Garret Murai | California Construction Law Blog
Contractors working on public works projects are likely familiar with the statutory claims resolution process under Public Contract Code section 9204. Section 9204, which went into effect in 2017, and which has been amended a couple of times since, provides a claims resolution process for public works projects with the goal of resolving claims before litigation.
Section 9204, which currently expires on January 1, 2027 (it has been extended once so far), provides for a three-step process: (1) submission of a claim by the prime contractor and response by the public entity; (2) if the claim is rejected in whole or in part by the public entity, a meet and confer conference between the prime contractor and public entity; and (3) if the claim is not resolved at the meet and confer conference, mediation (or other non-binding dispute resolution process) between the prime contractor and public entity.
A similar statutory claims resolution process has now been enacted that applies to most private works projects. The bill, Senate Bill 440, goes into effect on January 1, 2026, and is codified at new Civil Code section 8850.
What does the new law provide?
Like Public Contract Code section 9204, Civil Code section 8850 provides a three-step claims resolution process. The statute defines a “Claim” as including: (1) “[a] time extension,” including relief from damages or penalties for delay assessed by an owner; (2) “[p]ayment by the owner of money or damages arising from work done by, or on behalf of, the contractor pursuant to . . . contract” and “payment for which is not otherwise expressly provided or to which the claimant is not otherwise entitled” (more on that below); and (3) “[p]ayment of an amount that is disputed by the owner.”
Since this is a new law, I’m not sure what “payment for which is not otherwise expressly provided or to which the claimant is not otherwise entitled” means. For example, does that mean that “no damages for delay” provisions, which often limit contractors to extensions of time only but not delay damages, are no longer enforceable? What about contracts that are either silent, or which include provisions expressly prohibiting, cost escalations like cost escalations due to tariffs? Your guess, at this point in time, is as good as mine.
The statute also defined an “Owner” as an owner in fee, a vendee under a contractor for purchase, or a lessee or other person with an interest or estate less than fee. In other words, an “Owner” includes an owner, purchaser (not very common), or tenant.
The statute does not apply to residential construction projects if the project is not mixed use and does not exceed four stories. I assume both triggers are required for the exception to apply. In other words, I assume the statute applies to an apartment project that is wholly residential (e.g., no ground floor retail and, therefore, not mixed use) if it is five stories or more. Similarly, I assume the statue applies to smaller mixed use apartment projects that are four stories or less.
What is the three-step process?
Like Public Contact Code section 9204, Civil Code section 8850 generally provides for a similar three-step process including (1) submission of a claim by the prime contractor and response by the owner; (2) if the claim is rejected in whole or in part by the owner, a meet and confer conference between the prime contractor and owner; and (3) if the claim is not resolved at the meet and confer conference, mediation between the prime contractor and owner.
Step One: Claim Submission and Response
- A prime contractor may submit a claim to an owner on a private works project. The claim must be sent by registered mail or certified mail, return receipt requested. The direct contractor must furnish reasonable documentation to support its claim.
- Within 30 days of receipt of the claim the owner must provide the prime contractor with a written statement identifying what portion of the claim is disputed and what portion is undisputed. Upon receipt of a claim, an owner and prime contractor may, by mutual agreement, extend the time for the owner to provide its written statement in response.
- For any undisputed portion of a claim, the owner must make payment within 60 days after the owner issues its written statement. Amounts not timely paid shall bear interest at the rate of 2% per month. Note: That is the same as the prompt payment penalties of 2% per month found elsewhere under California law, which is a whopping 24% interest annually, or equivalent to credit card interest rates! Also noteworthy, is that the statute frames the 2% per month as “interest” rather than as a “penalty.”
- If the owner fails to respond to the claim within the time permitted, or fails to make payment within the time permitted, the prime contractor (and its subcontractors) may suspend performance of work, without penalty, upon notice by registered mail or certified mail, return receipt requested. However, if the owner fails to make payment within the time permitted, the prime contractor may not suspend work until 30 days after notice was submitted, and after an additional 10-day notice is sent by registered or certified mail, return receipt requested of the contractor’s intent to stop work. Note: Adding all of this up, it means that if the owner agrees to make payment, but fails to do so, the prime contractor must wait a total of 100 days before suspending performance of work.
Step Two: Meet and Confer Conference
- If an owner denies a claim in whole or in part, or if the owner fails to respond to a claim within the prescribed time periods, the prime contractor may demand in writing an informal conference to meet and confer for settlement of the issues raised in the claim. The demand must be sent by registered mail or certified mail, return receipt requested.
- Upon receipt of a demand, the owner must schedule a meet and confer conference within 30 days. Upon receipt of a demand, an owner and prime contractor may, by mutual agreement, agree to waive the conference and proceed directly to litigation or arbitration, as applicable. Note: It’s unclear whether the conference must be held within 30 days or simply scheduled within 30 days. Further, while the statute presumably requires an in-person meet and confer conference, arguably, the parties can agree to meet and confer by other means such as by telephone, video conference, or, perhaps, even in writing, although that may stretch the definition of a “conference.”
- Within 10 business days following conclusion of the meet and confer conference, the owner must provide the prime contractor with a written statement identifying what portion of the claim remains in dispute and what portion is undisputed. Note: The use of the phrase “business days” suggests that the other deadlines set forth in the statute, such as the 30 day written statement deadline, 60 day payment deadline, etc., are all calendar days.
- For any undisputed portion of a claim, the owner must make payment within 60 days after the owner issues its written statement. Amounts not timely paid shall bear interest at the rate of 2% per month.
- If the owner fails to meet and confer within the time permitted, fails to provide a written statement within the time permitted, or fails to make payment within the time permitted, the prime contractor (and its subcontractors) may suspend performance of work, without penalty, upon notice by registered mail or certified mail, return receipt requested. However, if the owner fails to make payment within the time permitted, the prime contractor may not suspend work until 30 days after notice was submitted, and after an additional 10-day notice is sent by registered or certified mail, return receipt requested of the contractor’s intent to stop work.
Step Three: Mediation
- If, following the conference, an owner continues to deny a claim in whole or in part, the remaining portions of the claim still in dispute shall be submitted to mediation. The direct contractor and public entity shall share the costs of mediation equally.
- Within 10 business days of receipt of the direct contractor’s writing identifying those portions of the claim still in dispute, the owner and direct contractor must mutually agree to a mediator. If the parties cannot agree upon a mediator within the time permitted, the prime contractor may select the mediator to be used. Upon receipt of a demand, an owner and prime contractor may, by mutual agreement, agree to waive mediation and proceed directly to litigation or arbitration, as applicable. Note: Unlike Steps 1 and 2, the prime contractor is not required to submit its demand for mediation by registered mail or certified mail, return receipt requested.
- If the owner refuses to engage in mediation, the prime contractor (and its subcontractors) may suspend performance of work, without penalty, upon notice by registered mail or certified mail, return receipt requested.
- If mediation does not resolve a claim, disputed amounts later found to be owed shall bear interest at the rate of 2% per month beginning from the date on which those amounts would have been due had they not been disputed.
Does the new law apply to all private works projects?
No. The new law does not apply to residential construction projects if the project is not mixed use and does not exceed four stories.
Does the new law apply to private works contracts after January 1, 2026?
No. While the new law will take effect on January 1, 2026, it only applies to private works contracts entered into on or after January 1, 2026. Also, unless extended or repealed, the new law only remains in effect until January 1, 2030. Note: My guess, given that Public Contract Code section 9204 has already been extended once, and since Section 9204 is substantially similar to Civil Code section 8850, is that Section 8850 has a fair chance of being extended (if not made permanent) as well.
Can public entities waive or modify the requirements of the new law in their contract documents?
“No” to the first part, and “yes” to the second, with limitations. Owners, prime contractors and subcontractors cannot waive the requirements of the new law and, if they do so, such waiver shall be deemed void and contrary to public policy. However, owners, prime contractors and subcontractors may prescribe reasonable change order, claim and dispute resolution procedures, and requirements in addition to those provided under the new law, so long as they do not conflict with or otherwise impair the timeframes and procedures set forth in the new law. Note: I think one rather obvious question here is whether prime contractors will retain in their subcontracts provisions providing that, if the prime contractor pursues a claim by a subcontractor, that the subcontractor will pay the prime contractor its reasonable attorneys’ fees and costs in pursuing such a claim. My guess is that, absent a court finding that such a provision is not permitted under Section 8850, prime contractors will continue to use such language, and with the new statue coming into effect, even prime contractors who did not do so in the past will not begin to include such language in their subcontracts.
What if an owner fails to comply with the deadlines set forth under the new law?
Failure by an owner to comply with the deadlines set forth under the new law shall result in a claim being deemed denied in whole. A claim that is denied by reason of an owner’s failure to respond to a claim shall not constitute an adverse finding with regard to the merits of the claim or the responsibility or qualifications of the claim.
What about claims by subcontractors?
- A subcontractor on behalf of itself or on behalf of another lower-tier subcontractor (but, apparently, not suppliers), may request that the prime contractor submit a claim to an owner. The subcontractor must furnish reasonable documentation to support its claim and cooperate with the contractor in the meet and confer conference and mediation. The prime contractor must act in good faith and shall make no settlement of any claim to which the subcontractor does not approve, in writing.
- Within 30 days of receipt of the claim, the prime contractor must notify the subcontractor in writing as to whether the contractor presented the claim to the owner, and if the contractor did not present the claim to the owner, provide the subcontractor with a statement of the reasons for not doing so. Note: This is interesting. On one hand, the prime contractor must act in good faith if it decides to pursue a claim on behalf of a subcontractor, but can presumably give any reason at all (even a lame one) if it chooses not to pursue a claim on behalf of a subcontractor. To me, this suggests that a prime contractor is going to want to be pretty sure of a subcontractor’s claim before it pursues it, since the statute appears to gives a subcontractor an argument that the prime contractor did not act in good faith if the prime contractor decides to pursue a claim on behalf of a subcontractor.
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