Anyone with experience in construction claims knows that the rules are different depending on whether a project is public or private. A recent California case underscores the importance of knowing whether a particular development project is public or private—especially for subcontractors hoping to secure payment rights with construction remedies.
The Second District Court of Appeal recently decided the case of California Paving and Grading Co. v. Lincoln General Insurance Company (2012) 206 Cal.App.4th 36.1 The heart of the dispute was whether a contract for a subdivision improvement project was a public or private work. If the project was a public work, then the subcontractor had not complied with various notice provisions and its claim was barred. If the project was private, then the subcontractor would not have had to comply with those provisions, and its claim would not be barred.
The dispute in California Paving stemmed from a contract between a private developer, and the City of Los Angeles regarding a subdivision. The agreement required the developer, as a condition to approval of the final map and at “its own cost and expense,” to “construct and install all public improvements required in and adjoining and covered by the final map.” The agreement also required the developer to obtain “payment security” in the amount of 50% of the estimated cost of the improvements. The developer obtained a “subdivision labor and material payment bond” in the appropriate amount.
The developer contracted with a prime contractor, who in turn contracted with the plaintiff paving and grading subcontractor. The question, then, was whether this arrangement formed a public or private work for purposes of subcontractor claims.
The court agreed with the surety company and disagreed with the subcontractor. After determining that the subcontractor’s claims were contingent on whether the subcontract involved a public or private work, the court noted that Civil Code section 3100 defines a “public work” as “any work of improvement contracted for by a public entity.”
From that definition, the court turned to the language of the original contract requiring the private developer, at its “own cost and expense,” to “construct and install all public improvements. . . .”. Under the court’s reasoning, the fact that the contract included “public improvements” and was contracted for by the City, a public entity, meant the primary agreement underlying subcontract was a public work. Once the court determined that the subcontract involved public works, it applied the public payment bond statutes. The court found that before “a claimant may recover on a payment bond on a public works project, it must give notice. The notice may be given either as a 20-day preliminary notice pursuant to section 3098, or as special notice provided in section 3252, subdivision (b).”
The subcontractor contended that its notice under the private-works preliminary notice provisions substantially complied with those under section 3098 and was therefore sufficient. The court was not convinced. Under section 3098, the preliminary 20-day notice must be given in writing to “the contractor, and the public agency involved.” (Civil Code § 3098, subd. (a), italics added.) The subcontractor did not serve the City with notice (as it was not required to do so under section 3097), and thus the subcontractor could not maintain its action.
This case places a high burden on subcontractors to understand not only their own relationship with their contractors, but also to understand any agreements between the owner and the local public entity. If the project involves work that could be construed as public, the subcontractor needs to make certain whether following the public works notice statutes is required.
In addition, it is worth noting that the California Paving case required a subcontractor to give notice to the “public entity concerned” even though: (1) the public entity was not the party with whom the prime contractor was in contract; and (2) the public entity was not the property owner. Thus, it is important for subcontractors to be aware of whether the work they are performing is a “public work of improvement” even if the work is performed on private property and under contract with a private developer.
1) California Paving was decided under the pre-2012 construction remedy statutes, and thus the case references the old statute numbers. It does not appear that the Court’s decision would be any different under the new construction remedy statute scheme.
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