Category: Construction Law

A Project Owner May be Liable for Interfering with a Contract Between a Subcontractor and the General Contractor

subcontractor working

California’s Fourth District Court of Appeal’s recent decision in Caliber Paving Co., Inc. v. Rexford Industrial Realty & Management, Inc. holds that an owner on a construction project may be liable for intentional interference with a contract between the project’s general contractor and its subcontractor.   

Rexford Industrial Realty & Management, Inc. (Rexford) hired Steve Fodor Construction (SFC) as its general contractor to make improvements to a Rexford property.  The scope of work included repaving the parking lots on the property.  SFC hired Caliber Paving Company, Inc. (Caliber) as its subcontractor to perform the parking lot repaving work.   

Caliber showed up to the jobsite on September 11, 2017, and then left because trucks and trailers were parked in the area where the paving work was to be performed.  Caliber demanded that SFC pay a $15,000 “move on” charge provided under the subcontract and refused to return to the project unless SFC agreed to pay.  SFC refused and then terminated Caliber from the project and hired another subcontractor to complete the repaving work.   

Caliber sued SFC for breach of the subcontract, and it sued Rexford for intentional interference with the subcontract.  Caliber claimed that SFC terminated Caliber from the project because Rexford personnel told SFC to “kick [Caliber] off the job or hire somebody else.”     

California law recognizes a tort cause of action against a noncontracting party who intentionally interferes with the performance of a contract, as in Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (Applied Equipment).  Intentional interference with contract requires proof of: (1) a valid contract between the plaintiff and a third party; (2) defendant’s knowledge of the contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) breach or disruption of the contractual relationship; and (5) resulting damage.  A contracting party cannot be held liable for conspiracy to interfere with its own contract.  

Rexford filed a motion for summary judgment.  The trial court granted Rexford’s motion, relying on the California Supreme Court’s decision in Applied Equipment: “The tort duty not to interfere with the contract falls only on strangers—interlopers who have no legitimate interest in the scope or course of the contract’s performance.”  The trial court held that Rexford could not be held liable for intentionally interfering with the subcontract between Caliber and RFC because, as owner of the project, Rexford had a legitimate economic interest in the subcontract.

The Appellate Court reversed and remanded the matter to the trial court for further determination.  The Court held that the Applied Equipment decision does not confer immunity for intentional interference for noncontracting parties having an economic interest in the contract.  The Court held that it would make no sense to allow Rexford to escape the consequences of its allegedly intentional misconduct merely because it had an economic interest in the subcontract between RFC and Caliber. 

“Conferring immunity from tort liability for interference with contract on a noncontracting party claiming to have a social or economic interest in the contractual relationship could have the anomalous result of leaving a plaintiff without a remedy for tortious conduct. … A party with an economic interest in a contractual relationship could interfere without risk of facing either tort or contract liability.”  

“Contract law exists to enforce legally binding agreements between parties; tort law is designed to vindicate social policy. (Citation).”   The law places greater moral blame on one who intentionally interferes with another’s contractual relationship, as opposed to a contracting party who fails to fulfill a contractual commitment. 

This differing moral blame is reflected in the assessment of damages an injured party may be entitled to recover for breach of contract, as opposed to tortious misconduct.  Breach of contract damages provide the injured party the amount they would have received if the contract had been fully performed.  The purpose of breach of contract damages is to put the injured party in as good a position as they would have been if the contract had been fully performed.  Consequential damages beyond the parties’ expectations when they entered the contract are not recoverable. 

Tort damages, on the other hand, are awarded for “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.”  In addition, punitive damages may be awarded against a defendant who acts with “oppression, fraud or malice” in committing a tort.  Punitive damages, even for a willful or malicious breach of contract, are not available in the absence of other tortious misconduct.  A plaintiff may be awarded a significantly greater recovery for economic losses caused by a defendant’s tortious misconduct, as opposed to breach of a contract.        

Caliber may be entitled to recover the profits it would have realized from the project if it can prove that RFC breached the subcontract by terminating Caliber prior to completion.  Caliber may be entitled to recover lost profits against RFC and Rexford jointly, and it may be entitled to other consequential and punitive damages against Rexford if it can prove that Rexford intentionally and improperly caused RFC to breach the subcontract.  Rexford will likely argue that it was justified in demanding that RFC terminate Caliber from the project due to Caliber’s refusal to complete the project because of a $15,000 payment dispute.  An “actor having financial interest in third person’s business does not improperly interfere if he did not employ wrongful means and acted to protect his own interest from being prejudiced.” 

The final outcome of the dispute between Caliber, SFC and Rexford remains to be determined, but the Caliber Paving Co. decision provides useful guidance and clarification of the law concerning tortious interference with contract by related third parties, particularly in the construction project setting. 

  1. Decided September 1, 2020.
  2. Applied Equipment Corp. v. Litton Saudi Arabia Ltd., (1994) 7 Cal.4th 503, 513-514.
  3. Pacific Gas & Electric Co. v. Bear Stearns & Co., (1990) 50 Cal.3d 1118, 1126.
  4. Asahi Kasei Pharma Corp. v. Actelion Ltd., (2013) 222 Cal.App.4th 945, 961. 
  5. Applied Equipment, 7 Cal.4th at p. 514.
  6. Applied Equipment, 7 Cal.4th at p. 515.  
  7. Lewis Jorge Construction Management, Inc. v. Pomona Unified School Dist., (2004) 34 Cal.4th 960, 968; Civ. Code § 3330.  
  8. Civ. Code § 3333.
  9. Civ. Code § 3294.
  10.  Woods v. Fox Broadcasting Sub., Inc., (2005) 129 Cal.App.4th 344.

Public Contract Code § 9204

Public Contract Code §9204 is a new law that requires a claims resolution procedure for claims arising in public contract. It became effective January 1, 2017 and was recently renewed until January 1, 2027. 

It applies to nearly all public works projects in California that are entered into on or after January 1, 2017. Projects that are excepted from § 9204 include the following: Water Resources, Transportation, Parks and Recreation, Corrections and Rehabilitation, Military, General Services, and the High-Speed Rail Authority. (Cal. Pub. Contract Code § 9204(c)(3)(B)(i-vii)). 

All public entities subject to § 9204 are required to include the § 9204 provisions, or an accurate summary of them, in every project plan and/or specifications. 

Below is an outline of the timeline that the law requires, as well as some practical considerations for public works projects in California. 

Timeline

The process of § 9204 begins once a contractor submits a claim with “reasonable documentation to support the claim” to the public entity. The claim must be sent by registered mail or certified mail with return receipt requested. (Cal. Pub. Contract Code § 9204(c)(1)). The claim can be for one or more of the following: a time extension, payment by the public entity of money or damages, or payment of an amount that is disputed. (Cal. Pub. Contract Code § 9204(c)(1)(A-C)).

After the public entity receives the claim, it has 45 days to “conduct a reasonable review” of the claim and to provide the contractor with a written statement that identifies what portion of the claim is disputed and what portion is undisputed. (Cal. Pub. Contract Code § 9204 (d)(1)(A)). 

If the public entity does not provide a written statement as required within the statute, it results in the claim being deemed rejected in its entirety. (Cal. Pub. Contract Code § 9204 (d)(3)). 

If the public entity identifies any undisputed claims, it must pay those claims within 60 days after it issues its written statement. (Cal. Pub. Contract Code § 9204 (d)(1)(D)). If the public entity fails to make payment within those 60 days, any amounts not paid shall bear interest at 7 percent per annum. (Cal. Pub. Contract Code § 9204 (d)(4)). 

If any part of the claim is disputed by the public entity, then after it issues its response or the time to respond has lapsed, the contractor can demand in writing an informal conference to meet and confer for settlement of the issues in dispute. The public entity has 30 days following a written demand to meet and confer to schedule a conference. (Cal. Pub. Contract Code § 9204 (d)(2)(A)).

Within 10 business days of the conclusion of the meet and confer conference, if any claim or portion of a claim remains in dispute the public entity shall provide the contractor with a written statement identifying the portion of the claim that remains in dispute and any portion that is undisputed. (Cal. Pub. Contract Code § 9204 (d)(2)(B)). The undisputed amounts must be paid within 60 days of the written statement or be subject to the 7 percent interest. 

If claims remain in dispute, the contractor shall provide the public entity with written notice that demands non-binding mediation. The parties have 10 days after the contractors notice to agree to a mediator. If the parties are unable to agree, each will select a mediator and those mediators shall select a qualified, neutral third party to mediate regarding the disputed portion of the claim. (Cal. Pub. Contract Code § 9204 (d)(2)(B)). 

If mediation is unsuccessful, the contractor may pursue litigation, arbitration, etc. for the remaining disputed claims. (Cal. Pub. Contract Code § 9204 (d)(2)(B)).

Practical Considerations

United Contractors was the original sponsor of the bill and it was intended to encourage timely resolution of contractor claims on public works projects. § 9204 is an additional procedure to existing claim resolution procedures such as the Public Contract Code § 10240 through §10240.13, related to state public works arbitration, and § 20104 through §20104.6, related to claims against local agencies under $375,000.00, unless the agency has elected to arbitrate under § 10240, et seq. Practitioners should be aware that deadlines and provisions under existing statutes must still be followed. 

United Contractors labeled the passage of the bill as a “win” for the industry after its multi-year battle to close the gap in prompt payment by public agencies to California contractors. United Contractors is hopeful that § 9204 has created an additional avenue for accelerated settlement of disputed contractors’ claims in public works projects. 

However, celebration of § 9204 may be premature. Currently, it is unclear how § 9204 will fit within the existing statutory scheme and contractors should remain vigilant about pitfalls in handling claims. 

First, under § 9204 waiver of its provisions is void; however, public entities may add contract requirements for change orders, claims, and dispute resolution that do not conflict with § 9204 provisions. This option is made clear in § 9204(f)(2): “a public entity may prescribe reasonable change order, claim, and dispute resolution procedures and requirements in addition to the provisions of this section, so long as the contractual provisions do not conflict with or otherwise impair the timeframes and procedures set forth in this §.” This statutory language seems to allow contract procedures to continue to define categories such as notice of potential claim, claim waiver features, negotiations of dispute, evidence of claims and more. 

Next, contractors should be aware that it is possible that the public entity’s written decision, or expiration of its response time thereby rejecting a claim, can trigger the 90-day period to begin arbitration under Pub. Contract Code § 10240.1. Further, the 90-day period under § 10240.1 may expire before mediation takes place under § 9204. 

Alternatively, the public entity’s written decision, or expiration of its response time thereby rejecting a claim, could begin the one-year period in which to initiate a government claim under § 10240.1, which again, may expire before mediation takes place under § 9204.

Third, there is no assurance of receiving earlier payment. Despite the ostensibly quick timelines within § 9204, the dispute resolution procedure leaves noticeable gaps in follow-through. For example, under subdivision (d)(2)(A), the public entity has 30 days following a written demand to meet and confer to schedule a conference. However, there is no parameters on when the meet and confer must be scheduled and little incentive on the public entity to schedule the conference as soon as practicable. The lack of a timeline allows the public entity to use the provisions of § 9204 to prolong the resolution of a claim and leaves the contractor dependent on the cooperation of the public entity. 

In addition, if the meet and confer conference does not resolve the claim, § 9204 does not set a time by which mediation must take place. Once again, the provisions of § 9204 allow the public entity to delay the resolution of a claim and leaves the contractor reliant on the cooperation of the public entity. 

Finally, subcontractors do not gain rights under § 9204. If a subcontractor has a claim, the subcontractors must present their claim to the general contractor. The general contractor must then notify the subcontractor within 45 days as to whether it presented the subcontractor’s claim to the public entity. If the contractor did not present the claim, the contractor must provide a statement of reasons for not doing so. (Cal. Pub. Contract Code § 9204 (d)(5)). Contractors should carefully consider their contractual obligations to the public entity and to the subcontractor if presented with a subcontractor claim. 

Conclusion 

§ 9204 offers another avenue through which contractors can bring claims to public entities. However, § 9204 also introduces another avenue for uncooperative public entities to delay contractor claim resolution. Additionally, if contractors decide to use the new dispute resolution procedures of § 9204, contractors may find their claim to be time-barred from arbitration or litigation under existing statutes. Contractors should exercise caution in outlining their timelines throughout the claim process to ensure they do not miss out on any option for claim relief. 

General Contractors: Serve a Preliminary Notice or Lose Your Rights

General Contractors Construction Law

A preliminary notice is essential to preserve the rights and remedies afforded to California contractors in disputes with owners for unpaid amounts.  Without a preliminary notice, contractors lose their statutory mechanic’s lien and stop notice rights, precluding any foreclosure on that lien to satisfy payment.  Losing these powerful rights forces contractors to pursue unsecured breach of contract claims against an owner, which could languish in court for years with little chance of success.

This is a notable issue because, although the law changed in 2012, some general contractors may still be unaware that California law requires them to serve a preliminary notice on the construction lender in order to preserve their mechanic’s lien and stop notice rights.  Prior to 2012, it was clear that subcontractors were required to serve preliminary notices on owners, general contractors, and construction lenders in order to assert valid mechanic’s lien and stop notice claims, and subcontractors became accustomed to doing so. It was unclear, however, whether the rule also applied to general contractors, because they were expressly exempted from serving preliminary notices by Civil Code section 3097(a), even though Civil Code section 3097(b) appeared to qualify that exemption.  Despite the ambiguity, general contractors, for the most part, concluded that they did not need to serve preliminary notices in order to assert valid mechanic’s lien and stop notice claims.

This is no longer the case.  In 2012, the California Legislature amended the preliminary notice statutes, in part to address the ambiguity found in Civil Code section 3097.  The Legislature removed the ambiguous language which appeared to exempt general contractors and clarified that a general contractor is, in fact, required to give preliminary notice to a construction lender on a private work.  (See Sen. Com. On Judiciary, Analysis of Sen. Bill No. 189 (2009-2010 Reg. Sess.), p. 4, as amended Dec. 15, 2009.)

The current law, therefore, requires any contractor in a direct contractual relationship with an owner to serve a preliminary notice on the construction lender as a necessary prerequisite to a valid mechanic’s lien or stop-payment notice claim.  As such, all general contractors should prioritize service of a preliminary notice to the construction lender at the outset of each project to preserve their rights and remedies under California law.

If you have any issue related to a mechanic’s lien or stop notice, contact us to schedule a free case evaluation.

Contact us online or call (855) 982-7182 to schedule your free consultation with an experienced construction lawyer who can help with all matters related to a preliminary notice.

Retention Payments & Prompt Payment Penalties

Construction Site

Retention Payments & Prompt Payment Penalties:  The Supreme Court in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. Interprets “Good Faith Dispute” in Subcontractor’s Favor. 

By Anthony P. Fritz, Herrig & Vogt, LLP

It is a standard practice in the construction industry for a project owner to pay its prime contractor (1) in installments at various stages of the project’s completion, and to withhold a certain percentage of each progress payment until the project is completed.  The retention withholding gives the owner some protection to ensure satisfactory performance of the construction project. The prime contractor typically passes these retention withholdings on to its subcontractors by including corresponding progress payment and retention provisions in its subcontracts. If a subcontractor fails to complete its work or correct deficiencies in its work, the general contractor may use the retention to pay costs needed to bring the subcontractor’s work into conformance with the project and subcontract requirements.  

The owner is required to release the final retention payment to the prime contractor at the completion of the project, and in turn, the prime contractor is required to pay each subcontractor their share of the retention.  However, the owner is allowed to withhold all or a portion of the prime contractor’s retention when there is a good faith dispute concerning the prime contractor’s right to the retention payment. The prime contractor may withhold all or a portion of a  subcontractor’s retention where a good faith dispute exists concerning the subcontractor’s right to payment.

Retention payments on construction projects are governed by Civil Code section 8810 et seq. Civil Code section 8812(a) requires the owner to pay the retention owed to a direct contractor within 45 days after the project is completed.  Section 8812(c) provides that if there is a good faith dispute between the owner and the direct contractor as to the retention payment due, the owner may withhold up to 150 percent of the disputed amount.   

Civil Code section 8814(a) requires the prime contractor to pay each subcontractor their share of the retention payment within ten days after the owner pays the retention owed to the prime contractor.  Section 8814(c) provides that if “a good faith dispute exists between the direct contractor and a subcontractor, the direct contractor may withhold from the retention to the subcontractor an amount not in excess of 150 percent of the estimated value of the disputed amount.”   Failure to make payments required under Sections 8812 or 8814 can subject an owner or a prime contractor to a two percent penalty per a month on the amount wrongfully withheld. (Civ. Code, § 8818(a). Section 8818(a) also provides that the prevailing party in an action to collect a wrongfully withheld retention is entitled to recover attorney’s fees.  

Disputes over cost overruns, delays, and defective or deficient work can arise during a construction project, and assigning fault between the owner, the prime contractor, subcontractors and other project participants can be a challenging task.  The owner will typically withhold all or a portion of all of the retention payment pending resolution of the dispute, and the prime contractor will withhold final retention payment from the subcontractors deemed to be responsible for the problems encountered on the project.  The prompt payment penalty provisions of Civil Code section 8818 are intended to mitigate the financial hardships that can result when a final retention payment is withheld without proper justification.

The California Civil Code does not define the term “good faith dispute”, and the language of section 8812(c) differs from section 8814(c).   Section 8812(c) allows the owner to withhold the retention payment where a good faith dispute exists between the owner and the direct contractor “as to the retention payment due”.  Section 8814(c) allows the prime contractor to withhold a subcontractor’s retention where “a good faith dispute exists” between the two, but the statute does not include language requiring that the dispute be “as to the retention payment due”.

Prior to the Supreme Court’s decision in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. certain courts had concluded that because the language in Section 8814(c) differs from Section 8812(c) the California Legislature must have intended to allow a prime contractor to withhold a subcontractor’s retention where a good faith dispute exists as to any issue concerning the subcontractor’s right to payment.   Other courts held that the prime contractor can withhold a subcontractor’s retention only where the dispute concerns the subcontractor’s right to the retention.   

In United Riggers, the owner hired Coast Iron & Steel Co. (“Coast”) as its prime contractor to work on the new “Transformers” ride at the Universal Studios theme park.   Coast hired United Riggers & Erectors, Inc. (“United”) as its subcontractor and agreed to pay United $722,742 for its work on the project. Approved change orders during the project more than doubled the original subcontract price.  Coast paid United 90 percent of the total contract price during the course of work and withheld 10 percent for retention. By the end of the project, United had been paid $1,346,377, and was owed $149,602 for the retention withheld under the subcontract. The owner paid Coast the full retention amount Coast was owed under the contract at the end of the project.  

United demanded payment of its $149,602 retention, plus $352,542 it claimed for delays and outstanding disputed change order requests.  Coast refused to pay any amount. United sued Coast seeking $446,857, plus prompt payment penalties and attorneys’ fees under Section 8818.  Coast did not dispute United’s right to the retention but claimed that it was entitled to withhold the retention because there was a good faith dispute over United’s right to additional payment for delay damages and unapproved change orders.  Coast eventually paid United the $149,602 retention amount several months after the lawsuit was filed.

The trial court found that United was not entitled to any payment for delay damages or contested change orders.  The court denied United’s claim for prompt payment penalties and attorney’s fees under Civil Code Section 8818 because it decided that the parties’ dispute over the contested change orders was “a good faith dispute between Coast and United . . . that entitled Coast to withhold the payment of retention.” The trial court found Coast to be the prevailing party under Section 8818, and awarded Coast $150,000 in attorney’s fees.

The Court of Appeal upheld the trial court’s ruling denying United’s claims for change orders and delay damages. However, the Appellate Court overturned the trial court’s decision regarding  prompt payment penalties, and held that under Section 8814(c) “a contractor is entitled to withhold a retention payment only when there is a good faith dispute regarding whether the subcontractor is entitled to the full amount of the retention payment.”  The Court determined that United, not Coast was the “prevailing party” under Section 8818, reversed the trial court’s award of $150,000 in attorney’s fees to Coast and ordered the trial court to award “attorney’s fees to United, including attorney’s fees for this appeal as it relates to the retention claim.”

The Appellate Court wrote: “To excuse Coast in this case from paying United the retention payments would unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment. This consequence is not allowed in light of the ‘broader remedial purpose of the prompt payment statutes’ to ‘encourage general contractors to pay timely their subcontractors and to provide the subcontractor with a remedy in the event that the contractor violates the statute.’”

The California Supreme Court affirmed the Appellate Court’s decision by its opinion in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co.(2018) 4 Cal.5th 1082.  The Court’s opinion  includes a detailed analysis of the legislative history and the policies underlying California’s prompt payment statutes: “These statutes are intended to discourage owners and direct contractors from withholding monies owed as a way of granting themselves interest-free loans.”   The Court held that even though the language of Section 8814(c) differs from Section 8812(c), the legislative history and policies of the prompt payment statutes do not support different interpretations of the two statutes. A direct contractor may not “withhold a retention that is simply part of that undisputed minimum amount, because a dispute has arisen over whether additional amounts over and above the retention might also be owed. In effect, the payor must be able to present a good faith argument for why all or a part of the withheld monies themselves are no longer due.” The Court states that its interpretation of Section 8812(c) “prevents contractors, who may have more leverage than the subcontractors they owe (Citation) from using the withholding of monies over which there is no dispute to exacerbate subcontractors’ cash-flow issues and chill the assertion of legitimate claims for additional compensation.”   

Comments:  The United Riggers makes sense from a policy perspective.  But the case also illustrates how several seemingly innocuous words in a statute can lead to expensive court battles between litigation adversaries.  Coast paid a high price for its decision to delay payment of United Riggers’ retention. Each side incurred attorney’s fees that greatly exceeded the retention amount, and United recovered its attorney’s fees in addition to the retention that Coast voluntarily paid after the lawsuit was filed.  Others in the construction industry are well advised to learn from Coast’s error and not make the same mistake.

 

(1) The prime contractor has a direct contract with the owner, and typically employs subcontractors to carry out specific parts of a construction project.   The terms “prime contractor”, “direct contractor” and “general contractor” have the same meaning and are used interchangeably.

A Late Certificate of Merit In Professional Negligence Matters Could Cost You Your Case

construction site crane

By Lindsay L. Volle, Attorney

A recent California case, Curtis Eng’g Corp. v. Superior Court, 16 Cal. App. 5th 542 (Cal. Ct. App. 2017), has provided important instructions to plaintiffs and their attorneys who are filing a professional negligence lawsuit.

Certificate of Merit Requirement

In California, a plaintiff who intends to file a professional negligence lawsuit against an architect, engineer, or land surveyor, must comply with the certificate of merit requirement found in California Code of Civil Procedure, section 411.35.

The certificate of merit is prepared by a plaintiff’s attorney and declares that the attorney has consulted with an expert in the same discipline as the defendant or defendants, and the expert has concluded that the plaintiff’s case for negligence has merit. The attorney must file and serve the certificate of merit on or before the date of service of the complaint.  (CCP Section 411.35 (b)(1).)

However, because these professional negligence actions only have a 2-year statute of limitations, California Code of Civil Procedure, section 411.35 (b)(2), provides a 60-day grace period to file the Certificate of Merit. If plaintiff’s attorney cannot obtain the consultation before the statute of limitations expires, the attorney can file the complaint to preserve the statute of limitations, and file the certificate of merit within 60 days after filing the complaint. (CCP Section 411.35 (b)(2).)

California Code of Civil Procedure section 411.35(b)(3) also provides that if the certificate of merit is somehow unavailable prior to filing the complaint, the attorney is required to submit a declaration that provides an adequate excuse for not obtaining the certificate. With regard to the excuse provision, the notes of decisions provided that the following was an acceptable excuse for purposes of section 411.35(b)(3): “the attorney had made three separate good faith attempts with three separate architects, professional engineers, or land surveyors to obtain this consultation and none of those contacted would agree to the consultation.”

Curtis Eng’g Corp. v. Superior Court

On May 5, 2014, the Plaintiff, in this case, was injured in a crane accident, and on May 3, 2016 – on the eve of the two-year statute of limitations – he sued Curtis Engineering for professional negligence. The Plaintiff did not include a certificate of merit pursuant to section 411.35 of the California Code of Civil Procedure.

On December 1, 2016, Plaintiff filed an amended complaint, which attached a certificate of merit. Curtis Engineering demurred to the amended complaint; arguing that the Plaintiff had failed to file the required certificate of merit within the two-year statute of limitations period applicable to a negligence cause of action. The trial court sided with Plaintiff, and overruled Curtis Engineering’s demurrer.

Curtis Engineering appealed, arguing that the certificate of merit was filed nearly seven months after the expiration of the statute of limitations, and was outside of the 60 day grace period allowed by California Code of Civil Procedure, Section 411.35 (b)(2).

In response, the Plaintiff argued that the certificate of merit should be treated as though it was filed on May 3, 2016 because of the “Relation-Back Doctrine”. Generally, the “Relation-Back Doctrine” provides that a later-filed pleading can “relate back” to the date of an earlier-filed pleading for statute of limitations purposes.

The appellate court ruled that the plain language of section 411.35 does not allow application of the relation-back doctrine, and applying the relation-back doctrine in this context would render meaningless the statutory requirement that the certificate be filed “on or before the date of service.” The Defendant’s demurrer had to be sustained without leave to amend because the Plaintiff did not file the required certificate of merit within the 60-day period set forth in section 411.35(b)(2) or the statute of limitations period. There was simply no way for Plaintiff to cure this defect. In other words, Plaintiff’s action was thrown out – the certificate of merit was too late and the statute of limitations had already expired.

The court of appeal further explained that section 411.35(b)(2) provides for an exception that allows the filing of the required certificate “within 60 days after filing the complaint,” only where the party files an excuse certificate stating he or she could not obtain the required consultation before the statute of limitations impaired his action.

The Plaintiff, in this case, did not file an excuse certificate, but even if he had, the 60-day period for filing such a certificate and the statute of limitations on the Plaintiff’s cause of action for negligence ran well before Plaintiff filed the certificate.

These findings from the court make it all the more important that you seek legal guidance in cases for professional negligence. Something as simple as being too late to file your certificate of merit could derail your entire case before you even get started.

If you have any questions about professional negligence, certificates of merits, or how any of the California Codes of Civil Procedure may apply to your case, please reach out to our experienced team of attorneys.

California Court Of Appeals Endorses The Eichleay Formula

Construction Delays and Damages

Most construction contracts include a provision that limits a contractor’s claim for delay damages to an extension of time for completion. A “no damage for delay” clause is intended to prevent a contractor from recovering additional costs resulting from owner caused delays in completing a project. Contractors have successfully challenged a “no damage for delay” clause where an owner knowingly provides misleading information during the bidding process, actively interferes with the contractor’s performance, or where a delay is so long that it constitutes an abandonment of the contract.

California Public Contract Code section 7102 permits a contractor to recover delay damages, provided the delay is unreasonable and not within the expectation of the parties. Furthermore, damages can be recovered even if a “no damage for delay” provision exists in a public agency contract. In Howard Contracting, Inc. v. McDonald Construction Co., Inc. and City of Los Angeles, a California appellate court held that a “no damage for delay” clause in a public works contract is invalid under Contract Code sec. 7102. The court also held that the contractor was entitled to compensation for the unabsorbed office overhead costs it incurred as a result of the owner caused delays.

 

The Eichleay Formula

The Eichleay formula has been adopted by Federal courts to determine a contractor’s recovery for office overhead costs incurred as a result of owner caused delays on Federal public works construction projects. When an owner delays or stops contract performance, the contractor’s stream of income and its direct costs for the project are reduced or interrupted. However, the contractor’s home office overhead operating costs continue to accrue until the project is completed. TheEichleay formula is commonly used to calculate a contractor’s compensable damages for office overhead costs due to owner caused project delays. Typically, the contractor must establish: (1) a government-caused delay; (2) that the contractor was on “standby” during the delay; and (3) that the contractor was unable to take on other work.

The three steps in calculating extended overhead damages using the Eichleay formula are: (1) determine the allocable contract overhead by multiplying the contractor’s total overhead cost incurred during the contract period by the ratio of billings from the delayed contract to total billings of the firm during the contract period; (2) get the daily contract overhead rate by dividing allocable contract overhead by the number of days of contract performance; and (3) determine the amount recoverable by multiplying the daily contract overhead rate by the number of days attributable to owner caused delays.

 

The JMR Construction Corp. Decision

There has been considerable debate about the application of the Eichleay formula in construction disputes in California courts. JMR Construction Corp. v. Environmental Assessment and Remediation Management Inc., decided by the California appellate court on December 30, 2015, is the first reported decision that holds that the Eichleay formula may be used to determine delay damages in construction disputes decided under California law. In that case, JMR Construction Corporation, the general contractor, sued its subcontractors alleging damages due to delays they caused in a Federal public works project. At trial, JMR provided documents and testimony from its project supervisors and experts that established the subcontractors’ responsibility for specific project delays due to inadequate staffing and supervision, deficient and late submittals, improper work and other issues. The evidence included e-mails JMR sent to its subcontractors during that project pointing out specific instances of delays and other problems with their work.

JMR’s experts used the Eichleay formula to establish JMR’s damages for home office overhead costs caused by the subcontractors’ delays. JMR also showed that it was unable to obtain replacement work during any period when work was stopped. The JMR Construction Corp. decision notes that delay damages are a common element of damages recoverable due to breach of a construction contract, and that the Eichleay formula is frequently used in California trial courts and arbitration proceedings to establish home office overhead damages.

 

Conclusion

Nothing in the JMR Construction Corp. decision suggests that its holding is limited to Federal public works projects. Thus, it appears that a prime contractor or subcontractor claiming delay damages against other participants in a California public works construction project will be able to use the Eichleay formula to establish home office overhead damages. However, depending on the circumstances, such damages may be precluded where a no damage for delay provision is included in a prime contract or subcontract for a private construction project.

 

Anthony P. Fritz is an attorney with Herrig & Vogt, LLP in Granite Bay, California, where he handles complex construction litigation.

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