Analysis

Topic: Construction Contracts
Sponsor: Representative Gilbert
Committee: House Regulatory Reform
Date Introduced: March 21, 2001
Date Ordered Enrolled: June 6, 2001
Date of Analysis: June 13, 2001

Position: The Department of Consumer and Industry Services has no position on this bill.

Background: Public Act 57 of 1998 requires that an improvement contract between an contractor and a governmental entity exceeding $75,000 contain a provision that does the following:

· Provides notification of the governmental entity if a contractor discovers previously unknown physical conditions at a site.
· When receiving such a notice the governmental entity is required to promptly investigate the physical condition.
· If the governmental entity determines that the physical conditions do materially differ and will cause and increase or decrease in costs or additional time needed to perform the contract, the governmental entity shall make its determination in writing, provide an equitable adjustment, and modify the contract accordingly.
· Provides that the contractor cannot make claims for additional costs or time resulting from a physical condition unless the contractor has complied with the notice requirements. The governmental entity may extend the time required for notice.

If an improvement contract does not contain such provisions the provisions are incorporated into and considered part of the contract.

Similar bills were vetoed on two occasions by Governor Engler in 1996 (House Bills 4957 and 6197). The veto messages said in part that it was inappropriate to create a statutory mandate on specific contract provisions. Objection was also made in the veto of House Bill 4957 to a proposed new cause of action. House Bill 6197 did nothing to address the mandated contract provision problem, but it did attempt to address the cause of action issue. However, the proposed arbitration language created judicially enforceable provisions that essentially created the basis for breach of contract claims. In 1998 the Legislature revisited the issue in a third bill. The third bill had neither a new cause of action or arbitration provisions. Although the mandated contract language was still present, the bill contained a sunset provision. Governor Engler signed the third bill. Public Act 57 sunsets on December 31, 2001.

Bill Content: The bill eliminates the sunset of Public Act 57.

Arguments For: Clauses relating to differing site conditions protect contractors when they encounter conditions at the site that they could not possibly have anticipated when they entered into the contract. Typically, these conditions are underground and would not have been readily visible during the bidding stage. Such clauses help the governmental entity by reducing litigation costs when these unexpected conditions come to light.

Arguments Against: Government should not be mandating contract language. It is an unnecessary and inappropriate intrusion into essentially private business to mandate the inclusion of specific clauses in contracts. A governmental entity and a contractor have the opportunity to freely negotiate such provisions. There is good reason for them to incorporate such provisions into their contracts, but they should not be mandated to do so.

There is little evidence or documentation that the law has been effective in decreasing the number of lawsuits brought by contractors against government entities. An extension of the sunset rather than its elimination would have been preferable.

Positions: The Associated Underground Contractors of Michigan and the Michigan Municipal League support the bill. No opposition was expressed in the committee meetings on the bill.

Fiscal Information: There is no direct fiscal impact on State government. Arguably, if a contractor finds unanticipated conditions, they will have to be addressed in some way.

Administrative Rules Impact: There is no rulemaking authority associated with this bill.