Addressing one of contractors' main causes of pain, in
2015, the California Legislature passed AB 626 that established a mandated
process for timely resolving contractor change order requests and claims on
public works projects, except for those of certain enumerated public owners,
during the project. That measure resulted in Public Contracts Code section
9204. The section 9204 process has met with mixed reviews.
SB 440, known as the Private Works
Change Order Fair Payment Act (SB 440, Ochoa Bogh) (codified at
Civil Code section 8850) presents a private works analog to AB 626 applicable
to contracts entered on or after Jan. 1, 2026. SB 440 is more protective for
contractors and subcontractors on private projects than AB 626 is for public
projects. SB 440 covers almost all private projects, with the
exception of residential projects that are under four stories and do not
include mixed uses.
AB 626 expires at the end of 2026 if not renewed, and SB
440 will expire unless renewed before Jan. 1, 2030. Contractors would benefit
if, as a condition renewal, AB 626 were required to incorporate aspects of SB
440.
Claims definition and presentation
Both laws define "claims" the same, generally as a written
demand (all notices and demands in these enactments must be sent by registered
or certified mail, return receipt requested) for a time extension, payment for
work performed (where not otherwise owed), or disputed payment amounts. In each
case, the claimant must furnish reasonable documentation to support the claim.
On the public works side, the direct contractor may
present the subcontractors' claims to the public owner, but the direct
contractor owes no obligation to present such claims and may simply write to
the subcontractor, stating the reasons the claim is not presented. Conversely,
on the private side, under SB 440, the direct contractor shall submit
the subcontractor's claim to the owner, the direct contractor shall
exercise good faith in fulfilling their obligations on behalf of the
subcontractor, and the direct contractor shall make no settlement of any
claim to which the subcontractor does not approve, in writing. If the direct
contractor presents the subcontractor's claim, the subcontractor must provide
documentary support and assist the contractor in the informal conference,
mediation and dispute resolution processes. As under AB 626, the direct
contractor under SB 440 must provide a statement to the subcontractor
specifying the reasons if the direct contractor does not submit the
subcontractor's claim to the owner.
Owner response obligations and interest
Both laws require the public or private owner to perform a
"reasonable review" and respond in a writing identifying disputed and
undisputed amounts. AB 626 allows public entities 45 days to respond to the
claim, whereas SB 440 requires private owners to respond in 30 days. Both laws
require payment of undisputed amounts within 60 days. Under AB 626, a public
entity must pay interest of only 7% annually for undisputed
amounts withheld. On the other hand, SB 440 calls for interest from the private
owner at 2% per month on the unpaid, due amount. Similarly, the same
interest rates apply in public and private projects on amounts found to have
been disputed without legal justification.
Informal conference, mediation and
dispute resolution
If the claimant disagrees with the public entity's or private owner's decision about the claim, or the
owner fails to respond timely, the claimant may demand in writing an informal
conference to meet and confer for settlement of the issues in dispute. This
conference must take place within 30 days of the demand. As with the original
demand, the public or private owner must, within 10 days, provide in writing
the owner's statement identifying the portion of the claim that remains in
dispute and the portion that is undisputed. Again, undisputed amounts must be
paid within 60 days. Amounts remaining in dispute must be submitted to
mediation, unless both sides agree to waive mediation. If mediation is waived
or fails, then the contract's other dispute resolution procedures must be
followed, such as arbitration or litigation. Neither AB 626 nor SB 440 provides
for recovery of attorney fees by the wronged contractor or subcontractor.
Contractors granted right to stop work
Whereas AB 626 does not provide contractors the right to
stop work on public projects, SB 440 provides that right on private works
projects until payment is made. Before stopping work, the contractor or
subcontractor must provide the owner with two notices. The first is to notify
the owner that payment is due, or if the owner failed to respond timely or
attend mediation, that the claim is deemed denied. After 30 days, the second
notice may be issued, informing the owner that the contractor or subcontractor will
stop work if the owner has not made payment within 10 days.
SB 440 cannot be waived
The new law states expressly that the rights conferred by
its provisions cannot be waived, and any attempted waiver is void and against
public policy. Nonetheless, SB 440 does provide that the parties may agree in
writing after a claim has arisen to forego the informal conference and
mediation provisions and proceed directly to a civil action or arbitration, as
applicable.
Conclusion
Contractors will want to revise their prime and
subcontracts to comply with the new law, and customize them as allowed by law,
without violating the new provisions.