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Conflict of Interest–Contractors Beware

Recently, we have seen an increase in legal rulings related to contractor conflict of interest in public works projects.

In a recent finding by the Court of Appeal, Davis. v.Fresno Unified School District, it was held that the taxpayer could pursue the general contractor for conflict of interest in connection with a public works project. Specifically, Harris Construction, the general contractor, had also served as the District’s construction manager. The Court found a potential and inherent conflict in both managing the District’s construction operations and then actually building one of the District’s facilities.

This same outcome was reached this April by the Second District Court of Appeal in Los Angeles. There, the Court ruled that a taxpayer lawsuit against Balfour Beatty Construction could go forward. As with the Davis case, Balfour Beatty had acted as both the District construction manager and general contractor.

The crux of this legal dispute is an interpretation of California Civil Code section 1090 which prohibits representatives from public entities from being financially interested in business dealings. Parties like Harris Construction and Balfour Beatty argued that the conflict of interest statutes should only apply to the public entity itself, not independent contractors and third-party vendors. This argument has been flatly rejected. In both legal opinions, the Courts have found that the breadth of the conflict of interest statutes extends to vendors and contractors of public entities. Without this extension, those who do work with public entities would be completely immune from legal liability for the conflicts they create. Thus, private companies can be liable for public conflicts of interest.

The ultimate irony in conflict of interest cases is that the beneficiary of such claims is not the plaintiff, but the public owner. The penalty for conflict of interest is disgorgement of any amounts paid to the contractor back to the public owner. In these cases, that means both contractors may have to reimburse the school districts for all amounts they received related to these public works projects, including all construction management fees.

So what is the lesson here? Contractors must create a clear segregation of roles and responsibilities on public works projects. If you have a construction management contract with an owner, do not bid or construct their public works projects. Do not use the allure of a construction management contract to gain a toe-hold with the owner in hopes of securing future construction work. For contractors who provide both construction management and building services, simply don’t perform both for the same owner. Keeping these roles segregated will help you avoid these conflict of interest claims and the disgorgement of money that follows.