Public Contract Code §5110, which took effect on January 1, 2004, provides California public works contractors with some but not complete protection when they perform work while bid challenges are ongoing.

The new statute allows public works contracts to be entered into while a bid challenge is pending. It provides that even if the contract later is found invalid, contractors can recover their reasonable costs of performance but no profit so long as the defects in the bidding process were "caused solely by the public entity." An example of such a defect would be when a public entity calls for a brand-name in violation of Public Contract Code §3400.

Other conditions to recovery include:

	The contractor must have proceeded based on "a good faith belief" that the public works contract was valid.
	The public entity must determine that the work was performed satisfactorily.
	The contractor must not have engaged in fraud in obtaining or performing the contract.
	The contract must not violate other statutes or constitutional provisions besides bidding laws.

Costs can be recovered for labor, services, materials and equipment provided up to the date the contract is determined to be invalid. But, the recovery is limited and cannot exceed costs as included in the bid plus the cost of approved change orders.

The stated purpose of §5110 is "to avoid unjust enrichment of the public entity and an unlawful taking of the contractor's property," according to AB 453, §1, by which §5110 was enacted.

Even so, §5110 expressly does not affect bid protests or legal proceedings - whether contractual, administrative or judicial - to challenge award of the public works contract or to enforce competitive bidding laws.

And, despite §5110, contractors remain at risk when they perform work pursuant to a disputed contract award if the contractor caused or potentially caused "any defects in the bidding process," such as filling out bid documents incorrectly. Courts have declared public works contracts void and invalid on the basis of contractor bidding errors, even after contractors have substantially performed the contract, thereby putting payments already made to the contractors at risk of disgorgement. See, e.g., Valley Crest Landscape, Inc. v. City Council, 41 Cal.App.4th 1432, 49 Cal.Rptr.2d 184 (1996).

Sponsors of §5110 acknowledged that there never has been an instance of a contractor, not at fault, being compelled to disgorge payments for work performed. But, they insisted that Wm. R. Clarke Corporation v. Safeco Ins. Co., 15 Cal.4th 882 (1997) had changed things. It holds that general contractors must pay their subcontractors even if the general contractor is not paid.

Contractors who may have made errors in bids and face bid protests would be well-advised to promptly consult counsel. They might find it advisable to withdraw their bids on the basis of their mistakes (Public Contract Code §§5101 et seq.) rather than go forward with the project and risk a disgorgement action.

Proponents and opponents of the bill divided in interesting ways. The bill was supported by the Contractor Employers Assn. and Associated General Contractors. It was opposed by the Engineering Contractors Assn., Marin and Sacramento Builders Exchanges, American Fence Contractors Assn., public owners and their associations. A prior version of the bill was vetoed and criticized as potentially making a gift of public funds.

AB 453 was signed on October 8, 2003, by former Gov. Gray Davis. It provides:

SECTION 1. It is the intent of the Legislature in enacting this act that a contractor subject to its provisions may be paid the reasonable cost, specifically excluding profit, of labor, equipment, materials, and services that were rendered under a contract that was competitively bid, but subsequently determined to be invalid, in order to avoid unjust enrichment of the public entity and an unlawful taking of the contractor's property. SEC. 2. Section 5110 is added to the Public Contract Code, to read: 5110. (a) When a project for the construction, alteration, repair, or improvement of any structure, building, or road, or other improvement of any kind is competitively bid and any intended or actual award of the contract is challenged, the contract may be entered into pending final decision of the challenge, subject to the requirements of this section. If the contract is later determined to be invalid due to a defect or defects in the competitive bidding process caused solely by the public entity, the contractor who entered into the contract with the public entity shall be entitled to be paid the reasonable cost, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor prior to the date of the determination that the contract is invalid if all of the following conditions are met: (1) The contractor proceeded with construction, alteration, repair, or improvement based upon a good faith belief that the contract was valid. (2) The public entity has reasonably determined that the work performed is satisfactory. (3) Contractor fraud did not occur in the obtaining or performance of the contract. (4) The contract does not otherwise violate statutory or constitutional limitations. (b) In no event shall payment to the contractor pursuant to this section exceed either of the following: (1) The contractor's costs as included in its bid plus the cost of any approved change orders. (2) The amount of the contract less profit at the point in time the contract is determined to be invalid. (c) Notwithstanding subdivision (a), this section shall not affect any protest and legal proceedings, whether contractual, administrative, or judicial, to challenge the award of the public works contract and enforce competitive bidding laws, nor affect any rights under Section 337.1 or 337.15 of the Code of Civil Procedure.

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For more information about the issues covered in this report, please contact W. Samuel Niece in our Silicon Valley office at 408-282-1842 or at wsniece@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





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