When Contractual Claim Requirements Are Met,
Government Code Claim Unnecessary
By Joel M. Long
The California statutory procedure for claims against local public entities under the Government Code is an alternative to, rather than in addition to, any contractual procedure within the contract between the contractor and the public entity. In other words, if the contractor satisfies the contractual claim requirements, then the submission of a Government Code claim is unnecessary unless the contract expressly requires the same.
The Arntz Builders v. City of Berkeley (2008) 166 Cal.App.4th 276 decision should create less uncertainty for contractors asserting claims against the owners of local public works projects. Where the prime contract establishes a protocol for the submission of claims, compliance with the applicable contractual provisions obviates the need to present a separate Government Code claim before filing suit unless the contract expressly states otherwise.
In Arntz, the general contractor on a project to restore and expand a library owned by the City asserted claims against the City for additional compensation and time extensions. After submitting a claim against the City pursuant to the claim procedures under the prime contract, the contractor sued the City for breach of the contract. The City asserted an affirmative defense that the complaint was barred by the contractor's failure to comply with the Government Claims Act (Gov. Code, sections 900 et seq.), specifically the failure to submit a statutory claim pursuant to Government Code sections 905 and 910.
The case proceeded to trial on the issue of whether the contractor complied with any applicable Government Code claim requirements. The trial court found that the contractor was required to submit a timely statutory claim, in addition to complying with the contractual claim procedures, in order to assert a valid cause of action against the City. Because the contractor had failed to submit a Government Code claim under section 910, its complaint was barred under section 945.4 (providing that, where a Section 910 claim is required, such a claim must be presented to and rejected by the local public entity before the claimant is entitled to file suit). The contractor appealed.
The appeals court reversed the trial court's decision on three grounds. First, in construing the express statutory language permitting a local public entity to include claim presentation procedures in its contracts, namely sections 930.2, 930.4 and 930.6, the court found that contractual claim procedures will exclusively govern claim presentation unless the contract expressly states that a Government Code claim also is required.
Second, in examining the legislative history underlying the statutory scheme permitting a local public entity to include claim presentation procedures in its contracts, the court found a legislative intent to authorize the creation of contractual claim procedures that are parallel with, instead of sequential to, the Government Code claim procedure under sections 905 and 910. Put differently, where contractual claim procedures are specified and complied with, a further, separate Government Code claim is not necessary.
Finally, the court noted the policy and common sense reasons supporting its holding. The fundamental purpose of the claim presentation statutes – to provide a public entity with an early opportunity to investigate, analyze and, as applicable, resolve claims before litigation is filed – is fully served by appropriate contractual claim procedures. To require an additional Government Code claim would impose an unnecessary burden on the claimant, while offering no additional benefit to the public entity and extending the claim process.
The court stopped short of precluding a public entity from requiring the submission of a statutory claim as part of its contractual claim procedures, thus leaving public entities with the flexibility to tailor contractual claim procedures to meet their individual needs. Where a public entity wishes to mandate submission of a Government Code claim, however, the contract must specifically so provide. Summarizing its holding, court stated that "if a local entity contract includes a claim procedure, that procedure exclusively governs the claims to which it applies unless the contract expressly requires the presentation of a statutory claim as well." (Emphasis in original.)
Joel M. Long, an associate in Sedgwick's San Francisco office, concentrates his practice in the areas of surety, construction, bankruptcy/creditors' rights and related commercial disputes.
Texas Adopts Injury-In-Fact Coverage Trigger
for Property Damage Liability Insurance
By Jacob De Leon
After years of uncertainty, the Texas Supreme Court in Don's Building Supply, Inc. v. OneBeacon Insurance Company No. 07-0639 (Tex. August 29, 2008) settled one of the most pervasive construction coverage issues under standard commercial general liability (CGL) policies: When does property damage "occur" under the terms of most liability policies?
Rejecting the widely used "manifestation" trigger for coverage, i.e., when the alleged damage is discovered, the Texas Supreme Court in Don's Building Supply held that coverage is triggered as physical injury to tangible property occurs, not when the conduct that caused alleged damages occurs or when those damages are discovered.
In Don's Building Supply, defective siding sold by Don's Building Supply (DBS) was installed on various homes from 1993 – 1996. DBS was covered by policies issued by OneBeacon during installation of the subject defective siding from 1993 – 1996. The homeowners alleged that the actual damage to the structure occurred within six months of the installation of the defective siding and continuing (i.e., during OneBeacon's policy periods), but that no noticeable signs of damage appeared until several years after the OneBeacon policy periods ended.
OneBeacon denied coverage, arguing that Texas courts had adopted the manifestation trigger to determine when property damage occurred. Since the homeowners alleged that the damage became apparent after the OneBeacon policy periods, OneBeacon asserted that there could be no coverage under its policies. In the coverage action, DBS argued that the terms of the OneBeacon polices mandated that the court use the injury-in-fact trigger of coverage in determining whether OneBeacon owed a defense obligation to DBS in the underlying lawsuits.
The Texas Supreme Court in Don's Building Supply followed the same approach it had taken in Lamar Homes, Inc. v. Mid-Continent Casualty Co. (2007) 242 S.W.3d 1 and simply gave effect to the literal meaning of the policy, which covers damage caused by an occurrence during the policy period and not when the damage is discovered. Because it was alleged that the physical injury to tangible property occurred during the OneBeacon policy periods, under the Texas eight corners OneBeacon's defense obligation was triggered.
Recently, the Dallas Court of Appeals put the injury-in-fact trigger into practice in Union Ins. Co. v. Don's Building Supply, Inc. No. 05-06-00884-CV (Tex. App.—Dallas, September 23, 2008, w.h.).
The Union lawsuit similarly involved defective siding sold by DBS that was used in the construction of a private home in 1991. The plaintiff homeowners discovered the alleged damages caused by the defective siding after they purchased their home in 2003. The plaintiff homeowners alleged that the damage to their home occurred within six months to a year after the defective siding was installed in 1991 and was continuous thereafter. Union Insurance issued liability policies to DBS from December 1996 through December 1998. (Recall that One Beacon insured DBS from December 1993 to December 1996.) Union argued, as had OneBeacon, that the Union policies were not triggered because the damage could not have been discovered prior to the purchase of the home in 2003.
Following the Texas Supreme Court's mandate, the Dallas Court of Appeals held that because the alleged damages were progressive, Union had a duty to defend DBS because injury-in-fact was alleged within the Union policy periods.
These related cases clearly demonstrate the significant effect of the Texas Supreme Court's adoption of the injury-in-fact trigger of coverage for property damage occurring over time. Broad and sweeping allegations of progressive damages occurring over several years can trigger a defense obligation from multiple insurers over multiple years. And because under Texas law each insurer whose policy is triggered has a duty to defend the entire action, the policyholder will be made whole first and it will be up to the insurers to determine what proportionate share to pay of the defense.
Jacob De Leon, an associate in Sedgwick's Houston office, focuses his practice on business and commercial litigation including breach of fiduciary duty, professional liability, breach of implied and express warranty, breach of contract claims and insurance coverage. He has also represented clients in a variety of construction matters including breach of contract claims against property owners and contractors, insurance coverage issues, defense of personal injury claims and contract review.
What to Expect From Anticipated E-discovery Legislation in 2009
By David F. Mangini
This past summer, the California Legislature passed Assembly Bill 926 (AB 926), which included noteworthy additions to California's Civil Discovery Act in the form of rules governing discovery of "electronically stored information" (e-discovery). On September 27, 2008, Gov. Arnold Schwarzenegger vetoed, explaining: "The historic delay in passing the 2008-2009 state budget has forced me to prioritize the bills sent to my desk at the end of the year's legislative session. Given the delay, I am only signing bills that are the highest priority for California. This bill does not meet that standard and I cannot sign it at this time."
In light of across-the-board support for AB 926 in the California State Senate and Assembly, from the California Judicial Council, and from both plaintiffs' and defense attorney associations, there is every reason to expect Schwarzenegger will sign a re-presented version of AB 926 into law in 2009. Operating under that assumption, litigants and their counsel will be subject to these new e-discovery procedures starting next year, some of which are extensions of existing discovery procedures, others of which are "new territory" based on the unique nature of e-discovery.
Like traditional discovery regarding production of documents, there are four procedural considerations in e-discovery: the demand, protective orders, objections and production, and compelling production.
The Demand
Demands for e-discovery are made under the existing procedures for demanding production of documents. The demanding party is required to specify the forms in which it wants e-discovery to be produced. For example, a demand for electronic project plans can specify production in both hard copy and electronic form. Alternatively, the demanding party can opt to demand only electronic versions of such documents, which could provide a substantial costs savings where only a discrete aspect of a project is being litigated and only a small number of documents would ever need to be printed.
Protective Orders
The responding party can seek a protective order from the court if the e-discovery demanded is from a source that is not reasonably accessible due to undue burden or expense, the onus of proving undue burden or expense being on the responding party seeking the order. If the court agrees with the responding party, it may nevertheless order production of the e-discovery with a condition attached that the demanding party pay for part or all of the expense of gathering and production.
Objections and Production
As is the case with traditional hard-copy document demands, a party responding to e-discovery demands may object to a given demand, and must do so with specificity as to the bases for a given objection. The new procedures allow a responding party to object to an e-discovery demand on the grounds that the e-discovery is from source that is not reasonably accessible because of undue burden or expense and that the responding party will not search the source in the absence of an agreement with the demanding party or court order. This serves the same purpose as seeking a protective order and is cost effective as it may lead to agreements that reduce the burden and expense of production without need for a motion seeking a protective order.
If a demand for e-discovery does not specify the manner of production – hard copy and/or electronic – the responding party is obligated to produce only in the "native" electronic form of the documents sought. If the e-discovery is demanded in a specific electronic format other than in a pre-existing "native" format, the demanding party must bear the reasonable expense of the responding party's conversion of electronic documents from the "native" format to the demanded format.
In recognition that production of massive amounts of e-discovery carries with it a higher potential of a document with private or privileged information being produced, there are specific protections in the new procedures in favor of the producing party that provide for return of such documents upon notice to the demanding party as well as a prohibition of use of information in such documents while a motion seeking their return is pending.
Motions to Compel Production
E-Discovery is subject to already-existing procedures governing motions to compel production of withheld documents. However, as unique to e-discovery, the failure to provide electronic documents that have been lost, damaged, altered or overwritten as a result of the routine, good faith operation of an electronic system is not subject to sanctions.
On a practical level, there remains a substantial element of unpredictability when it comes to motions regarding e-discovery disputes – the judge considering the motion. This author has seen firsthand how judges with limited knowledge of how electronic data is handled, stored, and potentially corrupted can rule in ways imposing nearly (or even actually) impossible burdens on the producing party or, on the opposite end of the spectrum, deny the most legitimate grounds for compelling withheld e-discovery. Litigants and counsel would be wise to present their arguments regarding an e-discovery dispute in such a way that even the technologically challenged can understand better the digital world.
David Mangini's current work focuses on counseling insurers in complex construction defect litigation, representation of insurers in inter-insurer litigation, and the defense of general contractors in construction defect litigation. He is an associate in Sedgwick's San Francisco office.
Killer Bond Forms and Contract Provisions--A Series
By Marilyn Klinger
This is the seventh in an ongoing series setting forth examples of bond and contract provisions and providing commentary as to their meaning and impact.
If Principal breaches the Contract (as determined in Obligee's sole discretion), Surety will, within seven days after written notice of breach, commence to complete the Contract. If, at its option, Obligee elects to complete, using contractors, subcontractors, or materials that Obligee, in its sole discretion, deems necessary, Surety will immediately pay Obligee's invoices without contest, waiving all defenses that either Surety or Principal may have under the Bond or the Contract.
By this provision, the surety must complete if the obligee requires it to complete but cannot insist upon completing if the obligee elects to complete—the worst of both possible scenarios from the surety's perspective. Further, if the obligee completes, the surety waives all defenses, including arguably that it is exonerated by virtue of the default of the obligee. It may also waive the defense of the bond amount cap. However, this provision has never been tested in the courts so it is unknown whether it would have that impact. California has a statutory provision in place, Civil Code section 2856, that allows sureties to waive virtually all rights otherwise granted because of its suretyship. What is interesting is that the waiver language in this provision does not apply if the surety completes. Accordingly, the surety could arguably complete under a reservation of rights and then pursue its excess costs against the obligee if it determines that the obligee was in default. It is unclear why the authors of this provision allowed the surety to assert its defenses and other rights when the surety completes other than in acknowledgment of the fact that the obligee can force the surety to complete.
In the event of the failure of Developer to complete the work covered by the performance bond and Obligee completes construction of the improvements, Developer and Surety under the performance bond shall be jointly and severally liable to Obligee for such costs of completion, including but not limited to, management and administrative costs, and engineering, legal and other costs incurred relating to the completion. Obligee shall bill Developer and Surety for such costs, which bill shall be paid within thirty (30) days after the billing date. Interest shall accrue on any late payment at the legal rate then prevailing.
Although this provision may seem onerous to sureties, arguably, each element of damages described in the provision would be included within a subdivision bond, i.e., costs of completion, management, administrative, engineering, legal, and other costs incurred in completing the improvements. The payment for such costs in 30 days is unusual but arguably not onerous when compared to the 40 plus 15 days in which a surety is to reject or deny a claim and make payment under California's Fair Claims Settlement Practices Regulations. (10 CCR section 2695.1, et seq.) Moreover, assuming the obligee has put the surety on notice of its intent to complete the improvements, the surety arguably had the opportunity to both complete the improvements itself or inspect what the obligee was doing so that it could pre-evaluate the obligee's costs before it received its bill for reimbursement.
Principal and Surety agree that if Obligee is required to engage the services of an attorney in connection with enforcement of this Bond, each shall pay Obligee's costs and reasonable attorney's fees incurred, with or without suit, in addition to the above penal sum.
The law generally provides that a surety's liability is capped at the penal sum, including attorney's fees incurred in enforcing the bond. (See, e.g., Hartford Acc. and Indem. Co. v Ind. Accident Comm., 216 Cal. 40 (1932); Lawrence Tractor Co. v Carlisle Ins. Co., 202 Cal.App.3d 949 (1988) (surety only liable for attorney fees beyond the penal sum of the bond if provided for by statute or if the bond provision regarding attorneys fees specifically obligated the surety to pay attorney fees in excess of the penal sum of the bond).) These provisions to the contrary, making a surety (and in this case, the bond principal) liable for attorney's fees in enforcing the bond in excess of the bond penalty are becoming quite prevalent. The theory is that the bond penalty corresponds with the contract price, which, in turn, theoretically corresponds to the cost to complete. If the attorney's fees that an obligee must expend to recover against a surety can reduce the penal sum, there is less money available for the obligee to complete the project or reimburse itself for the costs of completion. In California, this provision would automatically be mutual in the sense that if the bond principal and/or the surety prevailed in litigation that the obligee brought to enforce the bond, the principal and surety would be entitled to their attorney's fees and costs. (Civ. Code §1717.)
Marilyn Klinger heads the Los Angeles Construction Practices Group for Sedgwick, and is involved in all aspects of construction law on a state and national level. She is a partner in Sedgwick's Los Angeles office.
Attorney Profile James Diwik Partner James Diwik heads the firm's Construction Practices Group in Northern California. James represents owners, general contractors, subcontractors, suppliers, ad developers in all aspects of construction, including contract review, drafting and negotion; claim analysis and
prosecution; dispute resolution; administrative proceedings; and litigation. Furthermore, his practice includes the representation of sureties involving contract/commercial bonds and construction, including default termination; takeover and completion contracts; dispute resolution; claim investigation and analysis; and affirmative claim prosecution. James also represents clients in a variety of commercial transactions, disputes and litigation.
James is actively involved in several legal organizations, including the American Bar Association, Litigation Section and Tort and Insurance Practice Section, the American Bar Association Forum on Construction Law and Public Contract Law Section, as well as the Fidelity and Surety Law Committee. Over the years, James has prepared, presented and authored numerous programs involving issues of construction and surety law. James is also an active member of the Association of General Contractors, Associated Builders and Contractors, and the Engineering and Utility Contractors Association.
When he is off-the-clock, James enjoys spending time with his family (including his dog), drinking California red wine and training for triathlons (not all of which are mutually exclusive).
tel: 415.781.7900
fax: 415.781.2635
james.diwik@sdma.com
Construction Practices Group - About Us
Sedgwick has established a record of successfully protecting the interests of general contractors, subcontractors, sureties, project owners and developers (commercial, public and residential design professionals and material suppliers. The firm's construction attorneys represent clients in matters ranging from commercial and governmental projects to private and commercial residential construction.We handle various aspects related to construction – from the contracting, bonding, insuring and development phase; construction disputes, including terminations for default and convenience, takeovers and completion, litigation, arbitration, DRB hearings, and mediation; and post-construction issues, including impact claims, mechanic's liens and stop notice enforcement and defense, compliance with regulatory authorities, product malfunction, construction site injuries, and construction defects. We work with specialized consultants with design and construction expertise.
Through exceptional legal skills, substantial industry experience, and access to leading consultants, Sedgwick consistently provides cost-effective and expeditious management of complex construction law matters. When matters cannot be resolved, we utilize our significant trial experience to try and win cases.
Sedgwick, Detert, Moran & Arnold LLP
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San Francisco, CA 94105
415.781.7900