Do Owners Have a Legal Obligation to Disclose All They Know About Their Project Sites?

Troutman Pepper

This article was published in the July/August 2015 issue of Breaking Ground, the magazine of the Master Builder's Association of Western Pennsylvania. It is reprinted here with permission.

Unanticipated subsurface conditions can greatly increase the time and cost of construction. When faced with such conditions, contractors understandably look to place responsibility for the additional costs on the owner. Owners, however, are not eager to assume such responsibility and often utilize contract disclaimers intended to avoid such risk.

Historically, Pennsylvania law favored the owner. Early decisions held that “a contractor is presumed, in the absence of an express provision to the contrary, to have assumed the risk of unforeseen contingencies arising during the course of the work.” O’Neill Constr. Co. v. Philadelphia, 6 A.2d 525, 526–27 (Pa. 1939), citing Cramp & Co. v. Cent. Realty Corp., 268 Pa. 14, 20 (Pa. 1920). Owners had no duty to provide or disclose information, O’Neill, 6 A.2d at 529, and contractual disclaimers warning contractors not to rely on any information that was provided were strictly enforced. O’Neill, 6 A.2d at 528; Mundy Paving & Constr. Co. v. Delaware Cnty., 299 Pa. 225 (Pa. 1930).

Over time, Pennsylvania followed the lead of other jurisdictions and softened its position. In Pennsylvania Turnpike Commission v. Smith, 39 A.2d 139 (Pa. 1944), the Pennsylvania Supreme Court held that the government committed “constructive fraud” by publishing subsurface information it knew to be inaccurate. According to the court, this “constructive fraud” rendered the contract disclaimers invalid and shifted the risk of unforeseen conditions to the government. Since Smith, Pennsylvania courts have steadily chipped away at the earlier rulings to the point where their continued vitality is in question. In Acchione & Canuso, Inc. v. PennDOT, 461 A.2d 765 (Pa. 1983), the Pennsylvania Supreme Court reaffirmed Smith and extended it to misrepresentations that were made “innocently,” i.e., without actual knowledge that they were false. In answer to a pre-bid question, PennDOT instructed bidders to assume that 50 percent of existing in-ground conduit could be reused. Subsequent testing proved that a substantial amount of the conduit could not be reused. Although there was no evidence to suggest that PennDOT knew that the conduit was not reusable, the court found that the direction to assume that it was reusable “amounted to” a misrepresentation because it was made carelessly.

But what of the situation where the owner made no statement; where the documents were silent about something of which the owner was, or should have been, aware? In the absence of some statement or representation, was the mere failure to disclose what the owner knew a basis for holding it liable?

Until fairly recently, the answer appeared to be no. Because constructive fraud required a “positive representation,” the absence of any representation would preclude its application. For example, in Black Top Paving Co. v. Pennsylvania Department of Transportation, 466 A.2d 774 (Pa. Commw. Ct. 1983), the bid documents included no information regarding the existing base course. In the absence of any information, the contractor assumed that the base course would be of “typical” make up and consistency. As it turned out, the existing base course was “soft and spongy.” The contractor claimed that PennDOT committed constructive fraud because it was aware of the poor condition of the base course and failed to disclose it. The court denied the contractor’s claim, holding that, in the absence of a positive representation regarding the base course, “any assumptions as to [its] quality, density or firmness were the contractor’s alone.”

In the ensuing years, however, several courts have employed an expansive definition of “positive representation” and perhaps signaled a willingness to hold the owner liable for simply failing to provide pertinent information in its possession. The first of these cases was A.G.Cullen Construction, Inc. v. State System of Higher Education, 898 A.2d 1145 (Pa. Commw. Ct. 2006), in which the government was held liable for additional costs due to the presence of lead paint in a building that was more than 100 years old. Prior to construction, the existing windows (which were to be replaced) were tested and found to contain lead paint. Due to simple inadvertence, however, the test results were not included in the bid documents. In denying liability, the government argued that the presence of lead paint in a 100-year-old building was neither unusual nor unforeseeable, and it had made no representations regarding the presence, or absence, of lead-containing materials. The Board of Claims rejected this argument and found that a statement in the instructions to bidders that “any lead containing materials affected by the project would be addressed” was tantamount to a misrepresentation that none were known to exist. On appeal, the Commonwealth Court affirmed.

In Department of General Services v. Pittsburgh Building Co., 920 A.2d 973 (Pa. Commw. Ct. 2007), the Department of General Services (DGS) issued a report indicating that the project site was “balanced,” such that soil from cut operations could be used for fill without the need to import or export soil. The report further indicated that all soil on the site was suitable for use as fill. At the time the report was provided to bidders, however, DGS had an internal memo calling into question whether the site materials were suitable for fill during winter months. As it turned out, site work ended up being performed during the winter, and the soils proved to be too wet for use as fill. As a result, the contractor had to import a substantial amount of dirt. The court found that the failure to disclose the internal memo was significant because it contradicted, or at least called into question, the information provided to bidders. The court further found that, in light of the internal memo, the statements regarding the suitability of the fill were made with the knowledge that they might be inaccurate, which, under the rationale of Acchione, “amounted to” a misrepresentation.

Although both courts clearly disapproved of the failure to provide what they considered relevant information, neither case held that the failure to provide the information by itself constituted constructive fraud. To the contrary, in both cases, the court found that positive representations had been made — that no lead-containing materials were known to exist (through the statement that they would be addressed if found) in A.G. Cullen and that the soils were suitable for fill in Pittsburgh Building. However, these cases — and, in particular, a single sentence in the Pittsburgh Building decision — have subsequently been cited for the much broader proposition that a positive representation is no longer required and the mere failure to provide information may constitute “constructive fraud.”

In Pennsylvania State System of Higher Education v. Lyons Construction Services, Inc., No. 3916, 2013 PA Bd. Claims LEXIS 1 (Pa. Bd. Claims Jan. 18, 2013), the Board of Claims (Board) accepted this argument and found that the government committed constructive fraud when it failed to warn that accurately described subsurface conditions were prone to drilling-induced sinkhole formation. In so holding, the Board cited to Pittsburgh Building for the proposition that “constructive fraud can be found in cases where the government has not made an ‘affirmative representation’ but [has] failed to disclose relevant information which was at odds with documents provided to bidders.” Although the phrase “at odds with documents provided” implies that the System of Higher Education (System) made some sort of statement or representation contrary to the information it failed to disclose, this was not the case. Instead, the Board found that the failure to warn of the risk of sinkholes created the impression that there was no risk. According to the Board, because the System knew that there was a risk, this impression was misleading.

The project site was located within a geologic formation known to be prone to sinkhole formation, particularly during construction activities. The geotechnical report given to bidders accurately identified the area’s geology, as well as the specific rock, soil and groundwater conditions underlying the site. The report made no mention, however, that this geology was susceptible to sinkhole formation. The contractor acknowledged it was generally aware of the risk of drilling-induced sinkholes in the type of geology described. It argued, however, that it was the practice and standard in the geotechnical industry to specifically warn of this risk and to provide mitigation measures in the specifications. According to the contractor, it interpreted the absence of any warning as an indication that the System had determined that there was no risk of subsidence. The Board accepted this argument, holding that the absence of a warning “constituted an affirmative representation that significant sinkhole development was not expected on the Project site (which later proved to be false and misleading as substantial sinkhole activity developed on the site.)” The Board further found that the failure to disclose the occurrence of sinkholes during the construction of other buildings on campus contradicted the impression conveyed by the lack of warning and thus “amounted to” a material misrepresentation.

Because the Board found in favor of the System on the balance of the issues in dispute and the case then settled on appeal, the Commonwealth Court did not review the Board’s reasoning. Thus, to what extent the Board’s rationale will prevail in subsequent cases is not known. At least one Court of Common Pleas would appear to be inclined to disagree with the Board. In Mar-Paul Co. v. Jim Thorpe Area School District, 7 Pa. D. & C. 5th 387, 404 (Pa. Com. Pl. Ct. 2008), the Court of Common Pleas of Carbon County expressed skepticism of a contractor’s argument that the failure to disclose information, by itself, was sufficient to support a claim of constructive fraud. In a lengthy footnote, the court opined :

While the court in Pittsburgh Building Co., held that an affirmative representation is not required for constructive fraud to exist [and] that a representation which is misleading in light of other information known and withheld by the government agency is sufficient — whether the representation is false or misleading is a separate question from whether there has been a positive representation which the contractor has the right to rely upon. [citation omitted] Acchione, as well as the Supreme Court precedents on which it is based, requires that a positive misrepresentation be made to support a claim of constructive fraud.. . . . Standing alone, and absent any representations to the contrary, there appears to be no separate and affirmative duty on a government agency to disclose to prospective bidders adverse subsurface conditions of which it is aware.

To what extent the Commonwealth Court would endorse the Board’s expansive reading of Acchione is yet to be seen. Moreover, whether the failure to disclose relevant information, in and of itself, can constitute constructive fraud will ultimately have to be decided by the Pennsylvania Supreme Court, which has not addressed the subject since it issued its opinion in Acchione more than thirty years ago.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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