A recent decision from the Riverside Superior Court casts into doubt a contractor’s entitlement to be paid for conditions concealed by a public agency or entity. In the Riverside case, a public entity (the District) knew of a restriction in an encroachment permit which substantially increased the contractor’s costs of performance. The District appeared to have intentionally failed to disclose the restriction in an effort to get lower bids for the work. It was established that the District had disclosed the restrictions on its prior five projects. On this project the District included only a statement that the contractor would be required to comply with the City’s permit requirements. The District did not disclose the restriction in those permits, and the contractor submitted its bid without including costs caused by the permit restrictions. The contractor ultimately suffered over a 23% increase in the cost of performance as a result of the District’s concealment. As a longstanding general rule, a bidding contractor is entitled to reasonably rely upon the information provided by the agency. A public agency will be responsible for paying a contractor for costs incurred in excess of the contractor’s bid if the costs are caused by the public entity’s failure to disclose facts. Under the general rule, the Riverside contractor would have been entitled to be paid for the extra costs. A very similar case was decided in a contractor’s favor in 1998 in Howard Contracting, Inc. v. G.A. McDonald Construction Co., Inc. In Howard, the public entity failed to disclose known facts and merely stated that the contractor had to comply with all permitting requirements of third party regulatory agencies. The Howard Court held that mere reference to compliance with permit requirements was less than full disclosure, specifically reasoning that, “[s]ince the City bore the responsibility for obtaining the project permits, bidders were reasonably entitled to assume that the City would inform them of any permit requirements or restrictions adversely affecting their ability to perform work on the project.” November 2011 ORANGE COUNTY Mission Ridge 27101 Puerta Real, Suite 120 Mission Viejo, CA 92691 LOS ANGELES City National Plaza 515 S. Flower Street, 36th Floor Los Angeles, CA 90071 SAN DIEGO Emerald Plaza 402 West Broadway, Suite 400 San Diego, CA 92101 T: (949) 553-1951 www.aalaws.com F: (949) 553-0655 The Riverside Court relied instead upon a 2010 decision of the California Supreme Court entitled Los Angeles Unified School District v. Great American Insurance (Hayward). In Hayward, the Supreme Court adopted the Superior Knowledge doctrine, holding that while a public agency may not be liable for failing to disclose information a reasonable contractor should have discovered on its own, it may be liable when the totality of the circumstances were such that the public entity has reason to know that a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance. The Riverside Court held that the District had not misled the contractor. Instead, the Court found that the mere reference to the permit obligated the contractor to review the permit requirements prior to submitting its bid and excused the District’s nondisclosure. The pragmatic takeaway is that at least one court is applying Hayward to reduce the protections enjoyed by contractors. Contractors should take care in reviewing all documents referenced in bid specifications in order to protect themselves from costly surprises.