City of Salinas v. Souza & McCue Const. Co.

• Decision Date: 21 March 1967
• Docket Number: S.F. 22394
• Citation: 66 Cal.2d 217,57 Cal.Rptr. 337,424 P.2d 921
• Court: California Supreme Court
• Parties: , 424 P.2d 921 CITY OF SALINAS, Plaintiff, Cross-Defendant and Appellant, v. SOUZA & McCUE CONSTRUCTION COMPANY, Inc., Defendant, Cross-Complainant and Appellant; Aetna Casualty & Surety Company, Defendant and Appellant; Armco Drainage & Metal Products, Inc., Defendant, Cross-Defendant and Respondent. In Bank

Page 337

57 Cal.Rptr. 337

66 Cal.2d 217, 424 P.2d 921

CITY OF SALINAS, Plaintiff, Cross-Defendant and Appellant, v. SOUZA & McCUE CONSTRUCTION COMPANY, Inc., Defendant, Cross-Complainant and Appellant Aetna Casualty & Surety Company, Defendant and Appellant Armco Drainage & Metal Products, Inc., Defendant, Cross-Defendant and Respondent.

S.F. 22394.

Supreme Court of California,

In Bank.

March 21, 1967.

Rehearing Denied April 19, 1967.

Donald A. Way, City Atty., J. T. Harrington and William B. Boone, Santa Rosa, for plaintiff, cross-defendant and appellant.

Steel & Arostegui and Robert W. Steel, Marysville, for defendant, cross-complainant and appellant and for defendant and appellant.

Thelen, Marrin, Johnson & Bridges, San Francisco, as amici curiae on behalf of defendant, cross-complainant and appellant.

Bradford, Cross, Dahl & Hefner and Loren S. Dahl, Sacramento, for defendant, cross-defendant and respondent.

PEEK, ^* Associate Justice.

On these appeals the City of Salinas disputes findings that it misrepresented soil conditions to the damage of Souza & McCue Construction Company, its general contractor under a 1958 contract for the construction of a sewerline.

The action was commenced by the city for damages for Souza's alleged breach of the contract. The city also sought to recover from Souza's surety, the Aetna Casualty & Surety Company, and from Armco Drainage & Metal Products, Inc., a supplier of products to Souza. In a pleading denominated a cross-complaint, Souza set forth causes of action against the city for the recovery of the balance allegedly due under the contract, and a common count for goods and services. Souza also cross-complained against Armco, alleging that the latter guaranteed performance of piping it supplied and had promised to indemnify Souza for any losses. After the city answered the cross-complaint, the trial court refused to allow Souza to amend to include causes of action against the city for fraudulent misrepresentation and breach of implied warranty of site conditions. We granted a writ of mandate directing the trial court to allow the filing of such an amendment. (Souza & McCue Constr. Co. v. Superior Court (1962) 57 Cal.2d 508, 20 Cal.Rptr. 634, 370 P.2d 338.)

At the conclusion of the trial the court found that the city materially misrepresented soil conditions by failing to inform Souza and other bidders of unstable conditions known to it, that the city intended that Souza prepare its bid based on such misrepresentations, that Souza reasonably relied on the misrepresentations in bidding on the contract, and that Souza should recover damages in the amount of $124,106, as proximately caused by the city's fraudulent breach of contract. All other claims for relief were denied. On this appeal, the city's main contention is that the foregoing findings, and the judgment based thereon, are not supported by the evidence.

There was considerable testimony that the city's chief engineer in charge of the project and other officials involved therein, had knowledge, from their general knowledge of the city and from past project experience, of highly unstable conditions existing in the subsoils along the plotted line of the sewer. They knew that particularly difficult conditions were likely to be encountered in an extensive slough area which the route crossed. There was also evidence that the chief engineer directed an independent testing firm to take borings at preselected spacings and locations which avoided the area of the greatest unsettled conditions; that the method of taking the tests was misleading; that the reports of these boring tests were sent to bidders only a few days before the opening of bids, and that while it would have been proper practice to warn bidders of anticipated difficult conditions, the city officials did not do so.

It is the general rule that by failing to impart its knowledge of difficulties to be encountered in a project, the owner will be liable for misrepresentation if the contractor is unable to perform according to the contract provisions. (See United States v. Spearin (1918) 248 U.S. 132, 39 S.Ct. 59, 63 L.Ed. 166; United States v. Atlantic Dredging Co. (1920) 253 U.S. 1, 11--12, 40 S.Ct. 423, 64 L.Ed. 735; Gogo v. L.A. etc. Flood Control Dist. (1941) 45 Cal.App.2d 334, 338, 341--342, 114 P.2d 65; A. Teichert & Son, Inc. v. State of Cal. (1965) 238 Cal.App.2d 736, 756, 48 Cal.Rptr. 225.)

In a factually similar case, the contractor encountered 'unusual quantities of quicksand and excessive subsoil water conditions which had not been shown on the plans and specifications * * * information as to which, although known to it, had been withheld by the city.' (Valentini v. City of Adrian (1956) 347 Mich. 530, 533, 79 N.W.2d 885, 887.) An award of damages was affirmed because, as stated at page 534, 79 N.W.2d at page 887: 'The withholding by the city of its knowledge * * * resulting in excessive cost of construction, forms an actionable basis for plaintiff's claim for damages.'

Here, the city argues that provisions in the contract specifications requiring that the bidders 'examine carefully the site of the work,' and stating that it is 'mutually agreed that the submission of a proposal shall be considered prima facie evidence that the bidder has made such examination,' prevents a holding that the city is liable for the consequences of its fraudulent representation. However, even if the language had specifically directed the bidders to examine Subsoil conditions, which it did not, it is clear that such general provisions cannot excuse a governmental agency for its active concealment of conditions. (See, e.g., United States v. Atlantic Dredging Co., supra, 253 U.S. 1, 40 S.Ct. 423, 64 L.Ed. 735; United States v. Spearin, supra, 248 U.S. 132, 39 S.Ct. 59, 63 L.Ed. 166; Christie v. United States (1915) 237 U.S. 234, 35 S.Ct. 565, 59 L.Ed. 933; A. Teichert & Son, Inc. v. State of Cal., supra, 238 Cal.App.2d 736, 48 Cal.Rptr. 225.)

The city further argues that because it entered into a modification of the contract after Souza encountered initial subsurface difficulties, Souza waived any claim going to fraudulent representations. The modification provided for the use of imported soils for side support and backing material, extended the time and adjusted the contract price. This came about when the parties became aware that the native soils would not support the sewerline. At that time Souza, however, was still not aware of the city's knowledge, nor did it have knowledge of its own, of the unstable conditions that might be expected to become increasingly grave as the line was further extended.

The modification provided that 'the parties * * * have finally decided to settle and compromise all of their differences and settle their dispute by this compromise agreement.' The only dispute that had arisen at that point did not involve the considerable quicksand problems that Souza was to face during the remainder of the project, and concerned chiefly the inability of native soils to meet the compaction requirements of the original contract. That agreement could hardly be deemed to have settled a dispute over problems of which the contractor was not yet aware, and which, perforce, the parties could not have intended to include in the agreement. (See Lemm v. Stillwater Land & Cattle Co. (1933) 217 Cal. 474, 482, 19 P.2d 785; Warfield v. Richey (1959) 167 Cal.App.2d 93, 98, 334 P.2d 101.)

The modification agreement also provided that 'the contractor expressly agrees that it has now fully, thoroughly, and completely examined, inspected, and familiarized itself with all matters and things relating to said contract, and the specifications thereof.' At the time of the modification the pipeline had not yet begun to encroach upon the areas of greatest difficulty. The trial court found that nothing that Souza had done on the job prior to that date, and no independent information then available to it, disclosed to Souza or reasonably should have disclosed the existence of the extensive unstable conditions soon to be encountered.

The clause calling for and representing that the contractor had undertaken a full examination and inspection of 'all matters and things relating' to the contract does not bar the contractor's claim of reliance. Reliance generally is a question of fact (see Elkind v. Woodward (1957) 152 Cal.App.2d 170, 179, 313 P.2d 66), and any investigation undertaken may well have been imperfect Because of the preexisting and continuing misrepresentation by nondisclosure. (See Shearer v. Cooper (1943) 21 Cal.2d 695, 704, 134 P.2d 764; Sanfran Co. v. Rees Blow Pipe Mfg. Co. (1959) 168 Cal.App.2d 191. 203, 335 P.2d 995.)

The trial court could properly find that the misrepresentations of the city continued to be relied upon by the contractor during and subsequent to negotiations over the modification, despite the investigation clause, and despite the fact that the parties had engaged in a dispute involving the alleged falsity of another of the city's representations--the compactability of the native soils specified for use as backing material. (Cf. Shearer v. Cooper, supra, 21 Cal.2d 695, 703--704, 134 P.2d 764; Sanfran Co. v. Rees Blow Pipe Mfg. Co., supra, 168 Cal.App.2d 191, 203, 335 P.2d 995). The exculpatory provisions in the modification agreement must fall for the same reasons that the provisions in the original contract could not excuse the fraud of active concealment. (See, e.g., United States v. Atlantic Dredging Co., supra, 253 U.S. 1, 40 S.Ct. 423, 64 L.Ed. 735.)

The city next argues that the trial court did not properly find the amount of damages, asserting that there was no competent evidence to support the amount found. There is no requirement that the trial court set out either its computations, or the particular evidence upon which it may have relied in determining the amount of damages. (See Gollaher v. Midwood Constr. Co. (19...