One-Upmanship by Contractors In Prevailing Wage Decision Leads to a Bad Result for All . . . Perhaps

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Fights between contractors can be a bit like Mad magazine’s “Spy vs. Spy” with each side trying to out outwit and one-up one another. The next case, Division of Labor Standards Enforcement v. Built Pacific, Inc., Case No. D076601 (March 15, 2021), is a case in point.

The Built Pacific Case

Built Pacific, Inc. was a subcontractor to Austin Sundt Joint Venture on a public works project known as the San Diego Regional Airport Authority Project.

In 2015, following an investigation by the California Division of Labor Standards Enforcement (DLSE), the DLSE issued a Civil Wage Penalty Assessment of $119,319.76 based on Built Pacific’s failure to pay prevailing wages. The DLSE also named Austin Sundt in the Civil Wage Assessment pursuant to Labor Code 1743 which makes contractors and subcontractors jointly and severally liable for wage violations. As a result of the Civil Wage Assessment, Austin Sundt withheld approximately $70,000 in retention from Built Pacific.

Built Pacific then filed a request for review of the Civil Wage Assessment. In its request for review, Built Pacific alleged that Austin Sundt was solely responsible for the wage violations because Austin Sundt set the rates for Built Pacific’s employees and affirmatively represented to Built Pacific that the airport authority had approved the rates. As such, Built Pacific demanded that Austin Sundt either pay the DLSE the amount of the Civil Wage Assessment or agree to reimburse Built Pacific for such payment. Austin Sundt refused. Against this background, there was a pending lawsuit between Built Pacific and Austin Sundt in which Built Pacific was seeking over $200,000 from Austin Sundt in change order work on the Project.

Before the hearing on Built Pacific’s request for review, the DLSE, Built Pacific and Austin Sundt engaged in settlement discussions in which DLSE agreed to settle the matter for $82,077.15. Built Pacific agreed on condition that Austin Sundt pay the $70,000 in retention it was withholding from Built Pacific to the DLSE, that Built Pacific would pay the balance to the DLSE, but that Built Pacific would not waive its right to seek the $70,000 in retention in the pending lawsuit. Austin Sundt declined to enter into a settlement agreement on those terms.

About a week before the hearing on Built Pacific’s request for review, BPI and DLSE entered into a settlement agreement whereby BPI agreed to withdraw its request for review and submit payment to the DLSE in the amount of $83,201.40 no later than May 9, 2019. Upon payment, DLSE agreed to release BPI and Austin Sundt from all claims under the Civil Wage Assessment. Among the terms of the settlement agreement was a provision stating that “should any payment be made late, [BPI] shall be in breach of this agreement and DLSE shall be entitled to obtain judgment on the full amount of the [Civil Wage Assessment], including applicable liquidated damages and interest.”

Following the settlement, Built Pacific sent a demand to Austin Sundt demanding reimbursement of the $83,201.40 it was to pay the DLSE and for release of the $70,000 in retention being withheld by Austin Sundt. Austin Sundt did not respond to Built Pacific’s demand but later inquired whether Built Pacific had paid the settlement amount to the DLSE. Built Pacific responded that it had not paid the settlement amount and would not until Austin Sundt had released the $70,000 it was withholding in retention.

Austin Sundt then reached out to the DLSE and entered into an agreement whereby Austin Sundt paid the $83,201.40, but only to resolve Austin Sundt’s liability, and that the DLSE would seek all remaining amounts under the Civil Wage Assessment from Built Pacific. DLSE later filed a request with the superior court for a judgment against Built Pacific for the balance owed under the Civil Wage Assessment, liquidated damages and interest. The superior court entered a judgment in the amount of $69,101.54 against Built Pacific.

In response, Built Pacific filed an ex parte application with the superior court to vacate the judgment, arguing that the settlement agreement Built Pacific had entered with the DLSE had been fully satisfied through Austin Sundt’s payment of the $83,201.40 to the DLSE. The superior court denied the ex parte application and Built Pacific appealed.

The Appeal 

On appeal, Built Pacific argued that the judgment was unenforceable because it includes an award of liquidated damages and that the liquidated damages provision in the settlement agreement was unenforceable under Civil Code section 1671 which provides that “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.”

The 4th District Court of Appeals disagreed.

First, explained the Court of Appeals, Civil Code section 1671 applies by its terms to “contracts” not to judgments based on statute. “[T]he cases [Built Pacific] relies upon address civil contract disputes,” explained the Court, “they do not address the applicability of Civil Code section 1671 to judgments based on the Public Works Laws or any other similar statutory laws.” And here, Labor Code section 1742.1 provides for the assessment of liquidated damages and states in pertinent part:

After 60 days following the service of a civil wage and penalty assessment under Section 1741 or a notice of withholding under subdivision (a) of Section 1771.6, the affected contractor, subcontractor, and surety on a bond or bonds issued to secure the payment of wages covered by the assessment or notice shall be liable for liquidated damages in an amount equal to the wages, or portion thereof, that still remain unpaid.  

Note: I’m not sure if I completely agree with the rationale here. Sure, Labor Code section 1742.1 uses the term “liquidated damages,” but it simply means the amount in prevailing wages that should have been paid plus penalties and any accrued interest under Labor Code section 1741. Here, the Civil Wage Assessment was $119,319.76, Austin Sundt paid $83,201.40, leaving a balance of $36,118.36. Yet, the judgment against Built Pacific was in the amount of $69,101.54.

Second, explained the Court of Appeal, “[e]ven if Civil Code section 1671 applies to the judgment at issue, we would conclude the alleged liquidated damages provision in the settlement agreement is both reasonable and enforceable.” Responding to Built Pacific’s argument that judgment resulted in a penalty almost as much as the original amount due under the settlement agreement, the Court explained:

Not so. [Built Pacific] was simply required to pay the remaining amount due on the original [Civil Wage Assessment], which now included additional interest and liquidated damages pursuant to section 1742.1. Essentially, in the event of a breach, the liquidated damages clause placed the parties in the same position as they were in before the agreement was executed, except for the fact that [Built Pacific] had voluntarily withdrawn its request for review. Moreover, we note the amount of the judgment entered against [Built Pacific], $69,101.54, was less than the agreed upon settlement amount. Given the totality of circumstances existing at the time the parties entered into the agreement, the clause was reasonable.

Note: Again, I’m having some problems with the rationale here. The Court of Appeals states that the judgment of $69,101.54 against Built Pacific represents “additional interest and liquidated damages pursuant to section 1742.1. Additional interest I can understand but Civil Code section 1742.1 doesn’t provide for “additional” liquidated damages. Moreover, the Court’s statement that it “note[s] the amount of the judgment entered against [Built Pacific], $69,101.54, was less than the agreed upon settlement amount,” misses the point. Forget the agreed upon settlement amount. The settlement agreement was breached by Built Pacific, I get that. However, the Civil Wage Assessment was $119,319.75. DLSE received a settlement payment from Austin Sundt of $83,201.40. Then, DLSE obtained a judgment against Built Pacific of $69,101.54. Thus, the total amount received ($83,201.40) and owing ($69,101.54) to the DLSE is $152,302.94. While the judgment of $69,101.54 against Built Pacific is, as noted by the Court, less than the original settlement amount of $83,201.40, the total amount received and owing to the DLSE is more than the original Civil Wage Assessment, by $32,983.18, and I have a hard time believing that this difference is accounted for by interest alone.

Conclusion

So, there you have it. Kind of an odd opinion if you ask me. But, at the same time, I’m not seeing any commentary online questioning the decision. So, perhaps it’s just me.

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