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After California's Public Works Shutdown: How to Evaluate Legal Options and Damage Claims
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December 22, 2008 (Updated on May 4, 2009)
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By Aaron R. Gruber
Howrey LLP
After the California Legislature failed to timely resolve budget issues in 2008, many state agencies shut down ongoing construction projects – making good on earlier warnings that work would have to stop because the agencies would be unable to pay for work performed.
The work stoppages were ordered after the California Pooled Money Investment Board voted on December 17, 2008, to cut off funding for $3.8 billion in public works construction projects.
While many contractors were given work stoppage orders, they apparently were not given termination notices. Universities and colleges provide examples of suspended projects. At the University of California-Davis, projects involving the library, law school and school of management were suspended
In the California State University system:
 | At California Polytechnic State University, San Luis Obispo, the pool replacement project, electrical substation project, center for science and the new technology park all were suspended.
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| At San Francisco State University, the library project was suspended.
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| At California State University, Northridge, work on the performing arts center was suspended.
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Other large contracting state agencies also suspended work, including Caltrans, which suspended projects throughout the state.
Most of these projects are now back under construction, having been revived after the Legislature and Governor were able to agree on a budget.
The issue now is what damages were incurred and how much they are. Potential damages that could arise from the work suspensions include.
Mobilization and Demobilization: Assuming the suspension was long enough to warrant a temporary shutdown of the work, the owner, general contractor, subcontractors, and even material suppliers need to consider not only the cost to shut down the project but also the reasonable cost of bringing the project back up to a productive working level.
Costs during the suspension: Based upon the uncertain duration of the suspension and the nation’s economic conditions, it is likely true that many suspended contractors may not have been able to mitigate their overhead during the suspension. All parties need to review their contracts to determine whether there is language limiting such damages. Barring such limiting language, the parties need to determine a reasonable daily cost that likely would include not only overhead but also storage, maintenance and possibly even security costs, depending on the type of the project.
Delay damages: Project participants should look critically at the project schedule to determine if additional delay has been caused beyond the suspension period and the time necessary to ramp back up. Such delay may arise from the effect of the delay on material suppliers and subcontractors. For example, certain work, such as steel fabrication and other material production, may have been slotted to occur at a certain point in a schedule. If the budget-caused suspension resulted in missing a production slot because of uncertainty over whether the project would continue, the contractor may not be able to re-enter a production queue for several months. As a result, a 30- or 60-day suspension could result in a delay longer than the actual suspension.
These are just three examples of types of damages that contractors and owners should focus now that projects have resumed. Contractors should keep in mind contractual notice requirements, lest any claims be lost. Owners should not expect that contractors will forgo damage claims and should be wary of large claims at the end of the project after the contractor has had an opportunity to fully evaluate the results of the suspension. Both owners and contractors will be well-served by 1) performing a contemporaneous analysis of their contractual rights; 2) performing an assessment of costs arising from the work suspension; and 3) promptly addressing these items with each other.
As public agencies, general contractors, subcontractors and design professionals involved in these projects evaluate their contracts, they should examine provisions addressing suspension of work, schedule modifications, termination for convenience (if a project was terminated) and even force majeure to determine what their rights, remedies and potential exposures.
Suspension of Work
Design or construction contracts often contain language relating to the suspension of work. Clauses typically will apply to suspensions unforeseeable to the parties. However, contracts also may contain language that allows an owner to suspend work for cause (meaning a defined justification is provided) or for convenience (meaning no justification need be provided). If a California public owner decides to suspend for cause, the parties should examine the contract language to determine whether a professed inability to fund the project warrants suspension of work.
In the case of a suspension for convenience, justification is not an issue. The parties need only consider what rights and remedies the contract provides.
Examples of suspension for cause language can be found in the “Greenbook: Standard Specifications for Public Works,” which allows for suspension of work when the owner’s agent determines it is in the “interest of” the owner but requires the owner to pay reasonable damages incurred as a result of the suspension. See, §6-3 (2006). Similar language exists in the Caltrans standard specifications, which allow the owner’s agent to suspend work due to “conditions considered unfavorable for the suitable prosecution of the work.” See, §8-1.05 (May 2006). University of California standard specifications allow the owner to suspend for convenience although it limits the suspension to 90 days. See, §13.3 (June 2008). Based on the variations in these three suspension clauses, it is important that a contracting party carefully analyze its own contract before assuming a breach has occurred and walking off of the project. If the owner is within its rights to suspend and appropriate damages will be paid to the contracting party, no breach justifying a work stoppage will have occurred.
Schedule Modifications
Akin to contract language addressing suspension of work, contract language relating to project schedules often will contain references to delays or suspensions by the owner. If such language exists, it also should be reviewed to determine if a breach of the contract has occurred or whether particular damages and remedies are specified. For example, the standard general specifications of the Trustees of the California State University identify damages for delay due to activities beyond the control of the Trustees. See, §4.15(g) (January 2007). The provision limits the contractor’s remedy to a reasonable time extension and bars monetary damages. To the extent the inability to fund a project is beyond the control of the Trustees, a contractor may be precluded from recovering damages for the suspension.
Termination for Convenience
A termination for convenience clause allows an owner to terminate the contract without cause. State agencies may decide to invoke this clause if it will cost less than a prolonged suspension. However, they will need to consider the cost of putting the completion contract out to bid later when prices may have risen.
Termination for convenience clauses typically spell out the costs that can be recovered by the terminated party. The issue at the heart of the termination frequently is whether the contractor or design professional can recover lost future profits (profits it expected to make if the contract were completed) or whether it is limited to the recovery of costs (and corresponding profits) due as of the date of the termination. For example, the contract for the Trustees of the California State University allows for the recovery of costs and profits through termination but not lost future profits. See, §7.04 (January 2007). However, the University of California contract allows for recovery of the lesser of 5 percent of the remaining costs or $50,000, presumably as compensation for lost profits. See, §13.4 (June 2008).
Force Majeure
Force majeure clauses address external events that are not within the reasonable contemplation and control of the contracting parties. They usually are associated with severe weather, earthquakes, acts of war and the like. However, if a force majeure clause is written broadly enough (and many of them are very broad), it is not unreasonable to assume that a court could interpret it to include unforeseeable financial events causing delay to public projects. Thus, force majeure clauses should be carefully reviewed to understand the rights and remedies they produce.
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For more information about the issues covered in this report, please contact Aaron R. Gruber in our San Francisco office at 415-848-4958 or at grubera@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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