Kenny/Shea/Traylor/Frontier-Kemper v. City of Los Angeles

Filed 1/15/10 Kenny/Shea/Traylor/Frontier-Kemper v. City of Los Angeles CA2/5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FIVE

APPEAL from a judgment of the Superior Court of Los Angeles County, Robert L. Hess, Judge. Affirmed.

Monteleone & McCrory, Patrick J. Duffy and William R. Baerg for Plaintiff and Appellant.

Carmen A. Trutanich, City Attorney, Laurie Rittenberg, Assistant City Attorney, and Adena M. Hadar, Deputy City Attorney, for Defendant and Respondent.

______________________________________

This appeal arises out of a multi-million dollar public works project in which defendant and respondent City of Los Angeles Department of Public Works (City) accepted a bid from plaintiff and appellant construction firm Kenny/Shea/Traylor/Frontier-Kemper (Contractor) to serve as prime contractor for the building of an 11-mile sewer tunnel. Although Contractor completed the project on time and under budget, the City withheld $200,000 from the total payment of $257,738,260.52 as a penalty for failing to seek and obtain prior approval for what the parties contract termed the illegal substitution of three of the entities listed on Contractors bid proposal as subcontractors. Contractor sued City, alleging the penalty assessment was in breach of the construction contract and filed a motion for summary adjudication to establish that the contracts penalty provision did not apply to Contractors actions, which was denied. City responded with a summary judgment motion, which the trial court granted, finding no material issues of fact as to the propriety of Citys penalty assessment under the contract terms governing Contractors failure to follow the requirements for subcontractor substitution.

In his timely appeal, Contractor argues the summary judgment was improperly granted because, among other things, the contracts penalty provision did not apply to the challenged conductfailing to use the three entities services to the full extent listed in the bidbecause those entities did not fall within the contracts definition of subcontractor. We affirm.

STATEMENT OF FACTS^[1]

The parties construction contract consisted of a number of specified documents, including the four-volume bid proposal prepared by City in September 2000. Volume 1, part II of the proposal set forth the bidding requirements for Citys subcontracting outreach program for the use of minority owned business enterprises (MBEs) and women owned business enterprises (WBEs), whereby bidders for the project were encouraged to make a good faith effort to use MBE/WBE firms whenever there is a need to subcontract portions of the work. City would award the project contract to the lowest responsive, responsible bidder whose proposal complies with all requirements, including those under the subcontracting outreach program. City targeted levels of MBE and WBE participation at ten percent and two percent, respectively.

Failure to comply with those requirements would invalidate the bid. Work done by the prime contractor itself would not be credited for MBE/WBE participation; however, City would credit second-tier and third-tier subcontractors (also known as sub-subcontractors) if the bid clearly identified the higher level subcontractor for each lower tiered subcontractor listed in the bid proposal. For that purpose, the proposal included forms entitled List of Subcontractors and List of Subcontractors (2nd and 3rd Tiers Participation Recognition), upon which the bidder would list all subcontractors and identify them as MBEs, WBEs, or other business enterprises (OBEs).^[2]

Section F of part II of the proposal referred to subcontractor substitution: In addition to the requirements set forth in the provisions pertaining to the listing of subcontractors the following shall apply for the purpose of this program: [] 1. Substitution During Construction: The contract award requires that the level of all subcontractor participation shall be maintained throughout the duration of the contract. To this extent, any unapproved reduction in the bid-listed subcontract amount will be considered an illegal substitution. The prime contractor was required to make a written request to City for approval of all substitutions of bid-listed subcontractors. In such circumstances, this same contractual provision imposed on the prime contractor an obligation to make a good faith effort to replace the bid-listed subcontractor with a subcontractor having the same certification status.

Volume 2 of the proposal comprised the General Conditions and General Requirements for the project. Article 34, which was entitled, Subcontractors and Sub-Subcontractors, referenced the prime contractors obligation to comply with the mandatory subcontracting minimum requirements and the subcontractor listing requirements in volume 1 of the proposal, and provided: The CONTRACTOR shall be responsible for all acts of all Subcontractors at all tiers. All interests of the CITY in Work of subcontracts shall be coordinated through the CONTRACTOR. The article continued: The CONTRACTOR may not substitute any person as Subcontractor in place of the Subcontractor listed in the original bid or offer except upon approval of the BOARD, upon a finding by the BOARD that the prime contractor demonstrated one of the enumerated bases for substitution. Next followed a penalty provision: A CONTRACTOR violating any provision of this Article shall be deemed in violation of the Contract and the BOARD may at its discretion either cancel or terminate the contract or Assess the CONTRACTOR a penalty of not more than ten percent (10%) of the amount of the subcontract involved. The article provided the prime contractor with the right to a public hearing on five days notice in connection with any proceedings under this Article.

In its bid, Contractor included Pinnacle Petroleum in the List of Subcontractors as a WBE providing supplemental delivery of fuel, oil, and other materials in the amount of $2.6 million. In the List of Subcontractors (2nd and 3rd Tiers Participation Recognition), Contractor listed Valverde Construction, Inc.,^[3]as an MBE providing services of $1,978,000 to install piping for subcontractor Ameron International, and Lowbed and Pipe Hauling Services, Inc., as providing services for trucking pipe and miscellaneous items in the amount of $2,646,000, also for subcontractor Ameron.

On January 30, 2001, City accepted Contractors $240,350,000 bid proposal for the project. The bid satisfied Citys MBE and WBE participation levels of ten percent and two percent. During the projects construction phase, there were numerous change orders from City, which increased the total contract amount to $257,738,260.52. Contractor completed the project on November 17, 2004, ahead of schedule. Contractors final subcontracting report, submitted within 15 days of the final inspection as required by the contract, showed reductions in the contract amounts to a number of the listed subcontractors: The amount paid to Pinnacle was $570,112.69, instead of the $2.6 million listed in the bid; Valverde as a second-tier subcontractor for Ameron was paid $549,445, instead of the $1,978,000 listed in the bid; and Lowbed was paid $2,141,277, instead of the $2,646,000 listed in the bid.

The final report contained an attachment in which Contractor explained the reasons for the reduced payments to each of those entities. As corroborated by a letter from Pinnacle, Contractor explained that Pinnacle was unable to supply the anticipated amount of petroleum products because of unforeseen changes affecting its ability to deliver the required petroleum products. Pinnacle did not object to its reduced participation, but believed the reduction was equitable. As to Lowbed, it was explained that the original estimate for pipe-hauling services was based on the assumption that nine-axel trailers were required. When the pipe was manufactured, however, Lowbed determined that less expensive five-axel trailers could be used instead, which accounted for the reduced cost. Lowbed did not object; it considered it a very successful project. The cost savings were passed on to subcontractor Ameron. With regard to Valverdes participation as a second-tier subcontractor for Ameron, Contractor explained that due to various change orders by City, Valverde was unable to provide the resources necessary to complete the project in a timely manner. Contractor itself provided the shortfall in required personnel.

On February 10, 2005, City notified Contractor that it was considering whether to withhold $585,906.04 from payment to Contractor as a ten percent penalty for illegal reduction/and or substitution of various bid-listed subcontractors, including Pinnacle, Valverde, and Lowbed. City advised Contractor to submit any additional information that might bear on Citys penalty decision. In response, Contractor referred to the explanations offered in its final report and asserted that its conduct did not qualify as the kind of substitutions that required City approval. Contractor also explained that it exceeded Citys MBE/WBE participation goals even after the increase in total contract amount.

Representatives of Contractor appeared at a public hearing before the Board of Public Works on June 20, 2007, to consider Contractors challenge to the proposed penalty assessment.^[4] At the hearing, the assistant city attorney, representing Citys Office Contract Compliance, argued the penalty was not intended to punish Contractor for failing to satisfy MBE/WBE participation goals, but arose out of Contractors failure to seek prior approval for the reduced utilization of bid-listed subcontractors, which amounted to an improper subcontractor substitution under the Public Contract Code, as expressed in the terms of the contract. Upon questioning from the Board, the assistant city attorney represented that if Contractor had made a written request, the request would have almost certainly been granted. He was not aware of any reason for denying any such request. However, the assistant city attorney added a caveat with regard to the under-utilization of Pinnacle and Lowbed, where the lower level of participation resulted in cost savings. In that instance, prior notification would have given City the opportunity to adjust the contract to take those savings into account by issuing a change order that conditioned the under-utilization on a reduction on the contract price.

The Boards decision to assess a $200,000 penalty was a compromise. When the motion to impose the entire ten percent penalty recommended by the Office Contract Compliance did not receive a second vote, the Board agreed on the counter-motion to reduce the penalty to $200,000, with the recognition that this was a successful project and Contactor had done an extraordinary job.

DISCUSSION

Contractor attacks the trial court ruling on the ground that the contracts terms did not penalize its conduct in under-utilizing Pinnacle, Valverde, and Lowbed because the contract defined the term subcontractor in accordance with the Public Contract Code, which confers subcontractor status only on contractors that contract directly with the prime contractor.^[5] Because Contractor had no direct contractual relationship with Valverde and Lowbed, and because Pinnacle was not a contractor but a supplier of materials, Contractor argues its actions were not governed by the contractual penalty provision applicable to improper subcontractor substitutions. As we explain, however, the contracts penalty provision for improper subcontractor substitutions was not keyed to the statutory definition of subcontractor, but made expressly applicable to subcontractors and suppliers at all tiers that were listed in the bid.

We review de novo a superior courts summary judgment order in a dispute over the interpretation of a contract, applying settled rules governing contractual interpretation. (See, e.g., Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390 [interpretation of insurance policy] (Powerine Oil Co., Inc.).) The standard of review is well settled. As our Supreme Court instructs, the party moving for summary judgment always bears the burden of persuasion that there is no triable issue of material fact and that he is entitled to judgment as a matter of law. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850 (Aguilar).) A triable issue of material fact exists if, and only if, the evidence would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof. (Ibid.) (AmerUS Life Ins. Co. v. Bank of America, N.A. (2006) 143 Cal.App.4th 631, 638.)

Civil Code section 1635 provides that, absent a statutory exception, [a]ll contracts, whether public or private, are to be interpreted by the same rules. (See Tonkin Construction Co. v. County of Humboldt (1987) 188 Cal.App.3d 828, 831-832 [A contract between a governmental body and a private party is to be construed by the same rules which apply to the construction of contracts between private persons [citation], and the public entity is bound in the same manner as an individual].) When interpreting contracts, our fundamental goal is to give effect to the parties mutual intention, which is to be inferred solely from the contracts written provisions, if possible. That is, where the contractual language is clear and explicit, it will govern. (Powerine Oil Co., Inc., supra, 37 Cal.4th at p. 390.) A contractual provision is considered ambiguous when it is susceptible of two reasonable constructions. However, a provision will not be deemed ambiguous merely because it is not a specially defined term. Nor will an ambiguity arise from a mere disagreement concerning a phrases meaning, or the fact that a word or phrase isolated from its context is susceptible of more than one meaning. (Id. at pp. 390-391.) Instead, contractual terms must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract. [Citation.] If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist (i.e., the insurer) in order to protect the insureds reasonable expectation of coverage. [Citations.] [Citation.] (Id. at p. 391.)

Applying those principles, we conclude that a fair reading of the contract as a whole supports the trial courts finding that the underlying contract provided City with discretion to impose a ten percent penalty upon Contractor for failing to seek permission for its reduced use of subcontractors listed in the bid.

Volume 1 of the proposal made it clear that compliance with Citys subcontracting outreach program was mandatory, that work done by the prime contractor itself would not be credited for MBE/WBE participation, and that City would credit second-tier and third-tier subcontractors if they were properly listed on the proposals forms. In order to satisfy the MBE/WBE requirements, Contractor listed Pinnacle, Valverde, and Lowbed as subcontractors. Another provision within volume 1 applied directly to Contractors obligations concerning substitution of subcontractors during construction. It required Contractor to maintain the level of all subcontractor participation and specified that any unapproved reduction in the bid-listed subcontract amount will be considered an illegal substitution. The obligation to make a written request for City approval was made applicable to all substitutions of bid-listed subcontractors. Thus, the contract plainly informed Contractor that it was obligated to seek prior approval for under-utilization of entities listed as subcontractors at all tiers.

Contractor argues the application of those provisions to material suppliers and sub-subcontractors was rendered ambiguous because volume 1 also contained a definitions section that reflected a narrower definition of a subcontractor, consistent with section 4113 of the Public Contract Code.^[6] We disagree. Although volume 1 generally defined a subcontractor as an entity with a direct contractual with the prime contractor, the proposal clarified that for purposes of complying with the subcontracting outreach program, Contractors obligations extended more broadly: The prime contractor was required to list as subcontractors all MBE and WBE sub-subcontractors along with entities furnishing labor, materials, and equipment. An illegal substitution was defined to include the failure to utilize a bid-listed subcontractor at the full amount stated in the bid, unless City approved Contractors prior written request.

Any reasonable interpretation in favor of such an ambiguity is further undercut by the provisions in volume 2 on which City relied to impose the $200,000 penalty. As quoted supra, the penalty provision was contained in a section designated Subcontractors and Sub-Subcontractors, and which clearly referenced the prime contractors obligation to comply with the mandatory subcontracting minimum requirements and the subcontractor listing requirements in volume 1. In so doing, the contract made Contractor responsible for all acts of all Subcontractors at all tiers [italics added]. Further, that same provision enjoined Contractor from substituting any person as Subcontractor in place of the Subcontractor listed in the original bid or offer except upon approval of City. The penalty for violating any provision of this Article included Citys discretion to imposed a penalty of not more than ten percent of the amount of the subcontract involved. As such, the meaning is plain: Failure to comply with the subcontractor substitution requirements in volume 1 would subject Contractor to potential penalties under this provision.

Again, the fact that the contract documents also included references to the Public Contract Code in general and to section 4113s restrictive subcontractor definition in particular does not create an ambiguity in the application of this penalty provision. By virtue of the facts that the provision was plainly meant to enforce the subcontractor listing provisions in volume 1 and that it specified that Contractors obligations in that regard applied to the listed subcontractors at all tiers, application of the restrictive definition would render the entire section incoherent. It has long been understood that when a general and [a] particular provision are inconsistent, the latter is paramount to the former. So a particular intent will control a general one that is inconsistent with it. (Code Civ. Proc., 1859.) Accordingly, applying the recognized canons of contractual interpretation and reading the relevant contractual terms in the context of the instrument as a whole, the potentially conflicting references to subcontractor do not support a reasonable construction whereby the penalty provision applied only to the substitution of subcontractors having a direct contractual relationship with the prime contractor. (See Powerine Oil Co., Inc., supra, 37 Cal.4th at pp. 390-391.)

We need not decide whether Contractor is correct that City could not impose the $200,000 penalty for improper subcontractor substitution under the Public Contract Code. Section 4110, which authorizes a ten percent penalty against a prime contractor that violates the substitution guidelines set forth in section 4107 of the Public Contract Code, is subject to section 4113s restrictive definition of subcontractor. However, that argument is beside the point because City imposed the penalty under the terms of the parties contract, not independently under section 4107.^[7]

We therefore turn to Contractors arguments to the effect that City could not legally impose penalties for improper subcontractor substitution except pursuant to Public Contract Code section 4110. First, Contractor asserts the contracts penalty provision must be deemed invalid under Civil Code section 1670 because the contract provision effectively made City the sole arbiter of the underlying contractual dispute.^[8] As City points out, however, Contactor did not make that argument in the trial court. Because it is raised for the first time on appeal, the argument is forfeited. (Sea & Sage Audubon Society, Inc. v. Planning Com. (1983) 34 Cal.3d 412, 417; In re Marriage of Eben-King & King (2000) 80 Cal.App.4th 92, 117; Kolani v. Gluska (1998) 64 Cal.App.4th 402, 412 [failure to raise issue or argument in the trial court results in forfeiture on appeal].) In any event, we fail to understand how that Civil Code section applies to this dispute. Not only are liquidated damages provisions generally valid under these circumstances (see Civ. Code, 1671), but the fact that Contractor was entitled to mount a legal challenge to the penaltys imposition belies the assertion that it arose out of an unreviewable, unilateral decision by City.

Contractor also contends City was proscribed from imposing contractual obligations beyond those set forth in the Public Contract Code generally and section 4110 in particular. No persuasive authority is adduced in support of that contention. In contrast, in MCM Construction, Inc. v. City and County of San Francisco (1998) 66 Cal.App.4th 359 (MCM Construction, Inc.), the court rejected the argument that the city could not enforce a [public bidding] requirement above and beyond those of the [Subletting and Subcontracting Fair Practices Act (Pub. Contract Code, 4100 et seq.)]. (MCM Construction, Inc., supra, at p. 370.) Indeed, the court was convinced the [c]ity can enforce its own more restrictive bid requirements. (Ibid.) As a charter city, as that status is recognized in the California Constitution (Cal. Const., art. XI, 2, 3), the [c]ity is empowered by the Constitution to govern its own municipal affairs to the extent the field is not preempted by state law. (MCM Construction, Inc., supra, at p. 372.) Contractor makes no attempt to establish the elements of preemption, but merely makes the circular assertion that a contractual provision imposing obligations beyond those contained in the Subletting and Subcontracting Fair Practices Act is impermissible.

Contractors argument that Citys evidence was insufficient to support the judgment is without merit. The essential facts consisted of the parties contract documents and the undisputed facts that Pinnacle, Valverde, and Lowbed received compensation for their performance on the project below that of the levels listed in Contractors bid. On appeal, Contractor fails to identify any admissible evidence to establish a triable issue of material fact bearing on the issue of Citys right to enforce the relevant contractual penalty provision.

From this analysis, it follows that the judgment must be affirmed. There is reason to appreciate why Contractor feels aggrieved by the penalty. It is undisputed that Contractors performance on a massive and complex public works project was extraordinary. Not only did it complete the project within the budget and ahead of time, and despite the failure to seek approval for the three challenged subcontractor substitutions, there is no reason to think City would have withheld its approval. There is nothing in the appellate record that would lead to the conclusion those technical failures were motivated by anything approaching bad faith or involved bid shopping and bid peddling, the practices that the Subletting and Subcontracting Fair Practices Act was designed to prevent. (Pub. Contract Code, 4101.) Our holding should not be understood to mean anything but that City had the power to impose the penalty under the contract.

DISPOSITION

The judgment is affirmed. The parties are to bear their own costs on appeal.

KRIEGLER, J.

We concur:

TURNER, P. J.

ARMSTRONG, J.

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^[1] The trial court sustained Citys objections to the evidence submitted by Contractor in its opposition to the summary judgment motion and in support of its summary adjudication motion. Contractor does not challenge those evidentiary rulings on appeal and, therefore, forfeits any issues concerning the correctness of the trial courts evidentiary rulings. (E.g., Lopez v. Baca (2002) 98 Cal.App.4th 1008, 1014-1015; Code Civ. Proc., 437c, subd. (b)(5).) We refer only to facts that were not substantially contradicted and evidence found admissible below.

^[2] The definitions section in that part of the proposal defined MBE and WBE qualification. It also defined a Subcontract as an agreement between the prime contractor and an entity for the performance of work for which the prime contractor was obligated to perform. A Subcontractor was defined as an entity having a direct contract with the contractor for the performance of a part of the work which is proposed to be constructed . . . under the contract . . . including the furnishing of all labor, materials, or equipment.

^[3] Valverde was separately listed as an MBE subcontractor providing utility and miscellaneous work in the amount of $5,942,000.

^[4] Apparently, there was a prior hearing at which the Board assessed a penalty on Contractor. In response to Contractors complaint that it did not attend because it was not given notice, City agreed to schedule a new date for a public hearing.

^[5] Section 4113 of the Public Contract Code provides: As used in this chapter, the word subcontractor shall mean a contractor, within the meaning of the provisions of Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code, who contracts directly with the prime contractor. [] Prime contractor shall mean the contractor who contracts directly with the awarding authority.

^[6] The definitions sections referred to a Subcontract as an agreement between the prime contractor and an entity for the performance of work for which the prime contractor was obligated to perform, and defined Subcontractor as an entity having a direct contract with the contractor for the performance of a part of the work which is proposed to be constructed . . . under the contract . . . including the furnishing of all labor, materials, or equipment.

^[7] Accordingly, we do not reach Contractors related argument that it was improper to impose the penalty because the under-utilization of Valverde, Pinnacle, and Lowbed was attributable to Citys change orders, and therefore authorized under section 4107, subdivision (c) of the Public Contract Code. Moreover, the trial court granted Citys objections to the evidentiary support on which Contractor seeks to rely on appeal for that contention, and Contractor has failed to challenge those rulings on appeal. (E.g., Lopez v. Baca, supra, 98 Cal.App.4th at pp. 1014-1015; Code Civ. Proc.,  437c, subd. (b)(5).)

^[8] Any dispute arising from a construction contract with a public agency, which contract contains a provision that one party to the contract or one partys agent or employee shall decide any disputes arising under that contract, shall be resolved by submitting the dispute to independent arbitration, if mutually agreeable, otherwise by litigation in a court of competent jurisdiction. (Civ. Code, 1670.)