Hunt Ortmann is one of the foremost authorities on California construction law, contracts, dispute resolution and litigation offering additional legal services in the areas of business and commercial law, employment matters and labor law compliance, real estate, insurance and suretyship.
By Paul Rogoff
In JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District, the California Court of Appeal recently examined the due process rights of a subcontractor facing substitution by its general contractor. In doing so, the court found that a public agency’s authority to define the parameters of a subcontractor’s challenge to the substitution decision is extremely broad.
JMS Air Conditioning and Appliance was the listed HVAC subcontractor in Bernards Bros.’s winning bid for a construction project for the Santa Monica Community College District. Almost a year into the project, Bernards submitted a substitution request pursuant to procedures established by the Subletting and Subcontracting Fair Practices Act (Pub. Contract Code § 4100 et seq.). As part of its goal to combat bid shopping and bid peddling, the Act provides a mechanism for a public entity project owner to investigate and approve the initial subcontractors as well as any proposed substitutions. Once bids have been awarded, however, the Act only permits the general contractor to replace a subcontractor in certain specified instances. (§ 4107(a).) Any GC seeking to make such a substitution must first obtain approval from the agency, and follow the steps set out in the Act. Specifically, the Act requires that the current subcontractor be given written notice of a substitution request and an opportunity to object. Upon receiving a timely objection, the agency must hold a hearing to decide whether it will allow the substitution.
But what protections must such a hearing afford to the subcontractor mounting the challenge? Not as much as JMS would have liked.
JMS objected to Bernard’s substitution request, and the SMCCD’s authorized agent conducted a hearing after receiving written statements from Bernards and JMS. In support of its statement, Bernards included an unsworn statement from a former licensing deputy for CSLB that concluded that JMS was not sufficiently licensed to perform the boiler work listed in the HVAC specifications, which was a basis for the requested substitution. At the hearing, each side was allowed 40 minutes to present its case, 10 additional minutes to reply, and brief closing arguments. Bernards called two witnesses at the hearing and JMS called one. None of the witnesses testified under oath, and no cross-examinations were allowed. Based on the written record and evidence presented at the hearing, the substitution was ultimately approved.
In concluding that JMS’s due process rights had not been violated, the court of appeal found that the due process protections provided as part of the substitution hearing were of a limited nature. Examining the legislative purpose behind the Act, the appellate court stressed that the focus of the Act’s objectives is not the protection of subcontractors, but the protection of the public. The limited specified statutory rights provided to subcontractors by the Act (namely the right to a hearing before the awarding authority before a substitution can be made, and a limited number of bases upon which substitutions can be made) are “ancillary to the Act’s larger objectives.” Thus, after determining that there was substantial evidence to support SMCCD’s determination, the court of appeal upheld the substitution decision.
While a subcontractor’s due process rights in a substitution proceeding are limited, it remains free to pursue claims against the general contractor that go beyond those limited rights created by the Act. In fact, the court stressed that the substitution decision “can have no preclusive effect in the CSLB’s licensing decisions or any judicial review of those licensing decisions.” Thus, while JMS can still look forward to having its improper termination claims against Bernards adjudicated in court, SMCCD’s approval of Bernards’ substitution request, having been found to have been sufficiently protective of JMS’s due process rights, can no longer be challenged.
Paul Rogoff is a trial lawyer and associate attorney at Hunt Ortmann, a leader in California construction law. If you would like additional information about the subject matter of this bulletin, please contact him at email@example.com.