BILL ANALYSIS Ó
AB 552
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Date of Hearing: May 6, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
552 (O'Donnell) - As Amended April 27, 2015
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill requires that any state or local public works
contract, entered into after January 1, 2016, and containing a
clause requiring a contractor to be responsible for
consequential damages is not enforceable unless the damages are
AB 552
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for a set amount identified in the contract.
FISCAL EFFECT:
No likely state fiscal impact, as it appears consequential
damages clauses are not used in state contracts.
COMMENTS:
1)Background. When a breach of contract delays completion of a
construction project, the non-breaching party may recover
consequential damages (CDs) from the breaching party for any
losses indirectly caused by the breach and reasonably
foreseeable at the time the contract was made. Because the
indirect consequences of delay are potentially unlimited and
difficult to prove, construction contracts often instead
contain a liquidated damage (LD) provision to limit liability
for and make it easier for all parties, as well as sureties,
to assess risk. State law requires state construction
contracts to contain an LD provision that specifies a fixed
sum which the contractor must pay for each day beyond the
contracted completion date.
While LD provisions are common in construction contracts, CD
provisions are relatively rare, and if they exist at all, it
is often to specify that there is "no liability" for CDs.
Indeed LD clauses for delay are often intended as a substitute
for difficult to prove CDs resulting from delay. Recently,
however, the author and sponsor (Construction Employers
Association) assert some public agencies have included CD
clauses in contracts that make the contractor liable for
potentially unlimited consequential damages, with no set
amount or even a range of amounts, even though these same
contracts may contain LD clauses requiring the contractor to a
AB 552
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pay a fixed daily amount for delays.
While CD clauses in public contracts are still not the norm,
such clauses are common enough that surety bonders have
informed contractors and public agencies that they cannot
underwrite public contracts with open-ended CD clauses, or can
only provide bonds at higher prices. In response to such
concerns, some public agencies have already removed open-ended
CD clauses from all of their contracts, but apparently several
have not.
2)Purpose. This bill provides that if a public contract contains
a clause making the contractor liable for CDs, the amount
cannot be open-ended, i.e. the damages must be liquidated to a
set amount and identified in the contract. It is not the
author's or sponsor's intent, however, that CDs can only be
recovered if they are included in the contract and liquidated.
If a public agency opts not to include a CD clause, it could
still recover if it could show that the CDs were caused by a
contract breach and were reasonably foreseeable at the time
the contract was entered into.
Analysis Prepared by:Chuck Nicol / APPR. / (916)
319-2081