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Legislature Simplifies Contractor Claims Against Public Owners

In September, Governor Brown signed legislation which expedites contractor claims against owners on public works projects. The law, which applies to all public contracts entered into after January 1, 2017, adds new section 9204 to the Public Contract Code.

Historically, contractors seeking to pursue public owners for amounts owed for things such as unpaid change orders, delays, differing site conditions and defective plans and specifications would have to pursue their claim through the administrative procedures in the contract and then file a lawsuit against the public owner if they did not get paid. Many contractors simply give up their claim, or settle for pennies on the dollar, rather than incur the expense of hiring a legal team and waiting years for the claim to work its way through the judicial process.

Seeing the problem, the Legislature has attempted to fix it by establishing a three-part claims resolution process that seeks to avoid the courthouse altogether. After failing to receive compensation, the affected contractor can submit a formal written claim, by certified mail, to the public owner. The owner then has 45 days to review the claim and respond, in writing. If the claim is accepted, the contractor is paid. If the claim is denied, the contractor can seek a formal sit down settlement meeting with the public owner to review the claim and that meeting must be scheduled within 30 days of the owner’s response. If after the settlement meeting, the claim is still unresolved, the contractor can then demand nonbinding mediation, which must be accepted by the owner within 10 days. If after the nonbonding mediation the claim is still not resolved, the legislation permits binding arbitration of the claim.

This accelerated schedule means that a contractor claim can be set for mediation less than 90 days from claim submission. In a lawsuit, the parties will not usually mediate a case for at least six months, and then only after costly written discovery and depositions have taken place. Section 9204 not only saves contractor’s time, it saves them legal expense. It recognizes that the court system might not be the best forum to resolve construction disputes

Key to this new legislation is that no lawsuit is required. The affected contractor does not have to file suit in order to preserve their claim rights. In addition, affected subcontractors and material suppliers downstream can pursue their claims through the contractor and take advantage of these claims resolution procedures. Some State owners (notably Cal Trans, DGS, High-Speed Rail Authority) have been exempted from this legislation, but it applies broadly to cities, counties, school districts, Regents of the University of California, California State University, and most other public works owners.

Although this legislation seeks to expedite the claims resolution process, it will take time to work the “kinks” out. For now, we recommend that contractors seeking to utilize this fast-track resolution process consult with legal counsel to ensure that all of the applicable legal deadlines are being met. Lanak & Hanna will be working directly with its claim consultants in helping contractors prepare/submit these claims and shepherd them through this new claims resolution process. For more information about our claims program, please contact Colin McCarthy.