A solid foundation in school construction law: over the past year, a number of decisions have been issued by California and federal courts that have had an impact on school construction and the management of those projects

Leadership, May-June, 2004 by G. Christian Roux

While 2003 did not produce the same kind of stir that the 2002 case law produced with the California Supreme Court decision Amelco Electric Company v. City of Thousand Oaks, what did result were a number of decisions issued by California and federal courts that impact school construction and the management of those projects.

Contract abandonment and contractual DRBs

In 2002, the California Supreme Court ruled in Amelco Electric v. City of Thousand Oaks that a claim of contractual abandonment could not be asserted against a public agency. In 2003, in Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi, (2003) 111 Cal.App.4th 1328, a joint venture contractor argued that its subcontractor was precluded from bringing a contractual abandonment claim against it because under Amelco Electric, the general contractor was precluded from bringing such a claim against the public agency. The general contractor also argued that the subcontractor's claim was barred because he had not submitted its claim to the contractually mandated Dispute Resolution Board process.

The Court of Appeals held that a subcontractor can recover from a prime on an abandonment theory on a public works project even though the prime was precluded from passing through the claim to the public entity. The court further ruled that because the subcontractor had no right to participate in the selection of the Dispute Resolution Board panel, the panel was presumptively biased against the subcontractor and therefore the subcontractor was not required to submit its claim to the DRB.

Debarment

A case that focuses on the due process protections a contractor is entitled to in connection with an administrative debarment hearing came out of the California Court of Appeal in Southern California Underground Contractors, Inc. v. City of San Diego, (2003) 108 Cal.App.4th 533. In that case, the contractor challenged an administrative ruling by the City of San Diego that permanently debarred the contractor for engaging in "corrupt practices in connection with the administration of its contract." The contractor had been accused of a number of bad acts, including obtaining city water without a permit, falsifying permits and submitting false claims to the city.

In challenging the city's debarment, the contractor claimed that it was denied due process because at the city hearing it was denied the right to cross-examine adverse witnesses and present live testimony in support of its defense. The contractor claimed that it could not obtain a fair hearing because the city was acting as both the prosecutor and the judge, and because at the same time the hearing was held, the contractor was in litigation with the city in connection with a multi-million dollar claim.

The court rejected the contractor's arguments and upheld the city's permanent debarment. The court pointed to the fact that the contractor had been permitted to depose adverse witnesses before the hearing, was permitted to present a written defense of its case to the city council and was allowed to make an oral presentation at the debarment hearing.

The court held that "[g]iven these protections, the risk of an erroneous deprivation of [the contractor's] interests was minimal." The court also rejected the argument that the contractor could not obtain a fair hearing stating "[w]here, as here, an administrative body has a duty to act, and is the only entity capable of acting, the fact that the body may have an interest in the result does not disqualify it from acting. The rule of necessity precludes a claim of bias from the structure of the process."

False Claims Act

A number of federal decisions that applied the Federal False Claims Act are worthy of mention because the California False Claims Act closely tracks its federal counterpart. In Cook County v. United States, 538 U.S. 519 (2003), the United States Supreme Court ruled that local governments, as opposed to states, are considered to fall within the definition of "persons" who are liable under the Act.

In Ali v. Daniel, Mann, Johnson & Mendenhall, U.S. App. Lexis 746 (9th Cir. 2004), a former employee of Cal State Northridge brought a qui tam suit against DMJM for submitting false statements to FEMA to qualify CSUN for FEMA funds. DMJM argued that it was immune from liability because it was acting as an agent of CSUN, which was immune from liability. In a holding that should be heeded by consultants, the court rejected DMJM's argument and ruled that DMJM was not immune because it could not satisfy the five-part "arm of the state" test.

Finally, in United States v. Mackby, 339 F.3d 1013 (9th Cir. 2003), the Ninth Circuit reviewed a challenge to the district court's ruling that assessed in excess of $700,000 in false claims damages against the defendant for submitting false Medicare reimbursement claims. The defendant challenged the ruling on the grounds that damages awarded violated the Excess Fines Clause of the Eighth Amendment of the U.S. Constitution.

The court reviewed whether the damages "were grossly disproportional to the gravity of the defendant's offense," the standard set forth in the 1998 Supreme Court decision in United States v. Bajakajian, 524 U.S. 321. Noting that the defendant had submitted more than 8,900 false claims, some of which had been paid by the government, the court held that the award did not violate the Eighth Amendment. The court also recognized that in enacting the FCA, Congress viewed violations of the FCA to be serious offenses and that the damages awarded under the FCA promote the government's "strong interest in preventing fraud and the harm of such false claims beyond the money paid out of the treasury."