In old England, a citizen was legally required to raise a “hue and cry” when he saw a crime committed. No such rule exists here. Similarly, you do not have a duty to throw a life preserver to a drowning person. American law has developed in a way that does not require us to help one another.
So it is with contracts. A construction owner is not under an obligation (duty) to convey information he has to a contractor, though the information he gives must be accurate.
There are, however, instances where an owner’s silence can be considered wrongful. These instances fall under the category of “superior knowledge.”
Superior knowledge v. fraud
Fraud and misrepresentation fall under the category of “tort.” A tort exists where a duty owed to the public has been breached. It is separate from duties created by contract.
However, the courts regularly use tort concepts when reviewing breach of contract claims. This tort/contract fogginess is very apparent when questions arise as to what an owner must disclose to a contractor. For example, there are court decisions that state that an owner is only liable to a contractor if it “intentionally” withheld vital information. This focus on intent is not correct. In contracts, one party’s personal motivation for doing or not doing something should not be relevant. The focus instead should be on whether the contract requires or prohibits something.
As an example, an owner knows that its property has a high water table but does not tell the contractor. The electrical subcontractor finds out when he trenches for underground cable and water floods the ditch. Does the owner bear any responsibility for the increased costs? Has the owner breached the contract or committed a fraud?
If fraud is the claim, the remedy is to have the contract voided. If superior knowledge is the claim, the remedy is additional money; the contract is viable.
The problem with public contracts
At common law, federal, state and local governments are protected by sovereign immunity. However, by statute, where a public body enters into a contract, such as a construction agreement, it has waived that immunity within the context of the contract.
Therefore, a contractor cannot sue the government for fraud (a tort), but can sue for breach of contract. As such, superior knowledge claims dominantly arise with public contracts, while the same facts and circumstances would support tort claims for misrepresentation or fraud with private contracts.
The elements of proof
The federal courts created the “superior knowledge doctrine” following a 1963 decision involving Helene Curtis Industries and the production of disinfectant. When the government “possess[es] vital information which it was aware the bidders needed but would not have, [it] could not properly let them flounder on their own. … [T]he Government—where the balance of knowledge is so clearly on its side—can no more betray a contractor into a ruinous course of action by silence than by written or spoken word.”
The doctrine provides that, in certain circumstances, the government has a “duty” to disclose the information it has at bid time. This concept sounds fair but could lead to chaos. A contractor could always claim after the fact that, knowing these secret facts, its price would have been higher.
In an effort to control this beast, the federal courts have developed a four-part test: 1) the contractor must prove that the government had “vital” information that would affect the time or cost of construction, 2) that the government knew that the contractor did not have this data and had no reason to search for it, 3) nothing in the contract alerted the contractor to a need to investigate, and 4) that the government withheld the data. None of these elements is easy to prove.
Is it a defense for the government to say that it did not know the “secret” information was so important? Or, that it had no intention to deceive? Court decisions are not consistent on these questions.
A good example
A contractor may not have to prove the equivalent of fraud by the government in a case of superior knowledge, but it helps. In a recent California decision, a school district issued a fixed-price contract to complete a building after the original contractor was terminated for default. The district gave the completion contractor a list of known defects in the partially completed building but instructed the contractor to make its own inspection. The contractor did not know about the district’s own inspection report, which contained important findings the contractor would have used for its bid (Los Angeles Unified School District v. Great American Insurance Co., July 12, 2010).
The school district argued that it did not intend to deceive the contractor. It also argued that it had no obligation to perform the inspection, so it should not have had a duty to disclose the inspection report. It further contended that the contractor could have performed its own investigation and discovered the problems.
The district persuaded the trial court, and it dismissed the contractor’s case. The California Supreme Court sent the case back for trial, with the instruction that “intent” was not a factor to be considered. The court essentially adopted the federal standard for proof of superior knowledge.
How do you get past the elements?
The critical parts of proof are the importance of the withheld information and the reasons why you did not think to ask for it. Next in importance is the case for the owner to have divulged its knowledge and how difficult it would have been to get this data on your own.
Let us say that the specifications had a requirement for an alphanumeric keyboard for a PLC. The owner knew that there was only one manufacturer that produced the required keyboard. Your proof that this “sole source” information was vital should be straight-forward.
But how can you prove that the owner knew about your ignorance on this point? Your proof must be indirect. You argue that the owner hid the sole source issue by not flagging it in the specifications, that it would have been so simple for the owner to divulge this information that it must have wanted to keep it secret, that the owner never raised the issue in bid clarifications, and that the owner’s past dealings with the keyboard manufacturer clearly indicated that this was a rare item.
Then you need to show why you did not discover this issue at bid preparation. Why did you not check on available suppliers? You could argue that keyboards were not a major element of your bid in terms of dollars and only became an issue when they could not be located. Additionally, the specifications raised no red flags.
Think about the language in Helene Curtis, that the owner “could not properly let [you] flounder on [your] own.”
No matter what difficulties are involved, the doctrine of superior knowledge is worth having in your lexicon. Unlike other types of claims where there is a specific contract clause to alert you to your rights (differing conditions, delays, suspensions), superior knowledge is one of those legally implied duties that adheres to any construction contract, although not mentioned in the agreement.