A solid foundation in school construction law: over the past year, a number of decisions have been issued by California and federal courts that have had an impact on school construction and the management of those projects.

While 2003 did not produce the same kind of stir that the 2002 case law produced with the California Supreme Court decision Amelco Electric Company v. City of Thousand Oaks, what did result were a number of decisions issued by California and federal courts that impact school construction and the management of those projects.

Contract abandonment and contractual DRBs 

In 2002, the California Supreme Court ruled in Amelco Electric v. City of Thousand Oaks that a claim of contractual abandonment could not be asserted against a public agency. In 2003, in Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi, (2003) 111 Cal.App.4th 1328, a joint venture contractor argued that its subcontractor was precluded from bringing a contractual abandonment claim against it because under Amelco Electric, the general contractor was precluded from bringing such a claim against the public agency. The general contractor also argued that the subcontractor's claim was barred because he had not submitted its claim to the contractually mandated Dispute Resolution Board process.

The Court of Appeals held that a subcontractor can recover from a prime on an abandonment theory on a public works project even though the prime was precluded from passing through the claim to the public entity. The court further ruled that because the subcontractor had no right to participate in the selection of the Dispute Resolution Board panel, the panel was presumptively biased against the subcontractor and therefore the subcontractor was not required to submit its claim to the DRB.

Debarment

A case that focuses on the due process protections a contractor is entitled to in connection with an administrative debarment hearing came out of the California Court of Appeal in Southern California Underground Contractors, Inc. v. City of San Diego, (2003) 108 Cal.App.4th 533. In that case, the contractor challenged an administrative ruling by the City of San Diego that permanently debarred the contractor for engaging in "corrupt practices in connection with the administration of its contract." The contractor had been accused of a number of bad acts, including obtaining city water without a permit, falsifying permits and submitting false claims to the city.

In challenging the city's debarment, the contractor claimed that it was denied due process because at the city hearing it was denied the right to cross-examine adverse witnesses and present live testimony in support of its defense. The contractor claimed that it could not obtain a fair hearing because the city was acting as both the prosecutor and the judge, and because at the same time the hearing was held, the contractor was in litigation with the city in connection with a multi-million dollar claim.

The court rejected the contractor's arguments and upheld the city's permanent debarment. The court pointed to the fact that the contractor had been permitted to depose adverse witnesses before the hearing, was permitted to present a written defense of its case to the city council and was allowed to make an oral presentation at the debarment hearing.

The court held that "[g]iven these protections, the risk of an erroneous deprivation of [the contractor's] interests was minimal." The court also rejected the argument that the contractor could not obtain a fair hearing stating "[w]here, as here, an administrative body has a duty to act, and is the only entity capable of acting, the fact that the body may have an interest in the result does not disqualify it from acting. The rule of necessity precludes a claim of bias from the structure of the process."

False Claims Act

A number of federal decisions that applied the Federal False Claims Act are worthy of mention because the California False Claims Act closely tracks its federal counterpart. In Cook County v. United States, 538 U.S. 519 (2003), the United States Supreme Court ruled that local governments, as opposed to states, are considered to fall within the definition of "persons" who are liable under the Act.

In Ali v. Daniel, Mann, Johnson & Mendenhall, U.S. App. Lexis 746 (9th Cir. 2004), a former employee of Cal State Northridge brought a qui tam suit against DMJM for submitting false statements to FEMA to qualify CSUN for FEMA funds. DMJM argued that it was immune from liability because it was acting as an agent of CSUN, which was immune from liability. In a holding that should be heeded by consultants, the court rejected DMJM's argument and ruled that DMJM was not immune because it could not satisfy the five-part "arm of the state" test.

Finally, in United States v. Mackby, 339 F.3d 1013 (9th Cir. 2003), the Ninth Circuit reviewed a challenge to the district court's ruling that assessed in excess of $700,000 in false claims damages against the defendant for submitting false Medicare reimbursement claims. The defendant challenged the ruling on the grounds that damages awarded violated the Excess Fines Clause of the Eighth Amendment of the U.S. Constitution.

The court reviewed whether the damages "were grossly disproportional to the gravity of the defendant's offense," the standard set forth in the 1998 Supreme Court decision in United States v. Bajakajian, 524 U.S. 321. Noting that the defendant had submitted more than 8,900 false claims, some of which had been paid by the government, the court held that the award did not violate the Eighth Amendment. The court also recognized that in enacting the FCA, Congress viewed violations of the FCA to be serious offenses and that the damages awarded under the FCA promote the government's "strong interest in preventing fraud and the harm of such false claims beyond the money paid out of the treasury."

Additional Insured coverage

Typically, construction contracts require downstream contractors to provide Additional Insured endorsements to prime contractors and often to construction owners. Often times, parties who provide such endorsements do not appreciate the exposure they face when they provide Additional Insured coverage. A case that discusses the implications of providing additional insured coverage is Vitton Construction Co. v. Pacific Insurance Co., (2003) 110 Cal.App.4th 762.

In that case, a roofing subcontractors' employee was seriously injured after falling through a hole left by the steel subcontractor in a metal deck for future work. The steel subcontractor's insurer was sued for subrogation pursuant to an Additional Insured endorsement issued to the general contractor after the general contractor settled the personal injury claim. The steel subcontractor, which had demobilized from the job before the accident and had no responsibility for installing fall protection around the hole, argued that the Additional Insured coverage was not triggered because the accident did not "arise out of its work" and it had no fault in causing the accident.

However, the Court of Appeal ruled that the Additional Insured coverage was triggered. In reaching this conclusion, it interpreted the policy's language "arising under" very broadly, and noted that the general contractor was only required to show a "minimal connection" between the steel subcontractor's work and the accident, which it ruled was present. Most significantly, the court ruled that since the Additional Insured endorsement did not expressly limit coverage to a showing of fault, coverage was triggered.

Arbitration

Two cases decided in 2003 reconfirm California courts' strict enforcement of contractual arbitration provisions. In Brutoco Engineering v. Superior Court, (2003) 107 Cal.App.4th 1326, the court rejected a Caltrans contractor's challenge to the process for selecting an arbitrator pursuant to Section 10240 of the Code of Civil Procedure. Specifically, the court rejected the argument that because the selection process required the appointment of an arbitrator for the "state's certified list," the selection process was unfair.

In Metalclad Corporation v. Ventana Environmental Organizational Partnership, (2003) 109 Cal.App.4th 1705, the court, applying the Federal Arbitration Act, ruled that an arbitration clause in a sales contract executed by a subsidiary company was enforceable against the non-signatory parent corporation because the claims against the parent corporation were intimately founded and intertwined with the claims against the subsidiary. The court ruled that because the plaintiff argued that the parent caused its subsidiary to breach the contract, the plaintiff was equitably estopped from pursuing separate litigation against the parent.

California's 10-year statute of repose--Construct Defect Claims

The California Supreme Court considered the extent to which the principles of equitable tolling and equitable estoppel apply to extend Code of Civil Procedure Section 337.15 10-year statute of repose in Lantzy v. Centex Homes, (2003) 31 Cal.4th 363. In that case, homeowners brought suit against the homebuilder for construction defects. The homebuilder argued that the plaintiffs' claims were barred under Section 337.15's 10-year statute of repose. The homeowners argued that the statute should be extended, based upon the fact that the defendant had committed to perform all necessary repairs and it had, in fact, performed some repairs to their homes.

The Supreme Court rejected the argument that equitable tolling could ever extend the running of the statute, but held that under certain circumstances, the principle of equitable estoppel could preclude a defendant from asserting the statutory defense. Based on the language of the statute, the court read the 10-year limitations period to be absolute. However, since equitable estoppel works to preclude a party from asserting a statutory defense, the court held that if a plaintiff can establish the elements necessary for estoppel, it can be asserted against a defendant's claim that the 10-year statute had run.

Project Labor Agreements

It is not uncommon on large projects for public agencies, including school districts, to require that contractors enter into Project Labor Agreements. However, an Executive Order was issued that prohibits contracts that require PLAs on federally funded projects. In Building and Construction Trades v. Albaugh, 537 U.S. 1171 (2003), the United State Supreme Court rejected a challenge to Executive Order 13,202, which prohibits bidders or contractors on federally funded projects from being required to either enter into or prohibiting them from entering into Project Labor Agreements.

Prevailing wages

There were several prevailing wage-related cases decided in 2003. In City of Long Beach v. Department of Industrial Relations, (2003) 110 Cal.App.4th 636, a city challenged the DIR's ruling that prevailing wages were required to be paid on a private project that was partially funded by public funds. The city argued unsuccessfully that because it was not the awarding authority, and since its funding of the project was not used for the actual construction, the DIR's ruling was in error. The court concluded that when a city contributes funding to a private, non-profit organization for the specific purpose of constructing a facility to be used by the general public, the facility is a "public work" within the meaning of Labor Code [section] 1720 and is therefore subject to the state's prevailing wage laws.

The Ninth Circuit considered the appeal of a union that challenged the District Court's rejection of a claim against two contractors under the False Claims Act for the contractors' failure to pay prevailing wages in United States v. Caputo Co., 321 F.3d 926 (9th Cir. 2003). The dispute centered on whether wages for particular work should be paid at a plumbers' scale or at a laborers' scale.

The Ninth Circuit upheld the District Court's ruling on the grounds that the union failed to establish the applicable prevailing wages either by 1) a survey of the rates paid for the particular work, or 2) a collective bargaining agreement requiring wages for the work to be paid at a particular rate.

Licensing

In a case whose holding departed from existing precedent, the California Court of Appeals in MW Erectors, Inc. v. Niederhauser Ornamental and Metal Works Company, Inc. (2004), DJD. AR 1198 (4th Cir. Ct. App.), held that a contractor who was unlicensed at the start of a project was nevertheless entitled to pursue a claim for work performed after it received its contractor's license.

The defendant argued that under Owens v. Haslett, 98 Cal.App.2d 829, the contract was void as a matter of law because the plaintiff was unlicensed at the time the contract was signed.

However, the court noted that while the plaintiff was not licensed when the contract was signed, it received its license during the project and before a substantial amount of work was performed. Therefore, it was not precluded from seeking compensation for work performed after it received its license.

New construction legislation

There were several bills enacted in 2003 that became law on Jan. 1, 2004. They include:

* AB 1573 (Education Code 17250.35) changes existing law, which required a school district governing board to be the employer of the project inspector and the project inspector to be fully independent from any member of the design-build entity or its subcontractors. This new law requires to project inspector to act under the direction of either the director of general services or a competent, qualified agent of the school district.

* AB 14 (Public Contract Code [section] 20919) permits the Los Angeles Unified School District to engage in "Job Order Contracting" to procure services because of "unique fiscal and infrastructure difficulties" faced by LAUSD. The statutory authority expires Dec. 1, 2007.

* AB 17 (Public Contract Code [section] 10295.3) requires contractors providing goods or services to the State of California to provide equal benefits to domestic partners.

* AB 453 (Public Contract Code [section] 5110) allows a contractor to recover the reasonable cost of its work, excluding profit, if it is determined that the award of the contract was void.

* AB 902 (Public Contract Code [section] 4107) clarifies that a contractor can only be substituted for failing to sign a subcontract if the subcontract includes the scope of work and the price included by the subcontractor in its bid.

* AB 1756 (Public Contract Code [section] 6611) significantly expands the State Department of General Services' ability to use negotiated procurements in lieu of public bidding.

* SB 110 (Public Contract Code 3400) allows sole sourcing when a product is only available from a single source.

While most of the recent cases and statutory enactments do not deal specifically with the school construction boom, they can all be connected to public works construction and are relevant to a district's management of its school construction program. In the days ahead, as schools are completed and disputes arise with the completion of these projects, district management can expect to see more cases in which legal and legislative precedent may be established.

G. Christian Roux is a partner in the construction group at the Los Angeles based law firm, Weston, Benshoof, Rublacava & MacCuish, LLP. Roux is a co-author of an upcoming book on school siting, funding and construction law. He can be reached at [e-mail].