MORRILL COMPANY v. STATE

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District Court of Appeal, First District, Division 2, California.

E. H. MORRILL COMPANY, a corporation, Plaintiff and Appellant, v. STATE of California, Defendant and Respondent.

Civ. 22568.

Decided: May 09, 1966

Hardin, fletcher, Cook & Hayes, Oakland, Cyril Viadro, San Francisco, of counsel, for appellant. Thomas C. Lynch, Atty. Gen. of State of California, Clayton P. Roche, Deputy Atty. Gen., San Francisco, for respondent.

Plaintiff, E. H. Morrill Company, appeals from a judgment of dismissal entered after the court sustained, without leave to amend, the state's demurrer to a complaint for damages in the amount of $28,750, the cost of performing additional subsurface rock excavation work pursuant to a written contract for the construction of a correctional facility. We are here concerned only with the sufficiency of the allegations of the complaint as to the first two causes of action for fraud and breach of implied warranty.1

Plaintiff, in contending that the complaint states a cause of action for fraud, argues that the trial court erred in taking judicial notice of section 4 of the General Conditions of the contract, and that plaintiff's failure to allege intent to induce reliance could be cured by amendment or inference from facts alleged; that even if the trial court properly took judicial notice of section 4 of the General Conditions of the contract, the provision cannot be interpreted to exempt the state from liability for fraud. It further argues that the complaint states a cause of action in tort for warranty implied in law, and that section 818.8 of the Government Code does not immunize the state from tort liability where the misrepresentations alleged also constitute a breach of contract.

The complaint alleged that on May 7, 1962, plaintiff, a licensed contractor, and the state's Department of Public Works, entered into a written contract for the construction of the Mono-Inyo Conservation Facility for the Department of Corrections in accordance with the plans, specifications and special conditions attached to the written contract; that Special Condition 1A–12 (hereafter referred to as Special Condition) of the contract provided: ‘SPECIAL SITE CONDITIONS The site is situated on a terminal moraine. The soil is composed of granite boulders, cobbles, pebbles, and granite sand. Boulders which may be encountered in the site grading and other excavation work on the site vary in size from one foot to four feet in diameter. The dispersion of boulders varies from approximately six feet to twelve feet in all directions, including the vertical.’

The complaint further alleged that the Special Condition was fraudulent and misrepresented the true character of the site in that the boulders were substantially larger and more concentrated than represented, all of which was or should have been known to the state or its agents and employees because of their superior knowledge of the site and surrounding terrain; that plaintiff inspected the site prior to entry into the written contract but was not able to discover any facts to contradict the representations made by the state in the Special Condition; that relying on the above mentioned site conditions, plaintiff submitted its bid to the state and the bid was accepted; that during the course of excavation and trenching, pursuant to its obligation under the written contract, plaintiff encountered numerous boulders of diameter more than twice the size of the largest mentioned in the specifications and was required to resort to rock drilling and blasting along the entire length of the excavation, all of which it would not have been required to do if the representations of the Special Condition had been true and that the cost of the rock drilling and blasting was $28,750 in excess of the cost originally estimated. The second cause of action realleged the above mentioned facts but was based on a tort theory of implied warranty.

On appeal from a judgment sustaining a demurrer, the allegations of the complaint must be regarded as true. A complaint will be held to state facts sufficient to constitute a cause of action if, upon a consideration of all of the facts stated, it appears that plaintiff is entitled to any relief (Augustine v. Trucco, 124 Cal.App.2d 229, 268 P.2d 780). In passing upon the sufficiency of a pleading, its allegations must be liberally construed with a view to substantial justice between the parties (Buxbom v. Smith, 23 Cal.2d 535, 545, 145 P.2d 305). A demurrer does not, however, admit contentions, deductions or conclusions of facts or law which may be alleged in a complaint (Howard v. City of Los Angeles, 143 Cal.App.2d 195, 299 P.2d 294). The right to amend a complaint after a demurrer is sustained should not be lightly denied. It is, however, proper to sustain a demurrer without leave to amend when the complaint cannot be amended to state a cause of action (2 Witkin, Cal.Procedure (1954) p. 1498, § 506). With these welldefined rules in mind, we proceed to examine the complaint in relation to the applicable law (Marin v. Jacuzzi, 224 Cal.App.2d 549, 552, 36 Cal.Rptr. 880; Addiego v. Hill 238 A.C.A. 967, 970, 48 Cal.Rptr. 240).

There is no merit in plaintiff's contention that the trial court erred in taking judicial notice of section 4 of the General Conditions of the contract between the parties, wherein the state disclaims all responsibility for soil conditions disclosed in its plans and specifications or for extra compensation for unforeseen difficulties and imposes the duty on the contractor to make and rely on its own investigation.2 The trial court has the power to take judicial notice of official records of a state agency (Chas. L. Harney, Inc. v. State of California, 217 Cal.App.2d 77, 85–87, 31 Cal.Rptr. 524) and it is well settled that matters judicially noticed may be considered in construing pleadings (Contractor's Safety Ass'n. v. California Compensation Insurance Co., 48 Cal.2d 71, 75, 307 P.2d 626, and cases therein collected).

We now examine plaintiff's complaint to determine if section 4 of the General Conditions renders the pleading fatally defective.

Plaintiff's first cause of action attempts to allege fraudulent misrepresentation. The necessary requirements of a cause of action based on fraud are: (1) misrepresentation (false representation, concealment or nondisclosure); (2) knowledge of falsity; (3) intent to induce reliance; (4) justifiable reliance; and (5) resulting damage (M. G. Chamberlain & Co. v. Simpson, 173 Cal.App.2d 263, 276, 343 P.2d 438). Although the complaint fails to include the element of intent to induce reliance, this omission can easily be cured by amendment or inference (Gagne v. Bertran, 43 Cal.2d 481, 487–488, 275 P.2d 15; Civ.Code, § 1710, subd. 2). The paramount consideration, however, is whether the complaint can adequately allege plaintiff's justifiable reliance in view of General Conditions section 4.

Plaintiff cites Souza & McCue Constr. Co. v. Superior Court, 57 Cal.2d 508, 20 Cal.Rptr. 634, 370 P.2d 338, Gogo v. Los Angeles County Flood Control Dist., 45 Cal.App.2d 334, 341, 114 P.2d 65, and MacIsaac & Menke Co. v. Cardox Corp., 193 Cal.App.2d 661, 669, 14 Cal.Rptr. 523, and argues that section 4 is contrary to public policy insofar as it attempts to exempt the state from liability for fraud. Souza and Gogo do not sustain plaintiff's contention as neither case involved a provision similar to section 4 of the General Conditions. These cases simply hold that if a contracting agency furnishes inaccurate project information, such as soil reports, as a basis for bids, it may be liable in contract on a breach of warranty. As the court noted in Souza, the rule is based on the theory that the furnishing of misleading specifications by the public body constitutes a breach of an implied warranty of their correctness and the fact that a breach is fraudulent does not make the rule inapplicable. The MacIsaac case is likewise inapposite as it concerned a cause of action for extra work predicated on the theory of an executed oral contract.

The state properly relies on T. Kelly & Sons, Inc. v. City of Los Angeles, 6 Cal.App.2d 539, 45 P.2d 223. There, the contractor sued the City of Los Angeles for damages for ‘extra work’ alleged to have been caused by misrepresentations in the specifications of a bridge construction contract. The plans and specifications indicated that the subsurface was sand or other soft surface. In fact, the contractor encountered rock conditions which were more expensive to remove. In holding that the contractor was not entitled to additional compensation, the court laid great stress on the general provisions of the contract which were substantially similar to those in the instant case in providing for personal examination by the bidder. The court said at page 542, 45 P.2d at page 224: ‘Under the clear terms of the contract plaintiff was not entitled to an added sum because of difficulties it encountered in carrying out its agreement. By no reasonable construction could it be said that the provision for payment of cost plus 15 per cent for ‘extra work’ was intended to provide payment of such added charge to compensate the contractor for obstacles overcome in fulfilling his contract. To warrant such elasticity in construing this provision, we should be required to hold that it intended to say, ‘if the city has included in the plans and specifications anything that has misled you, notwithstanding its warning not to rely on them but to satisfy yourself as to conditions, and you are put to added expense in doing what you have agreed to do, this extra expense may be called ‘extra work’ and our subordinate officials are authorized without any further action on our part to bind us to pay as much as they see fit by way of such extra cost, to which will be added 15 per cent for rental and profits.''

Here, as in Kelly, the agency made the data concerning the boulders available under a disclaimer of responsibility. Under such circumstances, the contractor bears any loss occasioned by unexpected conditions. As stated by the court in A. Teichert & Son, Inc. v. State of California, 238 A.C.A. 853, 873, 48 Cal.Rptr. 225, ‘In considering the predicament of the public works contractor who encounters latent, unanticipated geological conditions, California courts have not had occasion to peer beyond the relatively simple points made in the Souza case, where the data had been warranted, and the Kelly case, where it had not.’

The court in Teichert reversed the trial court's order sustaining the demurrer to the complaint without leave to amend on the ground that the contract contained a provision similar to the ‘changed conditions' clauses frequently found in federal public works contracts. It relied on authorities in other jurisdictions holding that contract provisions imposing responsibility for subsurface investigations on the contractor and disclaiming liability on the part of the contracting agency do not prevent recovery of extra compensation under the ‘changed conditions' clauses where there are latent, unexpected and unusual subsurface conditions. However, in the instant case, plaintiff does not refer to nor rely on such a clause, either in its complaint or in its briefs on appeal, and in fact states in its closing brief that the Teichert case is distinguishable. We also note that in the instant case, the contractor merely encountered rock conditions increased in density over those represented by the state and was not faced with a totally different and unexpected situation.

The failure of the Special Conditions to refer to the General Conditions is of no significance as the law requires a contract to be considered as a whole (Civ.Code, § 1641). Furthermore, the language of section 4 of the General Conditions is not subject to differing constructions. (Civ.Code, § 1638.) It is plain and unambiguous with regard to plaintiff's duties to inspect and satisfy itself as to site conditions, in stating the limited purpose of the state's investigation, and in indicating that plaintiff is not entitled to extra compensation for unforeseen difficulties. Thus, the cause of action in fraud cannot be amended to include the required element of plaintiff's justifiable reliance and is fatally defective (Gold v. Salem Lutheran Home Ass'n., 53 Cal.2d 289, 291, 1 Cal.Rptr. 343, 347 P.2d 687; T. Kelly & Sons, Inc. v. City of Los Angeles, supra).

Plaintiff's second cause of action is based on the tort theory of implied warranty imposing strict liability (Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 61, 27 Cal.Rptr. 697, 377 P.2d 897; Vandermark v. Ford Motor Co., 61 Cal.2d 256, 263, 37 Cal.Rptr. 896, 391 P.2d 168). Such warranties were dictated by public policy to protect unsuspecting and helpless purchasers of tangible chattels (Prosser, The Assault Upon the Citadel, Strict Liability to the Consumer, 69 Yale L.J., 1099, 1122) but they are not limited to such transactions. Strict liability has also been imposed for innocent misrepresentations of facts that the maker purported to know, that the recipient relied on in matters affecting his economic interests, and that the maker positively affirmed under circumstances that justify the conclusion that he assumed responsibility for their accuracy (Gagne v. Bertran, supra).

The facts alleged in this case, when read in conjunction with section 4 of the General Conditions, precludes the imposition of strict liability of warranty. It is not enough to allege ‘that by reason of its superior knowledge of the site and surrounding terrain, the State warranted its representations to be true.’ The General Condition makes it clear that the state's investigation was limited to the sole purpose of design, that plaintiff was required to satisfy itself as to the surface and subsurface conditions to be encountered, and negates any implication that the state warranted or guaranteed the correctness of the findings set forth in its Special Condition. That the prescribed purpose of the state's investigation was clearly understood by plaintiff is indicated by its allegation that it did in fact make its own investigation.

Plaintiff relies on Hollerbach v. United States, 233 U.S. 165, 34 S.Ct. 553, 58 L.Ed. 898, where the contractor agreed to repair a dam for the United States under specifications indicating that the dam was backed with broken stone, sawdust and sediment. The contract stated that the specifications given were approximate only, that no claim should be made against the United States on account of any deficiency and that bidders or their authorized agents were expected to visit the site, ascertain the nature of the work and make their own estimate. Contrary to the specifications, the dam was not backed with sawdust and sediment as stated but was backed with sound logs filled with stone. The U. S. Supreme Court said that a government contract should be construed as are contracts between individuals and interpreted the specifications as an implied warranty of conditions that subsequently turned out to be untrue. The court held that the positive statement of the specifications must be taken as true and binding on the government and that the government was liable for its representations.

In T. Kelly & Sons, Inc. v. City of Los Angeles, supra, the reasoning of the Hollerbach case was expressly rejected and the case distinguished on the ground that there an affirmative misrepresentation or improper concealment misled the contractor. In Gogo v. Los Angeles County Flood Control Dist., supra, the court indicated 45 Cal.App.2d at page 341, 114 P.2d 65 that, despite the clear language referring to warranty, the true basis of the Hollerbach decision was fraud in the inducement of the contract. Furthermore, in MacArthur Bros. Co. v. United States, 258 U.S. 6, 42 S.Ct. 225, 66 L.Ed. 433, which is analogous to the instant case,3 the Hollerbach case and like authorities were clearly distinguished. The court said, 258 U.S. at pages 12 and 13, 42 S.Ct. at page 227: ‘The elements which existed in each of the cited cases are absent from the case at bar. In the case at bar the government undertook a project and advertised for bids for its performance. There was indication of the manner of performance but there was no knowledge of impediments to performance, no misrepresentation of the conditions, exaggeration of them, nor concealment of them, nor, indeed, knowledge of them. To hold the government liable under such circumstances would make it insurer of the uniformity of all work, and cast upon it responsibility for all of the conditions which a contractor might encounter, and make the cost of its projects always an unknown quantity. It is hardly necessary to say that the cost of a project often determines for or against its undertaking.’

We conclude that due to the obligations imposed on plaintiff by section 4 of the General Conditions, and the alleged fact that plaintiff made its own inspection, the complaint cannot be successfully amended to state a cause of action either for misrepresentation and fraud or for implied warranty. It thus becomes unnecessary to discuss plaintiff's contentions concerning section 818.8 of the Government Code.

The judgment of dismissal is affirmed.

FOOTNOTES

1.  The third cause of action based on a common count is not involved in this appeal as plaintiff concedes that it cannot stand by itself.

2.  Section 4 of General Conditions: ‘Examination of Plans, Specifications and Site of Work:‘The bidder shall examine carefully the site of the work and the plans and specifications therefor, and shall satisfy himself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered. He shall receive no additional compensation for any obstacles or difficulties due to surface or subsurface conditions actually encountered.‘If discrepancies or apparent errors are found in the plans and specifications prior to the date of bid opening, bidders shall submit a written request for a clarification, which will be given in the form of addenda to all bidders, if time permits. Otherwise, in figuring the work, bidders shall consider that any discrepancies or conflict between drawings and specifications shall be governed by Article 29, in the order there stated.‘Where investigations of subsurface conditions have been made by the State in respect to foundation or other structural design, and that information is shown in the plans, said information represents only the statement by the State as to the character of material which has been actually encountered by it in its investigation, and is only included for the convenience of bidders.‘Investigations of subsurface conditions are made for the purpose of design, and the State assumes no responsibility whatever in respect to the sufficiency or accuracy of borings or of the log of test borings or other preliminary investigations, or of the interpretation thereof, and there is no guaranty, either expressed or implied, that the conditions indicated are representative of those existing throughout the work, or any part of it, or that unlooked for developments may not occur. Making such information available to bidders is not to be construed in any way as a waiver of the provisions of the first paragraph of this article and bidders must satisfy themselves through their own investigations as to conditions to be encountered.‘Notwithstanding the responsibility stated in the first paragraph of this Article, if during the course of the work active utility lines are encountered which are not shown or indicated in the plans or specifications, and the removal or alteration of such utility lines is ordered by the State Architect, then compensation for such removal or alteration will be made in accordance with Articles 42 through 48 relating to changes in the work.’

3.  In MacArthur, the specifications indicated that a portion of the canal construction would be done ‘in the dry’ and a portion ‘in the wet.’ Because of leakage from an adjacent pier, all of the canal construction work had to be done ‘in the wet’ at a cost greatly exceeding the bid. The contract, like the one in the instant case, contained clauses indicating the contractor's duty of inspection and that the ‘quantities given in these specifications [relating to the amount of work under wet or dry conditions] are approximate only’ and were not to be relied on by the contracting agency as a dependable disclosure of the conditions to be encountered in fulfilling the contract.

TAYLOR, Justice.

SHOEMAKER, P. J., and AGEE, J., concur.

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