Kemp Bros. Construction, Inc. v. Titan Electric Corp. (2007) Cal.App.4th

By Thomas B. Snyder

In this case, Kemp was a prime contractor on two public works projects for the Los Angeles Unified School District ("LAUSD").  It subcontracted the electrical work to Titan Electric on both projects.  Partway through performance, Titan began to struggle with its payroll obligations and Kemp agreed to informally advance payments to Titan to assist in completing the work.  When problems continued, Kemp stopped the advance payments and Titan was unable to meet its payroll.  Kemp then retained another electrical subcontractor who completed the work.  Simultaneously, Kemp requested that the LAUSD approve Titan’s substitution as the listed subcontractor under Public Contracts Code Section 4107, arguing that Titan was failing and refusing to perform its work and/or delaying or disrupting the progress of the work.  The LAUSD hearing officer agreed that Titan had been disrupting and delaying the work and therefore determined that Kemp had the statutory right to substitute Titan.

After the projects were completed, Kemp sued Titan and immediately sought a writ of attachment to freeze a settlement payment that Titan was allegedly due to receive from another case.  In order to obtain such a writ, Kemp was required to prove the "probable validity" of its breach of contract claim against Titan, usually a high burden at the earliest stages of a case.  However, rather than rely on evidence of Titans’ breach, Kemp argued that the LAUSD’s administrative finding that Titan was delaying the work and could be substituted was the equivalent of a finding that Titan had breached the contract.  According to Kemp, this previous finding was conclusive as to Titan’s breach and therefore Titan could not re-litigate the breach of contract issue by contesting the "probable validity" of Kemp’s claim.  The trial court agreed and granted Kemp’s application.

The Court of Appeals reversed, finding that the LAUSD’s administrative review of Kemp’s statutory right to substitute Titan could not be given preclusive effect.  For collateral estopple to apply, the issue sought to be precluded must be identical to the former proceeding, and it must have been actually litigated and necessarily decided in the former proceeding.  In this case, Kemp was not required to prove that Titan breached the subcontract in order to substitute them as the listed subcontractor.  Rather, they were only required to demonstrate that one of the statutory grounds for substitution existed.  The administrative officer could, and apparently did, find that grounds for substitution existed without actually considering evidence of whether there was a breach of contract by Titan.  There was no evidence that the officer was presented with the subcontract and asked to determine breach under particular sections.  In this situation, the Court of Appeals could not find that the issue that Kemp sought to have precluded had been fully and fairly litigated before the LAUSD hearing officer.

The Court of Appeals noted that they were not deciding that it was impossible for such an administrative hearing to have preclusive effect in subsequent litigation.  That determination is left to the facts of each case.  In practical effect, because it is not necessary to prove breach of contract in order to obtain substitution under Section 4107, it is not likely that such administrative decisions will have preclusive effect.  However, both general contractors and subcontractors should be wary of what issues and evidence are presented for determination by the administrative officer.  Without due thought and advance consideration of the evidence presented and issues to be decided, an important issue could be decided, and a case won or lost, before it even reaches the courthouse.

For further information please contact Thomas Snyder.  Thomas Snyder is an associate in the Construction, Environmental, Real Estate & Land Use Litigation Practice Group in the firm’s Del Mar Heights Office.