Violation of Prompt Payment Statutes is Not a Breach of Contract. But That’s Not the Most Interesting Part
While construction projects can get messy, they don’t get much messier than the next case, which, while involving a fairly limited legal issue, has such jaw dropping facts it’s worth a read if only to make you feel a bit better about your own project.
The Clark Bros. Case
In Clark Bros, Inc. v. North Edwards Water District, 77 Cal.App.5th 801 (2022), general contractor Clark Bros., Inc. was awarded over $3 million in damages against a local water district on a water treatment facility project.
The North Edwards Water District serves approximately 220 customers in the Mojave Desert. It has one employee, Dollie Dimples Kostopoulos. Seriously, you can’t make this stuff up. The drinking water it provides to its customers contains three times the legal limit of arsenic, a carcinogen.
In 2010, the State of California funded a study to determine how to remove the excessive levels of arsenic from the District’s water supply. Three companies – Filtronics, Layne Christensen, and Pureflow – participated in the study. AECOM Technical Services, Inc., the engineering firm overseeing the study, found that Layne Christenson provided the best filtering system.
Although Layne Christenson was found to provide the best filtering system, the District insisted that all three companies be allowed to bid on the project, and threatened that if they weren’t given their way the District would scuttle the project and supply arsenic-laden water “forever.” Wow, just wow!
The Pureflow Single-Source Requirement
For reasons unknown, although Layne Christenson had the least expensive waste treatment system, Filtronics offered the least expensive operation and maintenance over 20 years, and Pureflow had the highest capital costs, the District selected Pureflow. The District’s selection of Pureflow was even more puzzling because Pureflow does not manufacture anything. Rather, everything Pureflow sells is made and installed by others.
After Pureflow was selected, Pureflow demanded an advance of $600,000, which the State rejected, countering that no payments would be made until at least half of the equipment was delivered to the project site. Pureflow and the State later compromised and the State agreed that Pureflow would be paid for each major piece of equipment when it was manufactured and passed inspection at the manufacturing facility. This agreement was incorporated into the project specifications.
In December 2013, Clark was awarded the bid. Under the terms of the contract, Clark was to complete the project by January 2015. Six days later, Pureflow complained about cash flow problems and demanded that it be paid in advance although the State had earlier rejected that proposal and Pureflow’s quote, which was accepted just two weeks earlier, provided that Pureflow would be paid as equipment was manufactured and passed inspection. The State once again rejected Pureflow’s request for money up-front.
Other Problems on the Project
This, however, was just the beginning of the problems. Although the site was located on mostly vacant land, two power poles and overhead electrical lines ran through the middle of the site, and relocating them was an important first task as they were located right over the area of construction and posed a danger to workers using heavy equipment. It was the District’s responsibility to move the poles and power lines. The poles and power lines were ultimately moved to a private property resulting in a 230 working-day extension because of the District’s delay in moving the power poles.
Consistent with common practice, the contract allowed Clark to use the job site for laydown, staging and construction. However, the District refused to allow Clark’s equipment on site, insisting instead that Clark lease a nearby vacant lot. That lot was owned by James Allen who, by no coincidence, was in a relationship with Kostopoulos. When Clark learned of the relationship it refused to pay Allen who replied that Clark was “poison” and should “get the hell out of here.”
As work began, Clark discovered underground gas lines that were not depicted on the plans. The plans also called for the construction of a second water well located about 20 feet away from an existing water well. However, when the well driller arrived, he refused to construct the new well because it was too close to the existing well and could resulted in a cave in that could have further contaminated the drinking water. These issues caused an additional 85 working-day delay on the project.
Pureflow Once Again
In the meantime, Pureflow again demanded a cash advance and, in a related move, notified Clark that Pureflow would deliver filter media to the site (triggering a $149K progress payment) although there was no place to put it. The District refused to agree to the early filter media delivery. Pureflow delivered it anyway. And Clark was forced to bear the cost of storing it.
Clark later asked AECOM to identify which Pureflow-supplied equipment it had inspected. AECOM did not identify any and instead stated that Pureflow was Clark’s problem. When Clark brought this to the attention of the District, the District, like AECOM, stated that Pureflow was Clark’s problem, even though the District had selected Pureflow and negotiated the payment terms with it before Clark even bid on the project. Shortly, thereafter, Pureflow asked Clark for $503K in “working capital” so that it could “move forward,” Pureflow’s fourth request for advance payment.
Now six months into the one-year project, the District directed Clark to “dump” Pureflow. Shortly thereafter, Clark sent a notice of breach of contract to Pureflow, and asked AECOM to identify another filter vendor, noting that Pureflow had already caused a 120 working-day delay on the project. However, three weeks later, the District reversed position and told Clark, “[Y]ou cannot replace Pureflow.” In an email to Kostopoulos, Pureflow’s Vice President, Archie MacDonald, thanked Kostopolous for her “tremendous effort” and stated “Enjoy your weekend and go for a drive in your [Audi] A8. You deserve it.”
Clark’s Termination and Other, Well, Eyebrow Raising Events
Later that month, at a District board meeting, board member Clifford Moyle told the Board that he had consulted with a lawyer who agreed “to write two very strong letters, one to Clark, one to AECOM, and make them know they have to shit or get off the pot” and informed the Board that he told the lawyer to “kick their ass.” The District later terminated Clark although it still had three months left to complete the project.
The District later hired an engineer to determine what needed to be done to complete the project. In an unusual turn of events, the engineer in his report asked: “Given the very real possibility that in the event of litigation against the district, [Clark] may prevail with regards to various issues it raises[,] . . . [i]s there any desire by [the District] to deescalate the matter and determine if there is any possibility of resolving the existing situation without litigation?”
When the report was read at a District board meeting, Kostopoulos asked her fellow Board members, “In other words, do we want to kiss Clark’s ass and take him back.” The answer, was apparently no, and the District fired the consulting engineer. At that same board meeting, Kostopoulos reported that the District’s attorney had “strongly urge[ed]” it to “immediately reconsider its position and attempt to resolve the matter with [Clark.]” Kostopoulos called the District’s attorney “a little weasel” who did not have “balls enough to fight this thing.” The District also fired the lawyer.
Apparently, at that same board meeting, Moyle suggested posting “No Trespassing” signs to deter Clark from returning to the site and to “shoot” him if he did. Another board member commented, with “buckshot in their butts,” “[t]hey’ll think twice about coming back.” Like I said, you can’t make this stuff up.
After the above, it makes what us lawyers do sound downright boring. As one might expect, Clark filed suit against the District as well as the State for breach of contract. The District in turn filed a cross-complaint against Clark and the surety which issued the performance and payment bonds on the project. Before trial, the State settled with Clark for $2.7 million, and following trial, the jury awarded Clark $3,288,721 in damages.
The District appealed
On appeal, the District argued that a jury instruction given by the trial court was erroneous. Specifically, the District argued that one of Clark’s contentions at trial was that the District failed to pay Clark within 30 calendar days of receipt of Clark’s pay applications and that the District was therefore liable for interest at the rate of 10% per annum under Public Contract Code section 20104.50.
According to the District, the Court erroneously instructed the jury that the District was contractually required to pay Clark within 30 calendar days and that this was in error, because Section 20104.50 does not require that local agencies to pay pay applications within 30 calendar days, but rather only that local agencies are subject to interest at the rate of 10% per annum for failing to pay pay applications within 30 calendar days.
The 4th District Court of Appeal agreed, kind of.
Public Contract Code section 20104.50(b), explained the Court, provides:
Any local agency which fails to make any progress payment within 30 days after receipt of an undisputed and properly submitted payment request from a contractor on a construction contract shall pay interest to the contractor equivalent to the legal rate . . .
Section 20104.50(b) does not, as the trial court stated in its jury instruction, require that local agencies to pay contractors within 30 days. Rather, explained the Court, Section 20104.50(b) provides only that if a local agency “fails” to pay within 30 days that it “shall pay interest” at the legal rate:
Here, the operative language in section 20104.50, subdivision (b) is that a local agency “which fails” to pay within 30 days “shall pay interest” at the legal rate. Giving these words their plain meaning, the statute does not compel payment within 30 days. What it compels is that interest be paid (at the legal rate) when payment is made after 30 days.
Of course, a 10 percent penalty for tardy payment is likely a strong incentive for local government to make progress payments within 30 days. But to incentivize payment within 30 days is not the same as to compel it. There may be a number of good reasons why a local agency might take longer than 30 days to pay. In this case, for example, the sheer bureaucracy in having payments approved by AECOM, North Edwards, and the State made payment beyond 30 days not only possible, but a near certainty.
Given the frequency with which even a good faith attempt to pay within 30 days may fail, section 20104.60 quite reasonably does not create a breach of contract every time a progress payment is made beyond 30 days. Rather, the legislative goal of prompt payment is effected by generously compensating the contractor for the time value of its money when delay occurs, and thus deterring tardy payments.
We accordingly hold that when section 20104.50 is incorporated into a local agency’s public works contract, as it was here, the agency does not breach that contract merely by making a progress payment after 30 days. The statute is violated, and a breach of contract occurs, if and when the agency fails to pay the requisite interest after a late payment is made.
In case your heart just fell to the pit of your stomach at the injustice, fret not. The Court of Appeals then turned to “whether the instructional error likely affected the outcome,” and here concluded the court, “we conclude it did not for two reasons”:
First, there was substantial evidence of numerous other (and much more serious) breaches by North Edwards, including its:
—Unwillingness to take responsibility, as the owner who chose Pureflow, for Pureflow’s “failings in moving the project and delivering.”
—Failure to extend Clark’s time to perform based on delay in (a) moving the power poles and lines, (b) dealing with undesignated high pressure gas lines, and (c) drilling the new well close to the existing one.
—Improper management of the Project.
—Termination of Clark when the general contractor still had three months to perform, even without any time extension.
And, second, explained the Court of Appeal:
Even more significant, North Edwards could not have been prejudiced by the instructional error because the record affirmatively demonstrates the jury did not base its damage award on tardy progress payments. Clark’s construction expert calculated damages by a simple formula that did not even consider late payment. He determined the amount Clark spent on the Project ($5,021,755), deducted what North Edwards paid Clark ($2,250,133), added a reasonable amount for profit ($377,230) and overhead ($139,869), resulting in $3,288,721 in claimed damage. The jury awarded this same $3,288,721. Thus, we are confident the verdict was unaffected by any instructional error regarding prompt payment obligations.
So, there you have it, a rather bland legal decision – A local agency’s violation of Public Contract Code section 20104.05(b) gives rise to a remedy (i.e., interest at the legal rate) but does not constitute a breach of contract – but one based on a sensational set of facts.
Note: Apparently, one of the District’s board members stated that he does not drink the water. Remind you of something?
2 Responses to “Violation of Prompt Payment Statutes is Not a Breach of Contract. But That’s Not the Most Interesting Part”
I drafted the initial complaint by Clark Bros. in this case, and did a fair amount of the discovery and depositions, but left the firm handling Clark’s side of the litigation just before trial. It was wild…
It sounds like it. And our article was just about what was reported in the appellate decision. I know a lot goes on behind the scenes that isn’t reported as well.