California Clarifies Subcontractor Substitution Hearing Procedures and Standard of Review

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The new year brings us some clarification regarding due process and sufficiency of the evidence necessary to support a subcontractor substitution on a California public works project. The case of note is JMS Air Conditioning and Appliance Service, Inc. v. Santa Monica Community College District, decided at the beginning of this year. The California Court of Appeals did an extensive and comprehensive review of what is required in terms of due process and evidence to substitute a subcontractor on a public works project under California law. In this case, the Santa Monica College District was acting within its authority when it allowed one of its contractors to substitute a subcontractor on the construction project.

The general contractor for the Santa Monica Community College District (“College District”) sought to substitute one of its subcontractors, JMS Air Conditioning (“JMS”) on statutory grounds, citing two of the six grounds permitted under California statutory authority (Public Contract Code 4107) to substitute a listed subcontractor. The grounds cited were the subcontractor’s failure or refusal to perform the subcontract obligations and the subcontractor was not properly licensed for a portion of its scope of work pursuant to California State Contract’s License law, albeit properly licensed for the other portions. Under California law, this triggered a substitution hearing.

The College District proposed as the hearing officer its facility manager with knowledge about the project to hear the matter and determine the substitution. The facilities manager limited the hearing to two hours. There was no opportunity for cross-examination of witnesses; however, there was no limit imposed on written submissions or exhibits or witness statements that could be submitted by either party at the hearing. The hearing took place before the hearing officer. The subcontractor denied that it refused to perform any work and denied lack of proper licensure.

The facilities manager who conducted the hearing accepted all the written materials offered, heard oral testimony (not under oath) and the evidentiary presentations of the parties. He further allowed the parties to reply to each other and permitted closing arguments. The decision of the College District was to approve the substitution based on the grounds there was sufficient evidence of the failure to perform and lack of proper licensure.

The subcontractor sought review of the College District decision in the Superior Court by way of writ of administrative mandamus on grounds that the facilities manager lacked jurisdiction, the subcontractor was denied due process, and that the findings lacked substantial evidence to support the decision. In the writ proceeding, the Court rejected the jurisdictional and due process claims. However, the court found there was substantial evidence supporting the substitution based on a finding of improper licensure, but found no substantial evidence to support a substitution based on a failure or refusal to perform.

On appeal, the subcontractor challenged jurisdiction – asserting the facilities manager could not hear the substitution request because the law required the awarding authority Board to hear the request. The Court of Appeal rejected this argument and held that it is permissible for an awarding authority to delegate someone to act as a hearing officer to conduct a hearing and rule on the substitution request. The Court held that the subcontractor substitution law does not require the governing Board to micromanage the process or who hears a substitution request.

The court went on to state that the substitution hearing only affects ancillary rights, it does not adjudicate anything beyond the limited right to substitute the subcontractor. Accordingly, the Court noted the amount of due process afforded in such a hearing is limited because it does not affect a fundamental vested right. The substitution request only determines whether a subcontractor is substituted and determines no substantive rights. The Court pointed out the subcontractor is free to pursue any claims regardless of the outcome of the substitution hearing. The court rejected the subcontractor’s argument regarding the right to cross-examination and determined that procedural safeguards vary depending upon the alleged right involved, the nature of proceedings and the burden of that proceeding. The substitution hearing is narrow and has a limited purpose; therefore, a subcontractor substitution hearing requires a correspondingly limited amount of due process. In reaching its decision, the Court looked to the practical necessity to resolve the subcontractor substitution disputes quickly without a burden on the public entity and the impact to a project.

On the issue of the sufficiency of the evidence necessary to support the substitution request, the Court stated that only substantial evidence needs to support the decision because the substitution request decision does not substantively affect any fundamental right. There is no binding legal effect on the subcontractor’s ability to pursue separate judicial proceedings, therefore there is no preclusive effect either way and further there is no preclusive effect on the state contractor license board on the licensing issue. The court applied a highly deferential review test — there only needs to be enough substantial evidence to support the decision.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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