It's Summertime: Another Contractor Stung by PWL in PPP

In Hensel Phelps Construction Co. v. San Diego Unified Port District (published July 26, 2011) the California Court of Appeal handed a prevailing wage bill to the general contractor of a $350 million hotel development project.  Odd, you might say, because the project seemed rather private.  The Port leased land on the San Diego waterfront to a developer (OPB) for construction of a hotel.  The lease term was for a long time, 60 years, and at the conclusion of the lease the land was to be delivered free and clear of the improvement.  In the meantime, the developer was to pay rent of $4.5 million per year ($2.25 during construction), plus 7% of room rental proceeds, 3% on food, and 5% on drink.  OPB hired a developer, who in turn hired Hensel Phelps Construction.  They apparently did not pay prevailing wages and the carpenters and laborer unions sued.

In making these wage and hour determinations, courts usually look to three things: 1) the nature of the ownership of the project, 2) whether the project is funded in part with public money, 3) and whether the project serves a public or private purpose.  See my recent article in The Procurement Lawyer.  In this case, none of these criteria jump out at you.  Although the Port owned the ground lease, the hotel project in this case was undoubtedly privately owned.  Similarly, although a hotel in the area would provide a shot in the arm for the neighborhood, operation of a private hotel does not seem particularly public in nature.  Finally, the Port District did not directly contribute any funds to the project. 

However, there wasa strong interest by the Port to have a hotel developed on the property.  Presumably they felt this was the highest and best use for the general development of the area.  In that sense, the project had a public purpose similar to the City of New London’s purpose in the Kelo case (U.S. Supreme Court takings case).  The Port District in this case attempted for many years to find a developer to build a hotel.  The Port provided specifications for the project.  In effect the Port lent the project a public air by taking such a keen interest in how they wanted the property developed. 

Ultimately, however, the case turned on statutory interpretation on the use of public funds.  The California Labor Code provides that prevailing wages must be paid on any project that is built in whole or in part with public funds, and the statute specifically provides that forbearance of rent counts as public funding.  In this case the developer advised the Port up front that the project did not pencil with the initially negotiated rents unless some of the rent was forgiven.  The Contractor and Developer argued that the lease agreement simply restructured the reasonable lease payments:  there was no lease obligation to be forgiven before the lease was signed and so this shouldn’t count as a “forgiving” of rent under the statute.  This argument was rejected. 

The moral of the story is, if a public entity has a strong interest in how a project is developed this may persuade a court that the project has a public character, even though it may be strictly private in ownership and use;  above all, however, pay very close attention to the applicable prevailing wage statutes in your jurisdiction whenever a public entity is involved, even if very periphorally.  One can’t tell from the opinion who will ultimately get stung here by this unexpected cost—suffice it to say it will not be pleasant.