On March 19, 2002, the City Council approved the award of a contract to Thompson Pacific Construction, Inc. ("Thompson Pacific") for the construction of a new Senior Center at the Sunnyvale Community Center. Thompson Pacific listed Crown Masonry, Inc. ("Crown Masonry") as the masonry subcontractor.

The Public Contract Code permits substitution of a listed subcontractor only under limited, specified circumstances, and requires a contractor to obtain authorization from the City before it can make a substitution. In turn, a subcontractor is entitled to a hearing before the City Council if it objects to the substitution.

On September 16, 2002, correspondence was received from Thompson Pacific requesting the City's authorization to substitute Crown Masonry for another subcontractor on the grounds that Crown Masonry had not executed an agreement for the work. Failure to execute an agreement is a basis for permitting substitution under the Contract Code. The City notified Crown Masonry of its intent to consent to the substitution. Crown Masonry claims it is willing to execute an agreement and has requested this hearing objecting to a substitution.

The Senior Center groundbreaking ceremony occurred in April 2002, and work on the building began in May. The construction is proceeding in an efficient and timely manner, it is anticipated that it will be finished sometime in April or May of 2003. The plans for the Senior Center call for certain portions of the building to be faced, or cladded, with masonry. In addition, the trash enclosure for the building will be masonry. In order to stay on schedule, this work should commence sometime around January 2003.

California's Public Contract Code contains the "Subletting and Subcontracting Fair Practices Act" (Pub. Cont. Code §§ 4100 et seq.) which requires a prime contractor to list whatever subcontractors it intends to use for certain portions of work when it bids on a public works project. The purpose of the Act is to prevent prime contractors from bid shopping and bid peddling in connection with the construction of public improvements. Once a prime contractor's bid is accepted, the prime contractor is not allowed to substitute a different subcontractor for one on the list, unless certain circumstances as set forth in Section 4107 are present. The circumstances generally relate to a subcontractor's inability or unwillingness to perform the work. Listing a subcontractor does not create a contract between a contractor and subcontractor, instead it creates a statutory duty on the part of the contractor to use the subcontractor unless one of the specified circumstances exists. In the event a substitution is permitted, the City retains its ability to approve the new subcontractor.

The specific language of Section 4107 relevant in this matter provides that:

Section 4107 further states:

According to this statutory scheme, the City Council is required to consider Thompson Pacific's request to substitute Crown Masonry. If Council finds that Crown Masonry has failed to execute a contract after it had a reasonable opportunity to do so in accordance with Section 4107 (a)(1), Council should authorize the substitution.

Staff believes that the circumstances listed in Section 4107(a)(1) are present, and recommends that Council authorize the substitution. As of this writing, Crown Masonry has been unable or unwilling to execute a contract. The parties have been involved in negotiations with each other since May 2002. Although many issues were raised between them, the remaining one appears to be as follows. When Crown Masonry submitted its bid to Thompson Pacific, Crown noted it would not be responsible for liquidated damages. The standard contract form Thompson Pacific asked Crown Masonry to sign contained boilerplate language stating Crown Masonry would be liable for liquidated damages if the damages were caused by Crown Masonry's delay. Crown Masonry objected to this language.

In July, Thompson Pacific then presented Crown Masonry with a written contract that incorporated the plans and specifications for the project as well as the subcontractor's bid containing the exclusion of liquidated damages language. Crown Masonry refused to sign it, taking the position that liquidated damages were not excluded clearly enough. Negotiations between the parties appear to have fallen apart at that point, with Crown Masonry refusing to sign the July agreement, and Thompson Pacific refusing to sign a modified agreement.