CONDON-JOHNSON & ASSOCIATES, INC., v. SACRAMENTO MUNICIPAL UTILITY DISTRICT

Filed 4/19/07

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

Story continued from Part I .

III

The Subsurface Conditions Indicated

The question is whether the SMUD contract indicated the subsurface conditions from which the contractor might draw a reasonable deduction of the actual conditions at the site of the work, thereby requiring SMUD to comply with section 7104, subdivision (b).

Determining whether the contract and related documents indicated the subsurface conditions at the jobsite, within the meaning of section 7104, subdivision (b), is a matter of contract interpretation and thus presents a question of law which may be decided by this court for itself. (See Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [it is solely a judicial function to interpret a written instrument unless the interpretation turns upon the credibility of extrinsic evidence].) However, since the changed conditions clause of the contract incorporates the provisions of section 7104, subdivision (b), the ultimate question is one of statutory construction.

As noted the contract provided that [t]he District has completed compression testing on two samples from the M-2 boring, at 20.0 and 25.7 feet. These tests were completed to give additional information as to what may be expected in the pier drilling. These samples were selected, by the District, on the basis of visually appearing to be the most competent core samples in the M-1 and M-2 recovery. The contract explained the purpose of providing the compression testing results. It is the inten[t]ion of the District to provide the soil boring information for the p[ur]pose of determining what type [of] rock may be encountered and not for determining the profile of backfill to rock. The references to the type [of] rock [that] may be encountered and information as to what may be expected in the pier drilling obviously mean the type of rock to be encountered in the performance of the work, i.e., the type of rock at the jobsite.

Although the test borings were made adjacent to the jobsite the representations made in the contract justified Condon-Johnson in inferring that such rock would also be found at the jobsite and could be relied upon in making its bid.^[1]

SMUDs argument is that the disclaimers should be taken into account in reading the contract. While that may be true if the disclaimer aids in the construction of that indicated regarding the test borings, it does not if the disclaimer conflicts with that indicated.

SMUD argues, in effect, that the disclaimers trump what the contract asserts the contractor may encounter or may expect to find at the jobsite, that what is indicated should not be taken into account in the bidding. SMUD says that under the Contract, the successful bidder, Condon-Johnson, had the sole responsibility for determining the subsurface conditions at the specific location of the Project no matter what the contract otherwise provided. That is also the point made by our dissenting colleague.

However, even under the law preceding the adoption of section 7104, a general disclaimer could not overcome positive assertions of fact regarding subsurface conditions upon which the contractor was entitled to rely. (See E.H. Morrill Co., supra, 65 Cal.2d at p. 793.) Adjusting the Morrill analysis to substitute the required statutory standard of indicated for positive assertions of fact, the disclaimer in this case is precisely the kind of general disclaimer condemned in the Morrill case.

The contract provides that [i]t is the sole responsibility of the Contractor to evaluate the jobsite and make his own technical assessment of subsurface soil conditions for determining the proposed drilling process, equipment and make his own financial impact assessment prior to bidding. The District makes no guarantees for the soil reports accuracy, findings or recommendations. The District will make no additional compensation or payments, nor will it accept any claims if the subsurface soil conditions are different than that assumed by the Contractor.

This language says that contractors cannot rely upon the soil boring information contrary to the stated purpose of the contract to provide the soil boring information for the p[ur]pose of determining what type [of] rock may be encountered and contrary to the implication that they may acquaint themselves with the information for the purpose of assessing the costs of the project. But, of course, it is the very purpose of the information provided, or in the language of section 7104 - indicated, to assist the contractor in making a bid.

To disclaim what is indicated runs counter to the requirements of section 7104 and its embodiment in the changed conditions provision of the contract, that if the subsurface physical conditions materially differ from that indicated in the contract, the public entity shall issue a change order effecting a change in the bid price.

Lastly, SMUD argues that the contract provides that contractors must acquaint themselves with all available information and the failure to do so will not relieve them of the responsibility of properly assessing the costs of the work. However, this does not rule out Condon-Johnsons reliance on the boring information since that is part of the information which it must consider in making a bid. It is only the failure to do so that does not relieve the contractor of responsibility.

DISPOSITION

The judgment is affirmed. Condon-Johnson shall recover its costs on appeal. (Cal. Rules of Court, rule 8.276.)

BLEASE , Acting P. J.

I concur:

CANTIL-SAKAUYE , J.

With regard to part III of the Discussion in the majority opinion and the disposition, I respectfully dissent.

As the majority recognizes, the crucial question here in determining whether SMUD breached its contract with Condon-Johnson is whether the subsurface conditions Condon-Johnson encountered at the job site were different than those indicated by SMUD, which, of course, requires a determination of whether SMUD indicated anything at all in its contract about subsurface conditions at the site. SMUD contends the disclaimers are essential to determining what, if anything, the contract indicated about subsurface conditions at the site. I agree.

One of the most fundamental principles of contract interpretation is that [t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other. (Civ. Code, 1641; see also id., 3541 [An interpretation which gives effect is preferred to one which makes void].) Thus, in construing the SMUD contract to determine what, if anything, it indicated about subsurface conditions at the site, we are required to make every effort reasonably possible to give meaning and effect to every clause in the contract. (See Bank of Stockton v. Diamond Walnut Growers, Inc. (1988) 199 Cal.App.3d 144, 158 [We read the contract as a whole, giving effect, if reasonably practicable, to every part. . . . Apparent repugnancy must be reconciled, if possible, by an interpretation that gives some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract].)

Unfortunately, the trial court failed to heed that rule (hence this appeal), and the majority in this court now follows suit. Essentially, in determining what the contract indicated about subsurface conditions at the site, the majority reads what SMUD communicated in the contract about the results of its subsurface investigation^[2]in isolation from the surrounding contract language. Only after satisfying itself that SMUDs test results were intended to indicate the type of rock at the job site does the majority consider the disclaimer language that follows only two paragraphs later, at the end of the very same section (headed Subsurface Investigation), beginning on the very same page. Of course, having already decided what the contract indicated about subsurface conditions, it is a foregone conclusion that the majority will reject the disclaimer as being in conflict with those indications.

In my view, what the law requires us to do is attempt to reconcile the paragraph setting forth the test results and the disclaimer language that follows, if possible, in determining what the contract indicated about subsurface conditions. In doing this, it is important to understand the impact of the changed conditions provisions required by Public Contract Code section 7104. Essentially, those provisions require the public entity to guarantee the existence of whatever subsurface conditions are indicated in the contract. If the conditions encountered are materially different from those indicated, resulting in an increase in the cost of the work, then the public entity must pay that increased cost.

It seems self-evident to me that the very purpose of a disclaimer like the one contained in the Subsurface Investigation section of the SMUD contract is to protect the public entity from the risk of having to pay any such increased cost by ensuring that the contract does not indicate anything about subsurface conditions at the site. Thus, while disclosing what information it has about the subsurface conditions that may be found at the site, the public entity goes on to disclaim any intent to actually indicate what subsurface conditions will, in fact, be found there. This is not inconsistent with Public Contract Code section 7104, because the contract still contains the changed circumstances provision required by that statute; the public entity has simply ensured that provision will not be triggered because the public entity is not indicating what the subsurface conditions are at the site.

In my view, that is the only reasonable reading of the SMUD contract under the circumstances, if we are (as required by law) to read the contract as a whole. Although the Subsurface Investigation section of the contract provides soil boring information [drawn from locations near, but not at, the job site] for the p[ur]pose of determining what type [of] rock may be encountered, that section also makes clear that [i]t is the sole responsibility of the Contractor to evaluate the jobsite and make his own technical assessment of subsurface soil conditions for determining the proposed drilling process, equipment and make his own financial impact assessment prior to bidding. The same section of the contract goes on to make clear that [t]he District makes no guarantees for the soil reports accuracy, findings or recommendations and will make no additional compensation or payments, nor will it accept any claims if the subsurface soil conditions are different from that assumed by the Contractor. Read together, these provisions provide the bidders information about what subsurface conditions mayexist at the site, but do not indicate the actual conditions for purposes of the changed conditions provision required by Public Contract Code section 7104.

This conclusion is consistent with prior California law on the subject. (See Wunderlich v. State of California (1967) 65 Cal.2d 777, 784-786 [where a section of the contract suggested that samples taken from a pit contained suitable materials, but the same section contained direct references to disclaimer paragraphs and to a specific disclaimer of the attributes of the source allegedly warranted, the disclaimer provisions controlled and there was no positive representation on which the contractor could justifiably rely].)

Relying on E. H. Morrill Co. v. State of California (1967) 65 Cal.2d 787 -- a case decided the same day as Wunderlich -- the majority contends a general disclaimer [cannot] overcome assertions regarding subsurface conditions upon which the contractor [i]s entitled to rely. However, the facts of E. H. Morrill Co. are readily distinguishable from the facts here, and the distinction only serves to prove why the majoritys interpretation of SMUDs contract is incorrect.

The contract at issue in E. H. Morrill Co. contained a SPECIAL SITE CONDITIONS clause that informed the contractor in relevant part as follows: 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. (E. H. Morrill Co. v. State of California, supra, 65 Cal.2d at pp. 789-790, italics omitted.) There was also a general disclaimer in another part of the contract purporting to disclaim liability for additional compensation for any obstacles or difficulties due to surface or subsurface conditions actually encountered. (Id. at p. 790.)

The trial court sustained the states demurrer to a complaint for damages for the costs of performing additional subsurface rock excavation pursuant to the contract on the ground that, because of the disclaimer, the state as a matter of law could not be deemed to have warranted the condition of the job site by its representations in [the SPECIAL SITE CONDITIONS clause]. (E. H. Morrill Co. v. State of California, supra, 65 Cal.2d at pp. 789-790.) On review, the Supreme Court determined that the trial court erred in construing the general disclaimer provision to be as a matter of law an effective disclaimer of the representation of site conditions in [the SPECIAL SITE CONDITIONS clause]. (Id. at p. 791.) The court distinguished Wunderlich by noting that in that case there was no positive assertion of fact as to condition; in addition, the very section in which the statement [of condition] was made was prefaced by a reference to disclaimer provisions that clearly sought to avoid the states responsibility for the factual conclusion which the contractor chose to deduce from the statement. (E. H. Morrill Co. v. State of California, supra, 65 Cal.2d at p. 791.)

Later, the court emphasized this point, as follows: It appears from the opinion in Wunderlich that disclamatory provisions may be considered in determining whether the statement alleged to constitute a warranty of condition is so in fact, especially when the statement is not cast in the form of a positive assertion of fact. [Citation.] In the instant case, however, nothing in [the SPECIAL SITE CONDITIONS clause], which purports to make a positive assertion of fact as distinguished from Wunderlich, in any way draws the attention of the bidder to the purported disclaimer [elsewhere in the contract]. Although, of course, the contract must be read as a whole, the absence of any cross-reference may be of significance in a determination by the finder of fact whether [the general disclaimer] would justify the bidder in relying upon the unqualified representation of specified site conditions. It would be going quite too far to interpret the general language of the other [sections of the contract] as requiring independent investigation of facts which the specifications furnished by the government as basis of the contract left in no doubt. . . . In its positive assertion of the nature of this much of the work [the government] made a representation upon which the claimants had a right to rely without an investigation to prove its falsity. . . . [] . . . Accordingly, the language in [the general disclaimer provision] requiring the bidder to satisfy himself as to the character . . . of the surface and subsurface materials or obstacles to be encountered cannot be relied upon to overcome those representations as to materials and obstacles which the state positively affirms in [the SPECIAL SITE CONDITIONS clause] not to exist . . . . (E. H. Morrill Co. v. State of California, supra, 65 Cal.2d at pp. 792-793, italics omitted.)

In my view, the facts of this case are comparable to those in Wunderlich and not to those in E. H. Morrill Co. The soil boring information in the Subsurface Investigation section of the SMUD contract did not amount to a positive assertion of fact as to the subsurface conditions to be encountered at the job site, like the states representations about the size and dispersion of boulders in E. H. Morrill Co. Indeed, the SMUD contract specifically noted that the core samples SMUD tested were from a location adjacent to the jobsite and that those samples were tested to give additional information as to what may be expected in the pier drilling. (Italics added.) Moreover, unlike the state in E. H. Morrill Co., SMUD does not rely on a general disclaimer contained in an entirely different part of the contract to escape liability for additional costs, but instead relies on a specific disclaimer contained in the very same provision as the representations about its subsurface investigation, similar to the situation in Wunderlich.

Based on the foregoing analysis, I conclude that to give effect to every part of the contract, it must be read as a matter of law as not indicating any particular subsurface conditions at the job site. Thus, I would reverse the judgment in favor of Condon-Johnson.

ROBIE , J.

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^[1] SMUD also argues the soil borings did not go to the depths required by the contract. On this point SMUD is simply in error. Although it claims the borings did not go to the depths of 62 to 82 feet provided in the contract, the test borings extended to 80.2 and 120.1 feet.

^[2] SMUD obtained two core samples (M-1 and M-2) from locations along the penstock, adjacent [to] the jobsite, but closer to the powerhouse than the proposed pier locations. SMUD then performed compression tests on two samples from the M-2 boring and communicated those test results to potential bidders in the contract. The core samples themselves were also to be made available for viewing during the prebid site visit.