California local public agencies and their contractors should take note of a recent appellate decision pertaining to late progress payments on public works projects. In Clark Bros., Inc. v. North Edwards Water Dist., 2022 Cal. App. LEXIS 331, filed on April 22, 2022, the Court of Appeal for the Fourth Appellate District held that a local agency’s late progress payments to a general contractor did not constitute breach of contract under the prompt payment penalty statute, Public Contract Code § 20104.50. Notwithstanding this holding, the contractor recovered damages, interest, fees, and costs in excess of its contract amount.

In 2013, the North Edwards Water District awarded a $6.2 million contract to Clark Bros., Inc. to construct a water treatment facility. The District’s water contained excessive levels of arsenic, and the project was sponsored by the State of California with funds earmarked to provide safe drinking water. The State agreed to disburse funds to the District during construction upon the State’s review and approval of the contractor’s progress payment applications. The contract required completion of the work within one year following the District’s issuance of a notice to proceed to the contractor.

As a result of factors arguably outside the control of the contractor, including unforeseen site conditions and the failure of the District’s equipment supplier to meet delivery deadlines, the project was significantly delayed beyond the deadline for completion. The District nonetheless terminated the contractor, which in turn filed suit against the District and the State. The contractor asserted claims for breach of contract, including breach of contract for the District’s failure to pay the contractor’s progress payment applications within the time specified under Public Contract Code § 20104.50. Subsection (b) of the statute provides:

Any local agency which fails to make any progress payment within 30 days after receipt of an undisputed and properly submitted payment request from a contractor on a construction contract shall pay interest to the contractor equivalent to the legal rate set forth in subdivision (a) of Section 685.010 of the Code of Civil Procedure.

Prior to termination of the contract, the contractor’s progress payment applications were typically not processed by the State for 90 days or more. However, the funding agreement between the State and the District provided that the District was solely responsible for timely payments to the contractor in accordance with the contract (which incorporated Public Contract Code § 20104.50), regardless of whether the State had processed the contractor’s applications.

At trial, the court instructed the jury that the District was contractually obligated to pay the contractor’s progress payment applications within 30 days of receipt, based on the timeframe provided by Public Contract Code § 20104.50(b). The jury returned a verdict in favor of the contractor, awarding a judgment against the District in excess of $3 million. Post-verdict, the court entered a net judgment for more than $4 million, including $182,656.14 in interest under Public Contract Code § 20104.50, $834,952.72 in pre-judgment interest, $2,185,846.93 in prevailing party attorneys’ fees, $146,755.05 in experts’ fees, other expenses under Code of Civil Procedure § 998, and $194,434.05 in costs. The State reached a separate settlement with the contractor, which was a $2.7 million offset from the award in the post-verdict judgment. On appeal, the District contended that the trial court’s instruction was erroneous because the statute does not provide that a tardy progress payment constitutes a breach of contract, but rather simply dictates the amount of interest due to the contractor because of a late payment.

The Court of Appeal concurred with the District, finding that “[h]ere, the operative language in section 20104.50, subdivision (b) is that a local agency ‘which fails’ to pay within 30 days ‘shall pay interest’ at the legal rate. Giving these words their plain meaning, the statute does not compel payment within 30 days. What it compels is that interest be paid (at the legal rate) when payment is made after 30 days.” The Court of Appeal noted the distinction between the language of the statute as compared with other prompt payment statutes applicable to both public and private works of improvement, including Public Contract Code § 7101(c) (“retention withheld by the public entity shall be released”), Public Contract Code § 10262.5(a) (“a prime contractor or subcontractor shall pay to any subcontractor, not later than seven days after receipt of each progress payment, the respective amounts allowed”), Civil Code § 8800(a) (“the owner shall pay the direct contractor, within 30 days … any progress payment due”), and Business and Professions Code § 7108.5(a) (“a prime contractor or subcontractor shall pay to any subcontractor, not later than seven days after receipt of each progress payment … the respective amounts allowed”) (emphases added).

The Court of Appeal found that these other prompt payment statues “illustrate that when the Legislature intends to require timely payment to a contractor or subcontractor (as opposed to merely incentivizing timeliness), it knows how to clearly say so. The absence of such language in section 20104.50, subdivision (b) thus manifests a different intention.” The Court of Appeal held “that when section 20104.50 is incorporated into a local agency’s public works contract, as it was here, the agency does not breach that contract merely by making a progress payment after 30 days. The statute is violated, and a breach of contract occurs, if and when the agency fails to pay the requisite interest after a late payment is made.”

Notwithstanding an erroneous instruction to the jury that the District was contractually “required” to pay the contractor within 30 days, the Court of Appeal affirmed the trial court award and found that the instruction was not prejudicial, as there was substantial evidence that the District committed several far more serious breaches and that the jury award did not base its damage award on tardy progress payments.

This case illustrates how a public agency can get into trouble and incur unnecessary liability in the administration of public works projects. In considering the termination of a contractor or the withholding of payments, both public and private owners are well advised to seek the advice of experienced legal counsel.    

For more information contact:

Ted Senet, Esq.

tsenet@gibbsgiden.com

Theodore L. Senet is a partner of the firm. Since joining the firm, Mr. Senet’s areas of practice have been insurance, construction, environmental, and real property law. Mr. Senet has been involved in planning and construction of major projects, including high rise buildings, hospitals, airports, roadways, pipelines, power plants, refineries, and major commercial and residential developments. He currently represents private and public entities in project planning, insurance coverage disputes, complex construction defect and environmental litigation, construction delay claims, and class action litigation.

Christopher Trembley, Esq. 

Ctrembley@gibbsgiden.com

Christopher Trembley’s practice encompasses a wide range of commercial, construction, real estate and insurance matters on behalf of corporate, public entity and individual clients.  Mr. Trembley specializes in representing owners, developers, general contractors and subcontractors in disputes and complex litigation involving public and private construction projects.  He also has extensive experience in transactional matters including corporate formations, sale agreements and legal compliance issues.