GIBBS, GIDEN, LOCHER & TURNER LLP NEWSLETTER

Vol. XII

Autumn 2001

CONTRACTORS BEWARE
by Irina J. Drill

RECONCILING PROMPT PAYMENT STATUTES
by Amy S. Hutchins

RECENT CHANGES TO CALIFORNIA'S

PREVAILING WAGE LAW
by Gary E. Scalabrini

SAVETHEDATE
January 23, 2002

GGL&T ANNUAL
REVIEW/PREVIEW SEMINAR

     In a recent, well-publicized case, a Los Angeles Superior Court jury ordered a major contractor to pay more than $29.5 million to a public entity who charged the contractor with submitting false claims for payment in connection with public works projects.

    After battling it out through nine weeks of trial, the judge ruled that the contractor had intentionally withheld and destroyed documents, and the court issued terminating sanctions that effectively handed the public entity victory. The judge found that the contractor had committed 1,048 separate acts of business misconduct.  The sole item left in the jury’s hands was to determine the amount of damages. Several of the jurors who awarded the large sum of money said they based their verdict on evidence that the contractor had submitted false claims for payment.

    Enacted in 1987 and modeled after a similar federal law, the California False Claims Act permits the recovery of civil penalties of up to $10,000 per claim and treble damages from any person, including a corporation or business, who “knowingly presents or causes to be presented [to the state or any political subdivision thereof]...a false claim for payment or approval.” Government Code §12651(a)(1).  A claim “includes any request or demand for money...made to any employee, officer, or agent of the state or of any political subdivision.…”  §12651(b)(1).  To violate the California False Claims Act, the offender must have had “actual knowledge of the falsity of the information, acted in deliberate ignorance of its truth or falsity, and/or acted in reckless disregard of its truth or falsity.” §12651(b)(2).

    Until recently, a dearth of California authority forced parties to turn to federal cases for guidance in interpreting the Act.  A recent Court of Appeal decision, City of Pomona v. Superior Court (2001) 89 Cal.App.4^th 793, however, makes it clear that contractors doing business in California should take very seriously the requirements of the California Act and should scrupulously abide by them.

    In City of Pomona, a manufacturer and supplier of pipes and other water distribution parts used in municipal water systems, represented in its catalogues and sales literature that all of its equipment complied with American Water Works Association (“AWWA”) standards.  In 1991, the manufacturer made a conscious decision to manufacture and to sell pipes and valves that did not comply with AWWA standards; however, it did not modify its catalogues and therefore continued to represent that the materials were in compliance with the AWWA.

    The City of Pomona purchased the non-AWWA compliant products from 1991 to 1997.  Throughout the purchasing process, the City used the manufacturer’s catalogue numbers to identify the parts it ordered.  The distributors understood that the parts requested were to conform to the description given in the manufacturer’s catalogue and the AWWA standards.

    The Court found that the City sufficiently stated a cause of action for the violation of California’s False Claims Act.  The City alleged that the manufacturer made false claims in its catalogues and sales materials by providing “patently false” representations which the manufacturer intended to, and “very naturally” did, induce the City to purchase the manufacturer’s parts.

    Another stringent requirement of the California Act, which is not found in the federal act (and which was not specifically at issue in City of Pomona), is California Government Code § 12651(a)(8).  That subsection provides that if a beneficiary of an inadvertent submission of a false claim subsequently discovers the falsity of the claim but fails to disclose the false claim to the public entity within a reasonable time, the beneficiary will be guilty of violating the False Claims Act.

    In light of the City of Pomona decision and the California Act’s strict provisions regarding false claims, contractors must not only act diligently in submitting their own invoices, progress payment requests, cost proposals, change order requests, etc., but must exercise the same diligence in submitting their subcontractors’ pass-through claims as well.  If the contractor fails to make the necessary inquiries to determine that a false claim is being submitted, the contractor may be guilty of submitting the false claim.

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SAVETHEDATE
January 23, 2002

GGL&T ANNUAL
REVIEW/PREVIEWSEMINAR

    Disputes regarding payment are all too typical in construction projects.  The disputes may be legitimate, such as when an owner withholds a portion of a progress payment from a prime contractor for defective work and the prime contractor, in turn, withholds that money from the subcontractor who actually performed the work.  Often, however, the reason for withholding payment from another is not justified.  Beginning in the 1970s, the California legislature attempted to minimize improper withholding of payments by enacting a series of statutes (e.g., Business and Professions Code § 7108.5, Civil Code § 3260 et seq. and Public Contract Code §10262.5), which make the timely transmission of both progress payments and retention not only a matter of contract between the parties, but also a matter of public policy, licensing, and contractor discipline.

     Although the statutes were all intended for the shared purpose of encouraging owners to pay contractors and contractors to pay their subcontractors timely, and to provide remedies for violations, each statute is customized to achieve more specific goals as well.  For example, Business and Professions Code § 7108.5 applies to both private and public works and requires that “amounts for work performed” by a subcontractor be paid within 10 days of receipt of funds by the contractor.  Where a contractor violates the statute, the subcontractor may pursue a 2% per month penalty in addition to interest, attorneys’ fees and costs, and may pursue these remedies either by civil action or disciplinary proceeding.  Business and Professions Code § 7108.5 is unique because it not only provides a means of relief for the individual subcontractor, it also creates a means for the subcontractor to “report” the violation to a disciplinary board, which may negatively impact the prime contractor’s licensing status.

     In comparison, Civil Code § 3260 applies only to private works and requires that the contractor pay a subcontractor its share of “retention proceeds” within 10 days of receipt by the contractor unless a “bona fide” dispute exists.  Where a violation occurs, the subcontractor may pursue 2% interest per month in lieu of interest as well as attorneys’ fees and costs.  Section 3260 is unique in that it allows the subcontractor to pursue an “expedited proceeding” in superior court to recover the unpaid retention and penalties.

     Finally, Public Contract Code § 10262.5, which applies only to state-funded public works, requires that any prime or subcontractor pay other subcontractors amounts allowed for work performed by that subcontractor 10 days from the prime’s receipt of funds from the owner, absent dispute.  The subcontractors’ remedies are a 2% per month penalty in addition to interest, attorneys’ fees and costs; and the surety may also be liable.  The focus of this provision is to promote the public policy of prompt payment.

     Given the overlap of the above statutes, courts have the task of clarifying the interrelationship among them.  In the recent case of Morton Engineering & Construction, Inc. v. Patscheck (2001) 87 Cal.App.4th 712, the Court of Appeal undertook this task.  The issue before the Morton Court was whether, under Business and Professions Code § 7108.5, the 2% penalty per month was recoverable in a civil action, or a disciplinary proceeding before the Contractors State License Board (“CSLB”), or both.

     In reaching the conclusion that the 2% penalty is recoverable in civil actions as well as in disciplinary proceedings before the CSLB, the Court compared § 7108.5 with Public Contract Code §§ 10262.5 and 7107.  All three statutes, the Court noted, provide for the same 2% per month penalty for failing to pay retention or progress payments promptly, and only Business and Professions Code § 7108.5 provides for disciplinary action by the CSLB.  Moreover, in Washington International Insurance Company v. Superior Court (1998) 62 Cal.App.4th 981, a subcontractor was allowed to recover the 2% penalty in a civil action under Public Contract Code § 10262.5.  Rejecting an argument that Washington International was distinguishable because Public Contract Code § 10262.5 does not provide for disciplinary action by the CSLB, as Business and Professions Code § 7108.5 does, the Morton Court reasoned:

     The Morton decision demonstrates that courts are willing to interpret the prompt payment statutes collectively to uniformly effectuate their common purpose, i.e., to give contractors and subcontractors who are “wronged” a means of recovery and to administer a stiff penalty to the offending party.  In light of these statutes and the signals sent by the Morton Court, parties should seriously consider the ramifications of withholding funds from a contractor or subcontractor on a project.  If funds are withheld, documentation and evidentiary support of a dispute are not only recommended, but necessary to defend against the significant penalties that could be imposed if the dispute is not found to be “bona fide.”

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SAVETHEDATE
January 23, 2002

GGL&T ANNUAL
REVIEW/PREVIEWSEMINAR

    As of July 1, 2001, California’s Prevailing Wage Law underwent significant changes pertaining to the procedure by which Prevailing Wage Law claims are prosecuted and administered. The deadlines for challenging an assessment by the Labor Commissioner and the remedies available to the contractor under the new legislation are significantly limited as compared to prior law.

     Under the new procedure, if the Labor Commissioner, after an investigation, determines that there has been a violation of the Prevailing Wage Law, the Commissioner shall issue a civil wage and penalty assessment to the contractor or subcontractor and serve a copy of the assessment on the public agency for whom the work is performed (the “Awarding Body”).  Upon receipt of the assessment, the Awarding Body is required to withhold and retain sufficient funds to satisfy the assessment from any amount due to the contractor under the public works contract.  If the awarding body did not retain sufficient amounts to satisfy the assessment, the contractor is required to withhold funds due to the subcontractor to satisfy the assessment and transfer the funds to the awarding body.  Sixty days after the service of a civil wage and penalty assessment, the contractor, subcontractor and surety are liable for liquidated damages in an amount equal to the wages that remain unpaid.

     A contractor or subcontractor may obtain a review of the assessment by transmitting a request for hearing to the Labor Commissioner within the 60-day period after the assessment.  Upon a timely receipt of the request, an impartial hearing officer appointed by the Director of Industrial Relations (the “Director”) shall commence a hearing on the assessment within ninety days.  If a request is not filed within the 60-day period, the assessment becomes final.

     At the hearing, the subcontractor or contractor has the burden to prove that the basis for the assessment is incorrect.  After the hearing, the Director shall issue a decision within 45 days.  If the contractor and subcontractor are dissatisfied with the decision, the contractor or subcontractor may obtain judicial review of the decision by filing a petition for writ of mandate with the Superior Court.  The petition must be filed within 45 days after service of the decision.  If the contractor or subcontractor fails to file the petition for writ of mandate within the 45-day period, the decision becomes final.

     Finally, although the Division of Labor Standards Enforcement (“DLSE”) is directed to exhaust all reasonable remedies against the subcontractor before proceeding against the contractor, the contractor and the subcontractor are jointly and severally liable for all amounts due pursuant to a final order or judgment under the statute.

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SAVETHEDATE
January 23, 2002

GGL&T ANNUAL
REVIEW/PREVIEWSEMINAR

The information contained in this Newsletter should not be relied upon  as legal advice or opinion regarding any specific matter.

All readers should contact professional legal counsel to obtain advice on specific projects or issues.

SPECIAL NOTICE:  The State Bar of Nevada does not certify any lawyer as a specialist or expert.
© 2001 Gibbs, Giden, Locher & Turner LLP.  All Rights Reserved.