BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 552|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: AB 552
Author: O'Donnell (D)
Amended: 7/16/15 in Senate
Vote: 21
SENATE GOVERNMENTAL ORG. COMMITTEE: 13-0, 6/9/15
AYES: Hall, Berryhill, Block, Gaines, Galgiani, Glazer,
Hernandez, Hill, Hueso, Lara, McGuire, Runner, Vidak
SENATE JUDICIARY COMMITTEE: 7-0, 7/14/15
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 79-0, 5/11/15 - See last page for vote
SUBJECT: Public works contracts: damages
SOURCE: Construction Employers Association
DIGEST: This bill provides that any state or local public
works contract, entered into on or after January 1, 2016, that
contains a clause that expressly requires a contractor to be
responsible for delay damages is not enforceable unless the
delay damages have been liquidated to a set amount and
identified in the public works contract.
ANALYSIS:
Existing law:
AB 552
Page 2
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
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 expressly requiring a
contractor to be responsible for delay damages is not
enforceable unless the delay 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)Defines "delay damages" to mean damages incurred by the public
agency for each day after the date on which the work was to be
completed by the contractor pursuant to the public works
AB 552
Page 3
contract. Delay damages shall not include damages incurred by
a public agency after the filing of a notice of completion or,
in the absence of a notice of completion, the acceptance by
the public agency of the public work as complete.
4)Stipulates that the provisions of this bill shall not be
construed to limit a right or remedy that the public agency
has to enforce the express terms of the public works contract,
except for delay damages.
5)Makes findings and declarations relative to the need for clear
and uniform guidelines for imposing delay damages in a 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
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,
AB 552
Page 4
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.
The author's office states that to address concerns about the
potential invalidation of clauses that, though not directly
involving consequential damages, may nonetheless be interpreted
as falling within this bill's liquidation requirements, this
bill limits the scope of consequential damages covered to only
"delay damages," as defined. Additionally, this bill's scope is
limited to cover only those public works contracts that contain
a clause expressly requiring a contractor to be responsible for
delay damages.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
SUPPORT: (Verified 8/18/15)
Construction Employers' Association (source)
Air Conditioning Sheet Metal Association
Air-Conditioning & Refrigeration Contractors Association
Associated Builders and Contractors of California
Associated General Contractors
California Association of Sheet Metal & Air Conditioning
Contractors' National Association
California Chapters of the National Electrical Contractors
Association
California Concrete Contractors Association
California Legislative Conference of the Plumbing, Heating and
AB 552
Page 5
Piping Industry
California Surety Federation
Finishing Contractors Association of Southern California
United Contractors
Wall and Ceiling Alliance
OPPOSITION: (Verified 8/18/15)
California Special Districts Association
City of La Quinta
City of Sacramento
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
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 Cities of La Quinta and
AB 552
Page 6
Sacramento, writing in opposition, state, "By requiring that all
consequential damages be liquidated, AB 552 limits 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."
The California Special Districts Association, also in
opposition, states, "This bill threatens to void many commonly
used contract terms which state specific recoverable damages
that could be classified as consequential damages. Public works
contracts contain many items which pertain to damages for
breach. Because it can be difficult to determine whether a
particular breach has caused consequential damages, AB 552 could
lead to uncertainty as to which contract items should include a
liquidated damages amount in order to prevent the provisions
being voided."
ASSEMBLY FLOOR: 79-0, 5/11/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder,
Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,
Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,
Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Williams, Wood
NO VOTE RECORDED: Atkins
Prepared by:Arthur Terzakis / G.O. / (916) 651-1530
8/20/15 16:31:15
**** END ****
AB 552
Page 7