Substitution hearings under the Subletting and Subcontracting Fair Practices Act

The next case, JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District, 30 Cal. App. 5th 945 (2018), provides an interesting behind-the-scenes look at substitution hearings under the Subletting and Subcontracting Fair Practices Act.

The Subletting and Subcontracting Fair Practices Act (Public Contract Code Section 4100 et seq.), also commonly referred to as the "Listing Law," requires that prime contractors on state and local public works projects "list" the following subcontractors in their bids:

1. Subcontractors who are anticipated to perform work with a value in excess of 0.5% of the prime contractor's total bid; and

2. Subcontractors, on street, highway and bridge projects, who are anticipated to perform work with a value in excess of the greater of: (a) 0.5% of the prime contractor's total bid; or (b) in excess of $10,000.

The purpose of the Listing Law is to prevent "bid shopping" and "bid peddling." Bid shopping is where a prime contractor uses a low bid received from a subcontractor to pressure other subcontractors to submit even lower bids. Bid peddling is where a subcontractor uses a low bid received by a prime contractor from a subcontractor to submit an even lower bid.

To prevent bid shopping and bid peddling, the Listing Law prohibits prime contractors from substituting another subcontractor with a "listed" subcontractor unless consent is given by the public agency overseeing the public works project, and that consent is limited to certain circumstances, such as the listed subcontractor's failure to execute a subcontract, its failure to perform, its insolvency, and other reasons bearing on the listed subcontractor's ability to perform its subcontract.

A prime contractor seeking to substitute a listed subcontractor with another subcontractor is required to provide notice of the prime contractor's intent to substitute with the public agency. The public agency is then required to give notice to the listed subcontractor of the prime contractor's request for substitution and the basis for the prime contractor's request. If the listed subcontractor objects to the substitution, the public agency then conducts a hearing on prime contractor's substation request.

Because substation hearings under the Listing Law are relatively rare, JMS Air Conditioning provides an interesting behind-the-scenes look at what occurs at a substitution hearings and provides some lessons for public agencies, prime contractors and subcontractors.

The Case

In JMS Air Conditioning, subcontractor JMS Air Conditioning and Appliance Service, Inc. performed work in excess of 0.5% of the bid of prime contractor Bernards Bros, Inc. on a project owned by the Santa Monica Community College District. JMS' work consisted of the installation of the heating, ventilation and air conditioning at the project and JMS held a C-20 warm-air heating, ventilating and air-condition license.

In March 2016, Bernards submitted a request to the district to substitute JMS. The reasons stated by Bernards for its request was because JMS had "failed or refused to perform its subcontract obligations and may not be properly licensed for portions of its work pursuant to the Contractors' License Law." As to the licensing issue, Bernards claim was that JMS' C-20 HVAC license did not allow it to perform "hydronic" work. Following receipt of notice from the district of Bernard's substation request, JMS filed an objection and requested a hearing.

On May 6, 2016, the district held a hearing to consider Bernard's substitution request and appointed its facility manager Greg Brown as the "hearing officer." Prior to the hearing, Brown informed the parties that: (1) the hearing would be limited to two hours; (2) that the technical rules of evidence would not apply; (3) that neither party would have a right to cross-examine witnesses; and (4) that should the parties wish they could submit written statements and that there was no page limitation on such statements.

Both Bernards and JMS submitted written statements. JMS, assuming that Bernards' "lack of proper licensure" claim related to hydronic plumbing work listed in the specifications, argued in its written statement that its C-20 HVAC license covered hydronic plumbing work under Business and Professions Code Section 7059 which permits specialty subcontractors to perform work that is "incidental and supplemental to the performance of the work in the craft for which the specialty contractor is licensed," as well as under Section 831 of the California Code of Regulations which defines "incidental and supplemental" as work which is "essential to accomplish the work in which the contractor is classified."

In its written statement, Bernards argued that JMS was not properly licensed because its C-20 HVAC license did not permit it to perform the "hydronic boiler" work and "hydronic plumbing" work listed in the specifications. Bernard's written statement also included a 250-page "Exhibit Book" that identified 21 "[p]erformance [d]efficienc[ies]" of JMS and included a written statement by Robert B. Berrigan, a lawyer and former licensing deputy of the Contractors State License Board, in which he opined that JMS' C-20 license did not permit it to perform hydronic boiler work, but in which he also stated that he "ha[d] not formed an opinion" as to whether JMS required a C-36 plumbing license to perform the hydronic plumbing work.

At the hearing, Brown allowed each side 40 minutes to present its case, a 10 minute right to reply and brief closing arguments. Bernards presented two of its employees as witnesses, Michael Toepfer, a senior project manager, and Dave Inman, a superintendent, who testified concerning the quality and timeliness of JMS' work. JMS presented its president, Joe Messica, as its sole witness. Messica testified that his company had completed other similar projects and that the hydronic boiler and hydronic plumbing work performed by JMS on the project was "essential to the HVAC system ... installed by JMS." None of the witnesses testified under oath.

On May 10, 2016, Brown sent a letter to the parties informing them of the district's approval of Bernards' substitution request finding that JMS had "failed to perform" its work "in the most sound, workmanlike and substantial manner" required by the subcontract, and finding that JMS was not properly licensed to perform the work, holding that JMS had performed over $3 million worth of boiler and piping work" and that such a substantial amount of work could not be "incidental and supplemental."

In response, JMS filed a petition for writ of administrative mandamus which was rejected by the superior court. JMS appealed.

Court of Appeal

On appeal, JMS raised several arguments, all of which were rejected by the Court of Appeal. The rationale of the court is less important than its holding, so I'll be brief:

• JMS' Argument That Only the District, Not a "Hearing Officer" (i.e., Brown), Could Conduct the Substitution Hearing Under the Listing Law

JMS' first argument was that, under the Listing Law, Brown lacked jurisdiction to conduct the substitution hearing, because under the Listing Law only the "awarding agency" may conduct a substitution hearing not a "hearing officer" designated by the awarding agency.

The Court of Appeal disagreed, explaining that the Listing Law was intended to prevent bid shopping and bid peddling, and nothing in the "[legislative] record, nor the [Listing Law's] history, nor its overall structure suggests that preventing an awarding authority's agent from conducting a substitution hearing might help combat bid shopping or bid peddling."

• JMS' Argument That It Was Denied Due Process Because the Hearing Was Too Short, It Did Not Have the Right to Cross-Examine Witnesses, and Did Not Receive Sufficient Notice of Bernards' Basis for Its Substitution Request

JMS' second argument was that it was denied due process under the Listing Law because: (1) the hearing was too short given the complexity of the issues involved; (2) it was not afforded the right to cross-examine witnesses; and (3) it did not receive sufficient notice prior to the hearing of the basis for the substitution request.

Again, the Court of Appeal disagreed, explaining that nothing in the Listing Law "requires a hearing of a particular length or the opportunity to cross-examine witnesses." Furthermore, explained the Court, so long as parties have "a reasonable opportunity to be heard, taking into account the 'specific factual context,'" the conduct of proceedings will be upheld. And, here, explained the court, although Bernard's substitution request stated that JMS might not be properly licensed to perform "some portions" of the work, JMS correctly concluded that Bernards' request was premised in part on its contention that JMS needed a C-36 plumbing license to install the hydronic plumbing, and while JMS was not aware that Bernards' request was also premised on its claim that JMS could install the hydronic boiler, "JMS failed to request a continuance to prepare additional evidence and argument to defend against Bernards' boiler licensure argument."

• JMS' Argument That There Was Insufficient Evidence for the District to Grant Bernards' Substitution Request

Finally, JMS argued that, while Brown testified that JMS' C-20 HVAC license was not sufficient for it to install the hydronic boiler, because its president Messica testified that the boiler work was "incidental and supplemental" or "essential" to JMS' HVAC work, that there was insufficient evidence for the district to grant Bernards' substitution request.

The Court of Appeal disagreed, holding that the substantial evidence standard of review applies, rather than the broader independent judgment standard of review, and that under the substantial evidence standard of review, court's "resolv[e] all conflicts in the evidence and draw[ ] all inferences in support of [the administrative findings]." And, here, explained the court, the credibility of witnesses and weight given to conflicting testimony is left to the discretion of the public agency unless "a reasonable person could not reach the conclusion reached by the agency."

As to the hydronic boiler installation, the Court of Appeal held that it would not "second-guess[ ] Brown's decision to believe Berrigan's testimony over Messica's. However, as to the hydronic plumbing installation, the Court of Appeal held that, because Berrigan expressly disclaimed offering an opinion on whether JMS was properly licensed to perform the hydronic plumbing installation, substantial evidence did not support the district's finding that JMS was not properly licensed to perform the hydronic plumbing installation.

Conclusion

JMS Air Conditioning provides an interesting behind-the-scenes look at substitution hearings under the Listing Laws, the primary take-aways being that: (1) the governing body of a public agency does not need to conduct substitution hearings itself, and can designate a hearing officer instead; (2) public agencies have broad discretion in how such hearings are conducted so long as the parties have a reasonable opportunity to be heard given the "specific factual context"; and (3) that substitution hearings are reviewed on appeal under a substantial evidence standard of review, whereby, appellate courts will resolve conflicts in the evidence and draw all inferences in support of the administrative findings. 