SUBCONTRACTS AND SUBCONTRACTORS
PART A. General Background and Contractual Framework of Subcontractors and Subcontracting
§ 35.01 Scope of Chapter
This chapter shall examine the use of subcontracts and subcontractors in the development and construction process in California. This chapter is divided into three parts. It will begin by explaining the traditional role and use of trade subcontractors in performing and executing the construction work undertaken in the development process as well as the principal industry forms and their use in the industry for the purposes of subcontracting. After some discussion and exploration of significant contract provisions inherent in most subcontract forms, this chapter will then examine the specifics of the legal relationships between the players to the development/construction process; subcontractors, owners, general contractors, lenders and design professionals.
In this chapter particular focus will be placed on how the statutory scheme and case law will treat the various parties to the development/construction process as it relates to specific disputes in which the parties may find themselves placed. Particular attention has been paid to organizing this chapter to discuss the legal treatment given to the subcontracting process, depending on whether the subcontractor is contracting with the developer, owner, general contractor, or others.
§ 35.02 Subcontractor's Role in the Construction and Development Process
[1]--Traditional Roles
The construction of improvements to real property has traditionally been performed at the trade level by subcontractors. Although owners of construction/development projects have almost always employed professionals such as architects/engineers, construction managers, and, traditionally, utilized the services of general contractors, the actual work has been performed at the trade level primarily by subcontractors. +[ See 1, STEIN CONSTRUCTION LAW 3.01 [1], [b],[iii] (Matthew Bender 1991)]+
The use and employment of trade subcontractors for the undertaking of the actual construction work is undoubtedly an outcropping of necessity. As construction methods and techniques/projects became more and more complex, the persons performing the hands-on construction work were required to possess more and more expertise and greater levels of sophistication. To meet these demands, contractors became more and more specialized forming not only specific trades within the construction industry but even sub-specialties within each trade.
In order to maintain order and cohesion in the development\construction process which often requires a dozen or more such trade subcontractors, it has become imperative that the legal instruments and relationships between the parties be of equal sophistication. What follows is a detailed discussion of the current instruments and legal relationships that have evolved from the use of subcontracting in the development/construction process.
[2]--Trade Contractor and Suppliers Compared
It is important to distinguish between subcontractors who undertake the actual performance of the work already contracted to be performed by another and suppliers who, by definition or design, undertake no work but merely provide materials to be incorporated into the work by the trade subcontractors. Unlike true subcontractors, material suppliers do not require licensing since they generally do not significantly provide jobsite services. +[ Bus.& Prof. Code Section 7052]+ Whether a particular entity will be considered a subcontractor or supplier will depend for the most part upon the nature of the circumstances. +[Thisen v. County of Los Angeles (1960) 54 Cal.2d 170, 352 P.2d 529, 5 Cal. Rptr. 161]+ This subject as it relates to Mechanics Liens is treated more fully under Chapter 63. As will be discussed in great detail below, owners and general contractors may, from time-to-time, contract not only with trade subcontractors but also with suppliers of materials for direct incorporation into the work by either the general contractor's forces or other trade subcontractors.
In the traditional development/construction setting, most often the materials to be incorporated into the work are purchased by the particular subcontractor performing the particular trade for which the materials are needed. Normally this allows the subcontractor who probably purchases large quantities of materials for use on other projects to take advantage of price savings resulting from the purchase of large annual quantities.
However, in addition to the traditional setting, there may be instances where the owner or general contractor has chosen to purchase directly itself the materials to be installed by a subcontractor. From a practical matter, there may be a number of reasons why an owner or general contractor may choose to contract directly with the material supplier rather than rely upon a subcontractor to procure the materials that are going to be used and consumed in the development project. For example, an owner or general contractor may decide to contract directly with a material supplier if the owner or general contractor has an established account with that supplier and is able to obtain preferred rates. Another reason may be where, because of the particular schedule involved in the construction project, the owner or general contractor is better equipped for handling the materials that are necessary for the trade subcontractor to meet the needed delivery schedule for the work.+[For a more detailed discussion of the importance and significance of scheduling see § 35.07 below.]+ No matter what the reason for any particular entity's decision to undertake the contract with the material suppliers, it should be pointed out that it is unlawful to do so for the purpose of obtaining money back from the supplier as a "kickback". +[Cal. Pen. Code Section 532e]+
However, just because an owner or general contractor contracts directly with a supplier, does not mean that the supplier is a subcontractor. Instead, the material supplier who contracts directly with the owner or general contractor and who performs no services toward installation of its materials remains merely a supplier and will be treated as such under most any applicable legal scrutiny. +[Thisen v. County of Los Angeles (1960) 54 Cal.2d 170, 352 P.2d 529, 5 Cal. Rptr. 161]+ As will be discussed later, the industry has developed distinct legal forms of contracts for use to purchase materials rather than subcontracting services.+[See Section 35.03 [3] Discussion of Industry Forms and Contract Terms]+
[3]--Subcontractors Modern Role as Contractor or Design- Build
[a]--As a Contractor
As discussed above, traditionally trade subcontractors have been utilized as the primary means of subcontracting out the work to be completed in the development\construction process. +[See 1, STEIN CONSTRUCTION LAW 3.01 [1], [b],[iii] (Matthew Bender 1991)]+ This traditional approach, in modern times, still accounts for the substantial majority of construction development projects in California. Under this role the subcontractor puts into place the work as called for in the plans and specifications that are provided it from the design professionals employed by the owner. For example, an electrical trade subcontractor is usually given a set of electrical plans and technical specifications designed by an electrical engineer and reviewed by the project architect. In other words, it is the design professional's duty to design the work to be performed +[SEE 1, STEIN CONSTRUCTION LAW, 5.04 (Matthew Bender 1991)]+ and the trade subcontractor's duty to construct it as designed +[Cf. Kurland v. United Pacific Insurance Company (1967) 251 Cal.App.2d 112, 59 Cal.Rptr. 258 (contractor not liable for defective system where it followed the plans and specifications given by the designer)]+.
[b]--Subcontractor As a Design-Build Contractor
In modern times, in addition to the use of trade subcontractors in the traditional manner, owners and contractors have also called upon subcontractors to facilitate additional functions in the development process. One such function includes the use of subcontractors in a design-build capacity.+[See Wyner v. Buxton (1979) 97 Cal. App. 3d 166, 158 Cal. Rptr. 587.]+ Subcontractors who are asked to design parts of their work are to some degree taking on some of the duties previously held by the architects and engineers which therefore limits the liability protections previously afforded them when the work they install does not operate fully due to design errors. +[See 1, STEIN CONSTRUCTION LAW 5.01 (Matthew Bender 1991)]+ Although the details of the design build process are too complicated for a complete treatment here, design-build issues related to subcontractors are explored in Sections 35.04 [2] and 35.06 [4] only as it relates to licensing issues and contracting terms.
§ 35.03 Methods and Parties to Subcontracting
[1]--General Background
There are many methods and variations of contracting for the services of trade subcontractors to perform the actual construction work undertaken in a development/construction project. +[See 1 STEIN CONSTRUCTION LAW 3.01 (Matthew Bender 1991)]+ In Part B below, we will discuss the issues concerning contracting and how the industry has responded to disputes between the trade subcontractor and the general contractor. In Part C below, we then discuss the legal issues surrounding the relationship between the subcontractor or the owner or other third parties under both a scenario where the owner has contracted directly with the subcontractor as well as general common law analysis of the legal relationship between a subcontractor and owner or other third party where they are not in direct privity.
No matter who has been selected to contract with the trade subcontractors, as a result of the substantial majority of the work being undertaken by trade subcontractors, the construction industry has developed a number of approaches in structuring the legal relationship between the parties to a construction project.
Generally speaking, a typical construction project, if there is such a thing, would include a hierarchy of players to the development process as follows:
Owner Architect/Engineer
General Contractor
Subcontractor (various trades)
Sub-subcontractor or supplier
Supplier
Of course, as discussed above there may be a variety of variations on this organizational framework.
In most instances the parties will execute express contracts or legal instruments between each of the various levels of these players. Even where there is an absence of an express agreement however, the law will often imply certain rights and responsibilities between these players and these implications are discussed throughout this chapter.+[See e.g.Higgins v. Desert Braemer, Inc. (1963) 219 cal.App. 2d 744, 33 Cal.Rptr. 527 (recovery for reasonable value of work and labor even though no formal written contract)]+
[2]--Legal Instruments of Subcontracting
In order to formalize the legal relationships between the above parties, the players in most instances will utilize a formal subcontract form under which the terms and conditions of the contractors are delineated in great detail either expressly or by reference to other documents. Since subcontracting has probably been used as far back as the construction of the Great Egyptian Pyramids, there has developed a variety of industry forms which have addressed the terms and conditions of a subcontractors performance. Of course, since some industry associations are stronger than others a particular forms treatment of any specific issue may be shaded by the perspective of the specific industry group which has developed the form being utilized. The details of these forms, the prospective they come from, and the treatment of particular noteworthy issues by express terms and conditions are discussed in subsection [3] below.
To the extent the owner or general contractor is contracting directly with a material supplier, it is likely that a purchase order form will be utilized rather than a subcontracting form. A fair example of a material supplier purchase order form can be found in the Associated General Contractor of California, forms AGCC-6 and AGCC-7 (See Appendix following) . Many contractors in California have standardized their subcontracting forms to apply to both subcontractors and material suppliers but a supplier should be wary of executing any such standardized form since it will undoubtedly contain numerous superfluous provisions which will only complicate any disputes. For the most part, suppliers contracts will be subjected to the California Commercial Code which controls claims and disputes among sellers and buyers to a large degree.+[See Cal.Commercial Code Section 9310]+ Again, the typical industry forms relating to both subcontractors and suppliers are discussed in greater detail below.
From a very basic level, the typical essential legal instruments of subcontracting include, but are not limited to, the following:
1. A contract form (or purchase order for suppliers) to guide the particular terms and conditions under which the subcontracting work (or materials) are to be performed and which reference the scope of work to be completed;
2. Change order forms to memorialize any additions or deletions of work that were originally not contemplated under the scope of work from which the subcontractors price quote is derived;
3. Submittal forms and clarification documents which transmit questions concerning the project and planned or suggested methods of construction to be employed by the subcontractor; and
4. Other contract documents such as plans, technical specifications or general conditions that are typically incorporated by reference into the agreement.
Each of these basic legal instruments and their interrelationship to each other as well as the potential issues and disputes which may arise on a project are discussed in the following sections.
§ 35.04 Discussion of Industry Forms and Contract Terms
As mentioned above, the various trade and professional organizations in the construction industry have developed a variety of standardized contract forms for use in the construction industry. Because these forms will be influenced by the particular industry which created the form it is important to be familiar with the types of industry forms and how they will be interpreted for or against the particular players to the subcontracting process. What follows is a detailed discussion of each of these industry forms as well as particularly noteworthy provisions and their legal treatment.
[1]--American Institute of Architects (AIA)
Probably the oldest and best known industry form for subcontracting is the American Institute of Architect's Standard Subcontract (AIA-Form A401).+[See Appendix 1 to this Chapter for a complete copy of this form.]+
To begin with it is important to note that the AIA forms were drafted by design professionals such as architects and engineers. For this reason it is suggested that the user must question whether the forms are drafted such that they may in some ways favor the position of the architect and its primary client the owner. Although the AIA 401 subcontract form is drafted from the perspective of the architect and its owner, it may be less offensive to the average subcontractor than the forms developed by the associations made up of primarily general contractors such as the AGCC. However since both associations have fairly recently updated their respective forms (presumably to make them more fairly drafted for the entire industry), this conclusion remains to be seen. With a little work both forms can relatively easily be customized to meet each parties reasonable self interests. It cannot be over emphasized and almost every form contract drafter recommends proper counsel be sought before using any particular form.
Because the AIA forms are the best known, their Standard form Subcontract has been widely used as a contracting form for subcontractors. In looking through the A-401, it is important to note that as with most of the AIA forms in addition to the Standard Form Subcontract one must also look to the General Conditions that are usually incorporated into the standard form.+[See Appendix for a complete copy of the AIA General Conditions which are set forth in AIA DOCUMENT 201]+ The General Conditions A-201 document substantially describes the in-depth legal relations and consequences between the Owner, General contractor and Subcontractor for purposes of subcontracting under an AIA form subcontract.
Beyond the A-201 general conditions the most significant clauses of the AIA 401 form are as follows:
[a]--Incorporation by Reference clause-
Incorporation by reference provisions are designed to enlarge the standard provisions of a contract form. In a subcontract setting these usually take the form of incorporating into the subcontract terms the plans, specifications and other documents that are unique to the project and are infeasible to retype into each new subcontract form. Under California law, when terms of a contract are referred to by incorporation by reference, the terms of the contract and those that are referred to must be considered as one instrument.+[Hollbrook v. Fazio (1948) 84 Cal.App 2d 700, 191 P.2d 123]+ There is no legal limitation to the ability to enlarge upon contractual terms through incorporation by reference unless the referred to terms are not available or known by the contractee.+[Richards v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1976) 64 Cal.App 3d 899, 135 Cal.Rptr. 26]+
The incorporation by reference provision of the A-401 subcontract form can be found in Article 1.1 of the A-401 document. This article provides:
ARTICLE 1. THE SUBCONTRACT DOCUMENTS
1.1 The Subcontract Documents consist of (1) this Agreement; (2) the Prime Contract, consisting of the Agreement between the Owner and Contractor and the other Contract Documents enumerated therein, including Conditions of the Contract (General, Supplementary, and other Conditions), Drawings, Specifications, Addenda issued prior to execution of the Agreement between the Owner and Contractor, and Modifications issued subsequent to the execution of the Agreement between the Owner and Contractor, whether before or after the execution of this Agreement, and other Contract Documents, if any, listed in the Owner-Contractor Agreement; (3) other documents listed in Article 16 of this Agreement; and (4) Modifications to this Subcontract issued after execution of this Agreement. These form the Subcontract, and are fully a part of the Subcontract as if attached to this Agreement or repeated herein.+[AIA Form A-401 reprinted with permission]+
A similar provision for all sub-subcontracts that the subcontractor enters into with others is also required of the subcontractor under Article 2.2.
[b]--Flow Down Provisions
This provision is closely related to the incorporation by reference provision. Although the incorporation by reference provision enlarges the standard subcontract terms to include the same terms as that of the general contract, the "flow-down" provision provides the vehicle for interpreting how the court is to interpret the provisions that are incorporated by reference.+[1, STEIN Construction Law, 5.02[4],[b] (1991 Mathew Bender)]+ In the AIA A-401 form this provision is found in Article 2.1 as follows:
" . . . to the extent that provisions of the Prime Contract apply to the Work of the Subcontractor, the Contractor shall assume toward the Subcontractor all obligations and responsibilities that the Owner, under the Prime Contract, assumes toward the Contractor, and the Subcontractor shall assume toward the Contractor all obligations and responsibilities which the Contractor, under the Prime Contract, assumes toward the Owner and the Architect. The Contractor shall have the benefit of all rights, remedies, and redress against the Subcontractor which the Owner, under the Prime Contract, has against the Contractor, and the Subcontractor shall have the benefit of all rights, remedies, and redress against the Contractor which the Contractor, under the Prime Contract, has against the Owner, insofar as applicable to this Subcontract. Where a provision of the Prime Contract is inconsistent with a provision of this Agreement, this Agreement shall govern.+[AIA Form A-401 reprinted with permission]+
From the general contractors point of view, it is essential that it be bound to the owner to no greater extent than its subcontractors are bound to it. This is because in most cases the contractor has not added any dollars in its bid to the owner above that which was bid to it by the subcontractor. If the general contractor is forced to do something by the owner based upon a provision in the general contract it is essential to the general contractor that the subcontractor be bound in a similar fashion. Otherwise the general contractor will be forced to spend time and money that it did not put in its bid to the owner.
From the subcontractors point of view, it is reasonable to be expected to perform all of the requirements that it based its bid upon so the essential issue for the subcontractor is that such provisions are clearly spelled out in the contract and that the subcontract not contain, either directly or indirectly by incorporation, any additional terms that could empower an unscrupulous general contractor or owner to use such flow-down provisions unreasonably. One such provision which does not exist in the AIA A-401 Subcontract is a "jail house" clause where the contract provides for the contractor (and therefore subcontractor) to perform all work directed by the owner to be performed even if extra, and that the contractor waives its right to stop work or rescind and limits its rights in a dispute to damages after full performance. These type of provisions are enforced under California law.+[B.C. Richter Contracting Co. v. Continental Cas. Co. (1964) 230 Cal.App 2d 491, 41 Cal.Rptr. 98]+ Under a general contract with such a clause combined with a flow-down provision in the subcontract, the subcontractor may ultimately be expected to finance the performance of a disputed extra work claim during the performance of the work. This could prove very costly to a subcontractor. Since the AIA subcontract does not contain such a provision the reader may wish to refer to the discussion under the AGCC Form Subcontract which contains a version of such a clause for further discussion.
From the owners point of view, it is primarily interested in getting the work done as it expected so to the extent the subcontract form contains a flow-down provision it is doubly protected and therefore would want to encourage such provisions in the general contractors subcontract forms. This is especially true since under current California authority, an owner is likely to be considered an intended third party beneficiary of the general contractors subcontract agreements. [Gilbert Financial Corp. v. Steelform Contracting Co. (1978) 82 Cal.App. 3d 65, 145 Cal.Rptr. 448] In the event the general contractor has abandoned the job or becomes financially insolvent the owner may be able to at least look to the subcontractor to perform as required.
[c]--Payment Provisions
The AIA A-401 contains the typical payment provisions that one would find in standard subcontracts with only a few exceptions. The A-401 contains the standard retention clauses and provide for periodic progress payments. The progress payment section is quite detailed and provides protection for both the general contractor and subcontractor as follows:
ARTICLE 11. PROGRESS PAYMENTS
11.3 Provided an application for payment is received by the Contractor no later than the _____________ day of the month, the Contractor shall include the Subcontractor's Work covered by that application in the next Application for Payment which the Contractor is entitled to submit to the Architect. The Contractor shall pay the Subcontractor each progress payment within three working days after the Contractor receives payment from the Owner. If the Architect does not issue a Certificate for Payment or the Contractor does not receive payment for any cause which is not the fault of the Subcontractor, the Contractor shall pay the Subcontractor, on demand, a progress payment computed as provided in Paragraphs 11.7 and 11.8.
11.4 If an application for payment is received by the Contractor after the application date fixed above, the Subcontractor's Work covered by it shall be included by the Contractor in the next Application for Payment submitted to the Architect.
11.5 Each application for payment shall be based upon the most recent schedule of values submitted by the Subcontractor in accordance with the Subcontract Documents. The schedule of values shall allocate the entire Subcontract Sum among the various portions of the Subcontractor's Work and be prepared in such form and supported by such data to substantiate its accuracy as the Contractor may require. This schedule, unless objected to by the Contractor, shall be used as a basis for reviewing the Subcontractor's applications for payment.+[AIA Form A-401 reprinted with permission]+
Under Article 11.3 the subcontractor is required to provide the written application to the general contractor on a date certain otherwise the general contractor has no obligation to pay the subcontractor. The subcontractor is protected under the provision since if the general contractor does not receive payment from the owner and that nonpayment is not related to the fault of the subcontractor the general contractor must still pay the subcontractor.
Finally, Article 11.5 indicates that the contractor and subcontractor will establish a schedule of values for estimating the progress payments that the subcontractor qualifies for based upon the percentage of completion. This is a good practice for all of the parties to the construction/development process since it eliminates or reduces the potential disputes relating to estimating the value of any given project at a particular time. It should also minimize the risks of a billing practice frowned upon by most owners known as "front-end loading". Front-end loading occurs where a contractor attempts to seek payment during the early portion of performance in a value that exceeds the true value of the work actually performed.+[Construction Dictionary by the National Association of Women in Construction (1985, 6th ed.)]+ If all of the parties to the project have agreed to the value of work in some detail ahead of time, there is less likelihood that during the time pressures of decisions during the work someone would be able to sneak in a value greatly exceeding the true value.
The provisions for final payment under the A-401 agreement are also relatively reasonable from the perspective of all parties. Article 12 provides:
ARTICLE 12. FINAL PAYMENT
12.1 Final payment, constituting the entire unpaid balance of the Subcontract Sum, shall be made by the Contractor to the Subcontractor when the Subcontractor's Work is fully performed in accordance with the requirements of the Contract Documents, the Architect has issued a Certificate of Payment covering the Subcontractor's completed Work and the Contractor has received payment from the Owner. If, for any cause which is not the fault of the Subcontractor, a Certificate for Payment is not issued or the Contractor does not receive timely payment or does not pay the Subcontractor within three working days after receipt of payment from the Owner, final payment to the Subcontractor shall be made upon demand. (Insert provisions for earlier final payment to the Subcontractor, if applicable.)
12.2 Before issuance of the final payment, the Subcontractor, if required, shall submit evidence satisfactory to the Contractor that all payrolls, bills for materials and equipment, and all known indebtedness connected with the Subcontractor's Work have been satisfied.+[AIA Form A-401 reprinted with permission]+
To begin with this Final Payment provision allows the general contractor to await payment from the owner before the contractor must pay the subcontractor and after the subcontractor has provided appropriate evidence of payment to all suppliers and employees. However if the reason there is a delay in the owners payment that is not the fault of the subcontractor the general contractor must pay the subcontractor. Further analysis of disputes surrounding final payment are discussed in this Chapter under Part B.
Finally, the A-401 also contains a payment provision that is not all that customary in subcontracts in California but is imminently fair to subcontractors. This provision is found in Article 4.7 as follows:
4.7 REMEDIES FOR NONPAYMENT
4.7.1 If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to other available remedies, upon seven additional days' written notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received. The Subcontract Sum shall, by appropriate adjustment, be increased by the amount of the Subcontractor's reasonable costs of shutdown, delay, and start-up.
This provision provides for a contractual right of the subcontractor to stop performance if it has not received payment within the appropriate time period. Normally a subcontractor is limited in its ability to cease performance in the face of nonpayment. Absent a "jail-house" clause discussed above, a contractor in California may not abandon performance of a contract without legal excuse,+[Bus.& Prof. Code § 7107]+ and could be terminated for default if it constituted a breach. Generally, a contractor under California law, absent such a clause, must prove that the lack of payment constituted a material breach.+[Integrated, Inc. v. Alec Fergusson Electrical Contractor (1967) 250 Cal. App. 2d 287, 58 Cal. Rptr. 503; See also 1 Witkin, Summary California Law, Contracts 793 (9th ed., 1987)]+ The question of whether a lack of payment is in fact a material breach in a given situation is a question of fact that the contractor must weigh very carefully along with competent counsel.+[Integrated, Inc. v. Alec Fergusson Electrical Contractor (1967) 250 Cal. App. 2d 287, 58 Cal. Rptr. 503; See also 1 Witkin, Summary California Law, Contracts 793 (9th ed., 1987)]+ This is because lack of grounds to stop work or rescind may cause problems for the contractor both from a licensing perspective as well as a financial risk since the work remaining to be completed will eventually be given to another contractor who may have no incentive to do it for the same price originally agreed to by the subcontractor. It has not been expressly decided whether there is a distinction for these purposes between a contractor who indicates it is rescinding the contract and one that indicates it is merely suspending performance until the breach is cured. Either way there appears to be extreme risk if the contractor is not certain of the materiality issue.
There is authority however that where the parties have contractually agreed to a party's right to stop work the contractor may in fact stop work and need not prove the materiality of the payment withheld.+[Big Boy Drilling Corp. v. Etheridge (1941) 44 Cal.App. 2d 114, 111 P.2d 953]+ Therefore the A-401 provision in Article 4.7.1 will be of tremendous assistance to any Subcontractor faced with an unscrupulous general contractor. It should be cautioned however that Article 4.7.1 will probably be construed to qualify the subcontractor to suspend further work and not to terminate or rescind since as will be discussed a separate remedy for termination is found in a different provision. [Big Boy Drilling Corp. v. Etheridge (1941) 44 Cal.App. 2d 114, 111 P.2d 953]
[d]--Termination of Contract Clause
Another noteworthy provision of the A-401 Subcontract form is the provisions describing terminations. The termination provisions of a contract are always important since they contain the parties agreement of when and how the contract may be terminated during performance. The A-401 document describes these circumstances as follows:
7.1 TERMINATION BY THE SUBCONTRACTOR
7.1.1 The Subcontractor may terminate the Subcontract for the same reasons and under the same circumstances and procedures with respect to the Contractor as the Contractor may terminate with respect to the Owner under the Prime Contract, or for nonpayment of amounts due under this Subcontract for 60 days or longer. In the event of such termination by the Subcontractor for any reason which is not the fault of the Subcontractor, Sub-subcontractors or their agents or employees or other persons performing the portions of the Work under contract with the Subcontractor, the Subcontractor shall be entitled to recover from the Contractor payment for Work executed and for proven loss with respect to materials, equipment, tools, and construction equipment and machinery, including reasonable overhead, profit, and damages.+[AIA Form A-401 reprinted with permission]+
7.2 TERMINATION BY THE CONTRACTOR
7.2.1 If the Subcontractor persistently or repeatedly fails or neglects to carry out the Work in accordance with the Subcontract Documents or otherwise to perform in accordance with this Agreement and fails within seven days after receipt of written notice to commence and continue correction of such default or neglect with diligence and promptness, the Contractor may, after seven days following receipt by the Subcontractor of an additional written notice and without prejudice to any other remedy the Contractor may have, terminate the Subcontractor and finish the Subcontractor's Work by whatever method the Contractor may deem expedient. If the unpaid balance of the Subcontract Sum exceeds the expense of finishing the Subcontractor's Work, such excess shall be paid to the Subcontractor, but if such expense exceeds such unpaid balance, the Subcontractor shall pay the difference to the Contractor.+[AIA Form A-401 reprinted with permission]+
The above termination provisions make it clear that the subcontractor and general contractor may terminate their performance under certain circumstances. A detailed discussion of the potential disputes concerning termination provisions is contained in Part B of this chapter.
[d]--Dispute Resolution Provisions
The A-401 agreement provides that the dispute resolution forum shall be arbitration under the rules of the Construction Industry Arbitration Rules of the American Arbitration Association.+[AIA Form A-401, Article 6.1]+ It is important to also note the drafting of the arbitration clause such that the Architect can not be made a party to the arbitration proceeding even if he is intimately involved in the dispute.+[AIA Form A-401, Article 6.1]+
[2]--Associated General Contractors of California (AGCC)
The second most widely used form for subcontracting was developed by the industry association made up of mostly general contractors. The Associated General Contractors is a national association of contractors and associates which is typically organized by state affiliates. The California affiliate boasts one of the largest memberships of contractors in the Associated General Contractors nationally. Although the AGCC is made up of primarily general contractors, the association also contains a number of subcontractor members and associates. Since the AGCC is made up of primarily general contractors, one may question whether the AGCC subcontract forms that are discussed below are in some instances structured to favor the general contractor over the subcontractor in certain instances. Although this should be kept in mind in deciding which form to use depending upon what prospective the reader is coming from, it is again submitted that with certain basic modification the AGCC form subcontract can be fairly utilized by both general and sub contractors. Of course proper legal advice should be sought to accomplish such a goal and what follows is a discussion of particularly noteworthy terms to help focus the readers attention on significant issues in the AGCC subcontract.
As far as subcontract forms are concerned the AGCC has developed both a Long Form as well as a Short Form in order to provide the owner and contractor an alternative.+[Long Form Standard Subcontract(AGCC-3) and Short Form Standard Subcontract(AGCC-4)]+ Obviously the Long Form contains greater references to the legal relations and in this authors view is a safer instrument from the general contractors point of view. The subcontractor is well advised to seek legal advise for modifications of either form.
[a]--Flow-Down and Incorporation by Reference Clauses
Similar to the discussion contained in the section focusing upon the AIA provisions, the AGCC standard subcontract forms+[Long Form Standard Subcontract(AGCC-3) and Short Form Standard Subcontract(AGCC-4)]+ contain Flow-down and incorporation by reference clauses. These clauses in the AGCC-3 and AGCC-4 forms are contained in the following provisions:
LONG FORM STANDARD SUBCONTRACT
SECTION 1. ENTIRE CONTRACT
. . . The Contract Documents are incorporated in this Agreement by reference, and the Subcontractor and his subcontractors will be and are bound by the Contract Documents insofar as they relate in any way, directly or indirectly, to the work covered by this Agreement. Subcontractor agrees to be bound to Contractor in the same manner and to the same extent as Contractor that where, in the Contract Documents reference is made to Contractor, and the work or specifications therein pertains to Subcontractor's trade, craft, or type of work, then such work of specification shall be interpreted to apply to Subcontractor instead of Contractor.
SHORT FORM STANDARD SUBCONTRACT
The work . . . shall be performed . . . in accordance with all plans, specifications and other contract documents attached to or incorporated into the prime contract . . .
. . .
Subcontractor and his subcontractors are bound by the prime contract and any contract documents incorporated therein . . .
It appears that the "flow-down" provisions of the AGCC-4 form are minimal at best. Without clear contract language as found in the longer form AGCC-3 a general contractor may wish to play it safe by utilizing the Long Form. Otherwise these provisions should accomplish the same ends as set forth in the previous discussion concerning these clauses under the AIA A-401 Subcontract.
[b]--Payment Provisions
The AGCC-3 and AGCC-4 agreements both contain typical payment provisions as far as retention and progress payment are concerned. These contracts call for a percentage retention and monthly progress payments. Both the progress payments and the final payment are due ten (10) days after the general contractor has received payment from the owner.+[But see this Chapter, Part B for a discussion of further payment issues]+
One noteworthy provision allows the general contractor to make joint payments to the subcontractors vendors, etc. For example:
SECTION 4. PAYMENT SCHEDULE
. . . Contractor, at his option, may make any payment due hereunder by check made payable jointly to Subcontractor and any of his subcontractors, suppliers, and materialmen who have performed work or furnished materials under this Agreement . . . .+[AGCC-3 Long Form Standard Subcontract, reprinted with permission]+
Under this provision the general contractor apparently has the contractual right to direct payment to the subcontractors vendors without there being any showing of risk to the project. Most subcontractors would want to eliminate such a provision since they may for one reason or another want to delay payment to a particular vendor or may even have reason not to pay them. With the general contractor having control over such an event the subcontractor may have to give up a bargaining leverage that it had not known it would need at the time of executing the subcontract.
The general contractor on the other hand wants to have some control over the unfortunate event of having liens placed upon the project because a subcontractor is not paying its bills on time. A potential middle approach might be to limit the clause to those instances where a vendor has raised claims of nonpayment but the language must clearly be expressed in order to adequately protect the general contractor. The normal indemnity provisions and the provisions calling for final payment after providing adequate evidence of payment of all vendors, etc may also be of help in this area.
[c]--Scope of Work Provisions
Although also discussed in greater detail in Part B below, a brief discussion of the "scope of work" provisions is necessary since a significant provision in the AGCC-3 form is contained therein. Section 2 of the form provides:
. . . In the event of any dispute between Contractor and Subcontractor over the scope of Subcontractor's work under the Contract Documents, Subcontractor will not stop work but will prosecute the work diligently to completion, the dispute to be submitted for resolution in accordance with Section 17 below.
This clause can be referred to as a "jail-house" or "annihilation" clause since it can annihilate a subcontractor by keeping him or her a captive of the general contractor's interpretation of the scope of work to be performed by the subcontractor. These types of clause have been upheld and interpreted to limit a subcontractors remedy for a dispute in the scope of work to damages for breach rather than rescission or termination which might otherwise be available.+[B.C. Richter Contracting Co. v. Continental Cas. Co. (1964) 230 Cal.App 2d 491, 41 Cal.Rptr. 98]+
This could prove extremely difficult or even fatal to a subcontractor that does not have the ability or desire to advance the costs of construction of the disputed work pending a final resolution either by settlement, arbitration or court litigation.
Scope of work disputes can involve a few hundred dollars or a few million dollars. Obviously the subcontractor will want some protection from having to advance construction costs that exceed a reasonable percentage of their original contract amount. If a subcontractor finds itself having signed such a clause, if the dispute is of such a great magnitude, or the parties have otherwise neglected their contractual duties, perhaps the subcontractor could avoid the "jail house" clause by declaring a cardinal change or abandonment.+[C. Norman Peterson Co. v. Container Corp. of America (1985) 172 Cal. App. 3d 628, 218 Cal. Rptr. 592.]
From the general contractors view, he or she will want to obtain some protection for the event that there should arise a reasonable dispute concerning a subcontractors scope of work. The general contractor will not want its project interrupted during the resolution of any such disputes and may therefore want to insist upon some form of clause that provides it protection without becoming a "jailer" of its subcontractor.
[d]--Bonding and Insurance Provisions
The AGCC-3 provisions for bonding are as follows:
SECTION 8. BONDING OF SUBCONTRACTOR
Concurrently with the execution of this Agreement, Subcontractor shall, if required by Contractor, execute a labor and material bond and performance bond, in an amount equal to one hundred percent (100%) of the Contract Price. Said bonds shall be executed by a corporate surety acceptable to Contractor and shall be in a form satisfactory to Contractor. Contractor shall pay the premium on said bonds unless otherwise provided herein or in the Contract Documents.+[AGCC-3 Long Form Standard Subcontract, reprinted with permission]+
The only significant issue related to the bonding provisions of the AGCC-3 Subcontract is that the general contractor is entitled to a surety bond in a form acceptable to it. The construction bond surety market is full of differing types and forms of contract bonds. These range from the admitted corporate surety to non admitted surplus lines bonds and personal sureties. The general contractor should carefully examine the form of the bond as well as the financial information on the surety if available. If the bond is being provided by the subcontractor pursuant to a public works, the bond probably has to be given to an admitted surety.+[See Pub. Contract Code § 7108.]+ The subcontractor should inquire from the general contractor ahead of time the acceptable form for a surety bond. As far as the entity responsible for payment of the premium on the bond, according to Section 8 of the AGCC-3 provision, it is to be paid by the general contractor unless noted otherwise. This is consistent with the statutory requirements for subcontractor bonds.+[Cal. Pub. Contract Code § 4108(c)(2).]+
[e]--Termination Provisions
Similar to the AIA form subcontract, both the AGCC-3 and AGCC-4 form subcontract agreements provide for specific termination provisions. A more detailed discussion of these forms can be found in Part B of this chapter but the form language is as follows.
The AGCC-3 provisions are:
14.1.2 Termination for Default. If Subcontractor fails to commence and satisfactorily continue correction of a default within forty-eight (48) hours after receipt by Subcontractor of the notice issued under Section 14.1.1., then the Contractor may terminate Subcontractor's right to perform under this Agreement and use any materials, implements, equipment, appliances, or tools furnished by or belonging to Subcontractor to complete Subcontractor's work without any further compensation to Subcontractor for such use. Contractor also may furnish those materials and equipment, and/or employ such workers or subcontractors as Contractor deems necessary to maintain the orderly progress of the work.
In such case, Subcontractor shall be entitled to no further payment until the balance of Subcontractor's work has been completed. At that time, all of the costs incurred by Contractor in performing Subcontractor's work, including a markup of fifteen percent (15%) for overhead and profit on such expenses, plus actual attorneys' fees as provided above, shall be deducted from any monies due or to become due Subcontractor. Subcontractor shall be liable for the payment of any amount by which such expenses may exceed the unpaid balance of the Contract Price.
14.1.3 Termination for Convenience. Contractor may at any time and for any reason terminate Subcontractor's services and work at Contractor's convenience. Cancellation shall be by service of written notice to Subcontractor's place of business.
Upon receipt of such notice, Subcontractor shall, unless the notice directs otherwise, immediately discontinue the work and placing of orders for materials, facilities, and supplies in connection with the performance of this Agreement, and shall, if requested, make every reasonable effort to procure cancellation of all existing orders or contracts upon terms satisfactory to Contractor, or at the option of Contractor, give Contractor the right to assume those obligations directly, including all benefits to be derived therefrom. Subcontractor shall thereafter do only such work as may be necessary to preserve and protect the work already in progress and to protect material and equipment on the job site or in transit thereto.
Upon such termination, Subcontractor shall be entitled to payment in accordance with Section 4 only as follows: (1) the actual cost of the work completed in conformity with this Agreement; plus, (2) such other costs actually incurred by Subcontractor as are permitted by the prime contract and approved by the Owner; plus (3) fifteen percent (15%) of the cost of the work referred to in Subparagraph (1) above for overhead and profit. There shall be deducted from such sums as provided in this subparagraph the amount of any payments made to Subcontractor prior to the date of the termination of this Agreement. Subcontractor shall not be entitled to any claim or claim of lien against Contractor or Owner for any additional compensation or damages in the event of such termination and payment.+[AGCC-3 Long Form Standard Subcontract, reprinted with permission]+
The AGCC-4 Short Form Standard Subcontract provides:
SECTION 10. TERMINATION
(i) Should Subcontractor fail to rectify any contractual deficiencies, including failure to pay its creditors, within three (3) working days from receipt of Contractor's written notice, Contractor shall have the right to take whatever steps he deems necessary to correct said deficiencies and charge the cost thereof to Subcontractor, who shall be liable for the full cost of Contractor's corrective action, including reasonable overhead, profit, and attorneys' fees. (ii) Contractor may at any time and for any reason terminate Subcontractor's services hereunder at Contractor's convenience; in the event of termination for convenience, Subcontractor shall recover only the actual cost of work completed to the date of termination plus fifteen percent (15%) of the actual cost of the work for overhead and profit. Subcontractor shall not be entitled to any claim or lien against Contractor or Owner for any additional compensation or damages in the event of such termination.
[f]--Dispute Resolution Provisions
The AGCC-3 and AGCC-4 forms both provide for disputes to resolved by Arbitration only if the general contract between the general and the owner calls for Arbitration.+[ AGCC-3 Section 17.1 and AGCC-4 Section 13]+ Otherwise all claims and disputes are to be decided by court litigation, not arbitration. For a detailed discussion of the consequences of failing to follow the contract terms for arbitration see Chapter 65.
[3]--Other AGCC Industry Forms Relating to Subcontracting
In addition to the Standard Subcontract forms the AGCC has also developed other contract forms which are related to subcontracting and for use in subcontracting. The applicable forms and a brief discussion of each form includes:
[a]--AGCC Standard Subcontract Change Order (Form AGCC-5)
This form can be used as a change order form when a subcontractors scope of work has been changed. It is important to point out the language of the form which a contractor should keep in mind when executing the document. The form has very significant language which states:
Execution of this Change Order by both parties constitutes a binding agreement that no adjustment in compensation or time of performance shall be made as a result of the foregoing change(s), except as provided herein. Contractor may require consent of the Subcontractor's surety, if any, to the terms of this Change Order.
It appears to be the intent of this language to create an accord and satisfaction of all damages arising from performing the work included in the change order. A subcontractor who believes it may have other damages such as delay, impact or others should refuse to execute the document without striking the above language or otherwise timely reserving its right to these other damages.
Compare for example the language contained in the Standard Form Prime Contract Change Order contained in form AGCC-2. This form of change order provides:
Execution of this Change Order by both parties constitutes a binding agreement with regard to the direct costs relating to this change order. Contractor reserves the right to request additional compensation at a later date with regard to impact, ripple, or other indirect costs arising from or related to the work which is the subject of this change order. Owner may require consent of the Contractor's surety, if any, to the terms of this Change Order.+[AGCC Standard Contract Change Order, reprinted with permission]+
Obviously when it comes to entering into change orders with the owner the general contractor does not want to give up any claims for delay, impact or other indirect damages. Therefore a prudent subcontractor will do the same.
[b]--AGCC Long Form Purchase Order (Form AGCC-6)
This form along with its counterpart Short Form Purchase Order (Form AGCC-7), is for use by a contractor or owner who is purchasing materials from a supplier. Rather than using a subcontract form which can be very cumbersome for a supplier these forms describe the terms and conditions under which the materials are to be provided. The significant provisions of the Long Form are as follows:
LONG FORM PURCHASE ORDER
3. CHANGES AND RIGHT TO TERMINATE.
(a) . . . Buyer may terminate or suspend at its convenience all or any portion of this order not shipped as of the date of termination or suspension of the order. In the event of any change or termination, there shall be an equitable price adjustment by Buyer. If Seller maintains that Buyer's adjustment is not equitable, the price change shall be negotiated. In the event the parties cannot agree, the final determination shall be made in accordance with the dispute resolution provision of this Agreement. However, if unit prices have been designated as to materials maintained in the normal course of Seller's business as standard stock, such unit prices shall control all price adjustments for quantity changes. No change or termination shall relieve Buyer or Seller of any of their obligations as to any material shipped prior to Seller's receipt of the change, termination, or suspension order. Any claim for adjustment by Seller hereunder must be asserted in writing within ten (10) days from the date of the change or termination is ordered.
(b) If the Owner shall order the Buyer to change, adjust, substitute, add to, delete from, suspend, or terminate the work included in this order, Seller shall comply with Owner's order and the price or time of performance hereunder shall only be adjusted as allowed by Owner. If requested by Owner, Seller agrees to be bound to and by the dispute resolution procedure of the Prime Contract.
13. ASSIGNMENTS, SETOFF. . . . Buyer may, at its option, setoff any amounts otherwise due from Buyer to Seller under this purchase order against any delinquent amounts or liabilities which are due to Buyer or its commonly controlled affiliates from Seller.+[AGCC Form AGCC-6, reprinted with permission.]+
According to the above purchase order language, it appears that the contractor may terminate the purchase of materials at any time. This could have significant effects upon a supplier. This is especially true where, although there are dispute resolutions provisions to obtain termination costs when the contractor initiates the termination, there may be no such measures where the owner has terminated.+[AGCC-6]+
[c]--Standard Form Prime Contract Between Owner and Contractor (AGCC-1)
Because an owner may from time to time choose to contract directly with a subcontractor, this form may be modified to apply between the owner and the subcontractor. A special provision referring to the contractor where ever it applies as meaning the subcontractor is appropriate.
[4]--Other Industry Subcontract Forms
In addition to the AIA and AGCC subcontract forms there are numerous other forms used by the industry for subcontracting. Many of these other forms are compilations of various terms and conditions of the clauses contained in the AIA and AGC forms while others have attempted to start from the beginning and have completely rewritten terms and conditions. The contractor or practitioner who looks to such forms would be well advised to carefully review the provisions with a licensed construction law attorney. Although there are no formalized subcontract forms developed by an association solely dedicated to the subcontractors perspective one association has published a guide to help subcontractors negotiate modifications to the AIA and AGCC forms.+[See the American Subcontractor Association (ASA) Guide entitled "Winning the Battle of Subcontract Forms" available directly from the ASA.]+
[5]--Pitfalls of Using Subcontract Forms Not Properly Drafted
There are extreme consequences for a failure to properly draft the contractual instruments of subcontractors. In addition to the issues raised in this Part relative to potential disputes among the parties there are other potential sanctions for a contractors failure to make certain statements in its contract forms. For example, Business and Professions Code Section 7030 provides:
Every person licensed pursuant to this chapter shall include the following statement in at least 10-point type on all written contracts with respect to which the person is a prime contractor:
"Contractors are required by law to be licensed and regulated by the Contractors' State License Board. Any questions concerning a contractor may be referred to the Registrar, Contractors' State License Board, Post Office Box 26000, Sacramento, California, 95826." This section shall become operative July 1, 1991. +[Bus.& Prof. Code 7030]+
Business and Professions Code Section 7030.5 also requires the license number of all contractors to appear on any contract the licensee enters into.
In this instance if the contract fails to contain such a provision the contractor may be subjected to disciplinary sanctions. One court has held that this provision was not intended to prevent the contractor from pursuing recovery under the contract in the event of nonpayment unlike other provisions in the Code such as Business & Professions Code Section 7031.+[Gonzales v. Concord Gardens Mobile Home Park (1979) 90 Cal.App. 3d 871, 153 Cal Rptr. 559]+ Even though a violation of this section will not preclude a contractor from recovery in a court of law, the potential sanctions available to the license board such as suspension, revocation and fines should be enough to encourage compliance.+[Bus.& Prof. Code Section 7090]+
Additionally, if the contractor is a Home Improvement Contractor+[See Bus.& Prof. Code Section 7151.2]+ or a Swimming Pool Contractor+[See Bus.& Prof. Code Section 7165]+ then the contract must provide for a provision as follows:
NOTICE TO OWNER
Under California Mechanic's Lien Law any contractor, subcontractor, laborer, supplier, or other person who helps to improve your property, but is not paid for his work or supplies, has a right to enforce a claim against your property. This means that after a court hearing, your property could be sold by a court officer and the proceeds of the sale used to satisfy the indebtedness. This can happen even if you have paid the contractor in full if the subcontractor, laborers, or other suppliers remain unpaid.
To preserve their right to file a claim or lien against your property, certain claimants such as subcontractors or material suppliers are required to provide you with a document entitled "Preliminary Notice." General contractors and laborers for wages do not have to provide this notice. A Preliminary Notice is not a lien against your property. Its purpose is to notify you of persons who may have a right to file a lien against your property if they are not paid.
TO INSURE EXTRA PROTECTION FOR YOURSELF AND YOUR PROPERTY, YOU MAY WISH TO TAKE ONE OR MORE OF THE FOLLOWING STEPS:
1. Require that your contractor supply you with a payment and performance bond (not a license bond), which provides a guarantee that all work and proper payments will be completed. This payment and performance bond as well as a copy of the construction contract may be filed with the county recorder for your further protection.
2. Require that payments be made directly to subcontractors and material suppliers through a joint control company, approved by the Registrar of Contractors.
3. Before making payment on any complete phase of the project, require your contractor to provide you with unconditional lien releases signed by each material supplier, subcontractor, or laborer involved on that project phase. Anyone signing this release loses the right to file a claim against your property. TO PROTECT YOURSELF UNDER THIS OPTION YOU MUST BE CERTAIN THAT ALL MATERIAL SUPPLIERS, SUBCONTRACTORS, AND LABORERS HAVE SIGNED.
Read and acknowledged:
____________________ ____________________
____________________ ____________________
Signature Dated+[Bus.& Prof. Code Section 7018.5]+
Finally, Home Improvement Contractors including Swimming Pool Contractors must include in their contracts a number of detailed notices to the homeowner including, but not limited to the following:
1. A schedule of payments+[Bus.& Prof. Code section 7159]+
2. Release of lien entitlement information +[Bus.& Prof. Code section 7159]+
3. Statements concerning change order limitations+[Bus.& Prof. Code section 7159]+
4. Start of Construction requirements+[Bus.& Prof. Code section 7159]+
5. If it involves a single dwelling then also a completion date.+[Bus.& Prof. Code Section 7164]+
If the Home Improvement contract also qualifies as a Home Solicitation Contract under the California Civil Code+[Civil Code Section 1689.5 et.seq.]+ then additional requirements of the contract form include:
1. A specific notice of the owners right to cancel any such contract within either three (3) or seven (7) business days+[Civil Code Section 1689.7]+
2. The date the buyer entered into the agreement+[Civil Code Section 1689.7]+
The principal factors to consider in determining whether the additional requirements of the Home Solicitation act are applicable is (1) whether the negotiations for the work were initiated by the contractor or the buyer,+[Civ. Code Section 1689.5]+ and (2) whether the contract was not signed at the contractors trade premises.+[Louis Luskin & Sons v. Samovitz (1985) 166 Cal.App.3d 353, 212 Cal.Rptr. 612]+ In order to prove the negotiations were initiated by the buyer rather than the contractor, the contractor must have the contract signed by the buyer acknowledging that the negotiations were initiated by the buyer.+[Civ.code Section 1689.5]+
In the above instances, the sanctions for a contractors failure to provide for the proper contract terms in a Home Solicitation contract are severe since the contractor may be denied recovery for the reasonable value of services rendered under the defective contract.+[Louis Luskin & Sons v. Samovitz (1985) 166 Cal.App.3d 353, 212 Cal.Rptr. 612; But See Beley v. Municipal Court (1979) 1000 Cal.App.3d 5, 160 Cal.Rptr. 508 where the court allowed recovery under a quasi-contractual theory]+
§ 35.05 License issues of Subcontracting-Overview
[1]--General Background and Implications
In Chapter 30, a detailed discussion of the basic license requirements and regulations related to licensing of contractors is set forth. This section shall discuss some specific licensing issues related to subcontractors which are of particular concern to the players from the perspective of a subcontracting point of view.
The general notion of licensing is designed to protect the public from unscrupulous or unqualified subcontractors who may attempt to perform the actual work in the various trades that are required to perform a particular project. As a consequence of the California legislature's desire to protect the general public from such perils, a substantial body of law has developed which deals with the implications of trade subcontractors who are not properly licensed. At the heart of that body of law is Business and Professions Code Section 7031 which provides:
(a) Except as provided in subdivision (d), no person engaged in the business of acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract for which a license is required by this chapter without alleging and proving that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person, except that this prohibition shall not apply to contractors who are each individually licensed under this chapter but who fail to comply with Section 7029.
(b) A security interest taken to secure any payment for the performance of any act or contract for which a license is required by this chapter is unenforceable if the person performing the act or contract was not a duly licensed contractor at all times during the performance of the act or contract.
(c) Proof of licensure pursuant to this section shall be made by production of a verified certificate of licensure from the Contractors' State License Board which establishes that the individual or entity bringing the action was duly licensed in the proper classification of contractors at all times during the performance of any act or contract covered by the action.
(d) The judicial doctrine of substantial compliance shall not apply to this section, except that a court may determine that there has been substantial compliance with licensure requirements, for purposes of this section, if it is shown at an evidentiary hearing that the person was a duly licensed contractor during any portion of the 90 days immediately preceding the performance of the act or contract for which compensation is sought, that the person's category of licensure would have authorized the performance of that act or contract, and that the noncompliance with the licensure requirement was the result of (1) inadvertent clerical error, or (2) other error or delay not caused by the negligence of the person. Subdivision (d) of Section 143 does not apply to contractors subject to this subdivision.
(e) The exceptions to the prohibition against the application of the judicial doctrine of substantial compliance found in subdivision (d) shall have no retroactive effect. These exceptions to that prohibition shall only apply to an action or arbitration proceeding, at law or in equity, that is commenced after the effective date of this section.
For the purposes of collecting any monies owed under a subcontract agreement, it is essential that a subcontractor be properly licensed.+[Although Bus. & Prof. Code § 7031 talks in terms of an "action," this section has been held applicable proceeding to enforce even an arbitration award. In Air Floor v. Regents (1978) 84 Cal App 3d 1004, 149 Cal Rptr 130, the court of appeal went at length into a discussion of applicability of Section 7031 where a contractor is attempting to enforce an arbitration award. In concluding that Bus. & Prof. Code § 7031 did apply to the proceeding to enforce an arbitration award, the court concluded that although the arbitration itself was no an action or proceeding from the meaning Section 7031, the contractor's attempt to elicit the court's action of the arbitration award by way of a confirmation of its award was such an action or proceeding contemplated by Bus. & Prof. Code § 7031 and the contractor, therefore, had to be properly licensed.]+
With this background of the general requirement of licensing and the implications if the contractor is not properly licensed we now turn to a discussion of particular details of the licensing laws that are applicable to subcontracting as well as potential exemptions from licensing in general.
[2]--Classifications of Licenses Related to Subcontracting
The California Business and Professions Code which regulates licensing of contractors divides the contractor's status into three sections, including an engineering contractor (A license), a general contractor (B license), and specialty contractors (C license).+[In Chapter 37, there is a detailed discussion of specialty contracts relating to particular trades such as electrical and plumbing contracts.]+
Contractors who are, therefore, performing subcontracting work must generally+[In some instances on very large contracts, a contractor licensed solely as a general contractor may take a contract as a subcontractor to another general contractor. In such cases the B license classification is sufficient only if the subcontract scope of work requires the contractor to perform work that involves three or more unrelated trades or crafts. Cal. Code of reg. 834]+ be licensed as a C classification specialty contractor which is defined as follows:
(a) A specialty contractor whose operations as such are the performance of construction work requiring special skills and whose principal contracting business involves the use of specialized building trades or crafts.
(b) A specialty contractor includes a contractor whose operations include the business of servicing or testing fire extinguishing systems.
(c) A specialty contractor includes a contractor whose operations are concerned with the installation and laying of carpets, linoleum, and resilient floor coverings.+[Bus. & Prof. Code § 7058.]+
Additionally, the legislature has allowed the Contractors' State License Board to enact administrative legislation to regulate contractors.+[The Contractors' State License Board is the administrative arm of the California Department of Consumer Affairs charged with regulating and performing disciplinary functions over contractors covered by the Bus. and Prof. Code.]+ Title 16 of the California Code of Regulations (formerly California Administrative Code) has been enacted and restricts a contractor from performing work in another classification unless the contractor is also licensed in the proper classification or subclassification that the work calls for,+[Cal.Code of Reg. section 830(b), 834(c)]+ or the work is "essential and supplemental" to the work that the contractor is duly licensed.+[Bus.& Prof. Code Section 7059]+ The regulations enacted define incidental and supplemental as work that is essential to accomplish the work that the contractor is duly licensed to perform.+[Cal.Code of Reg. Section 831]+ This latter exception for licensing where the work is incidental and supplemental has been interpreted very rarely, but has been determined not to include plumbing work by a heating, ventilating and air conditioning contractor.+[Currie v. Stolowitz (1959) 169 Cal.App 2d 810, 338 P.2d 208]+
Therefore a subcontractor should take extreme care in making sure it is properly licensed under the appropriate specialty classification that the contract calls for. The California Code of Regulations defines a specialty contractor classification as follows:
Specialty contractors shall perform their trade using the art, experience, science, and skill necessary to satisfactorily organize, administer, construct, and complete projects under their classification, in accordance with the standards of their trade.
The specialty classifications are divided into the following subclassifications:
Boiler, Hot Water Heating, and Steam Fitting -- C-4
Building Moving and Demolition -- C-21
Cabinet and Mill Work -- C-6
Concrete -- C-8
Drywall -- C-9
Earthwork and Paving -- C-12
Electrical (general) -- C-10
Electrical Sign -- C-45
Fencing -- C-13
Fire Protection -- C-16
Flooring and Floor Covering -- C-15
General Manufactured Housing -- C-47
Glazing -- C-18
Insulation and Acoustical -- C-2
Landscaping -- C-27
Lathing -- C-26
Limited Specialty -- C-61
Low Voltage Systems -- C-7
Masonry -- C-29
Metal Roofing -- C-14
Ornamental Metal -- C-23
Painting and Decorating -- C-33
Parking and Highway Improvement -- C-32
Pipeline -- C-34
Plastering -- C-35
Plumbing -- C-36
Refrigeration -- C-38
Roofing -- C-39
Sanitation System -- C-42
Sheet Metal -- C-43
Solar -- C-46
Steel, Reinforcing -- C-50
Steel, Structural -- C-51
Swimming Pool -- C-53
Tile (Ceramic and Mosaic) -- C-54
Warm-Air Heating, Ventilation, and Air Conditioning -- C-20
Water Conditioning -- C-55
Welding -- C-60
Well Drilling -- C-57+[Cal. Code Reg. § 832]+
The exact definitions of each of these specialty classifications by the California Code of Regulations are set forth in Appendix H to this chapter and are discussed in greater detail in Chapter 37.
[a]--Exemptions to Licensing Applicable to Subcontracting
There are various exemptions to the contractor licensing requirements that may be applicable to the subcontracting process. For example to the extent a subcontractor has on staff an individual who is an employee and is working for wages the individual is exempt from licensing.+[Business & Professions Code Section 7053]+ Of course what the definition of an employee may be is a significant question since to the degree an individual is an independent contractor the exemption will not apply. There are a number of factors which weigh upon the test of whether the individual is an employee including whether he or she had the ability to control decisions on time of employment, basis of compensation, and work product.+[Dahl-Beck Elec. Co. v. Rogge (1989) 275 Cal. App. 2d 1008, 80 Cal. Rptr. 440.]+
Other exemptions which may be important in the context of subcontracting are (1) the minor works exemption+[Business & Professions Code, Section 7048]+ (works less than $300.00), and the "owner-builder" exemption where one is performing construction services on its own property and does not intend to sell the property for one year+[Business & Professions Code, Section 7044]+
Because the penalties of performing construction services can be extreme the reader is cautioned to seek proper legal advice before deciding whether the particular activities it plans to undertake will qualify for a licensing exemption.
[b]--Other Licensing Issues Applicable to Subcontracting
In addition to the licensing requirements of contractors pursuant to Business and Professions Code Section 7031, there are other issues related to licensing that are applicable in particular to subcontracting. California Business and Professions Code Section 6737 et. seq. requires that any person or entity who attempts to perform design functions for plans and specifications applicable to development projects must be licensed as an engineer within the particular discipline that the designing activities are being conducted. There are special exemptions to the engineers licensing requirements for subcontractors in the electrical and mechanical trades. One such exemption applies to an electrical or mechanical contractor who has agreed to or are in fact is both designing and performing the construction of the work that they have designed. For example, the California Business and Professions Code provides:
For the purposes of this chapter a contractor licensed under Chapter 9 (commencing with Section 7000) of Division 3, is exempt from the provisions of this chapter relating to the practice of electrical or mechanical engineering so long as the services he holds himself out as able to perform or does perform, which services are subject to the provisions of this chapter, are performed on behalf of the contractor by, or under the responsible supervision of a registered electrical or mechanical engineer insofar as the electrical or mechanical engineer practices the branch of engineering for which he is registered.+[Bus. & Prof. Code § 6737.3.]+
A similar exemption is found in Business 7 Professions Code Section 6737.4 which provides:
This chapter does not prohibit a contractor, licensed under Chapter 9 (commencing with Section 7000) of Division 3, which engaged in the business of contracting for the installation of electrical or mechanical systems or facilities, from designing such systems or facilities in accordance with applicable construction codes and standards for work to be performed and supervised by such contractor within the classification for which his license is issued, or from preparing electrical or mechanical shop or field drawings for work which he has contracted to perform. Nothing in this section is intended to imply that a licensed contractor may design work which is to be installed by any other person.+[Bus. & Prof. Code § 6737.4.]
Under these sections, many owners and developers have utilized the design services of a subcontractor in lieu of the normal channels of proceeding through an electrical or mechanical engineer. Thus an electrical or mechanical subcontractor may design electrical or mechanical plans and specifications without an engineering license where it has under 6737.3 performed the work that is set forth in its design or under 6737.4 utilized the services of a registered engineer to supervise or oversee the design functions of the contractor.
PART B. Relationship Between Subcontractor and Prime Contractor
§ 35.06 Legal Effect of Bids to Perform Subcontracting
[1]--Contractual Precepts of Subcontractor Bids
Probably, the greatest risk a subcontractor undertakes in its business is providing its bid to perform the intended work for which he or she is bidding. Conversely the greatest risk a general contractor or owner takes in relation to the subcontractors is that by accepting a bid from a subcontractor the subcontractor will be able to complete the task for the price accepted. If a subcontractor offers to perform a given scope of work for a price that is later discovered to be wrong, and the subcontractor is bound to perform at the original quoted price, it could prove very risky for the contractor from an economic point of view. On the other hand if the owner or general contractor relies upon a subcontractors bid and is later told that the subcontractor cannot honor its bid there may be tremendous prejudice to them. For this reason, it is of vital importance that the legal effects of bids of subcontractors be known and understood.
Generally speaking, a contractor's bid, in most instances, is, by its very nature, an "offer" in the legal sense in that it usually contains a specific price quote to perform a specific scope of work. This must be contrasted to an invitation to bid which are nothing more than a request for offers.+[Universal By-Products, Inc. v. Modesto (1974) 43 Cal. App. 3d 145, 117 Cal. Rptr. 525.]+
Under normal contract legal analysis, if an offer is not otherwise revoked, it must be accepted by the offeree with the intent to create the formation of a contract before a legal obligation can be binding.+[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757]+ In other words, normally an offer can be converted into a binding contract by acceptance; however, if the offer is revoked before acceptance, then no binding contract exists. +[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757]. However, as will be discussed below, subcontractor bidding carries with it many exceptions and nuances which modify the general rule at least as it appears on the surface.
[2]--Private Works/Doctrine of Promissory Estoppel
It is well established law in California that contrary to the general rule that an offer can be revoked before acceptance, a subcontractor's bid to a general contractor is irrevocable where the general contractor has relied upon the subcontractor's bid to its detriment.
In Drennan v. Star Paving Company,+[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757]+ the Supreme Court of California held that although bidding on private works is not regulated by any specific statutory scheme, there are other basic principles at play that must, from a legal position, prevent a subcontractor from withdrawing its bid to a general contractor. The exception to the general rule is known in the construction industry as the doctrine of promissory estoppel. Under this principle of law, binding legal relationships are created by the mere offer to construct a contract where another has relied upon that offer.+[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757]+ Thus, even where the subcontractor's bid contains an error and even though the subcontractor has attempted to revoke its bid before the general contractor has "accepted" it, the subcontractor may be held to its original offer.+[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757]+ The application of the doctrine of promissory estoppel has particular validity to a general contractor's use of a subcontractor's bid in its proposal to an owner which is subsequently accepted or is binding upon the general contractor. In those instances, the normal circumstances for promissory estoppel, which include reliance by the general contractor and a detrimental effect such as the general contractor being bound to perform the work at a specified price which included the subcontractor's bid, are applicable.
Just as the general rule of no contract without an acceptance is subject to the exception of the promissory estoppel doctrine, even the Star Paving case is not without exceptions. For example, where a prime contractor has actual knowledge or it is determined that the general contractor had some reason to know that a subcontractor's bid contains an error, then the equitable doctrine of promissory estoppel may not be invoked. In Brunzell Construction Company v. G.J. Weisbrod+[Brunzell Construction Company v. G.J. Weisbrod (1955) 134 Cal. App. 2d 278, 285 P. 2d 989]+, the court of appeal decided that the subcontractor could avoid a mistake in its bid because the general contractor was imputed with knowledge of the mistake.
However, the area of a general contractor's imputed knowledge because it should have known of a mistake in a subcontractor's bid is a very difficult area for the court to work with. One court might conclude the general contractor knew or should have known of the mistake and another court might not. Contrast, for example, the Brunzell+[Brunzell Construction Company v. G.J. Weisbrod (1955) 134 Cal. App. 2d 278, 285 P. 2d 989]+ decision with that in Norcross v. Winters.+[Norcross v. Winters (1962) 209 Cal. App. 2d 207, 25 Cal. Rptr. 821]+ In this later case, the California Court of Appeal held a subcontractor to an alleged mistake in its bid which amounted to almost 40 percent. The evidence before the trial court indicated that the subcontractor bid of $4,800 was contrasted to bids from other subcontractors for the project ranged from $7,490 to a little over $8,100. The court concluded that the difference between the defendant subcontractor's bid and the other bids were not of such magnitude to impute knowledge of the mistake to the general contractor so the subcontractor would be required to perform the work at the original "offer" price.+[Norcross v. Winters (1962) 209 Cal. App. 2d 207, 25 Cal. Rptr. 821]+ The subcontractor's alternative is to face a damage claim by the general contractor for the difference in cost between the subcontractor's price and what it actually cost as performed by others. Similar conclusions were reached in C & K Engineering Contractors v. Amber Steel Company+[C & K Engineering Contractors v. Amber Steel Company (1978) 23 Cal. 3d 1, 587 P. 2d 1136, 151 Cal. Rptr. 323]+ where it was decided that a general contractor had reasonably relied on the subcontractor's bid and the subcontractor was estopped from revoking it, and in Saliba-Kringlen Corp. v. Allen Engineering Company+[Saliba-Kringlen Corp. v. Allen Engineering Company (1971) 15 Cal. App. 3d 95, 92 Cal. Rptr. 799]+ where the court determined that a subcontractor's attempt to extricate itself from its bid by giving notice to the general contractor before the owner accepted the quote from the general contractor was unreasonable and the subcontractor was required to honor its bid.
One final case worthy of mention is Architects and Contractors Estimating Service, Inc. v. Smith.+[Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal. App. 3d 1001, 211 Cal. Rptr. 45]+ In this case, the court applied legal theories of fraud or mistake in holding that a contractor may avoid the legal obligations of its bid even though it was relied upon by the general contractor.+[Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal. App. 3d 1001, 211 Cal. Rptr. 45]+ What factors did the court look to in deciding that the subcontractor could avoid its bid to the general contractor? First, the appellate court identified that the contractor involved had bid the project as its first project in the trade it had offered to perform. Furthermore, the court found, both with respect to the mistake and fraud counts, that the general contractor had encouraged the subcontractor to quote a price based upon assurances of a profit. Finally, the general contractor was aware of the inability of the subcontractor to perform the work at the price it bid and the court concluded that it would provide relief to the subcontractor to avoid its bid.+[Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal. App. 3d 1001, 211 Cal. Rptr. 45]+ A careful reading of the court's decision reveals that it is really nothing more than an application of the "knew or should have known" rule applied to a contract and couched in terms of avoidance by mistake or fraud. In other words, if there has been no formal acceptance before the subcontractor has revoked its bid, the court can refuse to apply the doctrine of promissory estoppel if the general contractor knew or should have known of a mistake. Similarly, even in those cases where a contract has been formed (acceptance communicated before withdrawal), the court can reach the same conclusion of avoiding the contract where the general contractor's knowledge constitutes fraud or mistake.+[Architects and Contractors Estimating Service, Inc. v. Smith (1985) 164 Cal. App. 3d 1001, 211 Cal. Rptr. 45]+
Regardless of the theory utilized by the court, it seems clear that in order for there to be a finding of imputed knowledge on behalf of the general contractor, a subcontractor must be able to demonstrate a large or substantial variance from all of the other responsive bids. Of course, this area of the law is very fact driven and, therefore, susceptible to frequent litigation. To avoid such disputes, the subcontractor would be well advised to, therefore, take great care in its quoting of a bid to a general contractor.
[3]--Subcontractor's Ability to Enforce Its Bid on Private Works
If a subcontractor is bound to a general contractor under the subcontractor's bid even absent a formal acceptance, one would believe that a similar conclusion would be likely when the tables are turned vice versa. However, that is not the case under California law in a private works setting since a subcontractor generally does not place the necessary detrimental reliance upon a prime contractor's use of a subcontractor's bid in order to satisfy the requirements of the doctrine of equitable promissory estoppel.+[Klose v. Sequoia (1953) 118 Cal. App. 2d 636, 258 P. 2d 515.]+ A private works is defined as one in which there is not a public entity contracting for the work to be done.+[Cal. Civ. Code § 3100]+ In such a project, the general contractor is not presently required to contract with a subcontractor even if it uses that bid to obtain a contract with the owner.+[Klose v. Sequoia (1953) 118 Cal. App. 2d 636, 258 P. 2d 515.]+ This same conclusion was also voiced in a recent federal case employing California law.+[Electrical Construction and Maintenance Company v. Maeda Pacific Corp. (9th Cir. 1985) 764 F.2d 619.]+ There appears to be a narrow exception to this rule where the subcontractor can allege and prove that the general contractor "accepted" the subcontractor's bid.+[Electrical Construction and Maintenance Company v. Maeda Pacific Corp. (9th Cir. 1985) 764 F.2d 619.]+ Acceptance can be expressed or implied and can be manifested in a variety of ways, including a prior course of conduct.+[Electrical Construction and Maintenance Company v. Maeda Pacific Corp. (9th Cir. 1985) 764 F.2d 619.]+ Caution should, therefore, be exercised by the owner and general contractor in communications with bidders, and subcontractors must be articulate in their bidding procedures if they want to attempt to clarify what the status of the parties dealings are in any given circumstances.
[4]--Application to Suppliers of Materials
In addition to the above principles, there are special rules concerning quotes of suppliers of material who are sought to be subcontracted with for a construction project. Commercial Code Section 2205 makes a merchant's offer, known to be relied on by a licensed contractor, irrevocable for 10 days after the awarding of the contract to the prime contractor.+[California Commercial Code Section 2205]+ Under the code, the contractor must confirm in writing the offer within 48 hours after it is made.
Therefore, a supplier who has provided a quote to provide certain materials could be held to that quote even if it contained an error so long as the contractor or owner has confirmed the quote as required by the statute.+[Cal. Comm. Code § 2205]+ As a practical matter, it could be argued from the supplier's point of view that if the supplier revoked its offer before it was confirmed in writing, then Section 2205+[Com. Code § 2205]+ would not apply. In other words, if the supplier revokes its bid before the statutory reliance steps are taken, then normal contract legal interpretation could be utilized to avoid its bid.
[5]--Public Works Statutory Bidding Obligations
The bidding process on public works differs substantially from normal contractual precepts of offers and acceptance in the private work arena. This is because on public projects there are statutory and customary bidding procedures which impose obligations on general contractors and subcontractors who are bidding to public owners. Many of these statutory procedures are now embodied in the California Public Contract Code and are applicable to most but not all public entities.
Similar to the promissory estoppel theory in public works, under the competitive bidding statutes for public works, the bids of contractors are considered irrevocable offers.+[M.F. Kemper Construction Company v. City of Los Angeles (1951) 37 Cal. 2d 696, 235 P. 2d 7.]+ Essentially, during the period that a public entity has to review all bids to determine which is the lowest responsible bid, the contractor may not revoke its bid unlike normal contract legal analysis.+[Menefee v. County of Fresno (1985) 163 Cal. App. 3d 1175, 219 Cal. Rptr. 99; City of Susanville v. Lee C. Hess Company (1955) 45 Cal.2d 684, 290 P. 2d 520.]+
Consequently, subcontractors can expect that their bids to a general contractor bidding on a public work will be similarly bound against them to the extent that the general contractor becomes the successful lowest responsible bidder to the owner.+[Drennan v. Star Paving Company (1958) 51 Cal. 2d 409, 333 P. 2d 757.]+ On the other hand, although normally a subcontractor on a private works project cannot enforce its bid against the general contractor this rule is modified on public works projects.+[Southern California Acoustics Company v. C.V. Holder, Inc. (1969) 71 Cal. 2d 719, 79 Cal. Rptr. 319]+ A subcontractor on a public works inherits certain rights which offset the burden of its bid being irrevocable pending the decision by the owner with respect to the acceptance of the general contractor's bid.
Under California public works law, subcontractors who are listed on a general contractor's bid to a public entity may invoke the benefits of the Public Contract Code. These statutes provide that a general contractor's bid which is accepted by a public entity may not substitute any other subcontractor in the place of one who is listed on the general contractor's bid absent very specific situations.+[Pub. Contract Code § 4104, et seq.]+ If the general contractor attempts to substitute a listed subcontractor on a public works, the public entity must disallow such substitution until a noticed hearing and findings are made under specific statutory rules. These rules include:
(1) When the subcontractor listed in the bid after having a reasonable opportunity to do so fails or refuses to execute a written contract, when that written contract, based upon general terms, conditions, plans, and specifications for the project involved or the terms of that subcontractor's written bid, is presented to the subcontractor by the prime contractor.
(2) When the listed subcontractor becomes bankrupt or insolvent.
(3) When the listed subcontractor fails or refuses to perform his or her subcontract.
(4) When the listed subcontractor fails or refuses to meet the bond requirements of the prime contractor as set forth in Section 4108.
(5) When the prime contractor demonstrates to the awarding authority, or its duly authorized officer, subject to the further provisions set forth in Section 4107.5, that the name of the subcontractor was listed as the result of an inadvertent clerical error.
(6) When the listed subcontractor is not licensed pursuant to the Contractors License Law.
(7) When the awarding authority, or its duly authorized officer, determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans and specifications, or that the subcontractor is substantially delaying or disrupting the progress of the work.+[Pub. Contract Code § 4107]+
Absent a reasonable conclusion of one of these specific exceptions, a subcontractor may enforce its bid against the successful general contractor and seek all resulting damages as a consequence of the general contractor's failure to allow the subcontractor to perform its work.+[Southern California Acoustics Company v. C.V. Holder, Inc. (1969) 71 Cal. 2d 719, 79 Cal Rptr. 319.]+
Of course, even exceptions to general rules are not without their exceptions and practitioners in this area should carefully review the applicable authorities.+[Interior Systems, Inc. v. Dell E. Webb Corp. (1981) 121 Cal. App. 3d 312, 175 Cal. Rptr. 301 -- Subcontractor could not invoke a damage claim under the Public Contract Code where it refused to sign a contract given to it by the general contractor.]+
A separate relief from error of a general contractor's bid with respect to the listing of subcontractors is set forth in Public Contract Code Section 4107.5. As mentioned above, a subcontractor who has been listed in a general contractor's bid to a public entity generally may enforce its subcontractor bid against the successful-bidding general contractor. Where, however, a general contractor has inadvertently listed the subcontractor in its bid to the public entity, the general contractor may be relieved of the duty to the listed subcontractor. Again, the time limitations and the ability of a general contractor to avoid such an alleged inadvertent clerical error are very restrictive.
Pursuant to Public Contract Code Section 4107.5, the general contractor must give notice to the public entity within two working days after the time the general contractor's bid is open as well as provide a copy of such notice to the subcontractor claimed to have been inadvertently listed. Thereafter, the subcontractor who has allegedly been inadvertently listed may, and if it wishes to enforce its claims shall, within six working days of the general contractor's bid opening, submit any written objections to the general contractor's intentions to replace the subcontractor.+[Pub. Contract Code § 4107.5]+
Finally, the public entity must notice a public hearing on the matter and reach specific conclusions. The hearings involved in such a substitution and claim of inadvertent listing are very strictly limited, both in time and subject matter, and if a contractor or practitioner is faced with this problem, due care should be taken in immediately complying with the statutory responsibilities.
§ 35.07 Performance Issues Relating to Scope of Work
When it comes to performance of subcontracts, one of the greatest areas of dispute between subcontractors and owners or general contractors involves the area of "scope of work." Normally, it is the goal of the general contractor in preparing its price quote to the owner to insure that it has covered the cost of every item of work to be performed under the plans and specifications for the project. Many times, however, it is difficult for the general contractor to ascertain under the pressures of last minute bidding activity whether it has, in fact, obtained quotes from subcontractors to cover every possible scope of work.
For example, a general contractor who is bidding upon a commercial building project which includes the installation of large air conditioning equipment will solicit bids from both mechanical contractors and electrical contractors to fulfill their various function for the commercial building project. There may be a scope of work issue concerning who is to do what as between the general contractor, mechanical contractor, and electrical contractor as follows. The mechanical contractor may feel that although it is installing the air conditioning equipment on the building's roof and that air conditioning equipment requires electrical connections to run the pumps and chiller for the air conditioning unit, the function of those electrical connections should be the electrical subcontractor's scope rather than the mechanical subcontractor's. The electrical contractor may, on the other hand, feel that although it is obligated to run the electrical conduit lines to the mechanical air conditioning equipment, it does not want to take the responsibility of the electrical connection to the mechanical equipment since that is work on the mechanical contractor's equipment. The issue may ultimately become a contract interpretation issue and the court will be called upon to construe the particular language identifying the scope of work.+[Brinderson-Newberg Jt. Venture v. Pacific Erectors, Inc. (9th Cir., 1992) 690 F. Supp. 89]+
It is ultimately up to the general contractor to insure that one or the other subcontractors has included the connections in its quote or that the general contractor has included the price to do so by its own forces. If not, it is possible that a dispute in the scope of work will exist between each of these players. While this example may not involve a tremendous amount of money, there are many other scope of work disputes that can involve substantial monetary amounts such that the general contractor and subcontractor will each resist having to perform the disputed scope of work. It is within this context that the substantial majority of disputes involving scope of work are involved. It is important for both subcontractors as well as general contractors to be aware of what steps can be taken to avoid or prevent scope of work disputes as well as how the courts will respond to the various positions in the event of a scope of work dispute.
[1]--Proper Care of Scope Issues and Contract Measures
There are specific measures which can be taken by both general contractors and subcontractors in the contracting process to help avoid and prevent scope of work disputes. From the subcontractor's point of view, it is essential that in the subcontractor's proposal, the subcontractor delineate all items which it intends to perform for the price it is quoting and to exclude all items that it intends not to perform. It is best to attach a copy of the proposal to the subcontract form but absent such careful drafting, a court might be able to consider an unattached proposal as evidence of a subjective intention.+[Western Med., Inc. v. Albers (1985) 266 Cal. App. 3d 383, 212 Cal. Rptr. 434]+ One way of handling such explicit quotations include provisions in the subcontractor's quote which delineate all sections of the specifications that the subcontractor's quote includes as well as a separate provision which lists all items that the subcontractor intends to exclude in its quote. The court may also look to all of the documents, the surrounding circumstances, and the subsequent conduct of the parties to determine true intent.+[Interfoam Corp. v. Mitchell (9th Cir., 1978) 575 F. 2d 1270]+
Because there is a great potential for scope of work disputes beyond the specifications, it may also be prudent for a subcontractor to provide a separate statement that any items that are not contained within the included list of items are hereby expressly excluded. If a subcontractor's bid does not list specific exclusions, a court could construe or interpret the contract to, in fact, include the items if they are normally included in the particular trades custom and usage.+[Civ. Code § 1645; but see Hinckley v. Bechtel Corp. (1979) 41 Cal. App. 3d 206, 116 Cal. Rptr. 33 -- if contract is fully integrated, custom and usage evidence is not admissible for proof of intent although it may be considered for purposes of deciding whether a contractee has properly performed under the contract.]+
From the general contractor's point of view, it is essential that he or she insure that the subcontractor has included all items that normally would be included in that trade. Most contracts have terms and conditions which specify such a result; however, in order to avoid disputes downstream, the prudent general contractor will also carefully review the subcontractor's quote in comparison to other subcontractor quotes who have bid that particular trade as well as the overall plans and specifications for the project.
Conversely, the general contractor may wish to include statements in the contract which require the subcontractor to perform all items of work which are reasonably related to the trade in which the subcontractors performing its work unless they are otherwise expressly excluded under the proposals/contract.
Also, it may be wise for the general contractor to include a contractual provision in its subcontract which obligates each and every subcontractor to perform work which the subcontractor contends is outside the scope of its work to the extent that there is a bona fide dispute and that the subcontractor may reserve its right to a claim for the costs associated with the extra scope of work. These clauses are generally upheld and prevent the subcontractor from rescinding or stopping work.+[B.C. Richter Contracting Co. v. Continental Casualty Co. (1964) 230 Cal. App. 2d 491, 41 Cal. Rptr. 98]+ The purpose for this sort of provision is to insure that the project continues to be completed in an orderly and timely fashion and so that the progress of the work is not interrupted by scope of work disputes. Essentially, this is a risk allocation provision which places the risk of scope of work disputes at the foot of the subcontractor. This mechanism allows the subcontractor to pursue a claim for extra work in the event the subcontractor can demonstrate that its price clearly did not include that scope of work.
Subcontractors may hesitate to agree to such a provision and accept that risk of loss. Even where a subcontractor agrees to accept such a provision and associated risk, the subcontractor should be able to argue that provision only applies to scope of work disputes where there is a bona fide dispute between the general contractor and subcontractor. Where there is a lack of bona fide dispute as to the scope of work, then the subcontractor should be able to argue that such a provision cannot be invoked in bad faith or that under extreme circumstances the clause is unconsiderable.+[Civ. Code § 1670.5]+ In one of the few court decisions to consider the unconscionable defense argument, a California court looked at both the procedural element of unconscionable provisions that are contained in the preprinted contract forms as well as the substantive elements of being beyond what is reasonable under the circumstances.+[A & M Produce Co. v. FMC Corp. (1982) 135 Cal. App. 3d 473, 186 Cal. Rptr. 114]+ These provisions are subject to great intellectual debate and are susceptible to unscrupulous use by general contractors but are generally designed as a provision of last resort since the best clarity and opportunity to avoid such disputes may be found in the proposal/quote stage as discussed above.
Most contracts include specific areas for designating the scope of work that the particular subcontractor is agreeing to perform and again it is essential that very specific inclusions and exclusions be contained within these sections similar to the proposal stage. For example, the American Institute of Architects' Standard Subcontract Agreement (AIA A-401) provides:
ARTICLE 8. THE WORK OF THIS SUBCONTRACT
8.1 The Subcontractor shall execute the following portion of the Work described in the Subcontract Documents, including all labor, materials, equipment, services, and other items required to complete such portion of the Work, except to the extent specifically indicated in the Subcontract Documents to be the responsibility of others. (Insert a precise description of the Work of this Subcontract, referring where appropriate to numbers of Drawings, sections of Specifications, and pages of Addenda, Modifications, and accepted Alternates.)+[AIA Form A-401, reprinted with permission]+
Similarly, the Associated General Contractors' Long Form Subcontract provides:
SECTION 2. SCOPE
Subcontractor agrees to furnish all labor, materials, equipment, and other facilities required to perform the work to complete:
It is at these portions of the contract that both a general contractor and subcontractor will want to be as specific as possible so as to avoid the problems of having a court, after the fact, try to interpret their original intent.
[2]--Legal Interpretation Rules of Scope of Work
Disputes
Generally speaking, scope of work disputes will be treated by the courts of California similar to other disputes involving the interpretation of contracts.+[Civ. Code § 1635.]+ Essentially, a contract must be interpreted so as to give effect to the mutual intention of the parties as it existed at the time of the contract+[Civ. Code § 1636]+ and to the extent that there are several writings comprising the contractual agreements between the parties, the court must consider all of the contracts taken together.+[Civ. Code § 1642.]+
Another possible aid in interpretation is if the court is able to determine who was the drafter of the agreement that has given rise to an ambiguity in determining the scope of work, any uncertainty or ambiguity will be construed against the person who drafted the agreement.+[Civ. Code § 1654.]+ Also, courts will imply stipulations and incidents necessary to carry out or into effect the implied obligations in order to reach a reasonable interpretation of the contractual documents+[Civ. Code §§ 1655, 1656]+ and may even be allowed to consider evidence by reference to the circumstances under which the contract is made.+[Civ. Code § 1647.]+
There are limitations, however, on the court's power to interpret written agreements and it is the general rule that courts should ascertain the intention of the parties of a written contract by and from the writing alone if possible.+[Civ. Code § 1639.]+ Furthermore, if the written agreement has an integration clause or is otherwise a fully integrated agreement, under California law, courts have limited ability to entertain parole evidence of terms of the agreement.+[Gerdlund v. Electronic Dispensers International (1987) 190 Cal. App. 3d 263, 235 Cal. Rptr. 279, 282.]+
The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is . . . whether the offer of evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.+[Gerdlund v. Electronic Dispensers International (1987) 190 Cal. App. 3d 263, 235 Cal. Rptr. 279, 282.]+
A very recent example of what can happen to contractors and subcontractors who have failed to make clear written expressions of their intent of the scope of work is set forth in Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. [Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. (9th Cir. 1992) D.A.R. 10042, 690 F. Supp. 891.] In that very recent case, the Ninth Circuit Court of Appeal was asked to construe the "scope of work dispute" between the general contractor, made up of a joint venture between Brinderson Constructors, Inc. and Gust K. Newberg and a subcontractor, Pacific Erectors, Inc. and its surety company.
Essentially, the scope of work dispute involved the meaning of the contract which provided that the subcontractor, Pacific Erectors, Inc., was to "erect complete and make a complete installation" of a flue gas system (FGS). The subcontractor introduced parole evidence to interpret the meaning of the above language to mean that it merely had to perform the structural and miscellaneous steel work for the FGS project. The general contractor, on the other hand, denied making any such representations to the subcontractor and insisted that the subcontractor had agreed to erect and install the entire FGS facility. In determining whether the trial court should have considered the parole evidence offered by the subcontractor as a tool in interpreting the contract language, the Ninth Circuit answered:
The precise issue is whether the terms "erect complete" and "make a complete installation," when read in context with the rest of the contract, are reasonably susceptible of the meaning Pacific attempts to advance through its parole evidence. If the court finds after considering this preliminary evidence that the language of the contract is not reasonably susceptible of [the proffered] interpretation and is unambiguous, extrinsic evidence cannot be received for the purpose of varying the terms of the contract. [Citations omitted.] +[Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. (9th Cir. 1992) D.A.R. 10042, 690 F. Supp. 891.]+
In finally concluding that the subcontractor's offered interpretation of the contract was could not be accepted and that therefore the subcontractor was required to perform the entire scope of work, the Ninth Circuit held:
Pacific's proffered interpretation stretches the contractual language beyond reasonable limits and violates most applicable rules of contract construction. Therefore, we find (1) that the district court erred in allowing the jury to hear parole evidence supporting Pacific's proffered interpretation, and (2) that as a matter of law, Pacific's work under the contract included the field assembly, picking and settling, and bolting and welding of the FGS components into permanent position. +[Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. (9th Cir. 1992) D.A.R. 10042, 690 F. Supp. 891.]+
However, the Ninth Circuit's decision against the subcontractor on the scope of work issue did not end there. The subcontractor, Pacific, had also sued for fraud and misrepresentation on behalf of the general contractor in attempting to hold the subcontractor to an interpretation of the scope of work that the subcontractor did not agree. The Ninth Circuit again concluded that in order for parole evidence of fraud or misrepresentation to be admissible under California law, "it must tend to establish some independent fact or representation, some fraud in the procurement of the instrument, or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing."+[Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc. (9th Cir. 1992) D.A.R. 10042, 690 F. Supp. 891, citing Bank of America National Trust v. Pendergrass (1935) 4 Cal. 2d 258, 48 P. 2d 659, 661.]+ The court went on to note:
As with the "meaning exception to the parole evidence rule discussed above, the purposes of the rule will be undermined unless there is some limit to the fraud/ misrepresentation exception. Thus, California holds parties responsible for signing integrated contracts and will allow parole evidence fraud only to the extent it does not contradict the integrated contract.
As can be seen from the above analysis, great caution should be taken by both subcontractors and general contractors alike in memorializing the exact scope of work that each intends to be undertaken for the price that has been agreed upon. The Ninth Circuit's conclusions could have easily gone the other way in support of the subcontractor's interpretation had the contract or scope of work language contained language which was closer to the subcontractor's proffered meaning rather than the general contractor's. In other words, especially in integrated contract situations, the courts will arrive at a reasonable interpretation of the scope of work language that is utilized in the contractual documents and will be limited in their ability to construe outside or parole evidence of the meaning which one party or the other attached to the language.