Court Holds That Public Entity Can Unilaterally Replace Subcontractor Under California’s Subletting and Subcontracting Fair Practices Act

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The Subletting and Subcontracting Fair Practices Act (Public Contract Code section 4100 et seq.), also known as the Listing Law, is intended to prevent direct contractors on public works projects from “bid shopping” and “bid peddling.”

Bid Shopping: Bid shopping is when a direct contractor discloses a subcontractor’s bid to other subcontractors in an attempt to obtain a lower bid than the one in which it based its bid to the owner.

Bid Peddling: Bid peddling is the other side of the equation. It is when a subcontractor whose bid was not selected, lowers its bid in an attempt to induce the direct contractor to substitute it for another subcontractor after the prime contractor’s bid has been awarded.

The Listing Law advances these goals by prohibiting a direct contractor from replacing a subcontractor listed in the direct contractor’s bid unless:

  1. Consent is given by the public owner; and
  2. That consent is based on one of several specifically enumerated situations, including a subcontractor’s failure to perform its work, failure to pay prevailing wages, failure to carry the proper contractor’s license for the work, etc.

As set forth in statute, the Listing Law allows a direct contractor to request a “substitution” from a public owner. However, it says nothing about a public entity’s ability to require a direct contractor to make a “substitution.” That is, unless you read between the lines, as courts are sometimes apt to  do.

Synergy Public Management, Inc. v. City and County of San Francisco 

In Synergy Public Management, Inc. v. City and County of San Francisco, Case No. A151199 (March 14, 2019), the City and County of San Francisco awarded a bid submitted by Ghilotti Bros. for street repairs in the historic Haight-Ashbury area of San Francisco. Ghilotti had listed Synergy Public Management, Inc. in its bid to perform excavation and utilities work.

Ghilotti’s contract with the City also included a provision providing:

When a Subcontractor fails to prosecute a portion of the Work in a manner satisfactory to the City, Contractor shall remove such Subcontractor immediately upon written request of the City, and shall request approval of a replacement Subcontractor to perform the work in accordance with Administrative Code section 6.21(A)(9) and the [Act], at no added cost to the City.

Work on the project began in April 2015. During performance of the work, Synergy broke five gas lines, improperly shored trenches on multiple occasions which could have led to a street collapse, and “dangled” one of its foremen “by his ankles” into an open manhole with no safety equipment. It reminds me of those hilarious, at least to me, construction fails you read about on occasion.

Following the fifth gas line break, the City had had enough and issued a stop-work order. In a letter to Ghilotti, the City directed Ghilotti, pursuant to the contract, “to remove [Synergy] immediately” and “immediately . . . request approval of a replacement subcontractor to perform the work.”

In response, Ghilotti informed the City that it “substantively and procedurally dispute[d] the validity of the City’s replacement demand” but had “solicited proposals for the completion of Synergy’s remaining scope of work.” Synergy submitted its own response stating that it “strongly object[ed] to the [the City’s] unilateral decision of subcontractor substitution.” And we’re off to the races.

The City, in turn, scheduled a hearing under the Listing Law. At the hearing, Ghilotti and Synergy argued that the hearing officer did not have jurisdiction to hold a hearing under the Listing Law because it was the City, not Ghilotti, who was seeking to replace Synergy. The hearing officer basically called Ghilotti and Synergy’s arguments hogwash (more specifically, “absurd”) and upheld Synergy’s removal from the project.

Synergy and Ghilotti each filed a petition for writ of  mandate to have the Superior Court review the decision by the hearing officer. At the hearing on the writ, the trial court found that because Ghilotti had not requested the replacement of Synergy that the hearing officer had acted outside of his jurisdiction.

The City appealed.

The Court of Appeal Decision

On appeal, the First District Court of Appeals acknowledged that “case law reflects ‘a consistent fact pattern’ of the prime contractor, not the awarding authority, seeking substitution, and [the Listing Law’s] references to a ‘request’ by a the prime contractor contemplates this will be the normal situation.”

But, explained the Court, “this does not establish that the prime contractor must always request a substitution for there to be jurisdiction for a hearing under the [the Listing Law]. ‘Rather, the failure to literally comply with an obligatory statutory procedure, such [as those contained in the Listing Law], is valid if the procedure used complies in substance with all reasonable objectives of the statutory scheme.'”

And here, held the Court of Appeals:

There is no dispute for purposes of this appeal that Synergy performed substandard and unsafe work, yet for reasons that are unclear Ghilotti wanted to retain Synergy. Thus, no risk existed of bid shopping by Ghilotti, much less bid peddling by Synergy or another subcontractor. And once the City elected under its contract with Ghilotti to force Ghilotti to remove Synergy for unsatisfactory work, another party’s work on Synergy’s portion of the project could not lawfully proceed without the City’s consent. The City’s decision to hold a hearing on its own initiative instead of waiting for Ghilotti to “request” substitution furthered the statutory objective of protecting public safety by giving the awarding authority control over which subcontractors work on a project.

Conclusion

So, there you have it. A public entity can unilaterally replace a subcontractor on a public works project under the Listing Law without waiting for a direct contractor to make a request for a “substitution,” so long as the public entity contractually reserves its right to replace a subcontractor. What’s less clear is if a public entity can reserve its right to replace a subcontractor for any reason or whether the reason must be based on one of the enumerated situations identified under the Listing Law.

2 Responses to “Court Holds That Public Entity Can Unilaterally Replace Subcontractor Under California’s Subletting and Subcontracting Fair Practices Act”

  1. David Ross

    Congratulations, Garret, for “digging up” another great conversation starter. This decision seems to put another tool in the toolbox for public Owners managing challenging projects, but at the risk of adding more challenges.

    In a typical substitution under the Listing Law, the GC bears the cost, if any, of the substitution (e.g. higher subcontract amount). Was Ghilotti’s pushback to the City’s demand driven by cost considerations? Or was SF offering to issue a change order for this?

    Reply
    • Garret Murai

      Thanks Dave. The decision doesn’t discuss “why” Ghilotti pushed back on the City. The decision breaks new ground with respect to the Listing Law, and while it doesn’t address “who” should cover any increased costs resulting from a substitution, it would seem to me only fair that if a public agency is insisting on the substitution that they should cover the costs. You raise a good point though, as it could create a situation where the general contractor and the public agency, are trying to position themselves so that it is the “other” party who is making the substitution “ask” so that they bear the cost.

      Reply

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