Defective and Deficient Contract Documents: Failure to Disclose Vital Information

This is the fifth blog post in a seven-part series that discusses defective and deficient contract document claims. Earlier posts discuss the owner’s implied warranty of suitability of a finished product or contract performance. One way an owner may breach this implied warranty is by omitting vital information. If the owner possesses superior knowledge that is not reasonably available to the contractor and is vital to its performance, then the owner must disclose that information. If the owner fails to disclose it, then the contractor may be able to recover its increased costs.¹ Situations in which owners have a duty to disclose include:

• Active concealment of specific information on matters of substance;
• Statements made by the owner that would be materially qualified by other information in the owner’s possession or that might mislead the contractor in the absence of the disclosure; and
• Information that would have a material effect on the bid price and project schedule while contractors are basing their bids on improper assumptions.

In the federal contract setting, the principle of superior knowledge defines the duty to disclose any special knowledge that is exclusive or not otherwise reasonably available elsewhere to the contractor and is vital to its performance.² Breaching this duty to disclose could constitute a breach of contract. The difficulty in this principle arises with the fact that the owner does not need to disclose everything it knows about a specific contract—only “specific information on matters of substance.” The owner is under no duty to volunteer information if the contractor can reasonably be expected to obtain such information elsewhere through its own efforts.

The stipulation is that the information must be something that the contractor needs to know to produce an item that meets specifications and to properly price the work involved. Without such information, the contractor’s methods and schedule of performance may be inappropriate and its bid costs too low. When the owner’s failure to disclose superior knowledge causes the contractor’s costs to increase, a constructive change is often the result, and the contractor may be able to recover its additional costs. It is, however, the responsibility of the contractor to anticipate any commonly known difficulties that are inherent in the work it performs.

The owner’s responses to pre-bid inquiries can avert situations ripe for claims. Where the owner knows of site conditions that would be impractical or impossible for the contractor to inspect, such information must be divulged upon inquiry—even in pre-bid negotiations. The owner is always under the duty to deal in good faith.³

Entitlement based on superior knowledge is frequently applied to changed conditions situations and is often found to be a contributing factor in practical (economic) impossibility or physical impossibility situations. The most common issues involved are soils data and details concerning the physical condition of an existing property. Where a differing site conditions clause is not contractually incorporated, superior knowledge may be a contractor’s only alternative for relief.

Construction disputes involving superior knowledge may be complex, and thus, the courts have established numerous theories to assist in resolving them. Typical questions that the courts often ask include the following:⁴

1. What express contractual duties and disclosure duties does the owner have concerning the information in question?
2. Are there implied duties? Is there recognition of implied warranties of the information supplied by the owner in the court’s jurisdiction?
3. Is there a changed or differing site conditions clause?
4. Who assumed the risk? Is there an applicable contract disclaimer? Is it enforceable?
5. Is there a noncontractual duty on the part of the owner that could give rise to a tort claim? Did the owner fail to show reasonable care or fail to act in good faith?
6. Was the contractor legally justified in relying on the asserted facts? Did it exercise reasonable care to discover any information in question?
7. Are there material differences between the actual conditions and those described in the information that the owner supplied?
8. Are the preceding questions affected by whether the contract is private or governmental?

Entitlement based on superior knowledge has not yet been widely accepted in private contract claims. Where this principle has been an issue, it has been dealt with under similar theories such as misrepresentation, defective specifications, or nondisclosure.

¹     See, e.g., Bradley Construction, Inc. v. United States, 30 Fed. Cl. 507, 510 (1994); Welch v. State, 139 Cal App. 3d 546, 188 Cal Rptr. 726 (1983).

²     2 CCH Government Contracts Reporter ¶ 10,125.

³     Hardeman-Monier-Hutcherson v. U.S. (1972) 17 CCF ¶ 81,368, 198 Ct. Cl. 472, 458, F.2d 1364; Gevyn Construction Corp. v. United States (Ct. Cl. 1979) 26 CCF ¶ 83,1000; Dunbar & Sullivan Dredging Co. v. United States (1928) 65 Ct. Cl. 567.

⁴     Steven G. M. Stein, Editor in Chief, Construction Law, New York, Mathew Bender, 1987, p. 5–268

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