case which can affect thousands of small businesses and potentially billions of dollars worth of contracts in the state of california the contracts in this case relate to the california high speed rail authority of projects which is one of the largest projects ever in the state of california maybe even in the united states the california prompt a minute that provides that lake penalty is towed by the high speed rail authority to s t v which was the prime contractor on this project continue to accrue until the high speed rail authority submit a claim schedule to the controller for payment or until the authority actually pays s t b directly in other words the la payment penalties that we're talking about here are occurring as we speak they have been going on for years and they will continue to accrue until these events happen that are set out in the prompt payment act set statues the legislature says set up mechanisms to assure that late payment penalties are paid and it set up which should have been a foolproof method to make sure that the contractors doing business with the state or paid promptly pursuant to the act the high speed rail authority should've paid s t v's invoices within forty five days of their submittal but it didn't pursuant to the its receipt of money from the high speed rail authority but unfortunately that didn't happen my client suffered substantial financial hardship because its invoices were not being paid within the approximate sixty days that we've outlined in the briefs we get the we get the sixty days because under the statute s t v was supposed to be paid within forty five days then when s t v was paid s t v was supposed to pay for systems within fifteen days so when ultra systems went into this project is a sub consultant or something if you need some contractor to s t v it had a very realistic expectation of having its invoices paid within approximately sixty days now in this particular case had to go back into the legislative history for the prompt payment act but i still interest still trying to figure out what's with your client whether to quote i don't you know i'm not quick i understand everything you've read your briefs and i read the statute but i'm trying to understand what your claim is the claim is for the late payment penalties that s t v should have collected from the state of california and should have paid pro rata to alter system so where is that in the contract it isn't in the contract so it is in the contract yes they were so i thought this was a breach of contract claim it started out as under the first amended complaint which was filed in the district court as a claim for breach of contract on the theory that the provisions of the prompt payment act in the contract between s t v and the state of california were incorporated by reference into the contract between s t v and alter and that's no longer the theory well that's still a theory that's was that motion was brought by s t v to dismiss that claim which the district court granted our appeal says that's a viable theory that we should be able to pursue so is that the is that is that your argument today i mean that in a second argument today your honor yes that and i'm the one you just outlined right now is that well through the language in the contract between s t v and ultra systems the language a particular provision of the contract between s t v in the state of california was incorporated by reference under that contract and specifically stated that s t v was to be paid in accordance with the government code section one twenty seven the theory is is that s t v had the obligation to pay alter systems the same prompt payment penalties that were owed by the state of california if it failed to pay for systems in voices within sixty days but that's the incorporation by reference that s t v had the same obligation to pay you that the state had to it would assert a theory based on the same factual situation that s t v had an implied obligation under its contract with ultra systems to collect the problem paying a penalty is due from the state of california implied obligation under the s t v alter systems contract to do what the contract supposed well you suppose that s p v would do namely collect the prompt payment penalties from the state and share them now does that fieri the breach of good faith implied good faith and fair dealing is the viability of that theory turn on the viability of your theory that nine twenty seven was incorporated by reference into the contract i don't believe so so i does it how is it a stand alone theory separate from your contract theory because under the contract between s t v and ultra systems s t v had the obligation to act in good faith under the prompt payment act the state of california was automatically required to pay the prompt payment penalties to s t v s t v did not pursue the collection of those prompt payment penalties and its ultra systems fearing that one of the reasons that this was done was that s t v had multimillion dollar contracts with the state of california connection with the high speed rail authority project that the highway high speed rail authority had a very limited budget and by not pursuing the collection of these late payment penalties asked he would rock the boat and would continue to receive this ongoing set of contracts for the high speed rail project asked if he was in a much better position to absorb the failure to pay prompting a penalty as that was my should not have blamed the prompt payment penalties that were due to that to the disadvantage of my client older systems that's that's what would have been you know breach of the cover of good faith and fair dealing to add new terms to the contract that's exactly what you'd be doing while we're not adding new terms to the contract actually under that is there anything in the contract today that says you have to share penalties and you have to go after them if they go after them and you have to share them with us well it would be an equitable to allow anybody is not mike that's not my question was is there anything in the contract that says s t v has to share they get from from their real for eighty i would i would say explicitly now ok implicitly because of the incorporation of the us a proper payment you're back to what judge well liberality of permitting amendments under roof of team would this amendment have been futile and if this theory that the judge did not let you it is tied to the incorporation of nine twenty seven in some way and further if we disagree with you on incorporation one twenty seven then doesn't necessarily follow that permitting amend it would be futile and that's what i think we're both trying to get  tell us why it wouldn't be futile if you lose on your first argument well the argument that we would have put forward if i had been allowed to amend the complaint as i've said before is that there would have been implied obligation on the part of v not to collect the money because it worked to the detriment of ultra systems and also it would have been equitable for ascii to collect prompt payment penalties based in large part on invoices from my client and many other subcontractors and then not be obligated to share those pump payment payment penalties with the sub contractors i may be a terrific one fall to s t v to be able to collect all that money and not have to share it with the authority there's future contracts coming yeah just forget about all these penalties i have a big question as to why he would walk away from that much money i mean under the prop payment statute if the high speed rail authority had to pay out the prompt payment penalties it could it was not allowed to go back to the state of california and ask for more money for this project just because it had to pay the late start by first while putting things into perspective i think it's evident from your comments that you understand the factual background but and let me say that when i use the term consultant agreement i'm referring to the prime contract that is the contract between the state agency and us t v and when i use the term sub consultant agreement i'm referring to the agreement between s t v and alter systems accordance with section one twenty seven which the court has indicated it is read and as the court no doubt knows that section only applies to the state's obligations to s t v yet has statute absolutely wrong but you can negotiate that absolutely they could have negotiated such a provision but they did and nowhere in the prime agreement or in the sub consultant agreement will you find any provision whatsoever which indicates any obligation by us to be to pay proper name and penalties to ultra systems and and i'd like to first note a series of admissions which when you pull them together are just completely fatal to the cause of action for breach of contract first of all the consultant agreement does not state anything with respect to payment to alter  specifically in the specified in government code chapter four point five commencing with section nine twenty seven ok that's all it sets doesn't anymore in them and so what is section nine twenty seven said ok you turn to section one twenty seven it quite clearly states it only applies to state agencies obligations to their contractors the only place in in the in the california prop a man act where there is any discussion at all about the contractor in this case the design professionals obligation to pay a sub consultant is in nine twenty seven point one zero and there you will see a very plain statement that the state encourages the choir but it encourages the the vendor to pay its sub consultants promptly what is what is that sentence that jamie payment will be made in accordance with i do and within that time period both so that that doesn't have any significance at all it has no significance whatsoever to s t v or to alter systems keep in mind this is not in the sub apply to the obligations of s t v the tortured argument that has been made by ultra systems is that the plain language of the act should be changed by th should be completely changed to say something it doesn't say it only applies to the states obligations it doesn't apply to us to s t v as obligations to its sub consults fights very terms at and i want to point out to your honor this torture the interpretation of section twenty nine twenty seven which would obligate s t v to make prompt him with penalties to to alter systems and in fact the it goes that this can affect small businesses and billions of dollars in construction agreements and that's the danger here because what they're asking you to do that would have implications far beyond this case because what there are  of product payment penalties even when they are not paid to that to that prime contractor so in other words in your honour's will know that there are pro payment statutes throughout the various codes in california the government code business and professions code and the civil code have various prop a mn penalty statutes and they're similar t one thing that they they all require that once a vendor is paid in fall like s t v they have an obligation to properly pay for their subcontractors or sub consultants and by the way is there any in the in the sept prime subcontract agreement that that imposes any time limits or any well yonder we don't even need to address that yes but there's no reason to address it because it is conceded that once s t v was paid for  the sub didn't kick in until s t v we see ved payment on its invoice pursuant to the contract that is correct so you and we did pay promptly once we were paying his argument is that you either waived your right to prompt payment for the state or drag your feet with respect to prom payment for the state from some other reasons that probably aren't in the record that some of violates either the first of all the statutes the proper payment penalty statutes are only triggered when the prime contractor or prime consultant here s t v is first paid by the state and that makes sense because the penalties kick in once you're paid on behalf of or s t v is paid on behalf of alter systems it has an obligation to promptly pay its downstream vendors that occurred here that is not in dispute it is conceded that asked whether or not the breach of the implied covenant with good faith and fair dealing turns on the viability of the breach of contract claim it absolutely does under the gust versus back to case the root regime case and others they quite clearly state that this the purpose of the covenant of good faith and fair dealing is to not get used to it so that one party cannot deprive the other frustrate their ability that is to the benefit of the underlying contract here the underlying contract does not provide for proper name and penalties so there is no it so so quite clearly there in the absence of such an obligation under the sub consultant agreement here and i think it's pretty clear that sub consultant agreement does no tortured way provides for the prime payment a proper name and penalties because that obligation does not it in a good faith and fair dealing cannot independently create that obligation because it never exist in ever existed to begin with and as to your point that it was waived well as is pointed out in the papers and is stated quite clearly in the in the act it's not waive a bill it was not waived it's not wave a ball they were not collected that is the penalties were never collected for reasons wouldn't kick in until they receive payment right from the state correct correct and that's in the cut and that's that obligation is in the contract it has to do with payment of the underlying in is there any allegation that s t v waited to submit its invoices to the state of california after having received you know collected in submitting a request for payment from the state and that breached the implied covenant of good faith and fair dealing i suppose if the answer is i don't know i haven't thought and was there in the district court and the discussion of what claim the plaintiff would add and the outlines of that claim at the time the motion to dismiss was either briefed or argued i believe your honor that yes there was the argument made in the in the opposition to the motion to dismiss that they would like to make a claim on the basis of the cove in fact specifically dealt with the question of you to that is correct your honor and i want to point one other thing out too and that is with regard to the opportunity by alter systems to seek penalties directly from the state they they sued the state for these very penalties so if they thought that they were somehow the beneficiary of this statute section one twenty seven they were given every opportunity to seek those penalties directly from the state and what did they do they dismissed the state they dismissed the state so here we are it is s t v stuck between a dispute stuck between two parties the and we're every bit the victim of the state budget i want to share in the profit in that in the penalty we want to share in the penalties that's exactly right and we don't understand why s t v would not collect the money from the state of california when it was automatically due there was no need to even submit a separate invoice under the proper payment act it's automatically do the money continues to accrue as i said before it's a crewing as we speak here today now counsel raised the question of having alter systems have a name the high speed rail authority in its earlier version of a complaint the predecessor council was convinced that there was no privity of contract between ultra systems and the high speed rail authority and decided to dismiss that claim without prejudice i think it was the right call our claim is against s t v the part of it we weren't privy of contract with and have the s t v alter systems contract which incorporates my reference the whole understanding of the party s was that s t v would be paid promptly by the state of california within the forty five days allowed  so you know i go they got a few seconds left here but that count state of california legislature set up a system that's mostly full proof and said when the invoices are going to be paid what the penalties would be if you didn't pay it they set