CONTRACTOR’S FAILURE TO OBSERVE CHANGE ORDER PROCEDURES BARS RECOVERY

November 2011
Number 72

An appellate court has issued a decision that favors local public agencies when they experience delays on construction projects. In Greg Opinski Construction, Inc. v. City of Oakdale (October 6, 2011) 199 Cal.App.4th 1107 [WL 4625304], the court held that if a contractor fails to follow contract procedures to obtain a time extension, a local public agency is entitled to liquidated damages for delay in completing a project, even if the agency caused the delay. In addition, the appellate court held that a local public agency is entitled to possess withheld retention funds once the agency deems the contractor to be in breach.

Greg Opinski Construction, Inc. entered into a contract with the City ofOakdalefor a building project. After conclusion of the work, Opinski sued the City for retention funds withheld by the City and for additional compensation Opinski alleged was owed. The City cross-complained for its own damages, including liquidated damages for delay.

The trial court ruled in favor of the City on its claim for liquidated damages because Opinski had failed to follow the contract procedures for seeking a time extension. Opinski argued on appeal that a 1963 Supreme Court case, Peter Kiewit Sons’Co.v. Pasadena City Junior College District (1963) 59 Cal.2d 241, required a different result. In reliance on Civil Code section 1511, which describes when a delay in performing a contract may be excused, Peter Kiewit held that an owner is not entitled to liquidated damages when the lateness was caused by the owner’s conduct, even if the contractor failed to follow contractually-required procedures for time extensions. Opinski contended that any delays were caused by the City.

However, the appellate court noted that the legislature amended Civil Code section 1511 in 1965 in response to the Peter Kiewit decision, and that the amended statute made it possible for the parties to agree contractually to specific time extension procedures. The appellate court recognized that the contractual provisions to which Opinski agreed were intended “to allocate to the contractor the risk of delay costs – even for delays beyond the contractor’s control – unless the contractor follows the required procedures for notifying the owner of its intent to claim a right to an extension.”

Opinski had also alleged that it submitted change orders to which the City never responded, but the appellate court concluded (in an unpublished portion of the opinion) that even if Opinski’s allegations were true, those change orders were not submitted within 30 days of when the need for each change order arose, as required by the contract. Thus, the Opinski decision upholds the right of a public agency to require a contractor to comply with the claims procedures set forth in the contract between the parties.

The appellate decision also addressed access to retention funds. Public Contract Code section 22300 gives contractors the option of requiring that retention be held in escrow, and Opinski had exercised this option. The trial court had awarded pre-judgment interest to the City on the retention funds held in escrow. Opinski argued on appeal that the City had “dominion and control” of the withheld funds, and because the City could have withdrawn the funds and collected interest to address what the City contended was Opinski’s breach of contract, the City should not be entitled to pre-judgment interest. In response, the City argued that it did not have the ability to withdraw the funds until it won at trial.

The appellate court’s analysis focused on the ambiguous language of the escrow agreement required by Public Contract Code section 22300. Some paragraphs supported Opinski’s interpretation, and some supported the City’s. The appellate court ultimately ruled that the escrow agreement’s language “presupposes that the owner has a right to possession of the retention when the owner deems the contractor to be in breach. The purpose of withholding retention would be undermined if this were not the case. . . .” The appellate court therefore ruled that Opinski did not have to pay pre-judgment interest, because the City had a right to possess the funds prior to final judgment.

This ruling actually favors local public agencies. The appellate court clarified that an agency may now take possession of retention funds held in escrow once the agency “deems the contractor to be in breach” and such breach causes the agency to incur damages. This right may give a public works owner an additional remedy during financial closeout of projects that involve disputes with the contractor.

The parties still have time to appeal this decision to the California Supreme Court. LOZANO SMITH will provide updates on the Opinski case if further developments occur. LOZANO SMITH can provide clients with form construction agreements and documents, which include language that protects the owner on these issues. If you have any questions about this recent decision or construction issues generally, please contact one of our eight offices located statewide, visit our website, or follow Lozano Smith on Facebook.

Written by:

Harold Freiman
Shareholder
Walnut Creek Office
hfreiman@lozanosmith.com

Arne Sandberg
Senior Counsel
Walnut Creek Office
asandberg@lozanosmith.com

© 2011 Lozano Smith

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