Contractors Beware!
New California Public Works Claims Resolution Process Raises Concerns and Traps for the Unwary!
AB 626 adds new Public Contract Code section 9204. It creates a new claims resolution procedure in addition to those already found in the Public Contract Code sections 10240 to 10240.13 (state public works arbitration) and 20104 to 20104.6 (claims against local agencies under $375,000 unless agency has elected to arbitrate under section 10240, et seq.). It applies to contractor claims on all public works projects, except for projects of the following Departments: Water Resources, Transportation, Parks and Recreation, Corrections and Rehabilitation, Military, General Services, and the High-Speed Rail Authority. This section becomes effective for contracts entered after January 1, 2017 and expires December 31, 2019 unless renewed.
AB 626 adds new Public Contract Code section 9204. It creates a new claims resolution procedure in addition to those already found in the Public Contract Code sections 10240 to 10240.13 (state public works arbitration) and 20104 to 20104.6 (claims against local agencies under $375,000 unless agency has elected to arbitrate under section 10240, et seq.). It applies to contractor claims on all public works projects, except for projects of the following Departments: Water Resources, Transportation, Parks and Recreation, Corrections and Rehabilitation, Military, General Services, and the High-Speed Rail Authority. This section becomes effective for contracts entered after January 1, 2017 and expires December 31, 2019 unless renewed. The public entity must include these provisions or a summary of them in each project’s plans or specifications. Any waiver of these provisions is void, however, public entities may add requirements for change orders, claims, and dispute resolution that do not conflict with these provisions. The parties also may agree in writing to avoid mediation and proceed immediately to arbitration or litigation.
More Good than Harm?
This bill is hailed by its sponsor, United Contractors, as: In a historic win for industry, today, Governor Brown signed AB 626, UCON’s “change order” reform legislation. This victory comes after a three-year battle to close the loop-hole in prompt payment by public agencies for CA contractors. The UCON-sponsored measure implements a fair and responsible process that requires local agencies, including the UC/CSU system and Airports, to respond to a contractor’s claim for “extra work” timely, pay the undisputed portions of claims and provides a path for expedited settlement of disputed claims. This is a major victory for California’s public-works contractors. United Contractors’ enthusiasm may be misplaced. Instead of amending existing law addressing the same issues, AB 626 engrafts a new scheme on top of them. How the old and new provisions interact is far from clear (please see attached table of provisions and timing of overlapping dispute resolution events), and while it is possible the new law will do more good than harm, significant concerns remain, and trade contractors need to be wary of potential traps in handling claims. Concerns for contractors include:
• These dispute resolution procedures potentially raise traps for the unwary:
o It is possible that the entity’s written decision or expiration of its time to respond thereby rejecting part a claim triggers the 90-day period in which to initiate arbitration under PCC section 10240.1, yet that 90-days may expire before mediation takes place under section 9204;
o It is possible that the entity’s written decision or expiration of its time to respond thereby rejecting part a claim triggers the 1-year period in which to initiate a government claim under arbitration under PCC section 10240.1, yet that 1-year period may expire before mediation takes place under section 9204;
- This new law provides for new, expensive hoops for contractors to jump through, before they initiate arbitration or litigation, with no assurance of receiving any earlier payment;
- Contractors gamble by undertaking these dispute resolution procedures, because an uncooperative public entity could use them to drag out resolving the claim:
settlement conference, yet an uncooperative public entity is free to stonewall
and offer nothing at this conference;
o If the matter is not resolved by the informal settlement conference, the
contractor may request mediation, but section 9204 does not set a time by
which mediation must take place;
- While public entities are supposed to pay undisputed amounts (after 105 days
following claim presentation, or later if the public entity’s board must meet to decide), the penalty for failing to make payment is only a 7% interest charge, and no attorney fees for having to chase recovery; - Trade contractors gain no rights under this section, except that a general contractor must tell the trade contractor, within 45 days after the trade contractor presents its claim in writing to the general contractor, whether the general contractor presented the trade contractor’s claim to the public entity and if not, why not. Trade contractors’ claims are subject to the concerns above—including having to pay for the process, without ability to control the process, since general contractors usually retain control by contract.
New PCC section 9204 may well benefit a substantial number of contractors in the State of California by creating a new mechanism to bring public construction parties to the negotiating table to discuss extra work and other claims. However, the new section puts new tools in the hands of uncooperative public entities to use to delay claim resolution and erode the resolve of contractors who must carry the cost of labor and materials for such claims work. Of more concern is the possibility that contractors may discover their right to arbitrate or litigate time-barred if they use the new dispute resolution procedures.
Daniel F. McLennon
275 Battery Street, Suite 1300 OFFICE 415.394.6688 San Francisco, CA 94111 FAX 415.394.6687
October 24, 2016
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