Failing to Pay Prevailing Wages May Have Just Cost You More Than You Thought

Mechanics lien claims, payment bond claims, stop payment notice claims, delay claims, defect claims, abandonment claims . . .

With the variety of claims unique to construction projects it’s easy to forget that construction disputes are simply a category of business disputes in which broader business-related torts apply.

In Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., Case No. B255558 (February 20, 2015), the California Court of Appeal for the Second District held for the first time that a second-place bidder on a public works contract may sue a winning bidder – who failed to pay its workers prevailing wages – under the business tort of intentional interference with prospective economic advantage.

Intentional Interference with Prospective Economic Advantage

The business tort of intentional interference with prospective economic advantage has its origins in English common law, and some say was recognized as early as 1620.

In one of these early cases, the King’s Bench, one of the early courts of England, held that a defendant, by firing his cannons from his ship, the Othello, off the coast of Africa, had intentionally interfered with the prospective economic advantage of the plaintiff by “contriving and maliciously intending to hinder and deter the natives from trading with” plaintiff’s rival trading ship, the Bannister.

Today, in California, the business tort of intentional interference with prospective economic advantage has five elements:

1. An economic relationship between the plaintiff and a third-party that makes it reasonably probable that the plaintiff will gain some future economic benefit;
2. The defendant’s knowledge of the plaintiff’s economic relationship;
3. A wrongful act or acts by the defendant designed to disrupt plaintiff’s economic relationship
4.  Disruption of the plaintiff’s economic relationship; and
5. Economic harm suffered by plaintiff proximately caused by defendant’s interference with the plaintiff’s economic relationship.

The Roy Allan Slurry Seal Case

Between 2009 and 2012, American Asphalt South, Inc. (“American”) was awarded 23 public works contracts totaling more than $14.6 million throughout Los Angeles, Orange, San Bernardino, and San Diego counties. Two of the losing bidders on those projects –  Roy Allan Slurry Seal, Inc. (“Allan”) and Doug Martin Contracting, Inc. (“Martin”) – sued American for in each of these counties for intentional interference with prospective economic advantage as well as under the Unfair Practices Act (“UPA”) (Bus. & Prof. Code §§ 17000 et seq.) and the Unfair Competition Law (“UCL”) (Bus. & Prof. Code §17200).

Their claim was that American was able to submit the lowest bid because it didn’t pay its workers prevailing wages, and because their material costs were essentially the same, had American paid its workers prevailing wages, Allan and Martin would have been the lowest bidders on the projects.

American sought to dismiss the claims contending that Allan and Martin did not have an existing economic relationship and reasonable probability of being awarded the projects and, as such, could not show that they had a valid claim for intentional interference with prospective economic advantage. This resulted in conflicting rulings from three trial courts in the various counties.

The Appeal

In response to American’s contention that Allan and Martin did not have an existing economic relationship and reasonable probability of being awarded the projects, the Court of Appeal held that while neither Allan nor Martin had been awarded the projects, their allegations were that “but for American’s interference” by not paying its workers prevailing wages they would have been lowest bidders on the projects, and that they had a “tangible expectancy interest the contracts would be theirs” because the public entities awarding those projects were required to award the projects to the lowest responsible bidder.

The Court of Appeal also rejected American’s contention that recognizing a claim for intentional interference with prospective economic advantage would be “bad public policy” because it would “open the floodgates to actions by disappointed bidders and will lead to the release of a defendant’s confidential and proprietary trade information through pretrial discovery.” To the contrary, the Court of Appeal held, the central purpose of the prevailing wage law is to protect employees on public works projects and, by recognizing that plaintiffs may bring claims for intentional interference with economic advantage claims against bidders who fail to pay prevailing wages to their workers, promotes the goals of the prevailing wage laws.

The Court of Appeal also rejected American’s contention that provisions in the Public Contract Code that allow a second lowest bidder on certain public works projects to seek damages from a successful bidder who obtained a contract through violations of workers compensation (Pub. Contract Code §19102) and unemployment insurance laws (Pub. Contract Code §20104.70), are the exclusive remedy for unsuccessful bidders. While a statutory remedy that creates “a right that did not exist in common law” is generally exclusive, explained the Court, a statutory remedy that provides for “a preexisting common law right” is merely cumulative. And, here, because the business tort of intentional interference with prospective economic advantage predates the Public Contract Code remedies, the Public Contract Code remedies are not exclusive.

The Court of Appeal also rejected American’s argument that: (1) its failure to pay prevailing wages was not an “independent wrongful act” giving rise to the tort of intentional interference with prospective economic advantage because its failure to pay prevailing wages occurred after it was awarded the bid; (2) that it’s conduct was “privileged” and amounted to no more than sharp elbow competition among business competitors; and (3) that American owed no “duty” to Allan and Martin under the prevailing wage law, that Allan and Martin lacked “standing” to sue American under the prevailing wage law, and that the proximate cause of Allan and Martin’s injuries was the public entities’ award of the projects to American, not American itself.

However, the Court of Appeal affirmed the dismissal of Allan and Martin’s UPA and UCL claims. As to the UPA claim, the Court of Appeal explained that, while it is unfair for a business to engage in predatory pricing (i.e., selling goods or services below cost for purpose of injuring competitors or destroying competition) under the UPA, by not paying its workers prevailing wages, American was not “selling below cost” but was unlawfully reducing its costs, which is not subject to the UPA.  As to the UCL claim, the Court of Appeal held that Allan and Martin’s request for injunctive relief by ordering American not to violate the prevailing wage law was properly dismissed because the prevailing wage law was intended to benefit workers and, as such, neither Allan nor Martin could show that they would suffer immediate and irreparable harm if an injunction was not issued.

Conclusion

The Roy Allan case is an interesting one. On one hand, it recognizes a business tort that heretofore has never been applied to a construction case involving prevailing wages and public bidding. In that sense, it recognizes a whole new basis for potential liability. On the other hand, I wonder if the facts of this case are so rare that its applicability would be extremely rare and limited to situations where: (1) the material costs between the lowest bidder and second-lowest bidder are extremely close; (2) the lowest bidder is conclusively found to have violated the prevailing wage law; and (3) the amount of underpaid wages is enough to make a difference between being the lowest bidder and second-lowest bidder.