Opinion ID: 1752759
Heading Depth: 1
Heading Rank: 2

Heading: administrative proceedingjudicial review

Text: Jones's contract claim against TxDOT in the administrative proceeding and in the trial courtseeks to recover, among other things, the costs Jones allegedly incurred because the BOP did not approve its request to replace the DBE. In the trial court, Jones claimed that the ALJ committed an error of law, because she applied the wrong standard when she reviewed the BOP's decision to deny Jones's request to terminate the DBE. Jones asserts that the ALJ should have reviewed the BOP's decision under a reasonableness standard, because that standard applies when reviewing a decision under a satisfaction contract. See Black Lake Pipe Line Co. v. Union Constr. Co., 538 S.W.2d 80, 88 (Tex. 1976), overruled in part on other grounds, Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.1989). On the other hand, TxDOT asserts that the ALJ properly reviewed the BOP decision under the partiality, fraud, misconduct, or gross error standard, because that standard applies when reviewing an agreed-upon referee's decision. See City of San Antonio v. McKenzie Constr. Co., 136 Tex. 315, 150 S.W.2d 989, 996 (1941). The court of appeals agreed with Jones, reversed the trial court's judgment, and remanded the case to the trial court. The court of appeals determined that, because the BOP is a TxDOT subdivision, the satisfaction clause was effectively subject to TxDOT's sole determination. 24 S.W.3d at 899. Relying on Black Lake, the court of appeals concluded that the ALJ committed an error of law when it reviewed Jones's contract claim, because the proper review standard is reasonableness rather than partiality, fraud, misconduct, or gross error. 24 S.W.3d at 899-900. Thus, the court of appeals instructed the trial court to remand to the ALJ to decide whether the BOP's decision to deny Jones's request to terminate AK Concrete was unreasonable. 24 S.W.3d at 899-900.
There are two different standards for reviewing decisions under a contract's satisfaction provision. Which standard applies depends on the nature of the contract involved. The first standard whether the decision was based on partiality, fraud, misconduct, or gross erroris derived from our decision in McKenzie, 150 S.W.2d at 989. In McKenzie, the Court held that [w]hen parties to a building contract agree to submit questions which may arise thereunder to the decision of the engineer, his decision is final and conclusive; unless in making it he is guilty of fraud, misconduct, or such gross mistake as would imply bad faith or failure to exercise an honest judgment. McKenzie, 150 S.W.2d at 996. Texas courts have applied this standard in other cases in which the contract designates an engineer on the building project to determine whether some aspect of performance suffices under a satisfaction clause. See State v. Martin Bros., 138 Tex. 505, 160 S.W.2d 58, 61 (1942) (plaintiff must allege and prove that State highway engineer's decision was based on partiality, fraud, misconduct, or gross error); Austin Bridge Co. v. Teague, 137 Tex. 119, 152 S.W.2d 1091, 1092 (1941) (applying partiality, fraud, misconduct, or gross error standard of review to State Highway Engineer's decision under satisfaction clause); State v. Clark, 695 S.W.2d 673, 675 (Tex. App.-Austin 1985, no writ) (court will set aside State highway engineer's decision only if plaintiff proves it was based on partiality, fraud, misconduct, or gross error); Austin Bridge Co. v. State, 427 S.W.2d 925, 937 (Tex.Civ.App.-Austin 1968, writ ref'd n.r.e.) (absent pleadings and proof that State engineer's decision was based on partiality, fraud, misconduct, or gross error, engineer had exclusive and final authority to determine satisfaction of performance). The second review standardwhether the decision was reasonableapplies when the party to the contract has the ultimate authority to determine whether a satisfaction clause has been satisfied. See Black Lake, 538 S.W.2d at 88-89 (adopting reasonableness test because construction contract provided that one party to contract could overrule its own inspectors' decision about whether performance was satisfactory); Cranetex, Inc. v. Precision Crane & Rigging of Houston, Inc., 760 S.W.2d 298, 302 (Tex.App.-Texarkana 1988, writ denied) (applying reasonableness test because a party to the contract and not a designated expert had final determination about satisfaction of performance). The objective reasonableness standard, which is less onerous to prove, allays concerns that agreements conditioned upon one party's satisfaction might be illusory because they could be vulnerable to that party's whim or bad-faith withholding of approval. Black Lake, 538 S.W.2d at 88.
We conclude that the ALJ applied the correct review standardpartiality, fraud, misconduct, or gross errorto review the BOP's decision to deny Jones's request to remove AK Concrete from the job. In Black Lake, this Court had to decide whether the contract required the prime contractor and subcontractor to perform additional work for Black Lake, or whether the work was extra-contractual and therefore compensable in quantum meruit. Black Lake, 538 S.W.2d at 86. To prove that the work was not extra but was required under the contract, Black Lake relied on the prime contract and the subcontract, which both stated that the decisions of Black Lake's inspectors under the work-performance satisfaction clauses were final and conclusive on the contractors but were not binding on Black Lake. Black Lake, 538 S.W.2d at 88. Black Lake contended that, as long as the inspectors' decisions to order additional work were not based on fraud, misconduct, or gross mistake, the Court should deem the work required under the contract. Black Lake, 538 S.W.2d at 88. The Court disagreed. The Court first noted that, in the cases Black Lake relied upon, the contracts provided that an engineer's or architect's decision under a satisfaction clause would bind all the parties. Black Lake, 538 S.W.2d at 88 (citing Martin Bros., 160 S.W.2d at 58; Teague, 152 S.W.2d at 1091; McKenzie, 150 S.W.2d at 989). Then, the Court observed that, in contrast, the Black Lake contracts provided that the inspectors' decisions were final and conclusive only for the contractors, while Black Lake could overrule the inspectors' decisions. Because a contract conditioned on satisfying a party's whim or caprice could be illusory, the Court concluded that the party's decision about whether performance is satisfactory must be objectively reasonable. Black Lake, 538 S.W.2d at 88. Applying that standard to the facts, the Court decided that the contractors could recover for the additional work if it was not reasonably within the scope of the contract's technical specifications and not simply if Black Lake's inspectors ordered the additional work in the absence of fraud, misconduct, or gross mistake. Black Lake, 538 S.W.2d at 89. Here, the court of appeals determined that the contract between Jones and TxDOT is analogous to the contracts in Black Lake. But this disregards two important factors that make this case not like Black Lake and most comparable to those cases Black Lake declined to follow. See Black Lake, 538 S.W.2d at 88 (distinguishing Martin Bros., 160 S.W.2d at 60; Austin Bridge, Co., 152 S.W.2d at 1091; McKenzie, 150 S.W.2d at 989). First, the contract between TxDOT and Jones made the BOP's decision about terminating a DBE binding on all the parties, including TxDOT. Unlike the contract that gave Black Lake a right to overrule its inspectors' decisions about performance, no provision in the contract here allows TxDOT to overrule the BOP's decision. Cf. Black Lake, 538 S.W.2d at 88. Second, contrary to what the court of appeals' analysis suggests, the Court's decision in Black Lake to apply a reasonableness standard did not turn on Black Lake's own inspectors having the authority to determine if performance was satisfactory. See 24 S.W.3d at 893 (Because the BOP is a subdivision within [TxDOT], we believe that this satisfaction clause was effectively subject to the determination of a party; accordingly the applicable standard is the objective reasonableness test.). As discussed above, our holding in Black Lake turned on Black Lake itself having the right to overrule its inspectors' decisions. See Black Lake, 538 S.W.2d at 88 (Black Lake's satisfaction was the conclusive test of whether the work was properly performed. When the inspectors ordered [the contractors] to perform extra work, the order was effective only because Black Lake let it stand.). Accordingly, though the BOP is a TxDOT subdivision, this is not the critical factor when determining what review standard applies. Indeed, in those cases in which the courts applied a partiality, fraud, or gross error standard to review the engineer's decision under the satisfaction clause, the engineer was an employee of a party to the contract. See McKenzie, 150 S.W.2d at 996; Teague, 152 S.W.2d at 1093; Martin Bros., 160 S.W.2d at 61; Clark, 695 S.W.2d at 675; Austin Bridge Co., 427 S.W.2d at 937. Yet, the courts still applied the partiality, fraud, or gross error standard to review the engineers' decisions. As this Court explained in Black Lake, [i]n deciding those cases we refrained from substituting our judgment for that of the architect or engineer, and we held that the decision of the architect or engineer is final and conclusive in the absence of fraud, misconduct, or gross mistake. Black Lake, 538 S.W.2d at 88. Here, we likewise should refrain from substituting our judgment for that of the BOP. The record shows that the BOP is a TxDOT subdivision in Austin with the sole purpose of administering the DBE and Historically Under-Utilized Business Programs. Further, the record establishes that federal regulations require that the contractor provide documents to, and receive approval from, the BOP before terminating a DBE. Moreover, the federal government reviews the BOP's records to ensure it properly follows procedures for terminating a DBE. And, as the record shows, it is the federal regulations about DBEs with which TxDOT had to comply to receive federal funding for the project. See 49 C.F.R. § 23 (1993). Consequently, Black Lake's concern that an objective reasonableness review standard was necessary to prevent the contract in that case from being illusory is not raised here. See Black Lake, 538 S.W.2d at 88. The BOP's temptation to refuse a request to terminate a DBE on a whim or caprice is externally checked by federal oversight. See Black Lake, 538 S.W.2d at 88. Accordingly, the ALJ correctly applied the partiality, fraud, or gross error standard to review the BOP's decision denying Jones's request to terminate its DBE. Finally, we note that, even if the court of appeals were correct in requiring review under the reasonableness standard, the ALJ expressly concluded in its final order the BOP's decision was reasonable. Jones has not challenged the sufficiency of the evidence that the ALJ found supporting that conclusion.