California Court of Appeals Holds Contrator Properly Debarred from Bidding on Municipality’s Public Works Projects for Submitting a Greatly Inflated Claim

Stacy & Witbeck, Inc. v. San Francisco,
42 Cal. Rptr. 2d 805, 1995 Cal. App. LEXIS 658 (Cal. Ct. App. Jul. 17, 1995)

A municipal public utilities commission’s order barring a contractor from bidding on the municipality’s public works projects for five years was upheld by the California appellate court where the commission found that the contractor had knowingly submitted a greatly inflated delay and disruption claim.

A contractor brought suit for declaratory and injunctive relief prohibiting a municipal public utilities commission (“PUC”) from barring the contractor from bidding on public works projects for five years. The California appellate court held that the PUC’s debarment order was enforceable.

The contractor was awarded a contract for the construction of a railway crossover track system. Problems ensued, delays occurred, and the contractor submitted a claim for damages to the City. The contractor ultimately filed suit — in another action — against the City and the City counterclaimed alleging that the contractor submitted a false claim in violation of the California False Claims Act. The City’s False Claims Act claim was eventually dismissed in that action on the grounds that the alleged false claim was absolutely privileged under state law because it was submitted to the City in anticipation of litigation. That lawsuit was eventually settled.

While that action was pending, however, the San Francisco PUC brought an administrative action against the contractor to determine whether (1) the contract claim was false; (2) if so, did the contractor knowingly submit it; and (3) if so, should the contractor be declared an irresponsible bidder. The PUC ultimately found that tued for injunctive relief. The trial court granted the contractor’s request, but the appellate court reversed, finding that the PUC’s action was valid and was not barred by the “litigation privilege.”

The PUC found that the contractor violated the implied covenant of good faith and fair dealing which was a part of the contract’s claim procedures. Although the contractor argued that the PUC was not empowered to “create a policy” within the ordinance it was enforcing, the appellate court found that the PUC’s interpretation was consistent with the policy of protecting the public when it is engaged in business with building contractors.
The contractor also argued that it submitted its claim in anticipation of litigation and, therefore, the claim was absolutely privileged under state law. The contractor further argued that because the communication of the claim was protected by the “litigation privilege,” it could not serve as the basis for the administrative action conducted by the PUC. The PUC, however, found that the claim was submitted to the City as part of the normal claims procedure — and not in anticipation of litigation — and, therefore, the “litigation privilege” did not apply. The court found that the submission of the claim served two purposes: to comply with the contract claims procedures and to detail the damages for the alleged breaches by the City. As a result, the court found that the “litigation privilege” would not protect the communication of the claim in this context.

The court also rejected the contractor’s arguments that the appeal was void because the ordinance had been repealed and revised, that the ordinance was unconstitutional, that the hearing was unfair and bias, and that the ordinance and the PUC’s action was preempted by state law.

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