In O'Shea v. New Jersey School Construction Corp., 388 N.J. Super. 312 (App. Div. 2006), the Appellate Division held that New Jersey's bid-naming statutes absolutely bar substitution for the bid-named subcontractors prior to the execution of subcontracts.
New Jersey's public bidding statutes require each bidder to name the major trade subcontractors (i.e., plumbing, HVAC, electrical and steel/iron) with whom the bidder will subcontract, on all projects to be awarded to a single prime contractor. In O'Shea, an association of New Jersey-based mechanical contractors and its executive director sought mandamus-type relief to compel the defendant, the New Jersey School Construction Corporation ("SCC"), to end its practice of permitting general contractors to substitute major trade subcontractors for those the general contractors named in their bids. The SCC is a subsidiary of the New Jersey Economic Development Authority and is the agency responsible for implementing New Jersey's unprecedented commitment to spend $8.6 billion to build new schools and overhaul the infrastructure of hundreds of existing schools in the state's poorest school districts. The SCC's bid forms state the prime contractor is not permitted to substitute subcontractors, but also state that substitution is permissible with the SCC's written approval. Plaintiffs apparently contended in the trial court that substitutions and bid-shopping were common on SCC projects.
Before the trial court, the SCC acknowledged that it was permitting prime contractors to substitute subcontractors for those named in their bids, but contended it had discretion to do so. In fact, during the litigation, the SCC created, officially implemented and produced in discovery, a written substitution policy that stated that subcontractor substitutions are allowed where the subcontractor identified in the bid was going out of business, refused to perform, refused to adhere to the contract requirements, stated in writing that it was overextended or overcommitted and provided a reasonable explanation for same, or under any other circumstance where the SCC deemed there to be a rational basis for the substitution. Plaintiffs' moved to transfer the case to the Appellate Division on the ground that mid-litigation adoption of the policy was procedurally and substantively improper rulemaking on the part of a state agency, a claim over which the Appellate Division has jurisdiction. The trial court denied the motion and, instead, dismissed the complaint, holding there was no justiciable controversy between the parties because no particular bidder's rights had been impacted by the SCC's adoption of the policy.
The Appellate Division reversed, finding not only a justiciable controversy, but also that the SCC does not have discretion to permit substitution of subcontractors after a contract has been awarded. Citing cases interpreting the Local Public Contract Law, N.J.S.A. 40A:11-1 et seq., a statutory scheme similar to the one under which the SCC operates, the Court noted that public bidding statutes have been strictly construed to require the prime contractor to adhere to all statutory requirements. Although neither the statutes nor the prior case law address the precise issue before the Court in O'Shea, i.e., whether a state agency has discretion to allow substitutions, the Court held that requiring the prime contractor to use the subcontractors listed in the bid gives meaning to the statutory language requiring the contractor to contract with the subcontractors named in its bid, fosters competition and decreases bid shopping.
The Court also cited its observation in Stano v. Soldo Constr. Co., 187 N.J. Super. 524 (App. Div. 1983), that the purpose of the bidding statutes is to secure the benefits of competition for the taxpayers. Allowing the prime contractor to substitute unlisted subcontractors, usually for a lower price than that quoted by the listed subcontractor, benefits only the prime contractor and not the public. Thus, even though the statutes do not expressly prohibit substitutions, allowing "bid shopping" after the contract is awarded is contrary to the statutory purpose and the plain language of the statute's requirement that the bidder list the subcontractors with whom it "will" subcontract.
Thus, as a result of O'Shea, it seems that substitutions are barred, under all of New Jersey's various public bidding statutes, during the period between bid submission and execution of subcontracts. A footnote in the opinion confirms the Court's holding is not intended to affect a prime contractor's remedies if a named subcontractor breaches after the subcontract is signed. Nevertheless, O'Shea appears to be a major victory for subcontractors in that the prime contractor must contract with all named subcontractors, upon pain of losing the award. The prime contractor's inability to shop the bid will ensure a measure of price protection for named subcontractors. Also, if named, a subcontractor would seem to have unprecedented leverage in its contract negotiations with the prime contractor.