BILL ANALYSIS
AB 216
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 216 (Beall) - As Introduced: February 3, 2009
As Proposed to be Amended
SUBJECT : PUBLIC WORKS CONTRACT DISPUTES: LOCAL AGENCIES
KEY ISSUE : SHOULD ADDITIONAL CONTROLS AND PENALTIES BE PLACED
ON THE DISPUTE RESOLUTION PROCESS INVOLVING PUBLIC WORKS
PROJECTS BY LOCAL AGENCIES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal
SYNOPSIS
This bill, sponsored by the Construction Employers' Association
(CEA), would amend the existing dispute resolution process
regarding local public works projects. The sponsor contends
that local agencies frequently fail to schedule statutory meet
and confer conferences to resolve disputes when requested to do
so by contractors. Because these informal dispute resolution
conferences do not take place, the sponsor agues, contractors
must resort to costly litigation in order to resolve their
disputed claims. The bill seeks to reform the pre-litigation
claims resolution process by making the following significant
changes: requests for meet and confer conferences would be
required to be completed within 10 days of the request;
claimants could compel mediation if any portion of the claim is
unresolved after the meet and confer conference; failure of the
local agency to schedule the conference in a timely fashion or
otherwise meet the time limits would result in the claim being
deemed approved in its entirety; in addition, a further penalty
would be imposed equal to two percent of the amount due for each
month the claim is not paid. The bill would not apply to claims
less than $50,000 or to any claims over $50,000 if the local
agency and the contractor have provided by contract for an
alternative dispute resolution process. Opponents, representing
a range of public entities, claim that the bill is unnecessary
because existing law provides an adequate framework for the
resolution of disputes. The opponents are concerned that the
adoption of the bill would be too costly to public entities.
Opponents contend that if the bill is passed, public entities
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will revise their standard construction contracts to provide
that disputes with contractors shall be resolved through
litigation.
SUMMARY : Revises the pre-litigation dispute resolution process
regarding local public works projects. Specifically, this bill :
1)Expands the dispute resolution process to include "change
orders," and other relief, makes charter cities and counties
subject to the process, and applies the process to claims
against contractors by local agencies.
2)Provides that when a claim for less than $50,000 is submitted
by either a contractor or a local agency, the responding party
to the claim has 45 days to make a written response to the
claim. If the responding party wishes to make a written
request for additional documentation for the claim or any
disputed potions of the claim, this request must be made
within 30 days of initial submission of the claim. The
request must be for information that the responding party
reasonably and in good faith believes is necessary to analyze
the claim or any portion thereof. The responding party has 15
days, or the amount of time it took the claimant to respond to
the request if greater than 15 days, to provide a written
response to the further documented claim.
3)Provides a similar process when a recipient of a claim for
$50,000 or more wishes to make a claim - the responding party
has 45 days to make a written response to the claim; if the
responding party wishes to make a request for additional
documentation, the request must be made within 30 days of
submission of the claim and must be a request that the
responding party reasonably and in good faith believes
supports the claim. The responding party would then have 15
days, or the amount of time it took the claimant to respond to
the request if greater than 15 days, to provide a written
response to the further documented claim. The maximum
allotted time that the responding party has to respond to a
claim is 105 days from the date of first submission of the
claim.
4)Provides that when a claim for $50,000 or more remains
unresolved after the request for additional documentation,
either party may request a meet and confer conference within 5
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days of the exhaustion of the 105 day time limit for
responding to a claim. The meet and confer conference shall
be completed within 10 days of the request for the conference,
unless both parties agree to an extension of time.
5)Provides that if any portion of the claim for $50,000 or more
remains unresolved after the meet and confer conference, the
claimant may compel mediation. Once the claimant demands
mediation, the parties must mutually agree to a mediator
within 30 days. If they fail to mutually agree, they must use
an alternative dispute resolution process to assist them in
the selection of a mediator.
6)Failure by the local agency, charter city, or charter county
to respond to a claim within the time periods set forth in
this subdivision shall result in the claim being deemed
approved in its entirety, and shall be processed for payment
within five days from the expiration of the time period in
which the local agency, charter city, or charter county is
required to act. Failure by the contractor to respond to a
claim from a local agency within the time periods prescribed
in this subdivision shall result in the claim being approved,
although the bill specifies no deadlines by which the
contractor would be required to take any further steps. The
parties may extend these time periods for response by mutual
agreement.
7)Further provides that failure by the local agency to respond
to a claim within the time periods shall also result in a
penalty of 2 percent of the total amount due for every month
that payment is not made. No comparable penalty is provided
if the contractor fails to meet deadlines. Moreover, in any
action for the collection of funds wrongfully withheld, the
prevailing party would be entitled to reasonable attorney's
fees and costs. These sanctions would be separate from, and
in addition to, all other remedies either civil, or
administrative.
8)Exempts contractors, local agencies, charter cities, and
charter counties that have adopted an alternative dispute
resolution process by contract and by local agencies that have
opted for private arbitration of disputes as provided by
Public Contract Code section 10240.
9)Provides that exercising rights under this section supersedes
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any and all notice requirements under Part 3 of Division 3.6
of Title 1 of the Government Code.
EXISTING LAW:
1)Exempts claims resulting from a contract between a contractors
and a public agency, where the public agency has elected to
resolve any of its disputes pursuant to Article 7.1 of the
Public Contract Code (establishes a process for resolution of
disputes involving state public works by private arbitration.)
(Public Contract Code section 20104.)
2)Governs public works claims of $375,000 or less filed by
contractors against local agencies that are entered into on or
after January 1, 1991. Claims must be for time extensions,
money for work done, payment that is not otherwise expressly
provided for, or payments that are in dispute. Public work is
defined in Section 3100 and 3105 of the Civil Code, except
that it does not include any work or improvement contracted
for by the state or the Regents of the University of
California. (Public Contract Code section 20104.)
3)Provides that when claim for less than $50,000 is submitted,
the responding party to the claim has 45 days to make a
written response to the claim. If the responding party wishes
to make a written request for additional documentation for the
claim or any disputed potions of the claim, this request must
be made within 30 days of initial submission of the claim.
The responding party has 15 days, or the amount of time it
took the claimant to respond to the request if greater than 15
days, to provide a written response to the further documented
claim. (Public Contract Code section 20104.2.)
4)Provides that when a recipient of a claim for more than
$50,000 wishes to make a claim, the responding party has 60
days to make a written response to the claim. If the
responding party wishes to make a request for additional
documentation, the request must be made within 30 days of
submission of the claim. The responding party has 30 days, or
the amount of time it took the claimant to respond to the
request if greater than 30 days, to provide a written response
to the further documented claim. (Public Contract Code
section 20104.2.)
5)Provides that when a claim or any portion thereof remains
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unresolved after the request for additional documentation, or
the local agency fails to respond within the time prescribed,
the claimant has 15 days from the date of the receipt of the
local agency's response or from the date of the deadline to
respond, to provide the local agency with a written demand for
a meet and confer conference. Upon demand, the local agency
shall schedule a meet and confer conference within 30 days for
settlement of the dispute. (Public Contract Code section
20104.2.)
6)Provides that following the meet and confer conference, if the
claim or any portion thereof remains in dispute, the claimant
may file a claim pursuant to Government Code Title 1, Division
3.6, Part 3, Chapters 1 and 2. The statute of limitations
under these provisions is tolled from the time that the
claimant submits his or her claim until the date that the
claim is denied as a result of the meet and confer process.
(Public Contract Code section 20104.2.)
COMMENTS : The author explains the reason for the bill as
follows:
Many public entities take years to resolve building
contractor payment claims, often times long after work has
ceased and projects are occupied. Although in some
instances the delayed resolution is the result of a
legitimate dispute, it is all too common for public
entities to delay resolution in order to try and
renegotiate previously agreed to contract terms. Because
there are no lien rights on public projects, building
contractors have little recourse other than to take costly
legal action or agree to renegotiate terms and take a loss.
Failure to resolve legitimate construction claims in a
timely manner jeopardizes the financial well being of
contractors and subcontractors. Delaying claims resolution
may also increase future project costs for public entities
because contractors may factor a public entities' claims
resolution history when submitting future bids.
To resolve this issue, AB 216 would create a mandatory
claims resolution process if a payment claim on a public
works project goes unresolved for 30 days.
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The sponsor contends that the current mechanisms governing the
resolution of disputes lead to significant delays and costly
litigation. The bill seeks to prevent these costly delays by
requiring that requests for additional documentation be
reasonable, that the meet and confer conferences be completed
within 10 days of the request for the conference, by allowing
claimants to compel mediation in the event that the meet and
confer conference does not fully resolve the dispute, by deeming
claims allowed in their entirety if a party failed to meet a
deadline and imposing an additional financial penalty on local
agencies equal to 2 % of the amount due each month for failure
to respond to a claim. The bill exempts parties that have
adopted a separate alternative dispute resolution process
As the supporters explain, California Public Contract Code
Sections 10261.5 and 20104.50 stipulate that state and local
public entities, respectively, shall pay a contractor within 30
days of submitting an undisputed claim. If the public entity
fails to pay the claim, the public entity is liable for interest
on the claim. The statutes do not specify what happens if a
public entity simply fails to pay a claim, or, how disputed
claims shall be resolved - presumably because these statutes are
addressed to the pre-litigation dispute resolution process.
Thus, under existing law, a local agency's failure to pay a
disputed claim results in either litigation or the invocation of
an agreed-to alternative dispute resolution process.
California Public Contract Code Sections 20104 through 20104.6
establishes a claims resolution process for construction claims
that are less than $375,000 in value. However, supporters of
this bill state, 20104.2 (d) stipulates that only the local
public entity may call for a meet and confer, and does not
provide recourse to a contractor if a public entity simply fails
or refuses to call for a hearing.
Ten Days To Complete The Meet And Confer Conference. Supporters
of the bill claim that existing law provides no recourse to a
contractor if a public entity fails to schedule a meet and
confer conference. This informal meeting is a necessary first
step to the resolution of a claim and when claimants lack the
opportunity to meet and confer, their only other recourse is
litigation. This bill requires that the conference be completed
within 10 days of a request. Failure to do so would result in
the claim being deemed accepted in full, and subject to a
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further penalty of 2 percent of the amount of the claim for each
month it was unpaid, along with attorney's fees and costs if a
lawsuit were filed.
Mandatory Mediation. The bill would establish a right to
mandatory mediation and set forth guidelines that will govern
the mediation process. After the disputing parties engage in
the meet and confer conference, if the claim or part of the
claim remains in dispute, the claimant may demand mediation. A
somewhat comparable provision in Civil Code section 929 governs
disputes between homeowners and builders; it imposes a maximum
of four hours of mandated mediation.
Penalty For Failure To Adhere To Deadlines. The bill seeks to
ensure that parties face substantial consequences if they choose
to ignore strict deadlines for responding to deadlines on
claims. The bill provides that if a party fails to respond to a
claim within the prescribed time periods the claim is deemed
approved. In addition, failure by a local agency to meet a
deadline would require that the claim be processed for payment
five days after the expiration of the time period in which the
local agency is required to act and be subject to a further
penalty equal to 2% of the amount due for each month the claim
was unpaid. If the contractor were to file suit to recover this
mandated claim and penalty, the contractor would also be
entitled to attorney's fees, in addition to the normal
pre-judgment interest to which all parties are entitled at the
rate of 10 percent. (See Civil Code sections 3287-3289.)
Supporters of the bill contend that this provision provides
substantial incentives so that claims are not ignored.
Reasonableness Standard. This bill requires that if parties
responding to a claim wish to request additional documentation
to supplement the claim, this request should be for information
that the party reasonably and in good faith believes is
necessary to analyze the claim or any portion of the claim.
Supporters of the bill claim that local agencies use the request
for documentation as a delay tactic. The reasonableness
standard in the bill reflects the supporters' general concern
that the current procedure for dispute resolution is lengthy and
costly.
Exemption For Alternative Procedures Established by Contract .
Supporters of the bill argue that the bill is not overly
prescriptive because parties can choose to engage in a different
dispute resolution process if agreed to by contract. Supporters
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point to San Jose's dispute resolution process as a model for
success. (San Jose Municipal Code Title 14 - Public Works and
Improvements; Chapter 14.06 - Dispute Avoidance and Dispute
Resolution Policy). San Jose's dispute resolution process is
part of the city's municipal code. It provides for a three-step
approach to resolving disputes over public works projects: 1)
dispute resolution through settlement conference; 2) facilitated
dispute resolution by a neutral facilitator; and 3) dispute
resolution before a dispute review board. At no point in the
San Jose process is a decision rendered binding. Costs for
dispute resolution are shared by the disputing parties. The
dispute resolution process does not preclude parties from
litigating or from agreeing to a different method of dispute
resolution. According to supporters of the bill, the San Jose
model illustrates that when parties adopt their own claims
resolution procedures, they reduce the need for litigation,
complete more projects, and complete these projects in a more
budget-friendly and timely manner. Under current law, local
agencies can also choose to have public works contract disputes
arbitrated pursuant to Public Contract Code Sec. 20104(a)(2).
Outstanding Issues. Under the bill in print, the only allowable
method for creating an alternative dispute resolution process is
by contract. The author may wish to consider broadening this
provision to include dispute resolution processes established by
local ordinance or policy, such as the apparently successful San
Jose ordinance.
The bill requires the meet and confer conference to be not only
scheduled but completed within 10 days of the day it is
requested. This may prove to be an overly ambitious goal given
busy work schedules, or potentially encourage parties to game
the deadlines by strategically timing their requests. Failure
to meet this deadline would result in the application of full
and substantial penalties under the bill. Moreover, requiring
meet and confer conference to be completed within 10 days may
force parties may to engage in a meaningless process simply for
the purpose of meeting the deadline, which is unlikely to aid in
the resolution of the dispute.
The bill also imposes its penalties for each and every failure
to meet any time deadline, no matter how trivial or excusable.
With respect to penalties, it should be noted that the 2%
monetary penalty applies only to local agencies; contractors
face no comparable penalty for failure to take any further steps
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that might be required to make good on a claim that is deemed
approved by the contractor's failure to respond in a timely
fashion.
Finally, the bill contains no limit on the length of time the
parties would be compelled to participate in mediation. Because
mediation is a process that can succeed only if the parties
voluntarily come to agreement, the imposition of mandatory
mediation can be controversial or inappropriate in some
circumstances, although there are corollaries in existing law.
In order to avoid the needless expense of time and money by both
sides when an unwilling party is involved in an unproductive
mediation, the author may wish to consider whether the amount of
time required for mediation should be limited to four hours or
some other realistic time period, keeping in mind that if the
mediation process is working at that juncture the parties can
voluntarily extend it.
Author's Proposed Amendments. In response to concerns about the
original form in which the bill was introduced, the author
judiciously proposes the following amendments:
On page 2, line 7, insert: (b) This article shall not apply to
any claims resulting from a contract between a contractor and a
public agency when the public agency has elected to resolve any
disputes pursuant to Article 7.1 (commencing with Section 10240)
of Chapter 1 of Part 2.
On page 2, line 11, strike "(b)" and insert "(c)"
On page 3, line 10, strike "one hundred" and insert "fifty"
On page 3, line 11, strike "($100,000)" and insert "($50,000)"
On page 4, line 26, strike "one"
On page 4, line 27, strike "hundred thousand dollars ($100,000)"
and insert: "fifty thousand dollars ($50,000)"
On page 5, strike lines 24 through 28 inclusive
On page 5, line 29, strike "(6)" and insert "(5)"
On page 5, line 39, insert: (6) Failure by the local agency,
charter city, or charter county to respond to a claim within the
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time periods set forth in this subdivision shall also result in
a penalty, payable to the contractor, of 2 percent of the amount
due per month for every month that payment is not made. In any
action for the collection of funds wrongfully withheld, the
prevailing party shall be entitled to reasonable attorney's fees
and costs. The sanctions authorized under this section shall be
separate from, and in addition to, all other remedies either
civil, or administrative.
ARGUMENTS IN OPPOSITION : The Regional Council of Rural Counties
(RCRC), the California Special Districts Association (CSDA), and
the California State Association of Counties (CSAC), oppose the
bill, even with the proposed amendments. They state:
The overwhelming majority of these contracts are executed
and fulfilled with little or no disagreements. When
disputes between local agencies and contractors arise,
these matters are currently handled in a variety of ways.
Some public works contracts contain clauses that specify a
mediation and/or alternative dispute resolution process.
Other contracts are silent on this point, and, as such, the
parties may enter superior courts to resolve disputes.
However, we would point out that the vast majority of
contracts and disputes are handled or resolved without
involving the superior courts.
Under proposed amendments, AB 216 would impose a 2% penalty
upon local agencies that fail to respond to a specified
dispute arising from a contractor. We believe this effort
is unnecessary. It would, in our view, inappropriately
place a new financial penalty on local agencies without
addressing those contractors who, in our belief, fail to
perform up to the standards specified in a contract.
Similarly, the Kern, Los Angeles, Los Rios, Rio Hondo, San
Jose-Evergreen, and West Kern Community College Districts argue
in relevant part:
Current law already specifies the procedures for resolution
of public works claims disputes between contractors and
local public agencies for claims between $50,000 and
$375,000. This bill would mandate a mediation process.
The legislation would deprive local agencies, including
community college districts, and contractors of the
flexibility to address major public works disputes in a
timely and cost effective manner. In large, complex claim
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disputes, mediation and arbitration often fail to provide
for the promised cost reductions and timely dispute
resolution that make the processes desirable alternatives.
Requiring that disputed claims be subject to such a process
would only increase mandated costs to community college
districts and other local public entities at a time when
local budgets are already strained. AB 216 would drive up
costs for local community college districts undertaking
public works projects to provide classrooms and training
facilities for tomorrow's workforce and increase the
likelihood that public funds are not being spent in the
most efficient and effective manner.
The League of California Cities contends that the bill sets up a
system that would favor contracts who submit claims to cities,
counties and other public agencies. The League also asserts
that the bill creates an "unreasonable deadline for public
agencies to respond to claims, and will result in cities having
to pay merit-less claims because of the public agency's
administrative capacity."
The American Council of Engineering Companies of California
(ACEC CA) argues that the time limits in the bill are confusing
and too long to encourage immediate resolution of disputed
claims. The group notes that time is of the essence in the
construction world and that any delay can slow a project down
and cause significant cost increases. It also claims that the
time limits are unclear and that as a result, the provision that
imposes a penalty for failure to respond by the specified time
limes "may result in substantial unfairness."
CSAC Excess Insurance Authority raises concern that the bill
would limit the right of public entities to litigate disputes
with their contractors in court. The group also contends that
the bill would restrict a public entity's ability to replace
underperforming contractors until the ADR process is completed.
According to the group, this restriction could delay important
projects.
Prior Related Legislation. According to the sponsor, a similar
but not identical measure, SB 1642, was held in Senate
Appropriations last year because of cost concerns raised by
local public agencies. Unlike SB 1642, the sponsor states, the
current bill does not have a mandatory arbitration provision.
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REGISTERED SUPPORT / OPPOSITION :
Support
Construction Employers' Association of California (sponsor)
American Federation of State, County and Municipal Employees,
AFL-CIO
Engineering Contractors' Association
California Chapter of the American Fence Contractors'
Association
California Fence Contractors' Association
Flasher/Barricade Association
Marin Builders' Association
Opposition
American Council of Engineering Companies
CSAS Excess Insurance Authority
Kern, Los Angeles, Los Rios, Rio Hondo, San Jose-Evergreen, and
West Kern Community College Districts
League of California Cities
Regional Council of Rural Counties
Analysis Prepared by : Kevin G. Baker and Neta Borshansky / JUD.
/ (916) 319-2334