Opinion
NOT TO BE PUBLISHED
Appeal from the Superior Court of San Bernardino County, No. RCVRS081568, Ben T. Kayashima, Judge. (Retired judge of the San Bernardino Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.).
Brown & Charbonneau, Gregory G. Brown and Michael Tran for Plaintiff and Appellant.
Wesierski & Zurek, Terence P. Carney, Joseph E. DuBois and John E. Stobart for Defendants and Respondents.
OPINION
McKinster, J.
INTRODUCTION
Sialic Contractors Corporation, dba Shawnan (Shawnan), sued the Chino Valley Unified School District, B.E. McMurray Construction, Inc., Rossetti Construction Company, Inc. (Rossetti) and Rossetti’s sureties, St. Paul Fire and Marine Insurance Company and Travelers Casualty and Surety Company of America, on a number of claims arising out of Shawnan’s contracts to perform construction services at an elementary school in Chino, which was then under construction. As we discuss in more detail elsewhere, Shawnan entered into a contract with the school district to perform certain services and later entered into a contract with Rossetti to perform other services on the same project, purportedly as a subcontractor to Rossetti.
Travelers Casualty and Surety Company of America was apparently sued as a Doe defendant.
Before trial, Shawnan settled its claims against the school district and B.E. McMurray Construction, Inc. for $1.1 million. The settlement agreement expressly excluded Shawnan’s claims against Rossetti. Those claims proceeded to trial. The jury returned special verdicts awarding Shawnan $130,790 on theories of breach of contract and quantum meruit.
Early in the trial proceedings, the question of the possible illegality of the contract between Shawnan and Rossetti arose. The record does not explicitly reflect how it came about. However, after opening statements but before testimony commenced, the court suggested to Rossetti that it should seek leave to amend its answer if it wished to assert the defense of illegality. Rossetti filed a motion for leave to amend its answer, which was granted. The question of the legality of the contract was not submitted to the jury.
Shawnan asserts that the court first raised the question of illegality near the conclusion of its case-in-chief, implying that it was blindsided. This is incorrect. The first reference in the record to the issue of illegality appears immediately after opening statements, and it appears that the issue first arose in connection with the court’s approval of the settlement between Shawnan and the school district.
After the jury returned its verdicts, the parties submitted briefing on the illegality of the contract. The court determined that the contract was illegal in that it violated the competitive bidding requirements of sections 20111 and 20118.4 of the Public Contract Code. (All further statutory citations refer to the Public Contract Code unless another code is specified.) The court further determined that Shawn Smith, the owner of Shawnan, knew that the contract was a sham, “expressly made in an attempt to subvert the bidding requirement, with the full knowledge of all involved.” Accordingly, the court declined to enforce the special verdicts and entered a judgment stating that “[N]either side may recover anything on the contract from the other, either at law or in equity.” The court found that there was no prevailing party and ordered that each party would bear its own costs and attorney fees.
Section 20111 provides, in part, that the governing board of any school district “shall let any contract for a public project, as defined in subdivision (c) of Section 22002, involving an expenditure of fifteen thousand dollars ($15,000) or more, to the lowest responsible bidder who shall give security as the board requires, or else reject all bids.” (§ 20111, subd. (b).) Section 22002, subdivision (c) defines “public project” to include the construction or improvement of any publicly owned or operated facility. (§ 22002, subd. (c)(1).)
Rossetti apparently filed a cross-complaint. It is not part of the record on appeal and does not appear to have been litigated in the proceedings which are before us.
Shawnan filed a timely notice of appeal.
FACTS
In or about 2002, the Chino Valley Unified School District began construction on two new schools, Edwin Rhodes Elementary and Michael G. Wickman Elementary. Assistant Superintendent Paul Anderson, was the school district’s administrator for the projects. The school district hired B.E. McMurray, Inc. (McMurray) as the construction manager for the project. McMurray had extensive authority. It developed the scope of work and the contracts which were put out for bids. It reviewed the bids, made recommendations to the staff and to the school board as to which contracts to award, and oversaw the construction once it commenced. McMurray’s employee, Robert Olin, was the overseer responsible for both projects.
On April 23, 2002, Rossetti, a general contractor, entered into a contract with the Chino Valley Unified School District to provide concrete and rough carpentry at both schools. On March 21, 2003, Shawnan entered into a contract with the school district to provide street improvements and grading and paving in connection with the installation of a storm drain at Edwin Rhodes Elementary. The price of Shawnan’s contract with the school district was $339,760.
In April or May, Olin informed Anderson that it was necessary to do additional finish grading, parking lot grading and some grading on the playground at Edwin Rhodes Elementary. This work was not within the scope of Shawnan’s contract. However, Shawnan’s contract with the school district included a $60,000 allowance for grading and surface work in connection with construction of the storm drain. Plans for the storm drain had been changed, and that allowance had not been used. Anderson concluded that the allowance could be used to have Shawnan do the additional grading work. Anderson believed that the work could be completed for approximately $100,000, and that the additional $30,000 to $40,000 (over the $60,000 allowance) could be funded via a change order to Shawnan’s contract. He was aware that if the cost of the remainder of the work exceeded $40,000, it would exceed the 10 percent change order cap provided for in section 20118.4 and that the grading contract would have to be put out to bid. Anderson authorized Shawnan to do the work on a time and materials (T & M) basis.
In May 2003, the $60,000 allowance had been used up but grading work remained to be done. At a meeting on July 14, 2003, Olin told Anderson that the grading work was probably going to cost more than expected and suggested “utiliz[ing] a strategy whereby Shawnan would become a sub to Rossetti.” Rossetti’s contract for Edwin Rhodes Elementary was for $2,235,000. Consequently, a change order to its contract in the amounts contemplated would not exceed 10 percent of the original contract price. Olin made the proposal to Shawnan and Rossetti. Olin told Rossetti it could use a subcontractor of its choice, but “knowing that Shawnan was onsite and was already mobilized, ” Rossetti apparently understood that it should use Shawnan.
Anderson testified that he did not approve the proposed “subcontract” arrangement and was skeptical of its validity.
Olin authorized Shawnan to continue the work on a time and materials basis. The work was to be directed by McMurray, not by Rossetti, and McMurray employees would sign off on Shawnan’s daily “T & M tickets.” Shawnan requested a written contract. Olin assisted Rossetti in drafting contract provisions for the work to be done on a T & M basis “at the direction of B.E. McMurray.”
The Shawnan-Rosetti contract did not include any limitation on the amounts Shawnan could bill for the work. The contract provided that Rossetti would received a 15 percent “markup” on material and equipment provided by Shawnan and a 20 percent markup on Shawnan’s labor. On September 8, 2003, Rossetti sent Shawnan’s invoice and the T & M tickets for work performed pursuant to the so-called subcontract, in the amount of approximately $59,000, applied the contractual markups, and submitted to McMurray a change order for $68,686. The T & M tickets had all been approved by McMurray, but the change order was not approved by the school district. Rossetti received other invoices and T & M tickets for work done by Shawnan, apparently totaling $147,000. Apparently, some of the T & M slips Shawnan submitted to Rossetti were for work done before the effective date of the contract. Rossetti did not pay Shawnan on any of the invoices which Shawnan submitted to it. The school district did not approve any change order based on Shawnan’s T & M invoices.
LEGAL ANALYSIS
THE SHAWNAN-ROSSETTI CONTRACT IS ILLEGAL AND UNENFORCEABLE
The Trial Court’s Ruling and the Standard of Review
If a contract is subject to statutory competitive bidding requirements, compliance with such statutes is mandatory and any contract made without compliance with the statutes is void and unenforceable as being in excess of the public entity’s power. (Miller v. McKinnon (1942) 20 Cal.2d 83, 87-88, 89, superseded on another point by statute as explained in Marshall v. Pasadena Unified School Dist. (2004) 119 Cal.App.4th 1241, 1260; see also Amelco Electric v. City of Thousand Oaks (2002) 27 Cal.4th 228, 234.)
Whether a contract is illegal is a question of law “‘to be determined from the circumstances of each particular case. [Citation.]’ [Citation.]” (Timney v. Lin (2003) 106 Cal.App.4th 1121, 1126.) If the evidence is not in conflict, this a pure question of law which an appellate court reviews independently. (Ibid.) If the resolution of the issue rests on contested evidence, however, we review the trial court’s factual findings to determine whether they are supported by substantial evidence. If the findings are supported by substantial evidence, we determine whether the contract is illegal based on the facts as found by the trial court. (Ibid.)
Here, the trial court found that the Shawnan-Rossetti contract was a sham, “expressly made in an attempt to subvert the bidding requirement, with the full knowledge of all involved.” The court also found that “any claim to a good faith belief by Shawnan that the contract did not violate the [Public Contract Code] is completely undermined by [Shawn] Smith’s testimony.” Viewed in the light most favorable to the court’s conclusion, as required by the substantial evidence rule (Bickel v. City of Piedmont (1997) 16 Cal.4th 1040, 1053), the record supports these findings.
First, the evidence supports the trial court’s conclusion that the contract was a sham. Anderson, Olin and Smith all testified that the idea of the contract was proposed by Olin as means of getting around the 10 percent cap on change orders to Shawnan’s contract. In addition, there is evidence that the school district had a compelling reason to avoid having to put the grading contract out to bid: The school was scheduled to open in September 2003. In its briefing on the illegality of the contract, Shawnan attached an excerpt from Olin’s deposition in which he testified that the school district, including Anderson, did not want to put the contract out to bid because of the delay that the process would entail, possibly delaying the opening of the school. (Anderson denied that he had any such concerns.) Smith testified that the additional work would take three to four months and that the school would not have opened on time if not for the work his company did.
Olin was not asked about this at trial. However, the trial court referenced the deposition excerpt in its ruling on the issue.
Second, the evidence supports the court’s conclusion that Smith knew the contract was a subterfuge. On direct, Smith testified that he did not understand the school district’s interpretation of the 10 percent rule at the time he entered into the contract with Rossetti, i.e., that the cap applied to each change order individually and required new bidding if the change exceeded the cap. However, he did understand that there was a rule that if a contractor exceeded 10 percent of its contract price, the school district would have to go to the school board to request additional funds. On cross-examination, he admitted that before the meeting with Rossetti and Olin, he had been informed that there were “issues about [his] work exceeding the 10 percent change rule” and that that was the reason that Olin and Anderson brought up the idea of his entering into a contract with Rossetti. He agreed that he was told that Rossetti had a “higher cap limit on his change orders” and that Shawnan’s bills could be “passed through” under Rossetti’s contract. He testified that he “assumed” that “they” were going to submit his work under Rossetti’s contract to get around the 10 percent limit on his work. He also knew that board approval for some of his earlier work had been sought but had not been received, and he wanted assurance that he was going to be paid for any further work. This testimony is substantial evidence that, however Smith understood the 10 percent rule-whether it merely required board approval or required new bidding-he knew that the contract with Rossetti was created to circumvent it.
Smith testified that Anderson was at the meeting. Anderson and Olin testified that Anderson did not attend that meeting.
Shawnan’s Contentions
We now turn to Shawnan’s contentions as to why the contract does not violate section 20111 or section 20118.4, or why the contract should be enforced even if it does violate either statute.
Shawnan contends that the competitive bidding requirements do not apply to its contract with Rossetti because the school district was not a party to the contract. It contends that the requirements apply only to contracts directly issued by a public entity and not to subcontracts entered into by a prime contractor on a public project.
We disagree that the Shawnan-Rossetti contract is exempt from competitive bidding requirements because it is between two private entities. As discussed above, Smith’s own testimony constitutes substantial evidence in support of the trial court’s finding that the contract is not a bona fide subcontract but merely a device intentionally designed to evade competitive bidding requirements. Because the contract is in effect a change order to Shawnan’s contract with the school district, section 20118.4 does apply to it.
Next, Shawnan argues that the contract should be enforced because failing to enforce it would not further the public protection purposes of the competitive bidding provisions of the Public Contract Code. (See Miller v. McKinnon, supra, 20 Cal.2d at p. 88 [competitive bidding requirement is “founded upon a salutary public policy declared by the legislature to protect the taxpayers from fraud, corruption, and carelessness on the part of public officials and the waste and dissipation of public funds”]; accord, Associated Builders & Contractors, Inc. v. San Francisco Airports Com. (1999) 21 Cal.4th 352, 365.) Because the contract is between two private entities, it contends, enforcing it will not protect the public.
This argument ignores the fact that the school district was the source of any payment Shawnan would have received under its contract with Rossetti: The contract provided that Shawnan would be paid by Rossetti only when Rossetti had been paid by the school district for Shawnan’s work. Moreover, Rossetti was charging the school district a markup of 15 percent on materials supplied by Shawnan and 20 percent on Shawnan’s labor. If the grading contract had been awarded through competitive bidding, or as a legitimate change order to Shawnan’s contract, the school district would not have been required to pay these additional amounts. Consequently, Shawnan’s argument that the public’s financial interests were not involved is untenable.
The trial court determined that the jury should not be informed that Shawnan was to be paid only when, or if, Rossetti was paid by the school district. Consequently, the “pay if paid” provision was redacted from the contract before it was admitted into evidence and the parties were forbidden to refer to it. The record does not reflect the basis for the court’s ruling. Even if it was not enforceable, the “pay if paid” provision reflects the parties’ intention that Rossetti would merely be funneling school district funds to Shawnan to avoid the 10 percent cap on change orders to Shawnan’s contract.
Shawnan next contends that even if the contract was subject to competitive bidding requirements, several exceptions apply which either validate the contract or allow it to recover for breach of the contract despite the violation of those requirements.
First, Shawnan asserts that it may recover for breach of the contract because competitive bidding requirements do not apply to damages for breach of a public contract. It relies on Shea-Kaiser-Lockheed-Healy v. Department of Water & Power (1977) 73 Cal.App.3d 679 (SKLH v. DWP). That case is inapposite, however.
In that case, the parties entered into a contract for the sale and purchase of concrete aggregate, which was awarded through a valid competitive bidding process. The contract provided that SKLH was to deliver a specified quantity of aggregate at a specified rate of delivery. The contract also gave the DWP an option to purchase additional quantities of aggregate up to the DWP’s maximum requirements during the contract period. The price of aggregate rose sharply during the contract period, and a dispute arose between the parties as to the maximum amount of aggregate SKLH was required to deliver at the contract price. Under protest and with a reservation of rights, SKLH delivered what it believed to be excess quantities of aggregate. (SKLH v. DWP, supra, 73 Cal.App.3d at pp. 683, 684-685.) It later obtained a judgment for the difference between the amount it was paid at the contract rate and the market value of the excess aggregate. (Id. at p. 690.)
The Court of Appeal originally reversed the judgment based on its conclusion that the damage award violated competitive bidding requirements. (SKLH v. DWP, supra, 73 Cal.App.3d at p. 684.) The court did not explain how it arrived at that conclusion in its original opinion. (But see id. at pp. 691, fn. 1, 694-697 [dis. opn. of Loring, J.].) On rehearing, the court concluded that SKLH could recover its damages because its damages were not amounts it claimed it should have been paid under a contract which was awarded in violation of the competitive bidding requirements; rather, the damages resulted from the DWP’s misinterpretation of a validly awarded contract. (Id. at p. 684.) Here, in contrast, the contract was entered into in a deliberate effort to evade the competitive bidding requirements and in violation of those requirements.
Next, Shawnan argues that the contract should be enforced because it had a good faith belief that it was a valid contract. It relies on section 5110, subdivision (a)(1).
Section 5110, subdivision (a)(1) provides that a contractor who proceeded with construction based on a good faith belief that the contract was valid may recover the reasonable cost of the work performed, irrespective of a later determination that the contract is invalid “due to a defect or defects in the competitive bidding process caused solely by the public entity.” (§ 5110, subd. (a)(1).) In enacting this provision, the Legislature declared its intent that a contractor “may be paid the reasonable cost, specifically excluding profit, of labor, equipment, materials and services that were rendered under a contract that was competitively bid, but subsequently determined to be invalid, in order to avoid unjust enrichment of the public entity and an unlawful taking of the contractor’s property.” (Stats. 2003, ch. 678, § 1; see Marshall v. Pasadena Unified School Dist., supra, 119 Cal.App.4th at p. 1260 & fn. 14.) Here, however, the trial court found that Shawnan did not have a good faith belief that the so-called subcontract was valid: “[A]ny claim to a good faith belief by Shawnan that the contract did not violate the [Public Contract Code] is completely undermined by [Shawn] Smith’s testimony.” As we have previously discussed, that finding is supported by substantial evidence. Consequently, we are bound by the trial court’s conclusion that Smith did not act in good faith reliance on a contract he believed to be valid. (Timney v. Lin, supra, 106 Cal.App.4th at p. 1126.) In light of that conclusion, section 5110, subdivision (a)(1) does not afford Shawnan any relief.
Finally, Shawnan contends that a long-recognized exception to statutory competitive bidding requirements, where circumstances render it undesirable or impossible to advertise for bids, applies in this case.
It has long been established that competitive bidding requirements provided for by statute or by city charter may be dispensed with if the public interest is better served by doing so, as where competitive bidding would not produce an advantage. (Graydon v. Pasadena Redevelopment Agency (1980) 104 Cal.App.3d 631, 636, citing, inter alia, Los Angeles Dredging Co. v. Long Beach (1930) 210 Cal. 348.) The courts have held that the competitive bidding statutes must be strictly construed and must not be extended beyond their reasonable purpose. They are not to be applied in a way which denies public agencies the authority to deal with problems “‘in a sensible, practical way.’ [Citation.]” (Domar Electric, Inc. v. City of Los Angeles (1994) 9 Cal.4th 161, 173.) In light of the evidence that stopping the grading work to solicit bids might result in delaying the opening of the elementary school, the school board could have exercised its discretion to dispense with competitive bidding in order to keep the project moving toward timely completion. However, there was no vote by the school board to do so. Instead, Anderson and Olin took it upon themselves to hatch a scheme to circumvent the requirements of section 20118.4. For us to ratify such a scheme would be contrary to a central purpose of the competitive bidding statutes, i.e., to guard against fraud and corruption. (Domar Electric, Inc. v. City of Los Angeles, supra, 9 Cal.4th at p. 173.) We do not hold or imply that Shawnan acted to defraud the school district. Nevertheless, the kind of subterfuge the participants entered into to circumvent section 20118.4 lends itself to fraud and corruption.
In Graydon v. Pasadena Redevelopment Agency, supra, 104 Cal.App.3d 631, on which Shawnan relies, the governing board of the redevelopment agency authorized the awarding of the contract without competitive bidding, based on the opinion of its legal counsel that competitive bidding was not required. (Id. at pp. 634, 638.)
Anderson denied having played any part in devising or carrying out the scheme. He also denied any sense of urgency about completing the construction so the school could open on time. The trial court found that the contract was devised with “the full knowledge of all involved, ” however, presumably including Anderson. We defer to the trial court on questions of witness credibility. (Lenk v. Total-Western, Inc. (2001) 89 Cal.App.4th 959, 968.)
We might reach a different conclusion if the school district were still a defendant in this case. If the school district had not settled with Shawnan, it would unquestionably have been unjustly enriched by the work Shawnan performed. Rossetti, however, has not been unjustly enriched; the work Shawnan did pursuant to the so-called subcontract was not part of the work designated in Rossetti’s contract with the school district, and Rossetti was never paid by the school district for the work done by Shawnan. Because Rossetti received no benefit from Shawnan’s work, we must conclude that there is no public policy which would be served by enforcing the contract against Rossetti.
Rossetti is not, however, an innocent bystander. On the contrary, it was apparently quite happy to collect markups on Shawnan’s work, which was outside the scope of its own contract, in return for doing nothing but passing the bills on to the school district.
For the same reason, we reject Shawnan’s contention that it can recover from Rossetti on a theory of quantum meruit. Shawnan contends that the doctrine applies because the contract was not “intrinsically illegal, ” i.e., that it is merely malum prohibitum (prohibited by statute) and not malum in se (immoral in character, inherently inequitable or designed to further a crime or obstruct justice). However, even if the contract was not intrinsically illegal, the equitable principle underlying quantum meruit is that one party should not be unjustly enriched by receiving the benefit of the other party’s performance. (Maglica v. Maglica (1998) 66 Cal.App.4th 442, 449-450.) As we have discussed, Rossetti was not enriched by the contract.
In light of our conclusion that the evidence supports the trial court’s conclusion that the contract was a sham and is unenforceable, we need not address Shawnan’s contention that the 10 percent cap provided for in section 20118.4 applies to each change order rather than cumulatively, as the school district believed. We note, too, that Shawnan does not explain how it would benefit from that interpretation. The first invoice Shawnan submitted to Rossetti was for $59,000. That change order request alone exceeded 10 percent of the price of Shawnan’s original contract-$339,000.
DISPOSITION
The judgment is affirmed. The parties are to bear their own costs on appeal.
We concur: Hollenhorst Acting P.J., Richli J.
In any event, how and when the issue first arose is not germane to the issues Shawnan raises on appeal: The illegality of a contract may be raised at any time, during trial or on appeal, either by the parties or by the court. (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 147-148, 150.) Indeed, the trial court has an obligation to raise the issue of illegality on its own motion, in order to prevent the judicial system from “lending its assistance to a party who sought to obtain the benefit of an illegal bargain. [Citations.]” (Yoo v. Jho (2007) 147 Cal.App.4th 1249, 1256.)
As pertinent here, section 20118.4 provides, “(a) If any change or alteration of a contract governed by Article 3 (commencing with Section 17595) of Chapter 5 of Part 10.5 of the Education Code is ordered by the governing board of the district, the change or alteration shall be specified in writing and the cost agreed upon between the governing board and the contractor. The board may authorize the contractor to proceed with performance of the change or alteration, without the formality of securing bids, if the cost so agreed upon does not exceed the greater of the following: [¶] (1) The amount specified in Section 20111 or 20114, whichever is applicable to the original contract. [¶] (2) Ten percent of the original contract price.”
(In 2003, when the Shawnan-Rossetti contract was executed, section 20118.4 provided that it applied to contracts governed by the provisions of “Article 3 (commencing with Section 39643) of Chapter 4 of Part 23” of the Education Code. However, Part 23 of the Education Code was repealed in 1996, effective January 1, 2008. (Stats. 1996, ch. 277, § 6; see Historical and Statutory Notes, 27 West’s Ann. Ed. Code (2009 ed.) foll. former §§ 39643, 39644, p. 166.) The same legislation enacted current Education Code, article 3, chapter 5, part 10.5, commencing with section 17595. (Stats. 1996, ch. 277, § 3.) Section 20118.4 was amended in 2006 to correct the erroneous cross-reference. (Stats. 2006, ch. 538, § 540.))