BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Isadore Hall, III
Chair
2015 - 2016 Regular
Bill No: AB 552 Hearing Date: 6/9/2015
-----------------------------------------------------------------
|Author: |O'Donnell |
|-----------+-----------------------------------------------------|
|Version: |4/27/2015 Amended |
-----------------------------------------------------------------
------------------------------------------------------------------
|Urgency: |No |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant:|Arthur Terzakis |
| | |
-----------------------------------------------------------------
SUBJECT: Public works contracts: damages.
DIGEST: This bill requires that any state or local public
works contract, entered into on or after January 1, 2016, that
contains a clause requiring a contractor to be responsible for
consequential damages is not enforceable unless the
consequential damages have been liquidated to a set amount and
identified in the contract.
ANALYSIS:
Existing law:
1)Provides that for a breach of contract the proper measure of
damages, except where otherwise provided by statute, is the
amount which will compensate the party aggrieved for all the
detriment proximately caused by the breach, or which in the
ordinary course of things, would be likely to result from the
breach. (Civil Code Section 3300.)
2)Provides that a provision in a contract liquidating the
damages for the breach of the contract is valid unless the
party seeking to invalidate the provision establishes that the
provision was unreasonable under circumstances existing at the
time the contract was made. (Civil Code Section 1671 (b).)
3)Requires every state contract to contain a provision in regard
to the time when the whole or any specified portion of the
AB 552 (O'Donnell) Page 2 of ?
work contemplated shall be completed, and shall provide that
for each day completion is delayed beyond the specified time,
the contractor shall forfeit and pay to the state a specified
sum of money, to be deducted from any payments due or to
become due to the contractor. The sum so specified is valid as
liquidated damages unless manifestly unreasonable under the
circumstances existing at the time the contract was made.
(Public Contract Code Section 10226.)
This bill:
1)Provides that a public works contract entered into on or after
January 1, 2016 that contains a clause requiring a contractor
to be responsible for consequential damages is not enforceable
unless the consequential damages have been liquidated to a set
amount and identified in the public works contract.
2)Defines "public agency" for purposes of this bill to include
the state, the Regents of the University of California, a
city, charter city, county, charter county, district, public
authority, municipal utility, and any other political
subdivision or public corporation of the state.
3)Makes findings and declarations relative to the need for clear
and uniform guidelines for how liquidated damages and
consequential damages are expressed in public works contracts.
Background
Purpose of AB 552. When a public agency enters into a contract
for a public works project with a contractor, the agency
generally includes provisions for charging the contractor for
damages due to delays or nonperformance of the contract. These
liquidated damages are specified within the contract and agreed
to upon signing of the contract.
According to the author's office, this bill is intended to
address a troubling trend concerning public works construction
contracts. Specifically, the author's office points out that a
number of public agencies have begun utilizing contract
provisions that call for both liquidated damages and unlimited
consequential damages as penalties for project delays in their
AB 552 (O'Donnell) Page 3 of ?
public works contracts.
Liquidated damages are specific sums of money stipulated by the
parties and written into the contract as the amount of damages
to be recovered by a party in the event of a breach by the other
party. Consequential damages, which may or may not be
referenced in the contract, allow the non-breaching party to
recover damages not only for the value of the non-performed part
of the contract, but for any losses that flow from the
consequences of breach, so long as such consequences were
reasonably foreseeable at the time the contract was made.
According to the author's office, unlike liquidated damages,
which are insurable, defined in contract and are intended to
cover actual projected damages, consequential damages are
uninsurable, open-ended and speculative. The author's office
contends that inclusion of consequential damages provisions
raises construction costs, chills participation by mid and
small-sized contractors and subcontractors, and increases
litigation costs.
Additionally, the author's office states that having a
measurable penalty rather than an open-ended penalty is an
important condition for insurers providing surety bonds for
projects. The author's office notes that no business can
reasonably assume open-ended, undefined and uninsurable risk and
that this recent trend by public agencies to try and do this
creates an untenable and unjustifiable burden on contractors.
AB 552 seeks to remedy this issue.
Furthermore, the author's office emphasizes that this bill will
not prevent a public agency from seeking consequential damages,
nor will it require a public agency to include a consequential
damages clause in its contract. Rather, this bill provides that
if the public agency opts to include a consequential damages
clause in the contract, then the damages must be liquidated at a
set amount and identified in the contract.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
SUPPORT:
AB 552 (O'Donnell) Page 4 of ?
Air Conditioning Sheet Metal Association
Air-conditioning & Refrigeration Contractors Association
Associated General Contractors
California Assoc. of Sheet Metal & Air Conditioning Contractors'
National Assoc.
California Chapters of the National Electrical Contractors
Association
California Concrete Contractors Association
California Legislative Conference of the Plumbing, Heating and
Piping Industry
California Surety Federation
Construction Employers' Association (sponsor)
Finishing Contractors Association of Southern California
United Contractors
OPPOSITION:
California School Boards Association
City of Sacramento
City of Thousand Oaks
ARGUMENTS IN SUPPORT: Proponents reference the fact that some
public agencies have adopted policies requiring both liquidated
damages and unlimited consequential damages as penalties for
project delays in their public works contracts. Specifically,
the City and County of San Francisco, the San Francisco Public
Utilities Commission, the San Francisco Metropolitan
Transportation Agency, and the Los Angeles World Airports, among
others, have attempted to create contracts that include
undefined consequential damages for project delay as a term
contractors must accept. While some of these entities have
reversed their decision on pursuing these provisions due to
difficulty finding contractors willing to agree, others have
not.
The Construction Employers' Association states that,
"Consequential damages are not a standard form of damages for
construction contracts because they are difficult to define,
quantify or ascertain. They are also uninsurable, and as a
matter of practice, they are only recoverable in tort actions.
Instead, contacts have historically addressed consequential
damages for delay using a stipulated liquidated damages amount.
In fact, the American Institute of Architects has utilized this
approach in their standard contract forms for approximately 25
AB 552 (O'Donnell) Page 5 of ?
years. Liquidated damages are intended to be a reasonable
advance approximation of an owner's projected damages for delay
such as indirect fees and costs, rental charges, and utility
costs. Liquidated damages therefore give all parties notice and
opportunity to evaluate the risk of delay, whereas one cannot
evaluate or price risk under an open-ended consequential damages
clause."
ARGUMENTS IN OPPOSITION: The City of Thousand Oaks has
expressed opposition to AB 552 and claims, "It will be nearly
impossible to craft a liquidated damages provision that would
cover the full realm of consequential damages. It's easy to
have liquidated damages that are a daily amount for delay but
much more difficult to determine a liquidated damages amount for
other types of consequential damages. The result will be that
the City will bear 100 % of the risk for any damages that are
not identified as liquidated damages."
The City of Sacramento notes that, "By requiring that all
consequential damages be liquidated, AB 552 would limit the
ability of public agencies to ensure that the costs associated
with a contractor's non-performance or under-performance could
be collected. The priority for cities is to have a project
completed on time, not to collect damages. However, when a
contractor does not perform as required under their contract,
damages provide restitution for the taxpayers and agency."
Also writing in opposition, the California School Boards
Association states that "AB 552 would shift project risk from
the contractor to the owner by exposing local educational
agencies to liability for damages beyond the cap stipulated in
the contract."
DUAL REFERRAL: Senate Judiciary Committee