Construction-Related Performance Relating To Retention Amount, Third Party-Lien Disputes, Or More Than Agreed-Upon Payments To Subcontractor Are Allowable Grounds For Delayed Payment, With The Holding Having Implication On Statutory Penalties and Attorney’s Fees For Delayed Payment Of Retentions.
California, for both private and public projects, has enacted prompt payment statutes relating to owner/direct contractor retentions, with delayed payments of retentions potentially leading to statutory penalties and attorney’s fees to the prevailing party. (See, e.g., Civ. Code, § 8818(a), (b).) However, they only kick in if the direct contractor withheld paying out a retention because there was a good faith dispute between the parties. Intermediate appellate courts had come to conflicting resolutions of the “dispute between the parties” language in Civil Code section 8814(c), namely, whether the exception allows withholding when there is any dispute between the parties or only when there is a dispute directly relevant to the specific payment otherwise due.
The California Supreme Court resolved that conflict in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., No. S231549 (Cal. Sup. Ct. May 14, 2018) (8-0 opinion authored by Justice Cuellar).
Our state high court went for the narrower construction, meaning that the dispute must relate to construction work relating to a retention payment due, unlike the dispute over contract extras at issue in United Riggers & Erectors which would effectively give the direct contractor an interest-free loan (an evil which inspired passage of the prompt payment statutes in the first place). Here is what can be done: “Consistent with this rule, a direct contractor may delay payment when the sufficiency of the subcontractor’s construction-related performance is the subject of a good faith dispute, when liens or other demands from third parties expose the direct contractor to potential double payment, or when the payment would result in the subcontractor receiving more than the minimum amount both sides agree is due.” Here is what cannot be done: “What a direct contractor may not do is withhold a retention that is simply part of that undisputed minimum amount, because a dispute has arisen over whether additional amounts over and above the retention might also be owed.” The bottom line is this: “In effect, the payor must be able to present a good faith argument for why all or a part of the withheld monies themselves are no longer due.” (Slip Opn., p. 19.)