{"id":895517,"date":"2019-02-13T15:38:14","date_gmt":"2019-02-13T22:38:14","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=895517"},"modified":"2019-02-13T15:38:16","modified_gmt":"2019-02-13T22:38:16","slug":"subsititution-hearings-california-listings-law","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/subsititution-hearings-california-listings-law\/","title":{"rendered":"A Behind-the-Scenes Look at Substitution Hearings Under California\u2019s Listing Law"},"content":{"rendered":"\n

Garret Murai | California Construction Law Blog<\/a> | February 11, 2019<\/p>\n\n\n\n

The next case,\u00a0JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District<\/em>, 2nd District Court of Appeal, Case No. B284068 (December 17, 2018), provides an interesting behind-the-scenes look at substitution hearings under the Subletting and Subcontracting Fair Practices Act.<\/p>\n\n\n\n

The Subletting and Subcontracting Fair Practices Act<\/h3>\n\n\n\n

The Subletting and Subcontracting Fair Practices Act (Public Contract Code Section 4100 et seq.<\/em>), also commonly referred to as the \u201cListing Law,\u201d requires that prime contractors on state and local public works projects \u201clist\u201d the following subcontractors in their bids:<\/p>\n\n\n\n

  1. Subcontractors who are anticipated to perform work with a value in excess of 0.5% of the prime contractor\u2019s total bid; and<\/li>
  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\u2019s total bid; or (b) in excess of $10,000.<\/li><\/ol>\n\n\n\n

    \u201cListing\u201d a subcontractor requires that the prime contractor identify the name, business address, contractor\u2019s license number, and public works registration number of the subcontractor.<\/p>\n\n\n\n

    The purpose of the Listing Law is to prevent \u201cbid shopping\u201d and \u201cbid  peddling.\u201d 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. In enacting the Listing Law, the California State Legislature found that bid shopping and bid peddling result in \u201cpoor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils.\u201d<\/p>\n\n\n\n

    To prevent these \u201cevils,\u201d the Listing Law prohibits prime contractors from substituting another subcontractor with a \u201clisted\u201d subcontractor unless consent is given by the public agency overseeing the public works project. Consent by a public agency is limited to nine circumstances:<\/p>\n\n\n\n

    1. Failure to Execute Subcontract:<\/strong> When the listed subcontractor fails or refuses to execute a written subcontract at the price stated in the subcontractor\u2019s bid;<\/li>
    2. Insolvency or Bankruptcy:<\/strong> When the listed subcontractor becomes insolvent or files for bankruptcy;<\/li>
    3. Failure to Perform:<\/strong> When the listed subcontractor fails or refuses to perform under its subcontract;<\/li>
    4. Failure to Furnish Bonds When Required:<\/strong> When the listed subcontractor fails or refuses to furnish a payment and\/or performance bond under its subcontract;<\/li>
    5. Inadvertent Clerical Error:<\/strong> When the prime contractor demonstrates that the listed subcontractor was listed as a result of an inadvertent clerical error;<\/li>
    6. Not Properly Licensed:<\/strong> When the listed subcontractor is not properly licensed under the Contractors\u2019 Licensing Law;<\/li>
    7. Unsatisfactory Performance:<\/strong> When the public agency determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans or specifications or that the listed subcontractor is substantially delaying or disrupting the project;<\/li>
    8. Labor Violations:<\/strong> When the listed subcontractor is ineligible to perform work as a result of labor violations under Labor Code Sections 1777.1 or 1777.7;<\/li>
    9. Non Responsible:<\/strong> When the public agency determines that the listed subcontractor is not a responsible contractor.<\/li><\/ol>\n\n\n\n

      A prime contractor seeking to substitute a listed subcontractor with another subcontractor is required to provide notice of the prime contractor\u2019s intent to substitute with the public agency. The public agency is then required to give notice by certified or registered mail to the listed subcontractor of the prime contractor\u2019s request for substitution and the basis for the prime contractor\u2019s request. The listed subcontractor then has five (5) working days to submit written objections to the public agency. If the listed subcontractor submits written objections, the public agency then has five (5) working days to give notice to the listed subcontractor of a hearing by the awarding agency.<\/p>\n\n\n\n

      JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District<\/em><\/h3>\n\n\n\n

      In JMS Air Conditioning<\/em>, subcontractor JMS Air Conditioning and Appliance Service, Inc. (JMS) performed work in excess of 0.5% of the bid of prime contractor Bernards Bros, Inc. (Bernards) on a project owned by the Santa Monica Community College District (District).  JMS\u2019 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.<\/p>\n\n\n\n

      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 \u201cfailed or refused to perform its subcontract obligations and may not be properly licensed for portions of its work pursuant to the Contractors\u2019 License Law. Within five (5) working days of receiving notice from the District of Bernard\u2019s substitution request, JMS filed an objection.<\/p>\n\n\n\n

      On May 6, 2016, the District held a hearing to consider Bernard\u2019s substitution request and JMS\u2019 objection and appointed its facility manager Greg Brown as the \u201chearing officer.\u201d 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.<\/p>\n\n\n\n

      Both Bernards and JMS submitted written statements. In its written statement, JMS assumed that Bernards\u2019 \u201clack of proper licensure\u201d claim related to hydronic plumbing work listed in the specifications, and argued that its C-20 HVAC license covered such plumbing work as \u201cincidental and supplemental\u201d or \u201cessential\u201d to its work under Business and Professions Code Section 7059, which permits specialty subcontractors to perform work that is \u201cincidental and supplemental to the performance of the work in the craft for which the specialty contractor is licensed,\u201d and under the Section 831 of the of the California Code of Regulations which defines \u201cincidental and supplemental\u201d as \u201cessential to accomplish the work in which the contractor is classified.\u201d<\/p>\n\n\n\n

      Bernards\u2019 written statement argued that JMS was not properly licensed because its C-20 HVAC license did not permit it to perform the \u201chydronic boiler\u201d work and \u201chydronic plumbing\u201d work listed in the specifications. Bernard\u2019s written statement also included a 250-page \u201cExhibit Book\u201d that identified twenty-one \u201c[p]erformance [d]efficienc[ies]\u201d 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\u2019 C-20 license did not permit it to perform hydroponic boiler work but which also stated that he \u201cha[d] not formed an opinion\u201d as to whether JMS required a C-36 plumbing license to perform the hydronic plumbing work.<\/p>\n\n\n\n

      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\u2019 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 \u201cessential to the HVAC system . . . installed by JMS.\u201d None of the witnesses testified under oath.<\/p>\n\n\n\n

      On May 10, 2016, Brown sent a letter to the parties informing them of the District\u2019s approval of Bernards\u2019 substitution request finding that JMS had \u201cfailed to perform\u201d its subcontractor \u201cin the most sound, workmanlike and substantial manner\u201d 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\u201d and that such a substantial amount of work could not be \u201cincidental and supplemental.\u201d<\/p>\n\n\n\n

      In response, JMS filed a petition for writ of administrative mandamus which was rejected by the superior court. JMS appealed.<\/p>\n\n\n\n

      The Court of Appeal Decision<\/h3>\n\n\n\n

      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\u2019ll be brief:<\/p>\n\n\n\n