Monday, July 14, 2014

Playing by the (Administrative) Rules

Luck Brothers, Inc. v. Agency of Transportation, 2013 VT 249

By Hannah Smith

In this case, what began with a simple contract dispute quickly evolved into a relatively complicated exploration of the administrative dispute-resolution process.

Plaintiff Luck Brothers, Inc., a construction company, bid on and was awarded a contract by the Vermont Agency of Transportation to rebuild a section of Main Street in Barre City, Vermont. The project commenced in 2011, expenses mounted (as they are wont to do), and soon plaintiff’s expenses exceeded the bid amount. Plaintiff filed a claim against the Agency for additional compensation, alleging differing site conditions from those assumed in the original contract. All very straightforward. The fun began when plaintiff attempted to skirt the Agency’s administrative review process by filing the claim in Superior Court instead of seeking a determination through the mandatory dispute resolution process. Luck Brothers sought from the court both compensation, and a declaratory ruling that it had no obligation to exhaust its administrative remedies through the Agency’s administrative-review process because that process failed to comply with the requirements of due process.

The superior court didn’t buy it, and dismissed the case for lack of jurisdiction, finding no reason why Luck Brothers should be exempt from the statutorily mandated administrative review process. The SCOV agreed, but seized on the opportunity to clearly articulate the standard of review in appeals to the Vermont Transportation Board. And so, where plaintiff sought parity the Court delivered clarity.

Let’s start with an explanation of the mandatory-dispute-resolution process for resolving claims regarding construction contracts administered by the Agency, which Luck Brothers found so disagreeable. The process is articulated in the Agency’s 2006 Standard Specifications for Construction Book, and requires a straightforward three-step process. First, claims for additional compensation must be submitted to the Agency’s Construction Engineer. If the claim is denied, the decision can be appealed to the Agency’s Director of Program Development. And the Director’s decision can be appealed to the statutorily created Transportation Board (the Board). If the results of the review process are unsatisfactory, parties can appeal the Board’s decision to superior court. Luck Brothers circumvented this process altogether, filing a complaint against the Agency directly in superior court.

Again, plaintiff’s primary argument against complying with the Agency process is that the administrative remedies provided by the Transportation Board fail to meet the requirements of due process. Luck Brothers argues that if the decisions of the Construction Engineer and the Director of Program Development are treated simply as executive level (rather than quasi-judicial) adjudications, they should not be given deference in a hearing before the Transportation Board. Plaintiffs contend that the Board’s deference to a “presumptively biased Agency decision” does not provide parties with a fair hearing.

This is not the first time a question has arisen about the Boards’ perhaps questionable review of contract disputes. Does the Board review such disputed compensation decisions de novo or on the record, in light of the fact that the Engineer’s and Director’s decisions are sometimes biased and often unaccompanied by an adequate record? The question was recently considered by the Board, which concluded that the record produced at the Agency level may not be sufficient to make an informed decision, and parties are entitled to a de novo hearing before the Board. Then, the Board later appeared to backpedal, concluding that review of contested-compensation appeals before the Board should be based on the slim record developed at the Agency level. The Board’s conflicting opinions about the standard of review to be used is at the crux of the dispute before the SCOV.

The SCOV first of all agreed that the superior court was right to dismiss plaintiff’s contract dispute for lack of jurisdiction. The SCOV relied on its own consistent precedent to conclude that whenever administrative remedies are established by statute or regulation, a party must “exhaust” those remedies before seeking relief from the courts. Requiring exhaustion of administrative remedies serves to promote judicial efficiency, and upholds the authority of administrative agencies.

The Court was not without sympathy for Luck Brothers, who argue that on-the-record review before the Board prevents the parties from making their case before a neutral decision maker as is required under due process. The Court recognized that the Engineer’s and Director’s decisions are informal, internal, and executive rather than adjudicative in nature, and thus it is up to the Board to provide parties with a “non-deferential standard of review that affords due process protections.” In other words, the Board should not blindly defer to the potentially biased Agency decisions in resolving contract disputes.

The Agency argues that its expertise in the arena of construction contracts entitles it to deference, and that the Board is limited by statute to on-the-record appellate review. The Court countered that the Board itself has extensive expertise in the field of construction contracts, and that the enabling statute actually empowers the Board to make findings and hold evidentiary hearings. In other words, the Board is not required to rely on the good word of the Agency to make its decisions. But despite the empowering language of the enabling statute, the standard of review remains murky; it lands somewhere between de novo review that ignores the agency decision, and typical appellate review where the record from below is considered. The SCOV attempted to clarify the standard once and for all, stating that review before the Transportation Board, “although it does not necessarily involve a full blown hearing and does not treat the Agency’s decision as if it did not exist, is essentially de novo review.”

The standard articulated in this case is different from the “deferential on-the-record review” standard, which applies when courts are reviewing legislatively authorized administrative decisions. In such cases, deference is necessary to prevent courts from acting as “superagencies” and to allow agencies to address matters within their “specialized expertise.” In this case, the Board itself has the expertise necessary to make an informed decision, and may consider but need not rely on the opinion of the agency.

Having determined that that Board may develop the record and must apply a de novo non-deferential standard of review to Agency decisions in the administrative claims process, the Court found no reason to allow plaintiff to avoid the administrative-review process. The de novo standard of review provides adequate protection of plaintiff’s due-process rights.

The Court’s decision concludes that in light of the now-clearly-defined standard of review, nothing short of a doctor’s note will get Luck Brothers out of complying with the administrative review process. The Court brushes off plaintiff’s remaining claims that the mandatory administrative procedure impedes due process, including the claim that formal rulemaking was required to establish procedures for the Agency’s claims process (not required since the process is executive rather than adjudicative in nature, and procedural due process is protected in the Board appeal process), and the claim that the lack of deadlines for decision-making under the claims process. In short, the Transportation Board provides the due-process protections Luck Brothers sought.

Although Luck Brothers lost the battle, their appeal provided the Court with a much-needed opportunity to shed some light on the murky standard of review applied by the Transportation Board.

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