On November 17, 2016, Governor Brown signed into law AB 626 which adds new Public Contract Code (PCC) 9204.  This new section of the PCC (which is effective for all contracts executed on or after January 1, 2017) reflects an effort to resolve contractor claims more expeditiously by requiring public entities to evaluate claims and engage in mediation or other forms of non-binding ADR.   The bill’s sponsor, United Contractors (“UCON”) touted the new law as follows:

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.

Although the new law benefits contractors by requiring public entities to address claims, there are some potential pitfalls.   Only time will tell how effective this new law is and how it interacts with statutes placing additional pre-litigation requirements on public works contractors.

DOES PCC 9204 APPLY TO ALL CALIFORNIA PUBLIC ENTITIES?

Most, but not all, California public entities are subject to the new ADR requirements of PCC 9204.  The new law applies to state agencies, departments, offices, divisions, bureaus, boards and commissions; the California State University and the Regents of the University of California; and local cities, charter cities, counties, charter counties, city and counties, charter cities and counties, districts, special districts, public authorities, political subdivisions, public corporations, and nonprofit transit corporations wholly owned by a public entity and formed to carry out the purposes of the public entity.

Public entities to which PCC 9204 does not apply are: (1) the Department of Water Resources; (2) the California Department of Transportation (“CalTrans”); (3) the Department of Parks and Recreation; (4) The Department of Corrections and Rehabilitation; (5) the Military Department; (6) the Department of General Services; and (7) the High-Speed Rail Authority.

PCC 9204 REQUIRES A THREE-PHASE ADR PROCEDURE

  • Phase I: Claim Submission And Response
  1. The contractor in direct contract with a public entity first submits its claim to a public entity. A “claim” is defined as: (1) a request for time extension or a request for relief from liquidated damages; (2) a demand for payment of money or damages arising from work performed; and (3) demand for payment of an amount that is disputed by the public entity.  The claim must include “reasonable supporting documentation.”  While not specifically detailed, the claim package should include items such as time impact analyses, cost records and other project records necessary to demonstrate entitlement and damages.  The contractor’s claim is to be sent by registered mail or certified mail, return receipt requested.
  2. The public entity has up to 45 days to provide the contractor with a written statement accepting the claim or detailing the portions of the claim that are disputed and undisputed. If the public entity believes that it needs more than 45 days to prepare its response, the time may be extended by mutual agreement.  Similar to Government Code claims, if the public entity fails to respond within 45 days, the claim is deemed to have been denied.
  3. If there are any undisputed portions of a claim, the public entity must pay the undisputed amounts within 60 days after the written response is served. Public agencies will be responsible for interest on untimely payments at the rate of seven percent (7%) per annum, which is less than the statutory rate of ten percent (10%).  The requirement to pay undisputed claims may become convoluted for several reasons: (1) some claims will involve requests for time extension, which may or may not be 100% compensable; (2) the ability to assess liquidated damages will complicate matters; (3) in some instances, entitlement to compensation may be undisputed, but there may be no agreement as to the amount of compensation.  Unless the claim is simple and straight-forward on the undisputed portion, payment within 60 days seems unlikely.
  4. While virtually all public agencies require board approval to resolve a claim, some agencies may also need board approval to provide the written claim response. If board approval cannot be obtained within the time limit, the public entity shall have up to three (3) days following the next regularly scheduled board meeting to provide its written statement.  Whether a public entity “needs” board approval to provide its claim response is inherently ambiguous.  Contractors can look to the public entity’s governance documents to clarify whether board approval of the claim response is necessary.
  • Phase II: Informal Resolution
  1. If the public entity denies a claim in whole or in part, or if the public entity fails to respond to a claim within the statutory time period, the contractor should next submit a written demand for an informal settlement conference. The demand must be sent by registered mail or certified mail, return receipt requested.
  2. Upon receipt of a demand, the public entity must schedule the conference within 30 days. It should be noted that the statute is unclear regarding whether the settlement conference must be held within 30 days or simply scheduled within 30 days.  Also, the statute is silent concerning any requirement for a face-to-face meeting.  Presumably, the public entity will want to meet in person.  However, a meeting by other means such as by telephone or video conference may comply.  Most public works contracts have detailed ADR provisions and these should be followed in conjunction with the PCC 9204 procedures.
  3. After the settlement conference is concluded, the public entity has ten (10) business days to issue a written statement identifying what portion of the claim remains in dispute and what portion is undisputed. (The use of the phrase “business days” in this portion of the statute suggests that the other deadlines are all calendar days).
  4. If the settlement meeting resolves all or a portion of the claim, the public entity must pay the undisputed portion within 60 days.
  • Phase III: Mediation Or Other Non-Binding Dispute Resolution Process
  1. If, following the settlement conference, all or a portion of the contractor’s claim continues to be denied by the public entity, the contractor can compel the public entity to mediate the remaining disputed items. If the parties believe that a mediation would be pointless, the parties can agree in writing to waive the mediation requirement and proceed directly to the commencement of a civil action or arbitration.  If mediation proceeds, the statute requires both sides to share in the cost equally.  The statute is silent regarding the interplay of the contract’s ADR provisions.  If the contract identifies an ADR provider, such as AAA or JAMS, and a location for the mediation, those contract terms should be followed.   Also, the statute does not require the contractor to submit its mediation demand by registered mail or certified mail, return receipt requested.  This implies that email or other forms of correspondence are sufficient.  The best practice, however, is to send via registered mail in order to preserve the record.
  2. Once the mediation demand has been received, the public entity and contractor have ten (10) business days to select a mediator. If the parties cannot agree, each party is to select a mediator and those mediators are to select a qualified, neutral third party to serve as mediator.  The statute does not state when such mediation should take place.
  3. In lieu of mediation, the contractor and public entity are able to utilize any other non-binding ADR process, including, but not limited to, neutral evaluation or a dispute review board. Any alternative, non-binding ADR process must conform to all deadlines set forth in PCC 9204.

SUBCONTRACTOR CLAIMS

If a subcontractor has a pass-through claim, the contractor has the option, but not the obligation, to present the subcontractor’s claim to the public entity.  The first step is for the subcontractor to make a written request to the contractor to present the pass-through claim.  Within 45 days of receipt of the subcontractor’s request, the contractor must advise the subcontractor that the pass-through claim was presented to the public entity or provide a statement of reasons why the contractor did not present the claim.  It should be noted that only a direct subcontractor, not a second-tier subcontractor, may make a written request to the contractor regarding the pass-through claim.  While there is no requirement under the PCC 9204 for a contractor to submit a subcontractor’s claim to a public entity, the subcontract terms applicable to subcontractor pass-through claims may influence the contractor’s decision.

CONCERNS AND POTENTIAL PITFALLS

The dispute resolution procedures set forth in PCC 9204 could potentially raise traps for impetuous contractors.  There are a number of other laws that contractors must adhere to in pursuing litigation against California public entities.

Generally, before a contractor can sue a public entity for breach of contract, the contractor must present the claim prescribed by Government Code § 910 within one year of the last breach of the contract (Gov. Code § 911.2).  Government Code § 945.6 provides that an action against a public entity on a cause of action for which a claim must be presented must be commenced within six months after notice of rejection of the claim.  Gonzales v. County of Los Angeles 199 Cal. App. 3d 601 (1988).  If no notice is given, then the action must be filed within two years after accrual of the cause of action.  Government Code § 945.6(a); Paniagua v. Orange County Fire Authority 149 Cal. App. 4th 83, 88 (2007). No Government Code claim is required for disputes arising out of contracts with the state.  PCC 19100.  These disputes go directly to arbitration under PCC 10240 et seq.

It is possible that the public entity’s written decision (or expiration of its time to respond thereby rejecting part of a claim) triggers the 90-day period in which to initiate arbitration under PCC 10240.1; yet that 90 days may expire before mediation takes place under PCC 9204.  Also, the time frame to submit a Government Code claim and initiate an action may also conflict with the procedures and spirit of the PCC 9204 mediation.

There are also concerns regarding the implementation of the new law.  For example, although PCC 9204 provides for new mandatory ADR procedures before contractors can initiate arbitration or litigation, there is no assurance of receiving earlier payment or that an uncooperative public entity will stop stonewalling a contractor.

CONCLUSION

PCC 9204 may benefit a substantial number of contractors in California by creating a new procedure to compel public entities to pay attention to and negotiate claims.  However, uncooperative public entities may use these procedures to delay claim resolution to the detriment of contractors.  More importantly, the new dispute resolution protocol may conflict with other laws governing the initiation of litigation or arbitration against public entities and the contractor should be cognizant of all pre-litigation requirements.