News

Written By Ali Salamirad, Founding and Managing Partner, SMTD Law LLP

Public infrastructure projects should be paid for with public funds – not by private contractors.  Unfortunately, far too many public project and program managers have either forgotten or chosen to ignore this fundamental rule.  Here are some general legal tips to follow when faced with this issue.

I recently represented a general engineering contractor in a claim against a local public agency for millions of dollars of costs incurred as a result of encountering differing and unusual site conditions on a storm drain installation project.  Based on a soil report prepared by the owner’s geotechnical engineer, our client expected to encounter poorly graded granular material that, given its moisture content and the detailed descriptions in the project borings, was going to be manageable for purposes of pulling a trench shield/box for shoring.   Nothing in the bid documents suggested the presence of existing roadways, substantial cobble materials (like walls of marble), boulders and extremely unstable caving soil.

THE SITE CONDITIONS IMPACTED PRODUCTION

The conditions dramatically impacted our client’s production.  Rather than achieve (conservatively) approximately 85 LF of production a day, the contractor’s operation yielded something closer to 35 LF per day.  For those of you who know about underground construction, production and cost accounting, the reduction from 85 to 35 LF of production per day can have a catastrophic financial impact on any contractor.

FOR INFORMATION ONLY? YEAH RIGHT.

Our client notified the city of the conditions and asked for help.  The city refused to compensate our client.  Not a penny.  The city’s position was that our contractor should not have relied on the soil report that was published with the bid documents because, in the city’s view, that report was “for information only” and not an “official Contract Document.”

The city’s position was illegal and improper under California law, and based entirely on its project team’s unfamiliarity with Public Contract Code section 7104, the affirmative obligation that the Legislature placed on public entities to investigate and resolve differing site condition claims and clear California case law on point (Condon-Johnson v. Sacramento Municipal Utility District).

Despite the city’s refusal to act properly, this small, family-owned contractor completed the project (with a little help from its surety).  At mediation we used the city witness’ video-taped deposition testimony to tell our story.  We coupled the deposition testimony with photos and videos from the collapsing trenches.  It’s hard to describe the gravity and seriousness of trench failures until you actually see and hear the earth move.  The city ended up agreeing to pay our client.

POURING SALT ON THE WOUND

One of the issues that was raised in this recent case, and is present in nearly all of the affirmative claims I handle for contractors against public agencies, is the owner’s decision to make matters worse and “pour salt on the wound” by assessing liquidated damages against the contractor for its failure to complete the project by the contract completion date.

When abused by public owners (which is often the case), this strategy results in the contractor not only having to finance the construction of the improvement in differing or unusual site conditions, but also deprives the contractor of the contract funds that the owner agreed to pay in the first place.  It takes an awful financial situation, and makes its exponentially worse.   When abused, this strategy is nothing more than an effort to create settlement leverage and, in the worst cases, destroy businesses

That is, the owner wants to be able to offer these same funds back to the contractor to settle its larger differing site condition claim.  How generous. The strategy is abusive, improper and entirely inconsistent with traditional notions of good faith and fair dealing.  The only way to stop public agencies from acting this way is to fight them when they decide to use these tactics and make them pay for their decisions.

SOME PRINCIPLES TO FOLLOW

When faced with an owner who is holding onto your hard-earned money in order to deprive you of cash, or create leverage to settle, keep these general principles in mind:

• The owner needs to prove that the contractor is the sole cause of the delay.
• Stated differently, if there is owner caused delay (site conditions, lack of permits, delayed responses to RFIs, re-designs, etc.) then the concurrency of the delays defeats the liquidated damages claim.
• Because concurrent delay defeats the liquidated damages assessment, a full blown forensic scheduling analysis is not always required – you (and your counsel and/or consultants) should focus on concurrency to get your money back.
• In order to allege that liquidated damages should not be assessed, the contractor should pay close attention to the notice and claim requirements of the prime contract and make sure to document events, facts and circumstances that suggest that factors outside of its control have delayed completion of the project.
• Similarly, document issues in daily reports, meeting minutes and emails. Also, pay attention to your statements of working days, and make sure you are demanding that the owner accurately documents actual conditions. There is nothing more powerful than using the owner’s own documents to defeat their position.
• Don’t forget about California’s prompt payment statutes, which can be gamechangers. In a case very similar to the one I just mediated, the County of San Bernardino watched a local contractor lose its business trying to install a sewer line in unforeseen caving conditions. Rather than pay that contractor for the millions of dollars that it had lost, the County denied all claims. The County then had the audacity to withhold the final quarter million dollars of contract funds on account of its liquidated damages assessment.  After a two-week trial, the Court concluded that the County improperly withheld the retention funds by assessing liquidated damages without establishing that the contractor was at fault.  Not only did we recover the retention for our clients, but the Court awarded the contractor penalties and over $500,000 in attorneys fees as a result of the County’s wrongful assessment of liquidated damages.  See the linked copy of LT Engineering v. County of San Bernardino (which is also the only California case validating the use of a measured mile to quantify differing site condition damages).
• Consider refusing to negotiate your claim until the owner has put all of your earned contract funds back on the table. This is an aggressive strategy; however, it will force the owner to quickly decide whether it wants to litigate the case or attempt to meaningfully resolve the claim for differing or unusual site conditions.

If you or someone you know is having difficulty getting paid for its work, we are happy to help.  Call Ali Salamirad at SMTD Law’s headquarters at (949) 537-3813 to talk about your case.  If nothing else, we’d be happy to steer you in the right direction and wish you the best of luck in your effort to force the public owner to pay for public improvements.