BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 1347 (Chiu)
Version: June 1, 2015
Hearing Date: June 30, 2015
Fiscal: Yes
Urgency: No
TMW
SUBJECT
Public contracts: claims
DESCRIPTION
This bill would establish, for public works contracts entered
into on or after January 1, 2016, a claim resolution procedure
by which a general contractor can seek public agency review of
the claim. This bill would also prescribe a procedure by which
a subcontractor or lower tier contractor may make a claim
against the public agency through the general contractor.
(This analysis reflects author's amendments to be offered in
Committee.)
BACKGROUND
In general, public works refers to construction, alteration,
demolition, installation, or repair work (including maintenance)
of any public structure, building, road, or other improvement
done under contract and paid by public funds, or if private
funds are used, more than 50 percent of the square footage is
leased to a public entity. Because of this, there are laws
regarding many aspects of the construction projects to protect
the public's interest. Public works projects do not include
those done by a public agency with its own employees.
On public works projects, a public agency contracts with a
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general contractor, who has submitted a bid or estimated cost to
provide the materials and services for the construction,
alteration, demolition, installation, or repair work. At times,
the cost of the materials and services is more than the general
contractor's bid due to changes in the project, which may be
attributed to inaccurate or incomplete project plans and
specifications, the public agency orders extra work to be
performed, or unexpected difficulties arise. These increases in
costs may be submitted to the public agency for payment.
Typically, unless a change order is issued by the public agency
or its legislative body or appropriate department approving the
increase in cost, the general contractor, who may not be
responsible for the underlying cause of the increase in costs
but has accrued the expense for the sake of completing the
project, will be unable to resolve a claim dispute outside of
arbitration or civil action. Further, a subcontractor, who has
performed additional services or provided materials outside the
scope of the original contract with the general contractor but
necessary to the completion of the project, may be seeking
payment from the public agency. Delays in payment for the extra
work provided by the contractor or subcontractor may place the
contractor or subcontractor at financial risk with their
employees or continued work on the public work. Additionally,
the failure of the public agency to issue a change order or the
denial of claims has resulted in costly litigation for the
public agency, contractors, and subcontractors. Multiple
legislative attempts to address pre-litigation claim disputes
have failed.
Existing law authorizes state agencies to arbitrate claim
disputes, while local agencies are subject to a different claims
resolution process. Subcontractors must rely on submitting
their claims for payment through the general contractor or other
subcontractor through which they have contracted for services or
materials to be provided on the public works project. However,
depending upon the general contractor and its desire, on one
hand, to help the subcontractor get paid, or, on the other hand,
to maintain positive relations with the public agency, the
subcontractor may or may not receive an answer from the general
contractor as to whether the claim was submitted to the public
agency.
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This bill seeks to provide a simplified, cost-effective claims
resolution procedure to resolve contractor claims prior to
arbitration or civil action. This bill would also provide a
clear process for a subcontractor to submit claims through a
general contractor in order to provide the subcontractor with
information as to whether the general contractor has rejected
the request to submit the subcontractor's claim to the public
agency.
CHANGES TO EXISTING LAW
Existing law prohibits a local public entity, charter city, or
charter county from requiring a bidder (i.e., general
contractor) to assume responsibility for the completeness and
accuracy of architectural or engineering plans and
specifications on public works projects, except on clearly
designated design build projects. (Pub. Contract Code Sec.
1104.) However, the local public entity, charter city, or
charter county may require a bidder to review architectural or
engineering plans and specifications prior to submission of a
bid, and report any errors and omissions noted by the contractor
to the architect or owner. (Id.) The review by the contractor
shall be confined to the contractor's capacity as a contractor,
and not as a licensed design professional. (Id.)
Existing law , prior to the commencement of the public work
costing more than $15,000, other than maintenance work or work
occasioned by emergency, requires the engineer to prepare and
file in his office either full, complete and accurate plans and
specifications or a work authorization approved by the engineer
describing the work to be performed, and an estimate of the cost
thereof, except where other and adequate provision is made by
law requiring the preparation and filing of such plans,
specifications and estimates of cost by some other officer or in
some other office. (Gov. Code Sec. 4004.)
Existing law requires any public works contract of a local
public entity which involves digging trenches or other
excavations that extend deeper than four feet below the surface
to contain a clause which provides the following:
that the contractor shall promptly, and before the following
conditions are disturbed, notify the local public entity, in
writing, of any material that may be hazardous waste, as
specified, subsurface or latent physical conditions at the
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site differing from those indicated by information about the
site made available to bidders prior to the deadline for
submitting bids, and unknown physical conditions at the site
of any unusual nature, different materially from those
ordinarily encountered and generally recognized as inherent in
work of the character provided for in the contract;
that the local public entity shall promptly investigate the
conditions, and if it finds that the conditions do materially
so differ, or do involve hazardous waste, and cause a decrease
or increase in the contractor's cost of, or the time required
for, performance of any part of the work shall issue a change
order under the procedures described in the contract; and
that, in the event that a dispute arises between the local
public entity and the contractor whether the conditions
materially differ, or involve hazardous waste, or cause a
decrease or increase in the contractor's cost of, or time
required for, performance of any part of the work, the
contractor shall not be excused from any scheduled completion
date provided for by the contract, but shall proceed with all
work to be performed under the contract. (Pub. Contract Code
Sec. 7104.)
Existing law provides that the contractor retains any and all
rights provided either by contract or by law which pertain to
the resolution of disputes and protests between the contracting
parties. (Pub. Contract Code Sec. 7104.)
Existing law prohibits a public agency, including the state, the
Regents of the University of California, a city, county,
district, public authority, public agency, municipal utility,
and any other political subdivision or public corporation of the
state, from requiring the contractor to be responsible for the
cost of repairing or restoring damage to the work, which damage
is determined to have been proximately caused by an act of God
(earthquakes in excess of a magnitude of 3.5 on the Richter
Scale and tidal waves) in excess of 5 percent of the contracted
amount, provided, that the work damaged is built in accordance
with accepted and applicable building standards and the plans
and specifications of the awarding authority. (Pub. Contract
Code Sec. 7105(a).)
Existing law authorizes public agencies to make changes in
construction contracts for public improvements in the course of
construction to bring the completed improvements into compliance
with environmental requirements or standards established by
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state and federal statutes and regulations enacted after the
contract has been awarded or entered into. The contractor is
required to be paid for the changes in accordance with the
provisions of the contract governing payment for changes in the
work or, if no provisions are set forth in the contract, payment
shall be as agreed to by the parties. (Pub. Contract Code Sec.
7105(c).)
Existing law provides that where authority to contract is vested
in any public agency, excluding the state, the authority
includes the power, by mutual consent of the contracting
parties, to terminate, amend, or modify any contract within the
scope of such authority. (Pub. Contract Code Sec. 7105(d).)
However, this provision does not apply to contracts entered into
pursuant to any statute expressly requiring that contracts be
let or awarded on the basis of competitive bids. (Id.)
Contracts of public agencies, excluding the state, required to
be let or awarded on the basis of competitive bids pursuant to
any statute may be terminated, amended, or modified only if the
termination, amendment, or modification is so provided in the
contract or is authorized under provision of law. (Id.)
Existing law provides that the compensation payable, if any, for
amendments and modifications shall be determined as provided in
the contract, and the compensation payable, if any, in the event
the contract is so terminated shall be determined as provided in
the contract or applicable statutory provision providing for the
termination. (Pub. Contract Code Sec. 7105(d).)
Existing law , except as otherwise provided, prohibits a suit for
money or damages against a public entity on a cause of action
for which a claim is required to be presented until a written
claim therefor has been presented to the public entity and has
been acted upon by the board, or has been deemed to have been
rejected by the board. (Gov. Code Sec. 945.4.)
Existing law prescribes a contract claims resolution process for
contracts entered into with a state agency. (Pub. Contract Code
Sec. 10240 et seq.)
Existing law requires arbitration of a claim, defined to mean a
demand for monetary compensation or damages, arising under or
relating to the performance of contracts with a state agency.
(Pub. Contract Code Sec. 10240.)
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Existing law authorizes a claimant to initiate arbitration no
later than 90 days after the date of personal or mail service on
the claimant of the final written decision by the appropriate
public agency department on the claim; however, this limitation
does not apply to any claim founded on any cost audit, latent
defect, warranty, or guarantee under the contract. (Pub.
Contract Code Sec. 10240.1.)
Existing law prohibits arbitration until the claimant pursues
diligently and exhausts, as to the claim, the required
administrative procedures set forth in the contract under which
the claim arose, unless more than 240 days have elapsed since
acceptance of the work by the department. (Pub. Contract Code
Sec. 10240.2.)
Existing law provides that unless otherwise agreed by the
parties, the arbitration shall be conducted by a single
arbitrator selected by the parties from the certified list
created by the Public Works Contract Arbitration Committee.
(Pub. Contract Code Sec. 10240.3.) If the parties cannot agree
on the arbitrator, either party may petition the superior court
to appoint one from the panel of arbitrators certified by the
Public Works Contract Arbitration Committee. (Id.)
Existing law specifies that no decision made by a department
shall be conclusive on any issue in the arbitration. (Pub.
Contract Code Sec. 10240.4.)
Existing law requires the Departments of General Services,
Transportation, and Water Resources to jointly adopt and may,
from time to time, modify, revise, or repeal uniform regulations
to implement arbitration provisions and may include, but need
not be limited to:
the method of initiating arbitration;
the place of hearing based upon the convenience of the
parties;
procedures for the selection of a neutral arbitrator;
the form and content of any pleading;
procedure for conducting hearings;
the providing of experts to assist the arbitrator in the event
the assistance is needed;
the content of the award; and
simplified procedures for claims of fifty thousand dollars
($50,000) or less. (Pub. Contract Code Sec. 10240.5.)
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Existing law authorizes a party to the contract to join in the
arbitration as a party, any supplier, subcontractor, design
professional, surety, or other person who has so agreed and if
the joinder is necessary to prevent a substantial risk of the
party otherwise being subjected to inconsistent obligations or
decisions. (Pub. Contract Code Sec. 10240.9.)
Existing law does not prevent the parties to the contract, after
the claim has arisen, from mutually agreeing in writing to waive
the arbitration statutes and to have the claim litigated in a
court of competent jurisdiction. (Pub. Contract Code Sec.
10240.10.)
Existing law , within the applicable time periods and upon
specified grounds, authorizes a party to petition the court to
confirm, correct, or vacate the award rendered by the
arbitrator; however, no department may petition to vacate an
award without the prior written authorization of its agency
secretary. (Pub. Contract Code Sec. 10240.12.) Except where
the parties agree not to have the arbitration decision rendered
as specified, a court shall vacate the award, or part thereof,
if it determines either that the award, or part thereof, is not
supported by substantial evidence or that it is not decided
under or in accordance with the laws of this state, in which
case, the court may order a rehearing before the original
arbitrator or remand to the original arbitrator that portion of
the dispute which the court concludes the arbitrator failed to
determine. (Id.)
Existing law provides that the costs of conducting the
arbitration shall be borne equally by the parties, but the
arbitrator may allow the prevailing party to recover its costs
and necessary disbursements, with interest, other than
attorney's fees, on the same basis as is allowed in civil
actions. (Pub. Contract Code Sec. 10240.13.)
Existing law provides a public entity with full authority to
compromise or otherwise settle any claim relating to a contract
at any time. (Pub. Contract Code Sec. 9201(a).) The public
entity is required to include provisions in a public works
contract for timely notification of the contractor of the
receipt of any third-party claim relating to the contract.
(Pub. Contract Code Sec. 9201(b).)
This bill would preclude any other claim resolution provision
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and apply to all claims by contractors in connection with public
works.
This bill would provide the following definitions:
"claim" means a separate demand by the contractor for one or
more of the following: (a) a time extension, including,
without limitation, for relief from damages or penalties for
delay; (b) payment of money or damages arising from work done
by, or on behalf of, the contractor pursuant to the contract
for a public work and payment for which is not otherwise
expressly provided or to which the claimant is not otherwise
entitled; or (c) payment of an amount that is disputed by the
public entity;
"contractor" means any type of contractor subject to the
Contractor's State License Law who has entered into a direct
contract with a public entity for public works;
"public entity" means, without limitation, a state agency,
department, office, division, bureau, board, or commission,
the California State University, the University of California,
a city, including a charter city, county, including a charter
county, city and county, including a charter city and county,
district, special district, public authority, political
subdivision, public corporation, or nonprofit transit
corporation wholly owned by a public agency and formed to
carry out the purposes of the public agency;
"public work" means the erection, construction, alteration,
repair, or improvement of any public structure, building,
road, or other public improvement of any kind; and
"subcontractor" means any type of contractor subject to the
Contractor's State License Law who either is in direct
contract with a contractor or is a lower tier subcontractor.
This bill , upon receipt of a claim sent by registered mail,
would require the public entity to which the claim applies to
conduct a reasonable review of the claim and, within a period
not to exceed 30 days, provide the claimant a written statement
identifying what portion of the claim is disputed and what
portion is undisputed.
This bill would require the claimant to furnish reasonable
documentation to support the claim.
This bill , if the public entity needs approval from its
governing body to provide the claimant a written statement
identifying the disputed portion and the undisputed portion of
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the claim, and the governing body does not meet within the 30
days following receipt of a claim sent by registered mail, would
provide the public agency up to three days following the next
duly publicly noticed meeting of the governing body to provide
the claimant a written statement identifying the disputed
portion and the undisputed portion.
This bill would require any payment due on an undisputed portion
of the claim to be processed and made within 30 days after the
public entity issues its written statement; if the public entity
fails to issue a written statement, the claim would be deemed
rejected in its entirety.
This bill , if the claimant disputes the public entity's written
response, or if the public entity fails to respond to a claim
issued within the time prescribed, would authorize the claimant
to demand in writing an informal conference to meet and confer
for settlement of the issues in dispute, and, upon receipt of a
demand in writing sent by registered mail, the public entity
would be required to schedule a meet and confer conference
within 30 days for settlement of the dispute.
This bill , within five days following the conclusion of the meet
and confer conference, if the claim or any portion of the claim
remains in dispute, would require the public entity to provide
the claimant a written statement identifying the portion of the
claim that remains in dispute and the portion that is
undisputed.
This bill would require any payment due on an undisputed portion
of the claim to be processed and made within 30 days after the
public entity issues its written statement, and any disputed
portion of the claim, as identified in writing, would be
required to be submitted to nonbinding mediation, with the
public entity and the claimant sharing the associated costs
equally.
This bill would require the public entity and claimant to
mutually agree to a mediator within 10 days after the disputed
portion of the claim has been identified in writing, and, if the
parties cannot agree upon a mediator, each party would select a
mediator and those mediators would select a qualified neutral
third party to mediate with regard to the disputed portion of
the claim.
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This bill would provide that if either of the parties rejects
the mediator's decision regarding all or part of the disputed
portion of the claim, the parts of the claim remaining in
dispute would be subject to other applicable claim resolution
procedures.
This bill would specify that mediation includes any nonbinding
process, such as neutral evaluation or a dispute review board,
in which an independent third party or board assists the parties
in dispute resolution through negotiation or by issuance of an
evaluation, and any mediation utilized must conform to the time
frames provided in this bill.
This bill would require the mediation conducted pursuant to this
bill to excuse any further obligation to mediate (meet and
confer) after litigation has been commenced.
This bill would not preclude an agency from requiring
arbitration of disputes under private arbitration or the Public
Works Contract Arbitration Program, if mediation does not
resolve the parties' dispute.
This bill would specify that failure by the public entity to
respond to a claim from a contractor within the time period
described would result in the claim being deemed rejected in its
entirety.
This bill would require amounts not paid in a timely manner to
bear interest at 7 percent per annum.
This bill , if a subcontractor or a lower tier subcontractor
lacks legal standing to assert a claim against a public entity
because privity of contract does not exist, would authorize the
contractor to present to the public entity a claim on behalf of
a subcontractor or lower tier subcontractor.
This bill would authorize a subcontractor to request in writing,
either on his or her own behalf or on behalf of a lower tier
subcontractor, that the contractor present a claim for work
which was performed by the subcontractor or by a lower tier
subcontractor on behalf of the subcontractor.
This bill would require the subcontractor requesting that the
claim be presented to the public entity to furnish reasonable
documentation to support the claim.
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This bill , within 45 days of receipt of that written request,
would require the contractor to notify the subcontractor in
writing as to whether the contractor presented the claim to the
public entity and, if the original contractor did not present
the claim, provide the subcontractor with a statement of the
reasons for not having done so.
This bill would require the text of the provisions provided
under this bill or a summary of it to be set forth in the plans
or specifications for any public works that may give rise to a
claim under this bill.
This bill would make a waiver of the rights granted by this bill
void and contrary to public policy.
This bill would apply to contracts entered into on or after
January 1, 2016.
This bill would find and declare that it is in the best
interests of the state and its citizens to ensure that all
construction business performed on public works in the state
that is complete and not in dispute is paid in full and in a
timely manner.
COMMENT
1. Stated need for the bill
The author writes:
There is no law in place requiring agencies to pay claims, in
a timely manner, made by contractors for extra work performed
and approved by the agency, even when the public agency
acknowledges that it owes the contractor for work performed.
This places contractors and their workers in difficult
financial circumstances.
Furthermore, there is a lack in uniformity for disputing a
claim. In many cases, some public agencies have no
requirements to respond to a claim or respond to a claim in a
timely manner. The breakdown of communication between the
public agency and the contractor adds to the burden on the
contractor and meeting their payroll obligations.
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AB 1347 creates a process that requires agencies to respond to
a contractor's claim, to pay out portions of the work they
acknowledge and agree they owe the contractor, and to resolve
disputed portions of payment through non-binding mediation.
Specifically, the bill would require a public agency to
respond in 30 days to a claim. If the public agency does not
respond within 30 days then the claim is deemed denied. If the
contractor wishes to continue the claim, then the contractor
must respond via registered mail. The public agency then has
30 days to meet & confer with the contractor.
If there is no agreement with the claim then the public agency
has 10 days to find a mutually agreed upon mediator. The
public agency has 30 days to pay for any undisputed portions
of the claim.
2. Public works contracts and change orders
Change orders are at the heart of the controversy involving this
bill. When a public work requires extra work unanticipated by
the contractor, a change order may be necessary, signed by the
public agency and the contractor, to amend the contract to
provide that the contractor is performing additional work for
which the public agency will pay. When a change order is not
executed by the public agency, or its governing body or
responsible department, the contractor, having provided the
necessary extra work or materials, submits a claim to the public
agency alleging the public agency owes the contractor payment
for the extra work.
Several cases provide the responsibilities of the contracting
parties that emerge when a public work requires additional
material or services than originally expected by the contractor.
First, case law has established that "a contractor that has
agreed to a particular performance at a specified price may not
avoid its contractual obligations or seek additional
compensation for performing them because unanticipated
difficulties are encountered." (United States v. Spearin (1918)
248 U.S. 132, 136.) However, case law has also settled that a
"contractor of public works who, acting reasonably, is misled by
incorrect plans and specifications issued by the public
authorities as the basis for bids and who, as a result, submits
a bid which is lower than he would have otherwise made may
recover in a contract action for extra work or expenses
necessitated by the conditions being other than as represented."
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(Suiza & McCue Constr. Co. v. Superior Court (1962) 57 Cal.2d
508, 510.) Although Public Contract Code Section 7104 requires
change orders related to unanticipated difficulties from site
conditions to be included in public work contracts, there is no
statute requiring change orders resulting from other kinds of
unanticipated conditions to be included in public work
contracts. Specifically, case law has established that there
are two types of differing site conditions that a public entity
cannot circumvent or otherwise disclaim liability for through
other provisions in the contract: (1) Type 1 differing site
conditions, in which the actual site conditions differ from
those originally described to bidders; and (2) Type 2 differing
site conditions, in which the actual site conditions differ from
the conditions ordinarily encountered in the particular type of
work in the particular locality. (Condon-Johnson & Associates
v. Sacramento Municipal Utility District (2007) 149 Cal.App.4th
1384.) For other unanticipated difficulties not associated with
the site conditions for which a change order is not executed,
the contractor is left to file a claim for the work performed.
3. Providing informal procedures to submit claims to public
agency
Existing law prescribes various requirements regarding the
formation, content, and enforcement of state and local public
contracts. Existing law applicable to state public contracts
generally requires that the resolution of claims related to
those contracts be subject to arbitration. Existing law for
local agency public works requires all claims made for work
arising out of the contract, but not expressly provided for in
that contract, that are $375,000 or less to first be resolved
through administrative resolution procedures. However, if the
contract provides for arbitration, the claim will have to be
arbitrated according to express arbitration statutes. The
arbitration statutes apply to both local agency and state agency
public work contracts.
This bill would prescribe a new claims resolution process by
which a contractor can submit a claim to a public entity as
follows:
applies to all claims submitted by a contractor to a public
entity, as specified;
the contractor must furnish reasonable documentation to
support the claim;
the public entity must conduct a reasonable review of the
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claim and, within 30 days, provide the contractor with a
written statement identifying what portion of the claim is
disputed and what portion is undisputed;
the time frame may be extended for public entities that need
approval from its governing body;
any payment due on an undisputed portion of the claim must be
processed and made within 30 days of issuance of the written
statement;
if no statement is issued by the public agency, the claim is
rejected in its entirety;
the claimant may demand an informal meet-and-confer conference
for settlement of the issues in dispute; and
establishes time frames for payment of settled claims and
provide for nonbinding mediation for disputed claims.
Proponents of this bill state that existing laws protect public
agencies from having to pay any unfair or unjust claims made by
a contractor. However, proponents argue, these conflict
resolution statutes do not require the public agency to pay
contractors in a timely manner for extra work performed on
public works contracts, even when that work was requested by the
owner and subsequently performed by the contract in good faith.
Proponents contend that "contractors who perform extra work put
themselves in great financial risk. California public works
contractors often have to wait months, and in some cases up to
years, for payment for work. Contractors who perform this work
to the benefit of the public agency must still pay for their
construction materials, employee wages and benefits and their
overhead. Not being compensated in a timely manner can result
in a contractor being forced to reduce capacity, or worse, close
their business."
Proponents contend that this bill would put a process in place
that requires public agencies to respond to a contractor claim,
would require the agency to pay out portions of the work they
acknowledge or agree they owe to the contractor, and implements
a fair process for resolving any disputed portions of the claim.
The proponents note that this bill does not require public
agencies to pay for any work it does not request, accept, or
approve but allows the public agency to deny or dispute any
claim for payment. Yet, the delay of trust fund contributions
with respect to trade unions can cause the loss of health
insurance due to a contractor's inability to make payments, and
the lack of prompt payment for extra work leaves many
contractors without the necessary resources needed to bid the
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next project and continue doing business, which ultimately
diminishes work opportunities.
4. Providing clarity for subcontractor pass-through claims
On public work projects, the public entity typically contracts
directly with a general contractor to perform the work. The
general contractor then contracts with subcontractors, such as
roofers, excavators, and plumbers, who perform specialized work
on the project. In this way, a subcontractor does not have a
direct contract with the public agency and therefore lacks
privity of contract. Accordingly, the subcontractor seeking
payment on extra work performed must rely on one of a few
methods for payment.
First, the subcontractor may attempt to recover payment from the
general contractor. However, depending upon the public agency's
position on which party is responsible for the extra work needed
to continue or complete the project, the public agency may have
failed to pay the general contractor for extra work, and the
general contractor may be unable to pay the subcontractor for
the extra work.
Second, the subcontractor may submit a stop notice to the public
entity to withhold a portion of the construction funds
sufficient to satisfy the subcontractor's claim. Rather than
attaching to real property, the stop notice attaches to the
construction loan fund, or to money in the hands of the public
entity that otherwise is to be paid to the general contractor.
The stop notice has the effect of intercepting these funds, and
the ultimate result of the enforcement of a stop notice is entry
of a judgment against the public agency for the amount claimed
in the stop notice. This procedure is not preferred as it does
not provide payment to the subcontractor in a timely fashion.
As discussed above, a subcontractor who is unable to recover
payment for work or materials provided in a good faith effort to
keep the public project moving forward or reaching completion
puts himself or herself at risk if the payment is necessary to
pay employees, purchase materials, or bid on other contracts.
Another method for recovering payment is to request the claim be
presented to the public agency through the general contractor,
known as a "pass-through" claim. Case law provides that "[a]s a
matter of law, a general contractor can present a
subcontractor's claim on a pass-through basis. (Maurice L.
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Bein, Inc. v. Housing Authority (1958) 157 Cal.App.2d 670. . .
.) When a public agency breaches a construction contract with a
contractor, damage often ensues to a subcontractor. In such a
situation, the subcontractor may not have legal standing to
assert a claim directly against the public agency due to a lack
of privity of contract, but may assert a claim directly against
the general contractor. In such a case, a general contractor is
permitted to present a pass-through claim on behalf of the
subcontractor against the public agency. (Citation omitted.)"
(Howard Contracting, Inc. v. G.A. MacDonald Construction Co.,
Inc. (1998) 71 Cal.App.4th 38, 60.) In the Howard case, the
City of Los Angeles was held to have failed to disclose material
information to the general contractor and its subcontractors
concerning project restrictions and difficulties, failed to
timely obtain construction permits from regulatory agencies, and
failed to provide access to the work site. (Id. at p. 48.) The
Howard case provides a poignant example of the types of
situations in which the general contractor and subcontractor has
performed their duties under their respective contracts in good
faith, yet the public agency created delays that required the
extra work performed, then failed and refused to pay the general
contractor work performed, who had then failed to pay the
subcontractor.
In these situations, the quickest method for a subcontractor to
receive payment for extra work performed is to request that the
general contractor submit the claim for payment to the public
agency. Although a subcontractor can already attempt this line
of recourse, the general contractor is under no obligation to
submit the claim to the public agency. Further, the general
contractor, who may also be attempting to recover payment for
extra work from the public agency, may decide against submitting
the claim in order to maintain positive communication with the
public agency. The general contractor is under no obligation to
advise the subcontractor whether or not the claim was submitted
to the public agency for payment. Accordingly, this bill would
allow the subcontractor to submit the claim through the general
contractor, but establish a timeframe of 45 days of receipt of
the written request for the general contractor to notify the
subcontractor whether the general contractor presented the claim
to the public agency. Further, if the general contractor opted
against presenting the claim to the public agency, the bill
would require the general contractor to provide the
subcontractor a statement of reasons for not presenting the
claim. These provisions would provide better clarity of the
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claim review process and important claim information for general
contractors and subcontractors.
5. "Home Rule" Doctrine
The California Constitution, Article XI, Section 7, provides
that a county or city may make and enforce within its limits all
local, policy, sanitary, and other ordinances and regulations
not in conflict with general laws. However, a charter city is
provided the ability to make and enforce all ordinances and
regulations in respect to municipal affairs, subject only to
restrictions and limitations provided in its several charters,
and, in respect to other matters, the charter city is subject to
general laws. (Cal. Const., art. XI, sec. 5.) A city charter
or municipal law which may have precedence over a conflicting
state statute purporting to regulate a municipal matter is known
as the "home rule" doctrine.
In Dibbs v. County of San Diego (1994) 8 Cal.4th 1200, the
California Supreme Court in contracting the home rule authority
of charter cities and chartered counties stated that, whereas
charter county "home rule" authority is limited to matters
concerning the structure and operation of local government, the
version of "home rule" afforded to a charter city is
substantially more expansive. However, the California
Constitution does not define what constitutes a municipal
affair. Accordingly, courts must determine whether the facts of
each case implicate a matter under municipal or state concern.
(County of Riverside v. Superior Court (2003) 30 Cal.4th 278,
292.)
The "home rule" doctrine becomes important in a public work if
the public agency is a charter city asserting that a state
statute does not apply to the charter city. Such was the case
in Howard Contracting, Inc. v. G.A. MacDonald Construction Co.
(1998) 71 Cal.App.4th 38, 51, in which the City of Los Angeles
claimed not to be subject to a state law interfering with the
City's public work contract. At issue was Public Contract Code
Section 7102, which provides that contract provisions in public
works construction contracts, and the subcontracts thereunder,
which attempt to limit the public entity's liability for delays
it causes, do not preclude the recovery of damages by the
contractor or subcontractor. The statute also provides that a
public agency cannot require the waiver, alteration, or
limitation of the applicability of this section. However, the
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statute cannot be construed to void any provision in a public
works construction contract that requires notice of delays or
provides for liquidated damages.
In the Howard case, the court discussed the City's claim under
the home rule doctrine of immunity from liability for damages
caused by its own delays:
In California Federal, the Supreme Court established a test to
determine whether the state has infringed upon a charter
city's sovereignty under the "home rule" doctrine. (54 Cal. 3d
at pp. 16-18.) Under the first prong of the test, the
existence of an actual conflict between a state statute and a
local measure must be ascertained. Once a conflict is found
to exist, a further determination must be made whether the
subject matter of the statutory enactment is more properly
characterized as a local or statewide concern.
In this case, the purported conflict with a provision of a
state statute does not relate to a charter provision or
municipal enactment, but to a "no damage for delay" clause
contained in the Standard Specifications of the contract
between MacDonald Construction and the City. Because the City
fails to establish a conflict between the Public Contract Code
and any charter provision or municipal enactment, Public
Contract Code section 7102 applies. As a consequence, the
contract clause purporting to exempt the City from liability
for damages resulting from delays caused by the City is
unenforceable under section 7102. (Id.)
Because the Howard case established that charter city public
work contracts are subject to state statutes under the Public
Contract Code, the provisions in this bill would likely not be
superseded by a city's charter or municipal laws because the
provisions of the bill involve a statewide concern, are not
solely aimed at regulating charter cities, and the bill's
provisions likely do not relate to a city's charter or municipal
laws but rather relate to public work contracts and obligations
thereon.
6. Author's amendment
This bill provides a definition of "public work" that is defined
as a "public works contract." A public work is typically the
project to build, alter, or repair a building, road, structure,
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or other public improvement, while a public works contract is
the document reflecting the agreement between a public agency
and, in this case, a contractor. Although the definition is
similar to that contained in Public Contract Code Section 20104,
which is not revised by this bill, this bill should be amended
to provide a clearer definition of "public work." Accordingly,
the author offers the following amendment in Committee to
clarify the definition of "public work:"
Author's amendment :
On page 3, in lines 32 through 33, strike ""public works
contract" as defined in Section 1101" and insert "the
erection, construction, alteration, repair, or improvement of
any public structure, building, road, or other public
improvement of any kind."
7. Opposition concerns
This bill was recently amended to address multiple concerns and
several prior opponents have now taken neutral positions on this
bill. However, the California Chapters of the American Public
Works Association and the California School Boards Association
submitted letters in opposition following the recent amendments.
These opponents contend that this bill places a difficult
30-day time restriction to respond to claims received from
contractors and will have a negative impact on taxpayers as it
will divert limited local government monies away from road
safety and maintenance projects by shifting the liability to
local governments and the cost onto taxpayers. Opponents also
argue that this bill requires disputed claim amounts to be
identified within a cumbersome 30-day time frame and requires
that interest on those amounts be assessed.
Further, opponents argue that this bill requires all
construction projects to use non-binding mediation since nearly
all construction projects have a least one claim in dispute and
will create another cost for which there is no funding source.
Opponents contend that this bill allows lower-tier
subcontractors to make claims, which creates an untenable
increased risk to public agencies on matters that are under the
direct supervision and legal responsibility of the prime
contractor. The opposition notes that this bill requires that
the text of the bill appear on plans and specifications, yet no
other requirement exists to place the text of state law on
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contract plans. Opponents also contend that Caltrans expects it
would need several dozen more personnel at an annual cost
exceeding $10 million and other agencies (the Departments of
General Services, Water Resources, and Corrections and
Rehabilitation, the University of California, and the California
State University) could experience similar impacts from this
bill.
The Santa Clara Valley Water District (SCVWD), opposed unless
amended, argues that the current dispute resolution process
between a public entity and a general contractor or
subcontractor works to the benefit and protection of both
parties. Further, SCVWD states existing law requires
contractors to certify any claim, but this bill merely calls for
reasonable documentation to support the claim, a much lower
standard. SCVWD requests the bill to be amended to clarify that
all parties to the non-binding mediation share equally in the
cost of the mediation, unless they agree otherwise, and require
a claimant to comply with all other requirements set forth in
the construction contract with the owner.
In response, the author points out that several groups,
including the California State Association of Counties, the
California Special Districts Association, California's Coalition
for Adequate School Housing, the Community College Facility
Coalition, and the County School Facilities Consortium,
previously in opposition to a prior version of the bill, now
contend that the latest version of the bill provides public
agencies appropriate time and control to review claims for work
performed under a public contract prior to payment to a
contractor. In particular, the now-neutral groups agree that
the provision deeming a claim rejected in its entirety when a
public agency fails to respond to the claim will ensure counties
and claimants meet and confer and enter into non-binding
mediation before the agency is required to pay disputed claims.
Further, the decreased interest rate from 10 percent to 7
percent was appropriate, and this compromise rate will still be
an effective incentive for public agencies to pay undisputed
claims within the timelines prescribed by this bill.
Support : Air Conditioning Sheet Metal Association;
Air-Conditioning & Refrigeration Contractors Association;
Associated General Contractors; Associated General Contractors,
California Chapters; Associated Plumbing & Mechanical
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Contractors; California Association of Sheet Metal and Air
Conditioning Contractors' National Association; California
Landscape & Irrigation Council; California Legislative
Conference of the Plumbing, Heating and Piping Industry;
California Plumbing and Mechanical Contractors Association;
California State Association of Electrical Workers; California
State Pipe Trades Council; Finishing Contractors Association of
Southern California; Northern California Mechanical Contractors
Association; Small Business California; Southern California
Contractors Association; Union Roofing Contractors Association;
Wall and Ceiling Alliance; Western States Council of Sheet Metal
Workers
Opposition : California Chapters of the American Public Works
Association; California School Boards Association; City of
Camarillo (prior version); City of Indian Wells (prior version);
City of San Carlos (prior version); Orange County Transportation
Authority Board of Directors (prior version); Santa Clara Valley
Water District
HISTORY
Source : California Chapters of the National Electrical
Contractors Association; California-Nevada Conference of
Operating Engineers; California State Council of Laborers; State
Building and Construction Trades Council of California; United
Contractors
Related Pending Legislation : None Known
Prior Legislation :
AB 2471 (Frazier, 2014) would have required state and local
public entities engaged in a public works contract awarded to
the lowest bidder to promptly issue change orders when extra
work is required of the contractor or subcontractor. AB 2471
died in the Senate Appropriations Committee without a hearing.
AB 2096 (Miller, 2010) would have allowed a public agency and a
contractor to mutually agree to resolve a claim through
independent arbitration. AB 2096 died in the Assembly Judiciary
Committee without a hearing.
AB 541 (Duvall, 2009) was substantially similar to AB 2096 and
died in the Assembly Judiciary Committee without a hearing.
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AB 216 (Beall, 2009) would have reformed pre-litigation claims
resolution procedures for local public works projects. AB 216
was held under submission in the Assembly Appropriations
Committee.
SB 1642 (Yee, 2008) would have established alternative dispute
resolution procedures for local public works projects costing
over $50,000. SB 1642 was held under submission in the Senate
Appropriations Committee.
Prior Vote :
Assembly Floor (Ayes 76, Noes 0)
Assembly Appropriations Committee (Ayes 15, Noes 2)
Assembly Accountability and Administrative Review Committee
(Ayes 9, Noes 0)
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