McKenna & Cuneo, L.L.P. routinely provides its clients and contacts in the construction industry with recent developments in the law. Below are recent developments in the law that may affect how you do business in California.
As we reported in our Spring 2001 Newsletter, in Lujan v. G&G Fire Sprinklers Inc., U.S., No. 00-152 (April 17, 2001), the United States Supreme Court held that California did not violate a public works subcontractor's right to due process of law by withholding a payment representing back pay and penalties for alleged violations of prevailing wage and payroll recordkeeping requirements. [See Cal. Labor Code ยงยง 1771, 1776]. The Supreme Court unanimously reversed a 2-1 decision by the Ninth Circuit in favor of the subcontractor. The Supreme Court found the subcontractor was not entitled to a hearing before the Division of Labor Standards Enforcement ("DLSE"), the state agency that ordered the withholding of back pay and penalties. Instead, the Supreme Court decided that the subcontractor would likely have the ability to pursue a claim to recover the payment through a breach of contract suit in state court.
However, more recently in Mobley v. Los Angeles Unified School District, 2001 Cal.App. LEXIS 570 (July 24, 2001), a California appellate court determined that the Lujan case only "tentatively" upheld the validity of the statutory scheme on prevailing wage violations, subject to the California courts' interpretation. The Mobley court held that a breach of contract suit against a contractor is insufficient because: (1) the contractor may have a valid contractual defense; (2) the dispute is really between the state agency (DLSE) and the subcontractor, which cannot be resolved through a breach of contract suit against the contractor; and (3) recent legislation (discussed in the next section), which Lujan noted was not in effect at the time of that decision, mandates a hearing on whether the basis asserted for wage and penalty assessment is correct.
Comment: This ruling essentially undercuts the holding in Lujan since the U.S. Supreme Court's decision was subject to California courts' interpretation of the existing statutes. Now that such interpretation has been rendered, Lujan is of questionable authority.
New Labor Code Provisions Require Administrative Hearings
Newly enacted Labor Code sections 1741 and 1742, which became effective July 1, 2001, clarify that an administrative hearing on the merits must be afforded both contractors and subcontractors. The pertinent portions are as follows:
New Section 1741 provides that if the Labor Commissioner determines "after an investigation" that there has been a prevailing wage violation, the Commissioner is to "issue a civil wage and penalty assessment to the contractor or subcontractor or both." The assessment "shall advise the contractor and subcontractor of the procedure for obtaining review of the assessment."
New Section 1742 provides that an affected contractor or subcontractor may obtain review of a civil wage and penalty assessment by transmitting a written request for such review to the office of the Labor Commissioner. The contractor or subcontractor is then entitled to a hearing before the Director of Industrial Relations, who shall appoint an impartial hearing officer. Within 45 days of the hearing, the director shall issue a written decision affirming, modifying, or dismissing the assessment. A contractor or subcontractor may obtain review of the director's decision by filing a petition with the state court.
Comment: The advantage of this procedure is that it provides a means for potential resolution of the prevailing wage and penalty assessment short of protracted litigation. For additional information visit the Director of Industrial Relations' website at www.dir.ca.gov.
Mechanic's Liens: Preliminary Notice for $10k Will Not Support Lien of $159k
In Rental Equipment, Inc. v. McDaniel Builders, Inc. (2001) 91 Cal.App.4th 445, a contractor was employed to demolish certain buildings. The contractor subcontracted the demolition work for $75,000. The subcontractor in turn rented equipment from the claimant, which filed two preliminary 20-day notices, each for $10,000. The claimant later recorded a mechanic's lien for over $159,000.
Litigation ensued. At trial, the court found that the claimant's preliminary notices did not comply with the strict requirements of Civil Code section 3097(c)(1) because they did not include an estimate of the total price of labor, equipment or materials to be furnished. The preliminary notices were therefore deemed invalid and, under Civil Code section 3114, so too was the mechanic's lien itself. The claimant should have provided in its 20-day notice "a figure which was derived by a rational process, based upon relevant factors" in a "reasonable and logical attempt to determine the final number." Instead, the claimant had simply guessed at a number which was $150,000 too low. As a result, that claimant received nothing.
Comment: This case demonstrates the risks of not providing a preliminary notice in strict compliance with the relevant statutory requirements. This case does not represent a departure from prior case law, which has in recent years required very strict compliance with statutory preliminary notice requirements. However, it provides a clear example of what can happen to otherwise valid mechanic's lien rights when the preliminary notice requirements are not met.
SIGNIFICANT LEGISLATIVE DEVELOPMENTS
Several bills which have significant impact on the construction industry in California were passed and signed into law recently. More information can be found on these new laws at www.leginfo.ca.gov/bilinfo.html.
AB 1402 authorizes design-build for school districts for projects over $10 million. State guidelines are to be developed within the first six months of 2002.
AB 1534 requires an owner to disclose the amount of a construction loan and to provide security in the case of default by the owner on projects over $5 million. This legislation was in response to concerns about general contractors' responsibility to pay subcontractors when an owner defaults.
AB 1442 allows substitution of comparable products in local government projects. This extends a similar law passed last year which allows substitution in state contracts.
UPCOMING MCEKNNA & CUNEO CONSTRUCTION SEMINARS
We will present at the Global Construction Superconference, November 5-6, 2001, in London. We will be moderating a panel of experts from the UK and US that will address the terms that shift performance and construction risks to contractors in turnkey contracts. The panel will present owner, contractor and lender views on the problems that have driven large companies like Raytheon Engineers, Morrison-Knudsen and others to near bankruptcy.
Peter Ippolito of McKenna & Cuneo's San Diego office will be moderating a panel discussion on "Avoiding the Nightmares of California's School District Expansion Program" at the 16th Annual Public Construction Superconference, December 13-14, 2001, in San Francisco.
For more information, please contact:
| Thomas M. Abbott - | Los Angeles |
| Jance R. Hawkins - | Los Angeles |
| Mark G. Budwig - | San Diego |
| Peter J. Ippolito - | San Diego |
| Steven S. Owen - | San Diego |