## Facts

- Los Angeles Unified School District (LAUSD) hired Lewis Jorge Construction Management, Inc. in 1996 to build an elementary school; in 1999 LAUSD declared the contractor in default with the project allegedly about 93% complete.
- LAUSD declared an emergency under Cal. Pub. Cont. Code § 20113 and sought a completion contractor without advertising for bids.
- LAUSD prepared and provided prospective completion contractors a “pre-punch list” describing remaining work and corrections to prior work.
- Hayward Construction Company entered a completion agreement with LAUSD in 1999 for a maximum price of about $4.5 million; Great American Insurance Company issued a performance bond for Hayward.
- After work began, Hayward claimed actual defective conditions (including stucco issues) were substantially worse than indicated and that LAUSD had not disclosed a consultant report identifying more extensive defects and warning Hayward’s proposed repair methods were inadequate.
- Hayward sought about $2.8 million in additional compensation; LAUSD paid $1 million under a reservation of rights, intending to litigate entitlement and possible reimbursement.
- LAUSD sued Hayward and Great American for declaratory relief under the completion contract and bond and to recover the $1 million; Hayward cross-complained for breach of contract and related claims based on alleged nondisclosure/misrepresentation.
- The trial court granted judgment on the pleadings against Hayward’s nondisclosure-based claims, reasoning the contractor had to plead affirmative misrepresentation or intentional concealment, and ultimately entered judgment for LAUSD with attorney’s fees.
- The Court of Appeal reversed, adopting a broad nondisclosure standard based on the public entity’s knowledge of material facts and failure to disclose.
- The California Supreme Court granted review to clarify the standard for public-entity liability for nondisclosure in public works contracting.

## Issues

1. Whether a public entity may be liable for extra compensation based on nondisclosure of material information affecting bid or performance when plans and specifications are otherwise correct.
2. Whether recovery for nondisclosure requires pleading or proving affirmative misrepresentation, intentional concealment, or fraudulent intent.
3. What limits qualify any public entity duty to disclose, including contractor diligence and foreseeability of risk.

## Decision

- The California Supreme Court held a contractor need not prove affirmative fraudulent intent to conceal to recover for nondisclosure.
- The Court rejected a categorical requirement of affirmative misrepresentation or intentional concealment as a prerequisite for nondisclosure-based recovery.
- The Court also rejected the Court of Appeal’s expansive rule that liability arises whenever the public entity knew material facts and failed to disclose them.
- The Court adopted a qualified duty-to-disclose standard tied to superior knowledge and reasonable contractor reliance, while reaffirming that public entities are not insurers of contractor performance.
- The Court affirmed in part and reversed in part and remanded for further proceedings under the clarified rule.

## Legal Principles

- A public entity may owe extra compensation for nondisclosure when it possesses material information that would affect bid or performance and that information is not reasonably available to the contractor (superior knowledge).
- Nondisclosure liability does not require proof of affirmative fraudulent intent to conceal.
- The duty to disclose is qualified: the undisclosed information must materially affect bid/performance in light of what the entity did disclose, and the entity must know or have reason to know the contractor would reasonably rely on the incomplete information.
- Contractors retain responsibility for reasonable diligence, including accounting for foreseeable contingencies and conducting reasonable inspection; public entities do not guarantee contractor profitability.
- A pleading should not be dismissed solely because it lacks allegations of intentional concealment if it otherwise alleges superior-knowledge nondisclosure that materially misled the contractor.

## Conclusion

The court clarified that a contractor may seek extra compensation from a public entity for nondisclosure of material, superior-knowledge information that reasonably would affect bidding or performance, without proving fraudulent intent, but only within limits that preserve contractor diligence and avoid turning public entities into insurers.


L.A. Unified Sch. Dist. v. Great Am. Ins. Co., 49 Cal. 4th 739 (Cal. 2010)