GIBBS, GIDEN, LOCHER & TURNER LLP NEWSLETTER

Vol. X

Winter 2001

OUTREACH PROGRAMS

BASED SOLELY ON RACE OR SEX

VIOLATE PROPOSITION 209
by Barbara R. Gadbois

ECONOMIC LOSS RULE

BARS TORT CLAIMS
FOR CONSTRUCTION DEFECTS
by Kenneth C. Gibbs

NEW LIMITATIONS
ON USE OF ALTERNATES
IN PUBLIC CONTRACTING
by Barbara L. Hamilton

PREVAILING WAGE LAWS EXTENDED TO DESIGN AND PRE-CONSTRUCTION PHASES
by Robert E. Kent and Gary E. Scalabrini

INVESTIGATE THE PAYMENT BOND SURETY - OR ELSE!
by James D. Lipschultz
and Christopher Ng

by Barbara R. Gadbois

     In what has been hailed by opponents of affirmative action as a landmark victory, the California Supreme Court ruled, in Hi-Voltage Wire Works, Inc. v. City of San Jose (2000) 24 Cal. 4^th 537, that the City’s outreach program, targeting minorities and women, violates California’s Constitution.

     Proposition 209 amended California’s Constitution to prohibit the state or its political subdivisions from discriminating or granting preferential treatment on the basis of race, sex, color, ethnicity or national origin in public employment, education and contracting.

     The City’s program, modified after Proposition 209 passed, required all bidders for a construction project to subcontract work to the number of minority and women owned (MBE/WBE) firms that the City determined would be expected in the absence of discrimination (participation option) or document specific, City prescribed, efforts to do so (outreach option).  Hi-Voltage, the low bidder on the project, intended to perform the work exclusively with its own forces.  Since Hi-Voltage did not list any MBE/WBE subcontractors or document any outreach efforts to them, its bid was rejected as nonresponsive.

     In the first opinion to apply Proposition 209 to a specific program, the Court traced 150 years of civil rights case law to interpret the initiative in its historical context.  The Court rejected every argument made by the City and ruled that: 1) the participation option causes prime contractors to discriminate against non-MBE/WBE firms on the basis of race and sex; 2) the outreach option grants preferential treatment to MBE/WBE firms because a prime contractor must notify, solicit and negotiate with MBE/WBE firms but may exclude non-MBE/WBE firms; and 3) the City discriminates if it rejects a low bidder for failure to satisfy either option.

     While the majority opinion flatly rejects outreach programs targeted solely at minorities and women as unconstitutional in California, proponents of affirmative action are encouraged by the acknowledgement in the majority opinion that not all outreach programs are unlawful and the guidance provided in the concurring opinions as to the forms of programs that are permissible.  One example of an outreach program that appears permissible under Proposition 209 is the City of Los Angeles program that requires prime contractors who intend to subcontract work to make and document good faith efforts to encourage participation by all types of subcontractors, not just MBE/WBE firms.

     Armed with this new opinion, it appears likely that the divisive legal battle to determine the parameters of permissible affirmative action programs will continue.

* * *

On December 4, 2000, the California Supreme Court issued a much-anticipated opinion in the case of Aas v. Superior Court (2000) 24 Cal. 4^th 627.

In a lengthy opinion, the Supreme Court ruled and affirmed that the “economic loss doctrine” bars recovery, in tort, for economic losses (i.e. cost of repairs or diminished value of property) caused by construction defects that have not caused injuries to persons or property.

The majority opinion boiled down the issue to the following dispositive question: “Does the law of negligence protect plaintiff’s economic interests in having houses that fully comply with the building codes, measured by the cost of repairs or diminished value associated with noncompliance, even though the asserted harm to those interests is unaccompanied by any injury to person or property?”

After analyzing all previous opinions on the subject, the majority concluded: No, plaintiffs may not recover for defects that have not caused injuries to persons or property notwithstanding the fact that such defects may in fact be dangerous and contrary to building codes.

Chief Justice George, in a concurring and dissenting opinion, would distinguish minor defects from “major life-safety” defects and would allow recovery for correcting such major defects “before a personal tragedy needs to occur.”  The majority, however, felt that the Chief Justice’s solution would be too complex and confusing to enforce and as such ruled that recovery is denied in all instances whether “major” or “minor.”

In the aftermath of Aas, we may see new legislation proposed to create an exception to the no economic loss rule, and to define major life safety issues.

The bar to recovery of economic loss applies only to tort theories (e.g., negligence) and does not affect the law governing claims for economic loss based on contract theories.

***

Many public projects require bidders to submit a base bid and alternate prices for discrete items of work.  This procedure allows agencies to pick and choose among the alternate items in order to select the low bidder who will provide the most desirable project within budgetary constraints.  Alternate bidding is intended to give a public agency some control over the cost of a project.  If bids are opened before the agency selects its alternates, however, it may be possible to manipulate the process to award the work to a favored contractor.

In an attempt to eliminate possible abuse of the alternate selection process, the legislature enacted AB 2182, which amends Section 10126 (applicable to the University of California) and adds Sections 10780.5 (California State University) and 20103.8 (local agencies) to the California Public Contract Code to specify how alternates are to be considered in awarding a contract.  The Code now requires that one of the following four methodologies be used to determine the lowest bid for state and local public works contracts when bids will include additive or deductive alternates:

• (1) The lowest bid on the base contract regardless of the price for the alternates;

• (2) The lowest total of the bid on the base contract plus the prices of those alternates specified in the bid solicitation as being used to determine the lowest bid;

• (3) The lowest bid on the base contract plus additive or deductive items taken in order from a specific list, depending on available funds, as specified in the solicitation; or

• (4) The lowest bid determined in a manner that prevents any information identifying any of the bidders from being revealed to the public entity before ranking all bidders from highest to lowest.

The public entity must specify, in the invitation for bids, the exact combination of the base bid and any of the alternates that will be used to determine the lowest bid for purposes of awarding the contract.  If no method is specified in the bid solicitation, then the first methodology described above is to be used to determine the lowest responsible bid.

When AB 2182 was first introduced, opponents of the bill voiced concerns that the proposed amendments would limit public entities’ flexibility to select the most cost-effective proposal, since at the time of bid solicitation the entity might not know which alternates may be possible within the budget.  In response to these concerns, the anonymous bid procedure (methodology 4 above) was added to the statutory scheme, which allows public entities evaluating bids including alternates the same flexibility as existed previously, as long as the identity of the bidders is concealed until after the bids have been ranked from lowest to highest.  (The concept of an “anonymous” procedure for bids that must be opened and “publicly declared” may be difficult to implement.)

The new requirements make clear that public entities must detail the scope of the project from the outset, obtain accurate cost estimates before soliciting bids, and carefully evaluate the procedures used for selecting alternates, to prevent the appearance of impropriety in selection of the low bidder.

* * *

The California prevailing wage laws require that all workers employed on public works projects be paid the general prevailing rate of per diem wages, as determined by the Director of Industrial Relations.  On September 28, 2000, Governor Davis approved SB 1999, which amends the Labor Code to extend prevailing wage requirements to employees engaged in the design and pre-construction phases of public works projects including, but not limited to, inspection and land surveying work.  This change reflects a trend toward expanding the application of prevailing wage rates to categories of work long held exempt.

Contractors, subcontractors and suppliers must take steps to ensure covered employees are being paid the correct wages.  In addition, all impacted contracts should be reviewed to determine if the changes will increase costs.  If so, there may be grounds to seek funds to cover these costs from the Commission on State Mandates.  Now is a good time to review your contracts and the new changes to the Labor Code.

* * *

A recent court case points out that it is more important than ever for public entities to scrutinize the qualifications of contractors and their ability to complete their contracts.  One of the frequently overlooked areas of investigation concerns the sufficiency of the surety on the performance bond and the labor and materials payment bond.  The performance bond protects the public entity in the event of a default by the contractor, and the payment bond protects the subcontractors and suppliers on the project in the event the contractor fails to pay them for their work on the project.

Pursuant to California Civil Code Section 3247, a contractor must provide a payment bond on any public works construction project in excess of $25,000.  A California Court of Appeal recently held that the failure of a public entity to confirm the sufficiency of the surety on the payment bond subjected that public entity to liability to a subcontractor after the general contractor failed to pay the subcontractor and the surety went out of business.  In the case of Rankin v. City of Murrieta (2000) 84 Cal.App.4^th 605, the California Court of Appeal held that the City had a mandatory duty under the Government Code to take certain measures to ensure the sufficiency of the surety on the payment bond.  Having failed to do so, and even though it had already paid the entire contract sum, the City was obligated to pay the subcontractor the unpaid balance owed to the subcontractor on the project.

What Should A Public Entity Do?

In light of this decision, public entities should take several steps to investigate and confirm the sufficiency of a surety on payment and performance bonds.  Not only will this serve to avoid liability to subcontractors in the event that the general contractor and the surety go out of business, it will also benefit the public entity by ensuring that there is a sufficient surety on the performance bond in the event the contractor fails to complete the project.  The following steps are recommended:

• (1) If a corporate surety is proposed, contact the California Secretary of State and the California Department of Insurance to confirm that the surety is an active corporation in California and that it is an admitted surety in California.  Secretary of State information is available on the Internet at www.ss.ca.gov; the Department of Insurance information is available on the Internet at www.insurance.ca.gov/docs/FS-Admitted.htm.

• (2) The larger corporate sureties are listed in United States Treasury Circular No. 570.  A copy may be obtained directly from the U.S. government printing office at (202) 512-1800 and is also available on the Internet at www.fms.treas.gov/c570/ c570.html.  This list identifies all states in which the surety is admitted to issue bonds—make sure California is included.

• (3) If an admitted corporate surety appears questionable, request that the surety provide the information specified in CCP Section 995.660--the original or certified copy of the document authorizing the person who executed the bond to do so; a certified copy of the Certificate of Authority of the insurer issued by the Insurance Commissioner; a certificate from the County Clerk that the Certificate of Authority is still in effect; and copies of the insurer’s most recent annual statement and quarterly statement filed with the Department of Insurance.

• (4) If personal sureties are proposed, be very cautious and make sure the individuals comply with CCP Section 995.510 and that an affidavit complying with CCP Section 995.520 is submitted.  These statutes require a substantial amount of detailed information which is too lengthy to describe in this article.  A public entity should also consult counsel before accepting any personal sureties on a payment or performance bond.

* * *

The information contained in this Newsletter should not be relied upon as legal advice or opinion regarding any specific matter.
All readers should contact professional legal counsel to obtain advice on specific projects or issues.

SPECIAL NOTICE:  The State Bar of Nevada does not certify any lawyer as a specialist or expert.
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