Subcontractor's Substitution is Not Necessarily Invalid

An awarding authority's consent to a subcontractor's substitution is not invalid simply because it is given after the substitution occurred and the subcontract work completed if the "reasonable objectives of the statute" have been met.

In Titan Electric Corp. v. Los Angeles Unified School District, --- Cal. Rptr. 3d ---, 2008 WL 435188 (2d Dist. Feb. 19, 2008), the Second District of the California Court of Appeals affirmed the lower court’s denial of a subcontractor’s petition challenging the Los Angeles Unified School District’s consent to substitution of the subcontractor under Public Contract Code § 4107. The subcontractor challenged the school district’s consent because by the time the administrative hearing occurred and consent was given, the prime contractor had already hired a replacement subcontractor and had completed the subcontract work. The subcontractor argued that the school district’s after-the-fact consent was not permitted under Section 4107.

While the Court of Appeals agreed that a literal reading of the statute contemplated consent before the substitution occurred, here, the consent was proper because it “complies in substance with all reasonable objectives of the statutory scheme.” Specifically, the Court of Appeals reasoned that Section 4107 was intended to serve two purposes: (1) to prevent bid peddling and bid shopping after the award of a public works contract, and (2) to provide the awarding authority (here, the school district) with the opportunity to investigate the replacement subcontractor before consent is given. Both of those objectives were met in this case.

The Court of Appeals found that the evidence presented at the administrative hearing showed that the prime contractor had not engaged in any bid shopping and the replacement subcontractor had not engaged in bid peddling. Rather, the administrative record showed that the subcontractor had effectively abandoned the project, which was a valid reason for its substitution under Section 4107. Moreover, nothing in the statutory language requires a court to invalidate a consent given after-the-fact.

Finally, the Court of Appeals rejected the subcontractor’s argument that allowing after-the-fact consents would chill wrongfully-replaced subcontractors from seeking a hearing once a replacement contractor had completed the work. A wronged subcontractor would have the incentive to pursue a hearing because if the awarding authority refused to consent to the substitution (even if the work was already completed), the wronged subcontractor would have a cause of action against the prime contractor. The awarding authority would also have an incentive to thoroughly review the substitution request – even after-the-fact – because the statute provides for severe penalties, including cancellation of the prime contract or a penalty equal to 10% of the subcontract involved.