United States: Impact Of New Claims Procedures On Project Administration For Public Entities And Contractors

This focuses on Public Contract Code § 9204, the new law requiring a minimum claims resolution procedure for claims arising in public contracts ("Section 9204"). Below is a listing of the key aspects of Section 9204, some analysis and practical advice, along with a timeline sequence of how the new statute works. Further below is the full text of the new statute.

New Claims Procedure for Public Works Contracts

What contracts do Section 9204 apply to?—All public works projects everywhere in California entered into on or after January 1, 2017, except when the public entity involved is (a) Dept. of Water Resources, (b) Dept. of Transportation, (c) Dept. of Parks and Recreation, (d) Dept. of Corrections and Rehabilitation, (e) Military Dept., (f) Dept. of General Services, or (g) High-Speed Rail Authority. Any attempt to limit or avoid the effects of Section 9204 through contractual agreement is null and void.

Are Charter Cities and Charter Counties included?—It depends. The statute certainly tries to reach all public works contracts (except for those involving agencies listed in the preceding paragraph), and specifically states that it should apply to public works contracts involving Charter Cities and Charter Counties. Due to California's "Home Rule" constitutional doctrine, which is conceptually similar to federalism, the applicability of Section 9204 therefore depends on a multiple prong test which has been part of California jurisprudence for decades. See, e.g., California Fed. Savings & Loan Assn. v. City of Los Angeles (1991) 54 Cal.3d 1; City of El Centro v Lanier (2016) 254 Call.App.4th 1494.

Under the first and likely most important prong of the test, the statute is binding on a Charter City or Charter County if there is no actual conflict between the statute and a charter provision or municipal enactment. Note—even if the statute conflicts with contract language a Charter City has been using for fifty years, that is not an actual conflict, because the contract language is not itself a municipal enactment.

If, however, the Charter City or Charter County has a charter or ordinance which does directly contradict the new statute, the "Home Rule" doctrine might negate the effect of Section 9204. In summary, whether any particular Charter City or Charter County must comply with Section 9204 depends on an individualized analysis focusing on particular municipal enactments and other elements unique to their circumstances. If there is no charter provision, ordinance or other municipal enactment conflicting with Section 9204, however, the new law likely applies to Charter Cities and Charter Counties.

What is the purpose of Section 9204?—The new statute is intended to encourage the timely payment of valid claims on public works projects. Will Section 9204 be with us forever?—The new statute expires automatically on January 1, 2020, and therefore only impacts contracts entered into during an initial three year period. For it to affect contracts entered into after that date, another statute would have to pass either extending it or making Section 9204 permanent.

Are other public contract claims statutes and procedures negated by the new statute?—No. Existing claims statutes impacting public works remain enforceable and must be read in conjunction with Section 9204. For example, Public Contract Code § 10240 et seq., requires some claims to be arbitrated rather than adjudicated in a court of law. The deadlines and other provisions of those statutes still must be followed as they did before. The only difference is that the provisions of Section 9204 now apply as well. Other examples are Public Contract Code §§ 19100 et seq. & 20104 et seq, which remain the law and in full effect. In addition, pursuant to subparagraph (f) of Section 9204, a public entity may prescribe reasonable change order, claim, and dispute resolution procedures and requirements in addition to the new law, so long as the contractual provisions do not conflict with or otherwise impair the time frames and procedures set forth in Section 9204.

Does Section 9204 have to be printed out in the public works contracts themselves?—Yes. Section 9204 requires that its term, or a summary thereof, be set forth in the public works contract's plans or specifications.

Timeline sequence of claim resolution activity required by Section 9204:

  • Process begins once contractor submits a claim to owner (consistent with any notice period prescribed by contract or local ordinance) accompanied by "reasonable documentation to support the claim." Presumably a public entity can prescribe the level of detail of documentation that must be submitted with the claim, as long as it is reasonable. The contractor's submission of the claim must be done by either registered mail or certified mail, return receipt requested. The claim itself can be for extra time, extra money, relief from liquidated damages, relief from backcharge, etc. Note—Long before contractor gets to this stage, it should ensure its compliance with any other contractual pre-requisites to submitting a claim (e.g., providing written notice of events potentially giving rise to claim for additional time or money within three days of occurrence, etc.).
  • Upon receipt, Owner has 45 days to conduct a reasonable review of the claim and provide the claimant a written response which identifies what portion of the claim is disputed and what portion is undisputed. The parties are free to extend this time period by mutual agreement. If the public entity needs approval from its governing body, and the body does not meet during the 45 day period, the owner's written response is due within 3 days of the publicly noticed meeting of the body following the 45 day period (or mutually extended period).
  • If the owner does not provide a written response as required, the claim will be deemed to have been entirely disputed on the date the response was due.
  • All amounts the owner identifies in its response as undisputed must be paid within 60 days of the owner's written response. If it takes longer, those amounts accrue interest at 7% per annum.
  • If any part of the claim is disputed by the owner, then after the response (or the time when it is deemed rejected) the contractor may demand in writing an informal conference to meet and confer about the dispute. If this written demand is made, the owner has 30 days to schedule such a conference.
  • If after the meet and confer conference some or all of the claim remains in dispute, then within 10 days of the conference, the owner must provide claimant with a written statement which identifies what matters are still outstanding. Again, undisputed amounts must be paid within 60 days of the written statement or be subject to 7% interest.
  • If the post-conference owner statement does identify aspects of claim still in dispute, contractor shall provide owner with written notice demanding non-binding mediation. Within 10 days of contractor's notice, the parties are obligated to agree to a mediator. If the parties cannot agree, each selects a mediator, and those two mediators will choose a third mediator, who will mediate the disputed parts of the contractor's claim.
  • If mediation is unsuccessful, contractor is free to pursue its claim pursuant to contract and/or applicable law (arbitration, litigation, etc.).
  • It is very important to comply with all other contractual and statutory requirements involving claims. For instance, complying with Section 9204 does not excuse a failure to submit a Government Code claim as a precondition to filing suit, which must be done within one year of the cause of action accruing. That is a timeline independent of the one contained in Section 9204. Furthermore, the time to submit a Government Code claim can be stayed while a contractor complies with some of the requirements of Public Contract Code § 20104 et seq., but in contrast there is no tolling effect explicitly created by Section 9204.

Does Section 9204 apply to subcontractor pass-through claims?—Somewhat. If a subcontractor has a claim against the owner, it can provide such a claim on a pass-through basis to the original contractor in writing. Reasonable documentation must be included with the subcontractor's claim. Within 45 days of the original contractor receiving the subcontractor's claim, the original contractor must notify the subcontractor in writing whether the claim was presented to the owner. If the original contractor did not present the claim to the owner, the original contractor in its written statement must explain the reasons it did not present the claim to the owner. If the subcontractor's claim is passed through by the original contractor to the owner, the sequence of events detailed above will apply.

Note—the original contractor's duty to investigate a subcontractor's claim prior to passing it through to the owner to avoid False Claims Act liability is notoriously unclear. Obviously an original contractor should not pass through a subcontractor's claim it knows for certain to be false. The amount of investigation, if any, required to insulate a contractor from potential False Claims Act liability may depend on the contractual relationship between it and the owner. For instance, an owner would have an easier time holding the original contractor liable for the submission of a false pass-through claim if the original contract imposes on the contractor a duty to investigate subcontractor claims prior to submission. False Claims Act liability does not arise from mere negligence, and there must at least be a reckless disregard for the truth proven before any defendant can be liable for False Claims Act liability.

Will 7% pre-judgment interest be available for sums unreasonably denied?—Probably. Although Section 9204 does not specify what remedy would be available to a contractor whose claim was wrongly denied, the owner may be liable for 7% interest if it is later determined by court or arbitrator that a reasonable review of the contractor's claim would have caused a reasonable owner not to dispute the claim. Similarly, if some of the dispute is later deemed reasonable and some not, the 7% would probably apply to only the part of the claim which was unreasonably disputed.

Originally published Friday, March 03, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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