, however, a dissenting opinion that, in essence, said that the Court of Appeals rule was overbroad in suggesting that recovery may be had for any failure to disclose material information.