Silva & Hill Constr. Co. v. Employers Mut. Liab. Ins. Co.

• Decision Date: 07 September 1971
• Citation: 97 Cal.Rptr. 498,19 Cal.App.3d 914
• Court: California Court of Appeals Court of Appeals
• Parties: SILVA & HILL CONSTRUCTION CO., Inc., Plaintiff and Appellant, v. EMPLOYERS MUTUAL LIABILITY INSURANCE COMPANY, Defendant and Respondent. Civ. 35699.

Page 498

97 Cal.Rptr. 498

19 Cal.App.3d 914

SILVA & HILL CONSTRUCTION CO., Inc., Plaintiff and Appellant, v. EMPLOYERS MUTUAL LIABILITY INSURANCE COMPANY, Defendant and Respondent.

Civ. 35699.

Court of Appeal, Second District, Division 2, California.

Sept. 7, 1971.

Hearing Denied Nov. 4, 1971.

William H. Brawner, and Ralph J. McGookin, Los Angeles, for plaintiff and appellant.

Spray, Gould & Bowers, Los Angeles, for defendant and respondent.

COMPTON, Associate Justice.

Plaintiff Silva & Hill Construction Company, Inc. commenced this action against its insurer, Employers Mutual Liability Insurance Company, alleging defendant's failure to defend and pay claims as provided by the terms of a liability insurance policy. Judgment was in favor of the plaintiff for $18,283.38 plus interest.

Plaintiff appeals from a portion of the judgment disallowing recovery in the amount of $31,000 for one item of damage allegedly sustained by plaintiff.

Defendant did not appeal.

This court in an opinion filed November 20, 1970, affirmed the trial court's judgment. After granting a hearing our Supreme Court transferred this matter to this court 'for reconsideration in light of section 14376 of the Government Code.'

The pertinent facts are undisputed and unchanged from those discussed in our original opinion, 12 Cal.App.3d 1086, 91 Cal.Rptr. 365, a copy of which is appended.

In its petition for rehearing in this court and for a hearing in the Supreme Court, plaintiff urged that our opinion cast doubt on the validity of Government Code section 14376.

Following the Supreme Court's referral for reconsideration, the Engineering and Grading Contractors Association obtained permission of this court to file an amicus curiae brief challenging the constitutionality of Government Code section 14376. We, in turn, invited the Attorney General and the Department of Public Works to file amicus curiae briefs in response.

THE APPLICABILITY, VALIDITY AND EFFECT OF GOVERNMENT CODE SECTION 14376

Section 14376 of the Government Code provides in pertinent part that 'Every (state) contract Shall contain a provision in regard to the time when the whole or any specified portion of the work contemplated shall be completed, and shall provide that for each day completion is delayed beyond the specified time, the contractor shall forfeit and pay to the State a specified sum of money, to be deducted from any payments due or to become due to the contractor.' (Emphasis added.)

Section 14376 is an integral part of a comprehensive statutory scheme governing the erection, construction, repair and improvement by the state of its buildings, roads and other structures. ¹ The statute represents an express legislative effort to protect the State of California from the consequences of delay in the completion of state construction projects. As such, section 14376 serves to protect the state in two ways. First, it insures that the state will be at least partially reimbursed for additional costs, lost public benefits, overhead expenses, etc., incurred as a result of the contractor's overrun. Secondly, it encourages the contractor to work towards a timely completion of the work.

California is not alone in its imposition of such late charges. Each of the fifty states and the Federal government have devised similar provisions for the imposition of pre-set damages to be paid by the contractor. Nor is such a provision to be found only in state construction contracts. 'It is commonly provided in building and construction contracts that there shall be deducted from the contractor's compensation a fixed sum for each day's delay in performing the contract beyond the day fixed therein.' (5 Williston on Contracts, 3d Ed., § 785, at 733; see also 5 Corbin on Contracts (1964 Ed.) § 1072, p. 402.)

Plaintiff contends that the trial court erred in characterizing the late charge as a penalty. It is argued that section 14376 is a legislative determination that late charges imposed in state contracts are by law liquidated damages within the purview of Civil Code section 1671. ²

We are unaware at this time of any cases in California which have considered the operation of section 14376 in light of the proscriptions of section 1670 of the Civil Code. ³ Courts in other jurisdictions have found that where a public entity and a private contractor expressly agree that indeterminable damages will result from the late completion of a highway, a precalculated late charge is binding on both parties. In Six Companies of California v. Joint Highway Dist. No. 13, D.C., 24 F.Supp. 346 (affirmed, 9 Cir., 110 F.2d 620; reversed in part on other grounds, 311 U.S. 180, 61 S.Ct. 186, 85 L.Ed. 114) the court found that since it would be impossible to measure the damage resulting from tardy Statutes are to be interpreted and applied in the light of their historical background and evident objective. (H. S. Mann Corp. v. Moody, 144 Cal.App.2d 310, 320, 301 P.2d 28.) "It is the general rule that where the general statute standing alone would include the same matter as the special act, and thus conflict with it, the special act will be considered as an exception to the general statute whether it was passed before or after such general enactment." (In re Williamson, 43 Cal.2d 651, 654, 276 P.2d 593, 594; People v. Gilbert, 1 Cal.3d 475, 479, 82 Cal.Rptr. 724, 462 P.2d 580, and cases cited therein; see also 45 Cal.Jur.2d, Statutes, § 120.) Civil Code section 1670 was enacted in 1872 and represents the Legislature's general desire to prevent the inclusion of penalty clauses in contracts absent the circumstances found in section 1671. Conversely, section 14376 was enacted in substantially its present form in 1909. Since that year the section has been made a part of the 'State Contract Act.' As noted, section 14376 has always been part of the state's comprehensive scheme governing its construction responsibilities and as such represents the Legislature's concern over the control and management of the millions of dollars spent annually on the construction of state highways and buildings.

completion of a highway, a liquidated damage provision in the contract between a highway district and a construction company was binding on the construction company in that it conformed with the provisions of section 1671 of the Civil Code. Other jurisdictions have similarly bound construction companies to liquidated damage clauses where it was stipulated at the time the contract was drafted that late completion of the highway would cause incalculable inconvenience and damage to the public. (Bethlehem Steel Corporation v. City of Chicago, 7 Cir., 350 F.2d 649; Dave Gustafson & Co. v. State, S.D., 156 N.W.2d 185.)

It is our conclusion that section 14376 of the Government Code is in effect a legislative determination that late charges imposed on a construction company by a state contract fall within the provisions of section 1671 of the Civil Code and as such are valid liquidated damages. This conclusion is compelled by the fact that section 14376 is a special statute enacted in response to unique circumstances. Thus, the character of the contracts to which section 14376 applies, the widespread use of liquidated damage provisions in such contracts, and the protection afforded the public by such provisions are factors which provide a reasonable basis on which the Legislature could properly take notice that the nature of state construction projects makes it 'impracticable or extremely difficult to fix the actual damage' caused by a contractor's late completion of a state project. (Compare: Robinson v. United States, 261 U.S. 486, 488, 43 S.Ct. 420, 67 L.Ed. 760.)

In the amicus brief filed by the Contractors Association it is urged that section 14376 is invalid in that it unconstitutionally sanctions the taking of property without due process of law. The thrust of the Association's argument is that section 14376 does not provide adequate standards by which a 'specified sum' is levied, and fails to provide for an administrative hearing procedure to determine the 'specified sum.'

The amicus brief of the Contractors Association fails to appreciate the status of plaintiff's appeal. The ultimate issue in the instant case is whether defendant's policy provided coverage for the damage sustained to the highway and for the $31,000 late charge. The facts presented do not call into question the constitutionality of the procedure by which the late charges were levied. Such an issue might be presented if plaintiff had contested the state's ability to withhold the sum from the money due under the contract. Here neither party contests the Procedure by which the state imposed the late charge on plaintiff, the question is who shall pay it.

Government Code section 14376 simply mandates the inclusion of a charge for tardy performance in state construction In resolving the dispute between the parties to this action we need go no further than to conclude that the Legislature was well within its constitutional power in requiring such a provision in state contracts and in so doing exempted the late charges from the prohibition of Civil Code section 1670.

contracts. The implementation of this requirement is to be found in the contract between the parties and the Standard Specifications promulgated by the Department of Public Works.

Assuming that we were to find section 14376 unconstitutional, such a result would not, as will be seen below, alter the final outcome of this appeal. If section 14376 did not properly sanction the imposition of the state's late charge, plaintiff would, as noted in our original opinion, still have failed to carry its burden of proof and defendant could not be held liable for plaintiff's loss.

In light of the above analysis, it is clear that the trial court erred in characterizing the $31,000 late charge as a penalty. This conclusion, however, is not determinative of plaintiff's appeal. The issue now framed...