Public Contracts and Construction

Recycled Water Systems for New Construction Will Be Mandatory

Attorney Authors: 

The ongoing drought is pushing the development of government efforts to increase use of recycled water.  AB 2282 is the latest effort to plan for future recycled water use, by requiring recycled water systems in newly constructed buildings in certain circumstances.  During the 2016 Intervening Code Adoption Cycle, the Department of Housing and Community Development (HCD) must (1) research, and (2) submit for adoption mandatory building standards for the installation of recycled water systems for newly constructed single-family and multifamily residential buildings.  The California Building Standards Commission (BSC) is responsible for the same research and adoption of standards for commercial and public buildings.   (Health and Safety Code sections 17921.5 and 18940.6.) 

Do you Design Build? New Law Revamps Design Build Procurement Requirements For All Public Projects Throughout The State

Attorney Authors: 

On September 30, 2014, Governor Jerry Brown signed in to law Senate Bill 785 which, among other things, updates and rewrites the statutory law relating to design-build procurement for public projects throughout the State.  The new law goes in to effect on January 1, 2015.

Court of Appeal Affirms the Discretion of a City in Waiving an Error in a Bid for a Public Works Project

Attorney Authors: 

Meyers Nave Principal Benjamin Reyes and Associate Eric Casher successfully defended the City of San Leandro ("City") in a legal challenge brought by a disappointed bidder in a major public works case.  On January 28, 2014, the Court of Appeal, First Appellate District, affirmed the decision of the City in waiving a bid defect in the case, Bay Cities Paving & Grading v. City of San Leandro, et. al.   The case was certified for publication on February 13, 2014.  There, the Court held that the City did not abuse its discretion by accepting an immaterial deviation in the low bidder's bid bond.  In applying the substantial evidence standard of review, the Court evaluated the City's actions and determined that it had properly complied with its procedures.  Accordingly, the Court did not second guess the City's decision in awarding the contract for the BART Pedestrian Interface Project to the low bidder, Gallagher & Burk, Inc.  

AB 44: New Law Requires Contractors to List Subcontractor License Numbers on Bids

Attorney Authors: 

Existing law under the Subletting and Subcontracting Fair Practices Act requires prime contractors bidding public construction projects to list the names and locations of each subcontractor performing work for a public works project.  The statute calls for contractors to identify each subcontractor performing more than one-half of one percent of the contractor’s total bid, or $10,000, whichever is greater.  (Public Contract Code Section 4104).

AB 44: New Law Requires Contractors to List Subcontractor License Numbers on Bids

Attorney Authors: 

Existing law under the Subletting and Subcontracting Fair Practices Act requires prime contractors bidding public construction projects to list the names and locations of each subcontractor performing work for a public works project.  The statute calls for contractors to identify each subcontractor performing more than one-half of one percent of the contractor’s total bid, or $10,000, whichever is greater.  (Public Contract Code Section 4104).

AB 44: New Law Requires Contractors to List Subcontractor License Numbers on Bids

Attorney Authors: 

Existing law under the Subletting and Subcontracting Fair Practices Act requires prime contractors bidding public construction projects to list the names and locations of each subcontractor performing work for a public works project.  The statute calls for contractors to identify each subcontractor performing more than one-half of one percent of the contractor’s total bid, or $10,000, whichever is greater.  (Public Contract Code Section 4104).

Sophisticated Parties Can Agree To Waive The Delayed Discovery Rule In California Construction Projects

Attorney Authors: 

On June 3, 2013, in the case of Brisbane Lodging, L.P. v. Webcor Builders, Inc., et al. (No. A132555), the California Court of Appeals set new precedent by affirming a lower court ruling upholding the enforcement of a contract provision which abrogated the “delayed discovery rule” by providing that all causes of action relating to work on the contract would accrue from the date of substantial completion. This is the first time in the history of the State that a California Court has done so.

Caltrans’ Disadvantaged Business Enterprise (DBE) Program Upheld As Constitutional…For Now

Attorney Authors: 

On April 16, 2013, in the case of Associated General Contractors of America, San Diego Chapter, Inc. v. California Department of Transportation et al. (No. 11-16228), the Ninth Circuit Court of Appeals affirmed a district court ruling upholding the constitutionality of the 2009 Caltrans Disadvantaged Business Enterprise (DBE) program that provides race and sex based preferences to African American-, Asian American-, Native American-, and women-owned firms on certain transportation contracts.  Plaintiffs, the Associated General Contractors of America, San Diego Chapter, Inc., challenged the program as an unconstitutional affirmative action program that fails to meet the constitutional standard of strict scrutiny.  The Ninth Circuit disagreed, finding that the program survives strict scrutiny by having a strong basis in evidence of discrimination within the California transportation contracting industry, and in being narrowly tailored to benefit only those groups that have actually suffered discrimination.

Supreme Court Rules that Charter Cities may not have to pay Prevailing Wages

Attorney Authors: 

On Monday, July 2, 2012, the California Supreme Court clarified that Charter Cities may exempt themselves from paying prevailing wages on public works projects where the projects are funded with local dollars.  The long anticipated case, State Building and Constructions Trades Council of California, AFL-CIO v. City of Vista, held that the ordinances of charter cities supersede state law with respect to “municipal affairs.”  The majority opined that the construction of a city-operated facility for the benefit of a city’s inhabitants is “quintessentially a municipal affair, as is the control over the expenditure of a city’s own funds.”

One-Time Contract For Tree Pruning Considered “Maintenance Work” Subject to Prevailing Wages

Attorney Authors: 

In Reliable Tree Experts v. Baker (California Department of Transportation), the First Appellate District affirmed an order holding that the pruning and removal of diseased trees along state highways was both a public work and “maintenance” work necessitating the payment of prevailing wages under the Labor Code.

The Court of Appeals found that public works are not limited to “[c]onstruction, alteration, demolition, installation, or repair work,” as set forth in §1720(a)(1) of the Labor Code.  A public work also includes “maintenance,” as set forth in §1771.  Both sections, the court found, §1720 and §1771, define the scope of what constitutes a “public work.”

In a dispute between the California Department of Transportation (“Caltrans”) and Reliable Tree Experts (“Reliable”), Reliable argued that the work it did for Caltrans was not “maintenance” work” requiring prevailing wages because maintenance is work that must be performed on a regular basis and its contract with Caltrans was for a one-time job only. 

The Court of Appeals disagreed, finding that whether or not the job constituted maintenance work did not depend on how often any particular contractor was hired to perform the job.  State highways are bordered by thousands of trees that must be maintained on a routine, recurring and usual basis.  Tree work on a Caltrans right-of-way is not a “one time project” but an on-going task requiring the use of many contracts throughout the state.  Thus tree work, in this instance, would be maintenance work regardless of how many times any individual contractor is hired to perform it.

Public Project Payment Retention Capped at 5%

On October 11, 2011, Governor Brown signed SB 293 into law, which will be codified as Public Contract Code Section 7201.  SB 293 contained various provisions, but most important to public entities is a new 5% cap on the payment retention that public entities can withhold on public projects.  Although no previous statutory authority dictated the amount of retention, a 10% retention on public projects is common.  The retention cap could provide public entities with less leverage as they try to compel contractors to complete projects in a timely and satisfactory manner.  SB 293 also addresses prompt payment between prime contractors and subcontractors, and recovery on payment bonds.

Public Works Contractors are Bound by Contractual Claims Requirements

Prime contractors that fail to complete public projects on time often claim that circumstances beyond their control caused the delay.  Frequently, contractors making such claims fail to follow procedures mandated by the construction contract and project specifications to request more time to complete the project.  Now, with a new California Court of Appeal decision, public entities have more authority to support their arguments that contractors in such circumstances are not entitled to additional compensation.  In the case, Greg Opinski Construction, Inc. v. City of Oakdale, the Court held that liquidated damages were proper against the prime contractor, which claimed that liquidated damages were improper because the public entity was responsible for its delay in completing the project, because the contractor failed to follow procedures in the contract for claiming additional time for completion.  Read the entire opinion, published October 6, 2011, here.

Project Thresholds Change Under Uniform Public Construction Cost Accounting Act

Attorney Authors: 

Public entities that utilize the UPCCAA should take note that the monetary thresholds for bidding on public projects has changed as follows:

(a) Public projects of thirty thousand dollars ($30,000) or less may be performed by the employees of a public agency by force account, by negotiated contract, or by purchase order.

(b) Public projects of one hundred seventy-five thousand dollars ($175,000) or less may be let to contract by informal procedures as set forth in this article.

(c) Public projects of more than one hundred seventy-five thousand dollars ($175,000) shall, except as otherwise provided in this article, be let to contract by formal bidding procedure.

Subcontractor False Claims Suit Properly Dismissed Where Suit Based on Public Information

On July 22, 2011 the California Court of Appeal confirmed that a subcontractor could not bring an action against a general contractor alleging that the general contractor submitted a claim to a public entity in violation of the California False Claims Act (Government Code Section 12650 et seq.).  In the case, the subcontractor attempted to bring the suit in the name of the State of California as a so-called "qui tam" plaintiff, who can receive a substantial payout of litigation proceeds if the case is successful.  However, the subcontractor was out of luck

Proposed Law Gives Attorney's Fees to Successful Bid Challenger

A new bill (A.B. 457) was recently introduced in the California Legislature that would provide attorney's fees to a public works bidder who is not awarded a contract for a public project, but who successfully challenges the bidding process for the project in court.

A.B. 457 would enact Public Contract Code 5111, which as drafted would state "If a contract is entered into under Section 5110 pending final decision on a challenge to the intended or actual award of the contract, and if the contract is later determined to be invalid due to errors or omissions of the public entity, a bidder who successfully challenges the intended or actual award of that contract shall be entitled to recover costs and attorney's fees incurred in pursuing that challenge."

Not surprisingly, A.B. 457 is supported by various associations that represent contractors and the construction industry. And, since the proposed law is likely to result in an increase in bid protests and subsequent lawsuits against public entities, and resulting project delays, as well as the potential for attorney's fees liability, various public entity associations oppose it.

The bill was scheduled for a committee hearing on March 22, 2011, but that hearing was cancelled. You can follow the status of A.B. 457 here.

Local Agencies Now Required to Provide Electronic Copies of Project Documents to Contractor Plan Rooms

The California State legislature recently passed AB 2036, codified as Section 20103.7 of the Public Contract Code, which provides that "[a] local agency taking bids for the construction of a public work project or improvement, upon request from a contractor plan room service, must provide an electronic copy of a project's contract documents at no charge to the contractor plan room." Section 20103.7 of the Public Contract Code took effect January 1, 2011.

California has approximately 32 plan room services throughout the state which allow contractors to conveniently access public contract bid documents. These contractor plan rooms are entitled to a free electronic copy of local agency public contract documents upon request under Section 20103.7 of the Public Contract Code. The law does not specify the electronic form in which contract documents must be produced, or the timeframe for production. Nothing in section 20103.7 suggests that local agencies are required, at their expense, to create electronic contract documents in specialized formats. However, local agencies may wish to familiarize themselves with contractor plan room services and their preferred electronic formats, because larger bid pools may result from placement of bid documents with plan rooms. Timely submission of electronic documents to plan rooms may further assist agencies by encouraging a greater number of contractors to bid on agency projects.

Section 20103.7 does not require local agencies to provide all bidders electronic copies of contract documents at no charge - only contractor plan rooms, and only upon request.

Local agencies should consider taking steps such as the following to comply with the law and maintain control over the contract information sent to potential bidders:

  1. Include in electronic documents provided to plan rooms the date when the documents were prepared and a notice that all bidders are responsible for ensuring that their bid is submitted on the latest project documents, and that all addenda are included, by contacting the agency project manager.
  2. Include a watermark on the electronic documents provided to plan rooms so the agency can distinguish the electronic plan room copies from hard copies provided to bidders, and check whether bids submitted on electronic documents contain the latest addenda.
  3. In addition to providing electronic copies of project documents to contractor plan rooms, post them on your agency’s website and provide bidders with an opportunity to register to receive updates and addenda via e-mail.

These steps can help prevent award complications and bid disputes that may arise from submission of bids on incorrect or incomplete versions of project documents. We will continue to monitor developments in public contract bidding law and provide updates on further developments. For more information or assistance with other construction or contract matters contact Ben Reyes, Eric Danly or Eric Casher at 800.464.3559.

Community Facilities District Financing Triggers Prevailing Wage Requirements For All Public Improvements of a Project

In Azusa Land Partners v. Department of Industrial Relations, the Second Appellate District Court of Appeal has upheld the California Director of Industrial Relations and the Superior Court of Los Angeles County in determining that use of Mello-Roos bonds to fund certain infrastructure required for a city’s approval of a mixed-use project requires payment of prevailing wages for the construction of all public facilities and infrastructure improvements required for the Project, and not just the public improvements funded by the bond proceeds.

In 2004 Monrovia Nursery entered into a Development Agreement with the City of Azusa (the City) for development of over 1,200 homes, 50,000 square feet of commercial construction, and public improvements and infrastructure, including a public school, park, sanitation district facilities, landscaping, and backbone infrastructure for the cities of Glendora and Azusa. The Nursery’s successor-in-interest, Azusa Land Partners (ALP) then entered into a Funding and Acquisition Agreement (Acquisition Agreement) with the City to provide partial funding of the required public facilities through establishment of a Community Facilities District to sell Mello-Roos tax bonds. The Acquisition Agreement initially referred to the eligible facilities simply as “Publicly Financed Facilities.” After the Mello-Roos bonds were issued, the City and ALP modified the Acquisition Agreement to identify specific, publicly financed facilities eligible for Mello-Roos funding.

The Acquisition Agreement required ALP to perform the public improvement work as a condition of approval of the project even if the actual cost exceeded the amount of bond funds. The bond proceeds funded a little less than half the actual cost of the public improvements, with the balance funded privately.

In 2007 the Director of Industrial Relations determined that the entire Project constituted a public work subject to prevailing wage requirements within the meaning of Labor Code Section 1720(a)(1). The Director also determined that the Project qualified for the partial prevailing wage exemption in Labor Code Section 1720(c)(2) under which only those public infrastructure improvements required as a condition of regulatory approval are subject to prevailing wage requirements, as long as the public funds contributed do not exceed the construction cost for the public improvements and the public entity does not retain a proprietary interest in the project. This determination was affirmed on administrative appeal in 2008.

ALP contended that only the public improvements actually funded by the Community Facilities District should be subject to prevailing wages and filed a petition for writ of mandate, which the trial court denied. The trial court found that Mello-Roos bond proceeds are public funds, the project is a “public work,” and that all public improvement work required as a condition of regulatory approval is subject to the prevailing wage law, regardless of the source of funding.

On appeal by ALP, the court of appeal stated that the entirety of Labor Code Section 1720 must be examined in analyzing prevailing wage issues, rather than focusing on select portions as ALP did. The statute should be liberally construed in keeping with the overall purpose of protecting employees on public works projects. The court addressed three specific arguments advanced by ALP.

First, the court rejected ALP’s contention that Section 1720(a)(2), defining public works as “[w]ork done for irrigation, utility, reclamation, and improvement districts…” limited application of prevailing wage requirements to work actually funded through the Community Facilities District. The court noted that the statute references “work done for” rather than “work paid for” by an improvement district, that all of the public improvement work was eligible for funding by the Community Facilities District and was required as a condition of regulatory approval, and that all work done for an improvement district is public work. Most important, the court found that the duty to pay prevailing wages on public works cannot be limited or eliminated by contract, such as specifying only certain public works that will be funded from Mello-Roos bond proceeds.

Next, the court determined that Mello-Roos bond funds “are public funds under the plain language of section 1720 and the Mello-Roos Act.” In so doing the court distinguished Mello-Roos bond financing from mere “conduit” financing where a public entity assigns its rights, including possession and control of the money, to a third party. The court also rejected ALP’s argument that Mello-Roos bond proceeds are akin to a government loan, the repayment of which is not contingent and is not at less than market rate interest.

Finally, the court held that use of the Mello-Roos bond proceeds to fund even a portion of the required public improvements triggered prevailing wage requirements for the entire project, subject to the Section 1720(c)(2) partial exemption. (The court also distinguished the analysis in Vineyard Creek Hotel & Conference Center, Redevelopment Agency, City of Santa Rosa (Oct. 16, 2000) Dept. Industrial Relations, PW 2000-016, which used a five-part test to determine whether “public” and “private” portions of a project were sufficiently integrated to impose prevailing wage requirements on the entire project, because the issue in Azusa was whether all public improvements should be subject to prevailing wages, and not the scope of the entire project. Following Azusa, it is unclear what effect the Vineyard Creek analysis may have in determining project scope outside the context of the Section 1720(c)(2) partial exemption.) The public improvements required for the project meet the test of the Section 1720(c)(2) partial exemption: The work was required as a condition of regulatory approval, the work cost more than the City’s contribution of public funds, and the City maintained no proprietary interest in the Project. The court found that applying ALP’s more narrow interpretation would result in developers being permitted to allocate lump sum public contributions to specific structures in order to minimize payment of prevailing wages and would thereby “render ineffectual” prevailing wage requirements for required public improvement work.

Oral Change Order, By City Staff, Did Not Bind City

In a breach of contract action filed by P&D Consultants, Inc. and the City of Carlsbad, for services pertaining to a redesign of the City's municipal golf course, the California Court of Appeals reversed the trial court, and found that because there was no written change order, in violation of provisions of the contract and public contract law (Gov. Code section 40602), the demand for payment for the extra work could not stand.

The court noted that unlike private contracts, public contracts requiring written change orders cannot be modified orally or through the parties' conduct. Here, the contract itself included a clause that all change orders had to be in writing agreed to by both parties. Furthermore, the City's charter did not provide for execution of oral contracts by employees who do not have requisite authority. Thus, alleged oral statements by city staff were insufficient to bind the City.

The court reversed the judgment (monetary award) concerning the complaint.

For the full case see P&D Consultants, Inc. v. City of Carlsbad (2010), No. D045810, Forth Dist., Div. One, December 16, 2010.

Public Works Contractors Entitled to Recover for Extra Work Absent Board Approval

On public projects, disputes frequently arise between a public entity owner and general contractor as to whether the contractor is entitled to be paid for project-related work performed beyond the original contract plans and specifications. In a decision published November 2, 2010 the California Court of Appeal, Fourth Appellate District, found that a contractor may recover for extra work despite the fact that the public entity’s governing board did not approve such work, where the contract terms are inconsistent regarding whether the board or the board’s authorized representative must approve of the extra work. In the case, Mepco Services, Inc. v. Saddleback Valley Unified School District, D055018, the School District argued that the contractor should have been prohibited from claiming that it was entitled to compensation for the extra work in light of California law, which generally holds that because of competitive bidding requirements, contractors are not permitted to recover on contracts entered outside the authority of the public entity’s board. To read the lengthy opinion, which dealt with various other evidentiary issues, click here.

Increased Contractor Costs on Public Works Projects - Strategies For Reducing Owner Risk

General contractors on public works projects often submit claims for extra compensation to public entity project owners for increased costs during construction, and point to information they did not know when preparing their bids. In light of the recent California Supreme Court decision in Los Angeles Unified School District v. Great American Insurance Co. (2010) 49 Cal.4th 739, such claims are likely to increase in the future.

In Los Angeles Unified School District, the Supreme Court held that a contractor does not need to show fraudulent intent in order to recover for extra work or expenses necessitated by unknown conditions. Rather, the contractor can recover for such extra expenses where "(1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information."

However, there are various strategies that public entities can employ during project bid phase to reduce the risk that they will be liable for such claims:

(1) Where conditions permit, the public entity should require a mandatory pre-bid site visit to the project location and walk through for all contractors that bid on the project.

(2) Public entities should double check the bid documents to ensure that all information material for bidders to calculate the cost of their performance has been provided. Such information may include reports from consultants that the public entity has hired to provide geotechnical, environmental, and other pre-construction site analysis. Where the public entity does not have any such information, the bid documents should specify that bidders are required to perform a site analysis in coordination with the public entity to determine any information material to their bids.

(3) For public projects that require the use of a design professional and/or project manager, the design professionals and/or project managers should be contractually required to provide any and all information that may be material to bidders in formulating their bids. Additionally, the public entity should require that it be named as an additional insured in case the it receives a contractor claim for increased cost of performance due to the failure to disclose material information. Finally, the design professional and/or project manager should be required to indemnify and defend the public entity with respect to any and all contractor claims for additional compensation that are the result of the failure to disclose information known by the design professional and/o project manager.

By employing these strategies, public entities can reduce the risk that they will be liable for contractor claims for increased cost of performance.

Public Works Contractors Need Not Show Fraudulent Intent to Recover Damages Caused by Incorrect Plans and Specifications

In Los Angeles Unified School District v. Great American Insurance Co. S165113, a decision filed July 12, 2010, the California Supreme Court decided whether a contractor on a public works project may recover in a contract action for extra work or expenses necessitated by a public entity's failure to disclose information that materially affects the cost of performance. The decision eliminated a long-standing split in the Courts of Appeal as to whether a contractor needs to show fraudulent intent on the part of the public entity in order to recover for extra work or expenses. Read more here.

New Stormwater Construction Permit Requirements Went Into Effect Last Week

The California State Water Resources Control Board substantially revised the statewide General Permit for Discharges of Storm Waters Associated with Construction Sites that regulates water quality at construction sites ("Construction General Permit") (See Order No. 2009-009 DWQ.) The new requirements, which take effect July 1, 2010, will significantly impact the planning and management of projects that are more than one acre in size.

The new Construction General Permit applies to any construction or demolition activity that results in a land disturbance of one acre or more, or of land disturbances of less than one acre, if the construction is part of a larger common plan of development, or the sale of one or more acres of disturbed land surface. The new Construction General Permit also applies to construction activities associated with Linear Underground/Overhead Projects ("LUPs"); discharges of sediment from construction activities associated with oil and gas exploration, production/processing/treatment operations, or transmission facilities; and storm water discharges from dredge spoil placement that occur outside the jurisdiction of the U.S. Army Corps of Engineers.

Previously, the regulation of storm water discharges from construction sites consisted primarily of the development of a Storm Water Pollution Prevention Plan ("SWPPP") and the implementation of Best Management Practices ("BMPs"). The new Construction General Permit, however, mandates several new monitoring and reporting requirements that are each individually enforceable.

In order to obtain coverage under the new Construction General Permit, the following five documents and appropriate fee must be filed electronically with the State Water Resources Control Board: notice of intent to comply, site map, site risk assessment, SWPPP, and signed certification statement. 

Contractors Permitted to Use Modified Total Cost Method of Damages in Public Project Claims

General contractors on a public works projects often assert close-out claims against the public entity at the end of projects. When this occurs, a major issue often is the method in which the general contractor can prove its damages on a claim. On March 18, 2010 the California Court of Appeal, Second Appellate District, confirmed that in California, general contractors are permitted to use the modified total cost method to prove damages on close-out claims. Under the total cost method, damages are determined by subtracting the contract amount from the total cost of the contractor's performance. Under the modified total cost method, if the contractor is responsible for some of its increased cost of performance, then those costs are subtracted from the contractor's damages to arrive at the modified total cost. In other words, the contractor cannot be foreclosed from proving the amount of damages caused by the public entity, just because the contractor itself is responsible for some of its extra costs. The Court's opinion in the case, Dillingham-Ray Wilson v. City of Los Angeles, B192900, is available here.

Designing a Public Project? Avoid Future Dangerous Condition Liabilities by Anticipating Changed Conditions

Government Code section 830.6 grants public entities immunity from liability for dangerous conditions on public property if those conditions arise because of improvement projects for which the plan or design was reasonably adopted or approved. A recent opinion by the California Appellate Court's Second District has reaffirmed that this immunity holds even if an improvement project becomes dangerous because of changed conditions -- as long as the public entity can demonstrate that it anticipated the changed conditions, whether or not it modified its plan or design because of the anticipated changed conditions.

The Second District's opinion highlights how important it is for public entities to consider future changed conditions in their planning or design of public works improvements.

The opinion, Alvis v. County of Ventura, held that where a public entity approves a design that contemplates a specific change of physical condition(s) that may affect a public work, the public entity will retain its design immunity if change of condition occurs and causes injury. In Alvis, the evidence showed that the Defendant County's designers had been warned by consultants that soil build-up would occur behind a retaining wall to be constructed by County, but had rejected the need for design changes to improve drainage. The County did not lose its design immunity when the wall failed and caused a landslide because the soil build-up was a changed condition that related directly to the factors the County considered in making its design choices, and the design immunity of Government Code section 830.6 is intended to prevent judicial second-guessing of a public entity's design choices. Read the entire opinion here.

Contract Terms That Apply Beyond this Galaxy… Seriously!

It must be close to Halloween. At least that is the explanation for the interesting story that appears in today’s Wall Street Journal, entitled “Lawyerese Goes Galatic as Contracts Try to Master the Universe.” Written by Dionne Searcy and James Hagerty, (and containing a video clip) the article tells about NBC’s contracts for contestants who compete for its popular show, “ America’s Got Talent.” These contracts contain terms which allow NBC to maintain rights to the performance and allow it to be “edited, in all media, throughout the universe, in perpetuity.” As lawyers, we’ve always imagined writing contract terms that allow our clients to expand their rights beyond the reach of their jurisdiction. NBC has taken its imagination one step further and wrote the language that provides it with rights beyond our solar system!

On August 19, 2009 the California Supreme Court granted review of the Fourth Appellate District's opinion in State Building & Construction Trades Council v. City of Chula Vista. In this case, the Court of Appeal determined on April 28, 2009 that on public works projects wholly financed by local funds, charter cities need not comply with California's Prevailing Wage Law. Specifically, Court concluded that the prevailing wage law does not address matters of statewide concern and therefore charter cities are not required to comply with the prevailing wage law on public works contracts that are financed solely from City revenues because such contracts are municipal affairs over which the City has paramount power under the California Constitution. Read more about the Appellate Court's opinion here.

The effect of the Supreme Court's grant of review is that the Appellate Court's published opinion can no longer be cited as precedential authority in California courts under California Rule of Court 8.1105(e)(1) . Additionally, the Supreme Court's action places charter cities in California in limbo with respect to whether they are required to comply with the Prevailing Wage Law on locally unded projects. Check back to the Public Blawg later for further information.

Court of Appeal Holds Prevailing Wage Law Does Not Apply to Locally Funded Projects of Charter Cities

The California Court of Appeal recently held that on projects wholly financed by local funds, charter cities need not comply with California's Prevailing Wage Law. In the case, State Building and Construction Trades Council of California, AFL-CIO v. City of Vista, the court concluded that the prevailing wage law does not address matters of statewide concern and therefore the City of Vista, as a charter city, is not required to comply with the prevailing wage law on public works contracts that are financed solely from City revenues. Read more.

Energy Efficiency and Conservation Block Grants Offer Unique Opportunities for California Cities

The United States Department of Energy’s (DOE) Energy Efficiency and Conservation Block Grant (EECBG) program, administered under the American Recovery and Reinvestment Act (ARRA) provides grants to fund projects that reduce energy use and fossil fuel emissions, and that improve energy efficiency. The deadline for units of local governments and tribal applicants to apply for these grants is June 25, 2009. Read more.

Navigating Stimulus Funding Red Tape

California may receive as much as $80 billion in federal stimulus money under the American Recovery and Reinvestment Act (ARRA). The act sets a goal of allocating 50 percent of funds to projects that can be initiated by approximately mid-June 2009.

Given the tight timeframe for allocating such a large portion of the ARRA funds, local governments are wise to act now. The red tape begins before you apply for funding, and doesn’t end until the project is complete. In our new series on Maximizing Your Stimulus, we’ll be walking you through the process of obtaining ARRA funding. In this alert, we cover the steps up to and including applying for funding. Read more here.

Recovery Act Funding for California Green Building

With the adoption of new laws requiring greener construction and greater energy efficiency, many local officials are wondering whether they will be able to fund critical infrastructure and building projects.

Last year, the State adopted the California Building Code, which contains both mandatory and voluntary green building and energy efficiency measures for public and private buildings. Additionally, at least thirty California cities and counties have enacted local green building ordinances in the last three years. All of these local green building regulations require LEED Ô certification, which can cost between 1% and 7% of a project’s overall cost.

Many local officials hope for funding from the American Recovery and Reinvestment Act, which allocated $60 billion for “green programs.” In an earlier post, we discussed California's share of funding allocated to transportation-related infrastructure. As of March 31, California will also be allocating infrastructure funds to storm sewers, new parks, government buildings, offices, and airport terminals. Additionally, the State will be receiving funds from the Department of Energy (DOE) and the General Service Administration (GSA). The DOE will receive roughly $32 billion of these funds for green programs, most of which will be focused on energy efficiency, renewable energies, and state weatherization. The GSA is expecting approximately $5.5 billion of these funds designated for green building. Federal green building funds are expected to be spent on greening federal buildings, state energy programs, state weatherization, and schools.

Local officials will be watching Governor Schwarzenegger’s office as it allocates funding to “shovel ready” projects. The estimated time for the funds to hit the market is the beginning of next year.

California To Spend $4 Billion in Federal Stimulus Funds for Transportation Projects

The American Recovery and Reinvestment Act signed into law by President Obama on February 17th, 2009, includes funding initiatives to modernize America's infrastructure, enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in greatest need. California's share of the $48 billion earmarked for transportation and infrastructure projects is nearly 10% of the total funds. California intends to spend most of the $4 billion in stimulus funds on highways, roads and bridge projects. The Recovery Act also permits California to apply for an additional $150 million in competitive grants for specific transportation projects. To read more about California's projects and for a breakdown of how the estimated $85 billion in funds will be expended in California, please visit the Governor's recovery portal website.

SB 1473: Cities and Counties Must Collect Fees to Fund Development of State Building Standards

Beginning January 1, 2009, cities and counties must collect, on behalf of the California Building Standards Commission a fee from building permit applicants based on building valuation to fund development of statewide building standards. Click here to read more.

Governor Signs Design-Build Legislation Expanding Authority of Cities, Counties, and Special Districts to Use Design-Build Method

On September 26, 2008, Governor Schwarzenegger signed Assembly Bill 642 ("AB 642"). AB 642 expands existing design-build authority of public agencies by adding Public Contract Code Section 20175.2, authorizing all cities to use the design-build method for the construction of buildings for projects exceeding $1 million, and Public Contract Code Section 20193-20195, authorizing all cities, counties, cities and counties, and special districts to use design-build contracting to construct local wastewater treatment, solid waste, or water recycling facilities exceeding $2.5 million.

To read more about AB 642, click here.

California's Prevailing Wage Laws Do Not Apply To Charter City's Public Works Project

The California Department of Industrial Relations ("DIR") recently issued a Public Works Coverage Determination (Public Works Case No. 2007-01) which concluded that the City of Merced ("City"), a charter city, is exempt from the state law requirement to pay prevailing wages on a public works project because the project is completely within the realm of a municipal affair of the City. Although DIR determinations may not be expressly relied on as precedent under California Government Code section 11425.60, the determination is helpful because it explains how prevailing wage laws apply to public works project of a charter city.

The City's public work project at issue was the installation of automated storm drain pump station high water cutoff mechanisms ("Project"). The City's charter contains a "home rule" provision stating that the City retains control over its municipal affairs. The DIR's determination found that a public works project is exempt from California's prevailing wage laws when it falls within a chartered city's "municipal affairs."  The factors used by the DIR to determine whether a public works project is a municipal affair of a chartered city included (i) the extent of extra-municipal control over the project; (ii) the source and control of the funds used to finance the project; and, (iii) the nature and purpose of the project. Applying these factors to the City's Project, the DIR found that the Project was not subject to extra-municipal control, was exclusively financed with municipal funds, and was intended to prevent flooding of City land owned by City residents. Therefore, the Project was a municipal affair under the City's charter home rule provision and exempt from California's prevailing wage laws.

California Court of Appeal Holds that Prime Contractor Is Not Liable to Subcontractor Under the Subletting and Subcontracting Fair Practices Act for Failing to Grant a Subcontract where Subsequent Change Order Eliminates the Subcontractor's Work

In Affholder, Inc. v. Mitchell Engineering, Inc. (App. 1 Dist. 2007) 153 Cal.App.4th 510, the First Appellate District Court held that a prime contractor is not liable under the Subletting and Subcontracting Fair Practices Act (California Public Contract Code Section 4100 et sq.) for failing to grant a subcontract to the subcontractor originally listed in a public agency project bid, which was accepted by the public agency, where the public agency subsequently granted a change order that effectively deleted the work the subcontractor bid to perform and added new work which the subcontractor did not bid and was not listed to perform. The court noted that if a change order calls for the performance of new work that can reasonably be construed as outside the scope of the originally specified work, then Section 4107(c) of the Public Contract Code permits the prime contractor to subcontract out that work even though no subcontractor was initially specified in the bid.

State Agencies Can't Use Union MOU To Restrict Work Contracted Out to Private Design Firms

A recent California Supreme Court case, Consulting Engineers & Land Surveyors, Inc. v. Professional Engineers in California Government, held that the State of California and a state employee union cannot restrict the use of private contractors for architectural and engineering services by state agencies through a memorandum of understanding (MOU). In reaching this decision, the Court turned to an earlier case where it held that a constitutional restriction on the ability of state agencies to contract with private firms for architectural and engineering services on public works project had been expressly removed by Proposition 35 and impliedly repealed certain regulatory statutes pertaining to private contracting. (Professional Engineers in CaliforniaGovernment v. Kempton (2007) 40 Cal.4th 1016.) The Court said that the MOU contained limitations similar to those that the Court had held to be repealed by Proposition 35 in Kempton and as a result violated the California Constitution.

California Cities Focus on Infrastructure Improvement Projects

The League of California Cities’ Legislative Action Days took place on May 16-17 in Sacramento. More than 450 representatives from California cities attended the two-day event, which featured an update on legislative issues and time for lobbying at the State Capitol. L eague President Maria Alegria, Mayor of Pinole, kicked off Legislative Action Days by welcoming everyone to Sacramento followed by Executive Director Chris McKenzie’s update on the organization’s strategic goals and priorities. Issues of importance to local government, including infrastructure, housing and healthy communities were discussed. For more about this post, click here.

Unlicensed Subcontractor's Bid Found to Be Responsive

Bid on a public agency contract cannot be declared nonresponsive by the public agency on the ground that the bidder has listed an unlicensed subcontractor on the bid forms; nothing in statutes requires that subcontractors be licensed as of the time of the submission of the prime bid. Where agency erroneously declared plaintiff’s bid nonresponsive, trial court’s order canceling contract and requiring agency to contract the remainder of the work to plaintiff based on its bid was error; correct remedy was to require agency to conduct a due process hearing to determine whether plaintiff was a responsible bidder. See D. H. Williams Construction, Inc. v. Clovis Unified School District (Emmett’s Excavation, Inc.) - filed January 10, 2007

Court of Appeals Upholds Federal Equal Protection Clause in Public Contracting Discrimination Case

On April 18, 2007, the Court of Appeal, First Appellate District, in Coral Construction, Inc. v. City and County of San Francisco ruled that despite Proposition 209, if the City has evidence of long-standing and pervasive discrimination by both city employees and contractors resulting in the exclusion of minority and women owned firms in public contracting, such evidence may justify the City's affirmative action program for minority and female contractors. Proposition 209 was adopted by California voters more than 10 years ago prohibiting state and local governments from discriminating against, or granting preferential treatment to "any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education or public contracting."

Meyers Nave attorney Mara Rosales, a principal in the firm's the Airport and Public Contracting practices, assisted the City and County of San Francisco in defending its Minority/Women Business Utilization Ordinance against a challenge alleging the ordinance violated California's Proposition 209. The Court agreed with Ms. Rosales' legal theory that the U.S. Constitution's guarantee of equal protection requires the City to grant narrowly tailored bidding preferences to minority and women contractors to eliminate the effects of demonstrated discrimination against them in public contracting.

The Court ruled 3-0 on the constitutional duty issue, sending a clear message to all local governments statewide that their duties and obligations under the Constitution to eliminate discrimination in public contracting does not stop with Proposition 209. Notably, Justice Timothy Reardon stated that "[t]he federal equal protection clause is the last word.''  This ruling is significant because if the City is able to show a constitutional violation (e.g. evidence of long-standing and pervasive discrimination against minority and women contractors by the City or its contractors) the equal protection clause of the U.S. Constitution would override Proposition 209's ban on race and gender preferences in public contracting and allow a race or gender specific remedy.

For complete decision, go to Download a1078031_2.pdf Coral Construction decision.pdf

California Cities Publishes Legal Advocacy Report

The League of California Cities published its litigation update on April 18, 2007. The report summarizes the cases reviewed by the legal advocacy committee, which engages in advocacy on behalf of California cities in the courts and in the legislature. Click on this link to review the full report: Litigation Update

For more information, please contact Ben Reyes or Steve Meyers

California's Supreme Court Rules on the Applicability of Pre-Proposition 35 Statutory Regulations

In Professional Engineers in California Government et al. v. Kempton (Professional Engineers), the California Supreme Court held that Proposition 35 repealed preexisting statutes regulating private contracting for architectural and engineering services. The Court also held that Proposition 35 did not invalidate certain procedures for selecting private architectural and engineering firms.

Proposition 35 (entitled the "Fair Compensation and Taxpayer Savings Act") was passed by California voters in 2000. The initiative added article XXII to the California Constitution and Chapter 10.1, commencing with section 4529.10, to the California Government Code. Proposition 35 removed existing restrictions on public agencies when contracting for private architectural and engineering services.

The Court also held that the "qualification based selection process" ("QBS procedure"), codified at California Government Code section 4525 et seq., is not inconsistent with Proposition 35 and may be used by public agencies in the post-Proposition 35 era. The QBS procedure requires a public agency to negotiate a contract with the best qualified firm for such services at compensation which is fair and reasonable. Although qualifications are the primary competitive measure by which contracts are awarded under the QBS procedure, the Court concluded that cost is not irrelevant and, therefore, not inconsistent with the intent of Proposition 35.

For more information about this case, please feel free to contact Ben Reyes or Elizabeth Pianca.

California Court of Appeals Holds that Mechanic's Liens Cannot be Enforced against Property Owned by a Municipality

In North Bay Construction v. City of Petaluma, the First Appellate District Court agreed with the trial court's decision and held that a mechanic's lien cannot be enforced against property owned by a municipality, even if the work was not performed as part of a "public works" project. In addition, the Court held that a contractor cannot recover in quantum meruit for improvements to a  municipality's property performed under a contract with a third party. The City of Petaluma was represented in this appeal by Joseph M. Quinn and Eric W. Danly, of Meyers, Nave.

In North Bay Construction, North Bay's complaint alleges that the City is the owner of real property commonly known as Redwood Empire Sportsplex that was leased to a developer for the purpose of constructing a sports complex. The developer contracted with North Bay, a licensed paving contractor, to perform grading work at the property, which North Bay completed, by for which it has not been paid. North Bay recorded a mechanic's lien against the property and served a "Notice of Potential Claim" on the City advising it that, as the owner and lessor of the property, it may be responsible for the reasonable value of the material and labor provided by North Bay. The complaint alleges, among other things, a common count to recover from the City the "reasonable value of the material and labor provided by North Bay."  The City demurred to the complaint on the grounds that a mechanic's lien cannot be enforced against public property and that common counts may not be asserted against public entities. The trial court sustained the demurrer without leave to amend. The City was dismissed from the action and North Bay filed a timely appeal.

In its reasoning, the Court explained that because of the principles of sovereign immunity, any right to impress a mechanic's lien of public property must be expressly, not implicitly, provided for by statute. While most of the cases supporting this conclusion involve public work projects, the Court noted that the prohibition is frequently stated as applying to "public property," not simply to public work projects. Moreover, in holding that a mechanic's lien could not be imposed in this situation, the Court disagreed with North Bay's assertion that a distinction must be drawn between property owned by a municipality that is used for governmental as opposed to proprietary purposes--that property held in a proprietary capacity (as North Bay contends is the case here) is subject to a lien as is any privately held property. The Court explained that while California formerly drew a distinction between property held in a proprietary as distinguished from a governmental capacity for the purpose of permitting execution on a judgment lien, this distinction has since been abolished by the Legislature, in its passage of the California Tort Claims Act. The Court also noted that the Legislature has enacted a separate comprehensive scheme prescribing the manner in which a judgment against a local public entity may be satisfied, and it does not include execution of public property.

Lastly, the Court held that North Bay's common count cause of action seeking to recover the value of services based on a theory of quantum meruit was improper given that a quasi-contract theory cannot be asserted against a municipality in a public works context. The Court cited certain general principles inherent in the arena of municipal contracts. The most important being, that contracts wholly beyond the powers of a municipality are void. They cannot be ratified; no estoppel to deny their validity can be invoked against the municipality; and ordinarily no recover in quasi-contract can be had for work performed under them. Moreover, the Court noted that the competitive bidding requirements were founded upon a salutary public policy declared by the Legislature to protect the taxpayers from fraud, corruption, and carelessness on the part of public officials and the waste and dissipation of public funds. As such, the Court concluded that North Bay must be presumed to have known the law. It could have protected itself by confirming the existence and sufficiency of a construction loan and following the statutory sop notice procedures, or by obtaining a payment bond or other security to ensure payment. Having failed to do so, North Bay cannot now shift the burden of its loss to the City in disregard of well-defined public policy to the contrary.

To read the entire published opinion, click here.

Design Professionals Immunity Bill Awaits Signature or Veto

Authored by Assemblymember Lois Wolk (Davis, CA), AB 573 adds a new section to the California Civil Code which makes unenforceable contract clauses that require design professionals to defend and indemnify public agencies against liability claims. There are exceptions for claims that arise out of the negligence, recklessness, or willful misconduct of a design professional, defined as architects, engineers and land surveyors. This bill is currently awaiting signature or veto by Governor Schwarzenegger. For the full text of the bill, click here.

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