Previously in this column, I have talked about the doctrine of superior knowledge, where an owner is under a duty to disclose all the material facts it knows or should know about site conditions for a particular construction project. When an owner fails to disclose material information and a contractor suffers damages as a result, the owner can be liable for those damages, even if the contractor’s claim would otherwise have been invalid under the contract’s differing site conditions clause.

A Pennsylvania appeals court recently extended the doctrine of superior knowledge in a differing site conditions case, holding an owner liable for constructive fraud. Why? The owner had withheld from bidders a memo critical of site conditions.

In the case, Department of General Services v. Pittsburgh Building Co. (2007), 920 A.2d 973, the contractor was hired in September 2003 to construct an armory building for the Pennsylvania National Guard. The sitework for the project, like that for many projects, was balanced in terms of cuts and fills. To prepare the site for building construction, the contractor had to use excess soil material from higher elevations as fill for lower elevation areas.

Despite repeated attempts to dry out the soil, the contractor’s sitework subcontractor was unable to achieve the specified soil compaction rates because of excessive moisture in the borrow area soils. The owner suspended the project until the following spring, but progress was again slowed due to the unfavorable characteristics of the wet soils. The owner agreed that the contractor was entitled to a schedule extension, but refused to pay the contractor’s claim for the additional costs of repeatedly handling the soil and trying to air dry it.

After some additional excavation, the owner directed the contractor to excavate borrow material from a different hillside slightly further away from the specified borrow area. This material was much better behaved, but the owner refused to pay the contractor’s claim for the extra costs of handling the material from the new borrow area. The overall project delay attributable to the soil problems was eleven months.

The contract required that the Pennsylvania Department of General Services Board of Claims decide the claim, and the Board held in favor of the contractor for $867,171.

In reaching its decision, the Board was critical of the owner’s failure to disclose a 1999 memo in which the Board’s own employees gave a “refreshingly frank assessment that the site [was] unsuitable for earthwork in winter and early spring.” Instead of disclosing the memo to bidders, the owner furnished another report that painted a much rosier picture of the subsurface. Based on the evidence of such conduct, the Board concluded that the owner was liable for constructive fraud. But the Board declined to award the attorney fees requested, which the contractor claimed it was entitled to under the law of constructive fraud and under a state statute regarding vexatious litigation.

The contractor appealed the failure to award attorney fees, and the owner appealed the holding that it was liable for anything, relying on contractual provisions that attempted to disclaim all warranties for subsurface information in the contract documents. The appeals court let stand the contractor’s award for breach of contract and reversed the Board’s holding regarding attorney fees, ruling that the owner’s conduct was indeed in bad faith and vexatious.

The appeals court also held that the exculpatory warranty disclaimers in the contract were nullified by the owner’s bad faith. Also, they were ambiguous because they conflicted with the differing site conditions provision itself. The court held that the disclaimer of the subsurface information so narrowed the differing site conditions clause that it negated the differing site conditions clause, creating an ambiguity that had to be interpreted against the owner, the author of the contract.

This case is not the first time a Pennsylvania court has decided that an owner’s issuance of optimistic site information and simultaneous failure to disclose contrary information rose to constructive fraud. The lesson that owners should take from this is to disclose everything and let the chips fall not only where they may, but where they should.