Garret Murai | California Construction Law Blog
Perhaps it should come as no surprise, but public entities get special treatment under the law, and when filing a claim against a public entity, in most cases, a claimant is required to file a claim with the public entity before filing suit under the Government Claims Act (Gov. Code §810 et seq.).
But, as the next case demonstrates, that’s not always the case. In Stronghold Engineering Incorporated v. City of Monterey, 96 Cal.App.5th 1203 (2023), the 6th District Court of Appeals examined whether a public works contractor that alleged an extended overhead claim was required to file a Government Claims Act claim before filing suit when its initial complaint was limited to a claim for declaratory relief.
The Stronghold Case
In December 2015, general contractor Stronghold Engineering Incorporated entered into a construction contract with the City of Monterey for the renovation of the City’s conference center and an adjacent city-owned plaza. The construction contract provided that any modification to the construction contract had to be approved by the City through a written change order. No surprise there.
However, the contract also included a somewhat ambiguously written (to my mind) dispute resolution procedure applicable to claims of $375,000 or less applicable to “[p]ayment of money or damages arising from work done by or on behalf the Contractor pursuant to this Contract and payment for which is not otherwise expressly provided for as the Contractor is not otherwise entitled.”
In early 2016, Stronghold and the City signed a change order to extend the completion date of the project. The change order provided that Stronghold:
waives its rights to any due compensable or excusable delays in time and money for all known and unknown knowledge of the project conditions, including unforeseen site conditions and errors and omissions in the drawings and specifications, with the exception of any major owner changes affecting the critical path of the schedule or Acts of God or of the public enemy, fire, floods, epidemics, quarantine restrictions, strikes and freight embargoes.
A dispute later arose regarding interpretation of the change order’s waiver language and, in December 2016, Stronghold filed suit against the City alleging a single cause of action for declaratory relief. Among other things, Stronghold’s complaint alleged that “[b]ecause this is an action solely for declaratory relief regarding the meaning, interpretation and legality of a contract, the Tort Claims Act [referring to an earlier name of the Government Claims Act] provisions are inapplicable.” Stronghold did not request any monetary damages in its complaint.
After the complaint was filed, the City filed a demurrer to the complaint contending that Stronghold was required to file a claim with the City under the Government Claims Act before filing suit. In February 2017, the trial court granted the City’s motion with leave to amend permitting Stronghold to amend its complaint. Following the City’s successful demurrer, and while the case was still pending, Stronghold filed three claims with the City under the Government Claims Act. In its claims, Stronghold asserted that the City had refused to approve proposed change orders due to excusable delays including unforeseen soil conditions, gas line conflicts, and design revisions.
In October 2019, Stronghold filed an amended complaint. In its amended complaint, Stronghold alleged four causes of action. In its first cause of action, Stronghold alleged that the City breached the construction contract by, among other things, not providing complete and accurate designs and refusing to issue change orders for modifications to the scope of work. In its second cause of action, Stronghold alleged, as it did in its initial complaint, that it was seeking declaratory relief from the court on interpretation of the construction contract. In its third cause of action, Stronghold alleged that the City breached the construction contract by refusing to issue change orders and pay for extra work. Finally, in its fourth cause of action, Stronghold alleged that the City violated the Public Contract Code by failing to promptly pay for work performed by Stronghold.
The City later moved for summary judgment arguing that the Stronghold’s entire suit was barred because Stronghold had failed to file a claim under the Government Claims Act before it filed its initial complaint. The trial court agreed and granted the City’ motion finding that Stronghold’s initial complaint was, in essence, a claim for money or damages and that Stronghold was required to file a claim with the City before filing its initial complaint under the Government Claims Act.
Stronghold appealed.
The Appeal
On appeal, the 6th District Court of Appeal noted that Government Code section 905 requires that “all claims for money or damages against local public entities’ be presented to the responsible public entity before a lawsuit is filed.” However, observed the Court, cases interpreting Section 905 had found that no claim is required to be presented to a public entity in “non pecuniary actions, such as those seeking injunctive, specific, or declaratory relief.”
“A declaratory judgment action provides litigants with quick, efficient means of resolving a disputed issue,” explained the Court of Appeal, “[u]nlike coercive relief (such as damages, specific performance, or an injunction) in which a party is ordered by the court to do or to refrain from doing something.”
Here, explained the Court of Appeal, Stronghold sought to resolve a dispute with the City as to whether it waived its right to seek payment of its extended overhead costs by signing the change order, and in its initial complaint for declaratory relief, Stronghold sought a judicial determination that the “City must compensate Stronghold for due compensable or excusable delays in time and money for any changes made by or caused by the City to the Project that negatively impact the critical path” (emphasis added).
Seizing on the term “compensate,” the City argued that Stronghold’s initial complaint was “in substance, a claim for ‘monetary damages’ under Government Code section 905 and that Stronghold was required to file a claim against the City before filing suit under the Government Claims Act. Whoa, not so fast (my eloquent words not the Court’s) held the Court of Appeals:
[I]n our view the initial complaint did not seek or attempt to show entitlement to damages of any kind. A declaratory judgment in Stronghold’s favor would establish the parties’ rights and duties related to delays under the contract and the first change order. But to obtain a money judgment Stronghold would need to further establish—either by change order or through a breach of contract action—that a particular delay was compensable under the contract and the first change order, as interpreted in the declaratory judgment. Despite its reference to an obligation to “compensate” Stronghold for certain types of project delays, the initial complaint sought only declaratory relief; it was not a complaint for specified money or damages and no advance claim was required.
To be sure, any future claim for money or damages based on the judicial interpretation Stronghold sought in the declaratory relief action would need to be preceded by a claim presented to the city. That is what occurred here, with Stronghold presenting three government claims before amending its complaint to add breach of contract causes of action. But those claims were not a prerequisite to the purely declaratory relief Stronghold sought through its initial complaint. We see a material difference between a judgment that defines the parties’ rights and duties under a written agreement versus a judgment that applies an interpretation to a specific factual scenario. As the latter case would potentially create an award of damages, it would require a prefiling claim, but the former does not.
The City further argued that Stronghold’s initial complaint was functionally equivalent to an indemnity action and that courts have concluded that a declaratory relief cause of action for indemnity as to certain damages is itself a claim for damages that must be preceded by a claim filed with a public entity under the Government Claims Act. “But unlike indemnity,” held the Court of Appeals, “where a defendant subject to a suit for damages seeking to hold a third party liable for those damages – here no damages would flow solely from a declaratory judgment entered in Stronghold’s favor.”
The City also argued that Stronghold “viewed its complaint as an alternative to a damages claim.” “But where an actual controversy exists,” held the Court of Appeal, “a party need not wait for a damages claim to arise or ripen before pursuing declaratory relief.” “A judicial declaration of the parties’ rights and duties would allow Stronghold to assess the viability of proceeding with a breach of contract action once such a cause of action has accrued. In the context presented here, we see the initial complaint not as an alternative to a damages claim, but as a permissible precursor to a potential damages claim.”
In addition, the City argued that, under the dispute resolution procedure, Stronghold was required to file a claim with the City before filing suit because Stronghold’s claim was less than $375,000. The City argued that Stronghold’s claim was less than $375,000 because Stronghold submitted a proposed change order in May 2017 which did not include a specific dollar amount, that Stronghold submitted another proposed change order in September 2017 seeking $826,589 for 182 days of delay at $4,541.59, and that if you calculate the number of day from the March 2017 delivery date of the project to when Stronghold first presented its proposed change order in May 2017 only 52 days had elapsed and when multiplied by Stronghold’s daily extended general condition rate it totals just $236,162.68. The Court of Appeal was not buying it. Without much fanfare, the Court held that “by the time that claim was presented to the city approximately 180 days after the March 2017 delivery date, the amount claimed for elapsed time was over $800,000. We conclude the agreed upon dispute resolution procedure does not apply.”
Finally, seizing on the word “done” in the dispute resolution procedure, the City argued that anticipated damages should not be used to calculate the amount claimed because they are based on work not yet “done.” However, the whole of a contract is to be taken together, explained the Court of Appeal, and “[o]ther provisions in the contract require Stronghold to submit notice of potential claims “prior to the time that the Contractor commences performance” and to bring disputes to the city’s attention “at the earliest possible time in order that such matters may be settled” and [r]eading those provisions together, we conclude that a claim by Stronghold for “money or damages arising from work done by or on behalf of the Contractor” may include both damages already accrued and reasonably anticipated future damages” and “[a]s Stronghold’s $826,569 claim was well over the $375,000 threshold, the pretrial dispute resolution procedure was not triggered.”
Conclusion
A lot of arguments by the City in that case. However, bottom line, is that a claimant does not need to file a claim with a public entity before filing suit under the Government Claims Act if the claimant’s claim is solely for declaratory relief and this still holds true if the claimant, after presenting a claim to a public entity under the Government Claims Act, later amends its complaint to allege a claim for monetary damages.
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