June 19, 2018
Most of the law governing public works construction projects is based in either the Public Contract Code or municipal or county charters. The Public Resources Code, Health & Safety Code, Business and Professions Code, Civil Code, Education Code, Water Code, Government Code, Labor Code, Code of Regulations, and the enabling acts of special districts also cover public contracting. These statutes are interpreted by the courts and there is substantial case law, or judge-made law. The law that applies will depend on a variety of factors:
1. What type of public entity? Is there a municipal, city or county charter that supersedes the Public Contract Code on specific issues? Is the specific entity required to competitively bid its contracts?
2. What type of procurement is it? Professional services, construction, procurement of materials and supplies, each have their own requirements. What is the contracting method, design-bid-build, design-build, construction manager at-risk? Specific procurements, such as energy management contracts or unique products, have their own requirements.
3. What is the context of the procurement and the parties involved? The rules governing conflicts of interest and independent contractors have been the subject of recent clarification by the California Supreme Court, and have serious implications in the event of violations. Issues of delegated authority and authorized mode of contracting, also have serious implications and turn on specific actions by the governing body for the contract.
4. What funding sources provide requirements and what regulatory agencies have jurisdiction over the work? Are there federal funds? Is construction regulated by the state, such as hospitals, schools and community college districts, that work under a different regulatory regimen than other public works, as do jails and essential facilities.
5. What environmental requirements, permits and standards apply? Are they in the contract or imposed by regulation?
6. What is the genesis of the project: is it required by law, court order or legislation?
7. Are you a hospital or otherwise under the jurisdiction of the Office of Statewide Health Planning and Development (OSHPD)
2. Where to Start?
For all procurements, the statutes affecting project planning, surveyed below, and the public entity’s enabling legislation regarding general procurement authority, are the places to start. If the procurement is professional services, then the next step is the California Government Code on procuring professional consultants discussed in Section I.D of this seminar manual. If the procurement is construction, then the starting point is the Public Contract Code and the Labor Code discussed throughout this manual, starting at Section II. In the case of charter cities or charter counties, equivalent municipal code provisions or contracting guidelines may supplant and supersede portions of these statutes.
Procurements pursuant to court order, to meet legislative mandates, and for hospitals present special circumstances. Legislation, court orders, regulations, financing requirements, must all be examined. For hospitals, the California Building Code includes regulations prepared by the Office of Statewide Health Planning and Development (OSHPD) which provides requirements and regimens for all stages of hospital structural assessments, classification, retrofit or replacement requirements, planning, design and construction. These regulations should be
consulted at the outset and carefully followed throughout the project.
3. Statutes Affecting Project Planning
Six types of statutes affect project planning by public entities, discussed in the following sections. Noncompliance with any of these statutes can result in litigation and the possibility of a court injunction restraining the public entity from going forward with a construction project. Where a public works project encounters community opposition, these statutes often become the focus of efforts to stop or delay the construction project.
(a) What’s New? California Supreme Court Applies Government Code Section 1090 Conflict of Interest Prohibitions to Independent Contractors “Whose Actual Duties Include Engaging in or Advising on Public Contracting”
Under Government Code Section 1090, where an officer or member of the public agency’s governing board has a financial interest in the contract, the contract is void.1 For financial interests not covered by Section 1090, the requirements of the Political Reform Act of 1974 2 may apply. These provisions require disclosure of any interest in the contract and abstention from voting on the contract. Violation may result in an action for injunctive relief to restrain the execution of any official action pending final adjudication.3
California Government Code section 1090 has long limited a public entity’s officers and employees from making contracts in which they have a financial interest when they act in their official capacities. As used in Section 1090, a contract “made” by an officer or employee encompasses preliminary discussions, negotiations, compromises, reasoning, planning, drawing up plans and specifications and solicitation for bids.4 Any contract entered into in violation of section 1090 is invalid.5 A willful violation of section 1090 is punishable as a felony.6
Self-dealing in violation of Section 1090 can result in substantial civil liability including restitution of all public moneys paid under the tainted contract. Under Section 1090, “the prohibited act is the making of a contract in which the official has a financial interest.” A contract that violates Section 1090 is void regardless of whether the terms of the contract are fair and equitable to all parties.7 Further, if the self-dealing is knowing and willful, then criminal liability may apply and the person “is forever disqualified from holding any office in this state.”8
But how does Section 1090 apply when the contract is made by a public entity’s consultant, advisor or an independent contractor? In People v. Superior Court (2017) 3 Cal.5th 230 (Sahlolbei), the California Supreme Court answered this question. Section 1090 applies to any contract by “any contractor who has been retained or appointed by a public entity and whose actual duties include engaging in or advising on public contracting.” Section 1090 applies to advisors, consultants and independent contractors. The Sahlolbei decision overviews California case decisions and statutes related to conflicts in governmental decision and procurements.
Overall, the Sahlolbei decision suggests the courts will employ a heightened standard of review of contracts made by or with independent contractors having prior or existing relationships with a public project or procurement. The decision is required reading for all lawyers advising public entities on public contracting and procurement.
(b) The Sahlolbei Decision
The Sahlolbei decision involved a criminal prosecution under Section 1090 and a narrow fact pattern unrelated to the construction industry or typical procurements of equipment, material or supplies.
In Sahlolbei, the Riverside County District Attorney prosecuted a surgeon under Section 1090 for allegedly influencing the public hospital where Dr. Sahlolbei worked to hire another doctor and then profiting from that doctor’s contract. Dr. Sahlolbei was an independent contractor and never an employee of the Hospital. He served on the Hospital’s medical executive committee, an independent committee comprised of members of the medical staff that advised the Hospital and its governing board on the Hospital’s operations, including physician hiring.
The Hospital’s CEO asked Dr. Sahlolbei “to try to bring physician services to the hospital because [the surgeon] had better connections than [the Hospital] did.” The District Attorney alleged that Dr. Sahlolbei had then negotiated what amounted to kick-backs in connection with his recruitment of an anesthesiologist to serve on the hospital’s medical staff.
The District Attorney brought charges against the surgeon for grand theft and violation of Government Code section 1090. The trial court dismissed the section 1090 charge and the court of appeal affirmed, both courts relying on People v. Christiansen (2013) 216 Cal.App.4th 1181 (Christiansen), a decision involving a construction program manager for a school district construction bond program. Both courts applied the same rationale: section 1090 applied only to public employees and officers, not to independent contractors. The California Supreme Court reversed.
(c) Key Takeaways
The California Supreme Court’s opinion surveys a broad range of published decisions, legislative history and secondary authority, all with direct application to public works construction and public procurement.
Who Comes Within the Scope of Section 1090? The dissent in the lower court had argued that section 1090 should have applied to the surgeon based on case decisions that applied section 1090 to independent contractors occupying positions “that carry the potential to exert ‘considerable’ influence” over public contracting.”9 The Sahlolbei decision found that even these cases indicated too high a standard:
“But we decline to adopt the “considerable influence” standard when it comes to defining who is covered by section 1090 in the first instance. As we have explained, independent contractors come within the scope of section 1090 when they have duties to engage in or advise on public contracting that they are expected to carry out on the government’s behalf.”
The Sahlolbei decision went on and applied the new rule to the surgeon, explaining that: “A physician who was an officer or a common law employee of the Hospital who was similarly tasked with engaging in and advising on physician recruitment would have been expected to be faithful to the public in performing those duties and would have come within the scope of section 1090. [The surgeon] is not exempt from section 1090 liability merely because he was an independent contractor.”
This new standard in Sahlolbei is significant because it effectively “lowers the bar” for section 1090 scrutiny. It is, potentially, a paradigm shift in the analysis and initial screening of any transaction for potential section 1090 scrutiny.
Are Corporations Subject to Section 1090? The answer is yes. The Sahlolbei decision cited with approval the holding of Davis that applied section 1090 to corporations to the same degree as individual consultants.
Examples of Potential Section 1090 Liability in Public Works Construction and General Procurements. The Sahlolbei decision discusses a series of cases with approval that provides examples and standards for potential section 1090 scrutiny:
Advisors and Program Managers. An independent contractor who advised a school district on a bond measure for school construction and then won a project management contract for administration of the construction program funded by the bond.10
Designers and Planners. A designer or planner serving a public entity as a consultant that plans a construction project who then later acts as the contractor who carries out the project.11 (Although not cited in the Sahlolbei decision, this same principle is reflected in statutes authorizing design-build procurements that preclude a project’s “bridging designer” from competing for the design-build contract that follows.12)
Construction Contractors. A construction contractor or consultant who performs preconstruction services, assisting a public entity with plans, specifications and project planning, and thereafter bids or proposes on the subsequent (and separate) construction contract.13 The case law relied on by the Sahlolbei court arose from lease-leaseback transactions where the contractor reviewed plans and specifications for school projects and then proposed on the lease-leaseback contract.14
Service on Boards or Oversight Committees. The court relied extensively on a 50-yearold decision defining the “making of a contract” for purposes of section 1090, as including service on oversight committees regarding the project.15 Management Consultants. A waste management consultant who recommended and received a franchise to operate the waste management for the public entity as part of a cost reduction measure.16
Facts That May Warrant Close Scrutiny. The Sahlolbei decision discusses and provides some clarity on the underlying facts that may trigger section 1090 scrutiny regarding consultants or independent contractors:
Engaging in or Advising on Public Contracting. The decision provides a relatively bright line standard which it restates in several locations in the opinion: any contractor who has been retained or appointed by a public entity and whose actual duties include engaging in or advising on public contracting is charged with acting on the government’s behalf is expected to subordinate his or her personal financial interests to those of the public in the same manner as a permanent officer or common law employee tasked with the same duties.17
Having A Role in Planning or Preliminary Discussions Regarding the Later Contract. The decision relies on a 50-year-old California Supreme Court decision and republishes its holding on what constitutes the “making of a contract” for purposes of section 1090. Simply put, it goes far beyond the drafting and signing of a written instrument; it includes “planning, preliminary discussions, compromises, drawing of plans and specifications and solicitation of bids.”18
Present or Future Expectations of Profit or Loss. The court commented on the phrase ‘financially interested’ in the making of a contract, for purposes of section 1090. The court stated that it “broadly encompasses anything that would tie a public official’s fortunes to the existence of a public contract” and “include indirect interests and future expectations of profit or loss.”
Proof of Financial Interests May Be Implied. Notably, the court discussed the standard of proof of improper financial interests: “[m]oreover, prohibited financial interests are not limited to express agreements for benefit and need not be proven by direct evidence. Rather, forbidden interests extend to expectations of benefit by express or implied agreement and may be inferred from the circumstances.
When Section 1090 Does Not Apply. Finally, the Sahlolbei decision also provides some standards for when Section 1090 scrutiny does not apply.
Advisor/Independent Contractors Not Involved in Public Contracting. The court also made clear that not all independent contractors are covered by section 1090: “section 1090 liability extends only to independent contractors who can be said to have been entrusted with transacting on behalf of the government…” and that application “turns on the extent to which the person influences an agency’s contracting decisions or otherwise acts in a capacity that demands the public trust.” The court gave the following example:
“so, for example, a stationary supplier that sells paper to a public entity would ordinarily not be liable under section 1090 if it advised the entity to buy pens from its subsidiary because there is no sense in which the supplier, in advising on the purchase of pens, was transacting on behalf of the government.”19
Renegotiating the Advisor/Independent Contractor’s Own Contract. The decision identifies instances where advisors/independent contractors subject to section 1090 will be involved in the making of public contracts in which they benefit, but will not be liable because they were not acting in their official capacities.20
For example, an attorney may negotiate a contingency fee contract with the public entity, acting in her or his own capacity, which is permitted; but then negotiating a separate referral agreement based on the contingency fee contract, is not.21 City firefighters may negotiate a contract with the city for sale of equipment they designed.22 This is distinguished, however, from changing “hats” from advisor to contractor on the same project.23 (d) Resolved for Now: Who Has Standing to Sue?
In Cal. Taxpayers Action Network v. Taber Construction, Inc. (2017) 12 Cal.App.5th 115, published May 31, 2017, the Court of Appeal recognizes taxpayer standing to bring suit for section 1090 violations where the public entity fails to act.
The Sahlolbei decision was published June 26, 2017 and does not mention Taber. Whether due to the close proximity in time, the fact that Taber was published after oral argument, or for other reasons, is not known. The Taber holding recognizing taxpayer standing is, therefore, binding on the California trial courts.
(e) Conclusion
The Sahlolbei decision addresses several of the primary elements that constitute a section 1090 violation: who is subject to section 1090? What constitutes the making of a contract? What constitutes a financial interest?
The issue of taxpayer standing was not presented nor mentioned and as of this writing, it is only resolved at the appellate level. What the trial courts and appellate courts do with the Sahlolbei decision and the subject of taxpayer standing will be an evolving set of issues in the years to come.
(f) Other Statutes Affecting Project Planning Each of the statutes below could take a full day of presentation and discussion and fill hundreds of pages. They are mentioned briefly.
(g) CEQA
The California Environmental Quality Act24 (“CEQA”) requires an analysis for any “project” which may have a significant effect on the environment, leading to a negative declaration or an environmental impact report. The term “project” is broadly defined, and specifically includes:
“An activity directly undertaken by any public agency including but not limited to public works construction and related activities, clearing or grading of land, improvements to existing public
structures…”25
Unless exempt, a project cannot be “approved” until the environmental review process is completed.26 With respect to public projects, CEQA Guidelines provide that environmental documentation “should be prepared as early as feasible in the planning process” and that “CEQA compliance should be completed prior to acquisition of a site for a public project.”27 CEQA is a specialty field that exceeds the scope of this seminar manual.
(h) Brown Act
The public agency’s governing board must comply with the Brown Act28 when approving plans and specifications, calling for bids, or awarding contracts. The act requires the public agency’s legislative body deliberate and make decisions in open public meetings.29 The agency must prepare and post in advance an agenda describing the items of business it will transact or discuss at the meeting.30 The Brown Act was passed by the legislature to recognize that:
public commissions, boards and councils and the other public agencies in this State exist to aid in the conduct of the people’s business. It is the intent of the law that their actions be taken openly and that their deliberations be conducted openly. The people of this State do not yield their sovereignty to the agencies which serve them. The people, in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know. The people insist on remaining informed so that they may retain control over the instruments they have created.31
Any interested person may commence a court proceeding against the agency to obtain a judicial determination that an action taken by its legislative body in violation of the Brown Act “is null and void.”32 (The statute establishes time limits for protesting the governing body’s decision and for taking steps to cure it.) Thus, the validity of an action awarding a bid or approving a contract may be subject to contest for Brown Act violations.
An action cannot be declared null and void if “[t]he action taken gave rise to a contractual obligation, including a contract let by competitive bid…, upon which a party has, in good faith…, detrimentally relied.”33
Under this provision the agency may avoid invalidation of a contract, however, a lawsuit may hold up the contract until the relevant good faith and reliance have been established before the court. A Brown Act claim, however, must pertain to “action” by the public body and meet prescribed time limits.34 Like CEQA, the Brown Act is a specialty field that exceeds the scope of this seminar manual.
(i) Zoning And Building Ordinances
Generally, the local agency must “comply with all applicable building ordinances and zoning ordinances of the county or city in the which territory of the local agency is situated.”35 This requirement does not apply to a facility for “the production, generation, storage, or transmission of water.”36 Also exempt from building code requirements, but not zoning code requirements, are facilities “for the production, generation, storage, or transmission of . . . waste water.”37
Note that in some agencies may have rights of pre-emption over local zoning regulations. In 1956, California Supreme Court held that the state had completely occupied the field of regulating public school building construction, and construction of such school buildings by school districts was not subject to the building regulations of a municipal corporation in which the building is constructed.38
Following this decision, the legislature passed a series of statutes limiting the City of Taft holding, including what is now Government Code section 53094. Another court interpreted thisstatute and determined that the legislature had “conclude[ed] instead that State educational policyshould not automatically prevail over local regulatory concerns. Rather a school board decisionto exempt itself from local regulation is subject to public and judicial scrutiny and reversal iffound to be arbitrary and capricious. Thus, rather than grant absolute immunity from or giveunqualified consent to local control, the Legislature in section 53094 struck a balance, though notequal, between State educational and local regulatory interests and control.”39
Practitioners representing school districts, special districts, and state agencies may need to evaluate the extent to which local planning and zoning regulations apply to agency projects. In addition, certain construction projects may be exempt from local building plan review and inspection. The most common examples are projects subject to review by the Division of the State Architects for schools and community colleges, and hospitals, which are under the jurisdiction of the Office of Statewide Health Planning and Development.
(j) General Plan Requirements
If a county or city has adopted a General Plan, the local agency may not construct or authorize “a public building or structure” until it submits to the planning agency having jurisdiction, the location, purpose and extent of the project and the planning agency has reported as to the project’s conformity with the General Plan.40 The planning agency has 40 days to review the matter, and failure to do so constitutes a finding of conformity. If the planning agency does not approve the project, the decision may be overruled by the local agency.41
1. See Thomson v. Call (1985) 38 Cal.3d 633, 645-46.
2. Gov. Code Section 81000, et seq.
3. Gov. Code Section 91003.
4. Stigall v. City of Taft (1962) 58 Cal.2d 565, 569-71; Millbrae Assoc. for Residential Survival v. Millbrae (1968) 262 Cal.App.2d 222, 237.
5. Gov. Code Section 1092.
6. Gov. Code Section 1097.
7. People v. Honig (1996) 48 Cal.App.4th 289, 333; Thomson v. Call (1985) 38 Cal.3d 633, 646-49.
8. Gov. Code Section 1097.
9. Cal. Housing Finance Agency v. Hanover/Cal. Management and Accounting Center, Inc. (2007) 148 Cal.App.4th 682, 693 (California Housing) [outside attorney, though an independent contractor, was covered by section 1090]; Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1125 (Hub City) [independent contractor who provided waste management services came within section 1090]; Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261, 300 [extending section 1090 to corporate consultants].)
10. The facts in People v. Christiansen (2013) 216 Cal.App.4th 1181, reversed by Sahlolbei.
11. Sahlolbei, 3 Cal.5th at 238, approving Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, 301 (Davis); McGee v. Balfour Betty Construction, LLC (2016) 247 Cal.App.4th 235, 249 (McGee). Also see
Cal. Taxpayers Action Network v. Taber Const., Inc. (2017) 12 Cal.App.5th 115 (Taber) decided shortly before Sahlolbei and not mentioned in the Sahlolbei opinion.
12. See, e.g., Education Code §81703(c)(2)(A)(“An architectural firm, engineering firm, construction manager, contractor, subcontractor, consultant, or individual retained by the governing board of the community college district directly or indirectly before the award of the project to assist in the planning of the project, including, but not necessarily limited to, the development criteria or preparation of the request for proposal, shall not be eligible to participate in the competition with the design-build entity or to perform work on the project as a subcontractor.”); but see Public Contract Code §22162(c) suggesting but not requiring the determination of a prohibited conflict (“The local agency shall develop guidelines for a standard organizational conflict-of-interest policy, consistent with applicable law, regarding the ability of a person or entity, that performs services for the local agency relating to the solicitation of a design-build project, to submit a proposal as a design-build entity, or to join a design-build team.”)
13. Sahlolbei, 3 Cal.5th at 238, approving Davis and McGee. See also Taber, supra.
14. See Davis, supra; see also McGee, supra, Taber, supra.
15. Sahlolbei, 3 Cal.5th at 239, approving Stigall v. City of Taft (1962) 58 Cal.2d 565, 571 (Stigall).
16. Hub City Solid Waste Services, Inc. v. City of Compton (2010) 186 Cal.App.4th 1114, 1125.
17. Sahlolbei, 3 Cal.5th at 240.
18. Sahlolbei, 3 Cal.5th at 239, approving Stigall, 58 Cal.2d at 571.
19. Sahlolbei, 3 Cal. 5th at 240.
20. Id. at 246.
21. Id. (citing Campagna v. City of Sanger (1996) 42 Cal.App.4th 533, 539-40).
22. 80 Ops. Cal. Atty. Gen. 41, 41 (1997) (“[C]ity firefighters who have developed a firefighting protective device may sell the device to the city’s fire department without violating…section 1090 if they contract with the city solely in their private capacities.”)
23. McGee, supra; Davis, supra. See also Taber, supra.
24. Public Resources Code section 21000, et seq.
25. 14 Cal. Code of Regs., section 15378(a)(1).
26. See Public Resources Code section 21151.
27. 14 Cal. Code of Regs., section 15004(b)(1); see McQueen v. Board of Directors of Mid-Peninsula Regional Open Space Dist. (1989) 202 Cal.App.3d 1136, 1147.
28. See Gov. Code sections 54950 – 54962.
29. See Gov. Code sections 54950, 54953.
30. Gov. Code section 54954.2.
31. Gov. Code section 54950.
32. Gov. Code section 54960.1.
33. Gov. Code section 54960.1(d)(3).
34. See Boyle v. City of Redondo Beach (1999) 70 Cal.App.4th 1109.
35. Gov. Code section 53091.
36. Id. (emphasis added).
37. Gov. Code section 53091 (emphasis added).
38. Hall v. City of Taft (1956) 47 Cal. 2d 177.
39. City of Santa Cruz v. Santa Cruz City School Bd. of Education (1989) 210 Cal. App. 3d 1, 6 (finding that a school board was authorized to exempt a project for new stadium lighting from local zoning control); see also Taxpayers for Accountable School Bond Spending v. San Diego Unified School Dist. (2013) 215 Cal. App. 4th 1013 (Upholding the District’s decision to exempt from zoning a large group of projects at several sites and is in accord
with the City of Santa Cruz holding).
40. Gov. Code section 65402(c).
41. See Id.
42. See Gov. Code section 4000 et seq.
43. Gov. Code section 4000 – 4004.
44. Gov. Code section 4007.