Not Just Any Dispute: The California Supreme Court Instructs on Withholding Retention

Contractors, take note! If a direct contractor withholds retention from a subcontractor because of a payment dispute, it better be sure the dispute relates to the retention. So says the California Supreme Court in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., 2018 Westlaw 2188916, (May 14, 2018). United Riggers clarifies section 8814 of the Civil Code, which requires a direct contractor to release retention to subcontractors within 10 days of the contractor’s receipt of retention from the owner.

Any failure to comply could subject the contractor to prompt payment penalties of interest of 2 percent per month on the wrongfully withheld amount and attorneys’ fees. Unless, of course, there is a “good faith dispute” of the amount owed to the subcontractor. 

The Supreme Court reviewed what constitutes a “good faith dispute” and affirmed that a contractor withholding retention avails itself of this safe harbor only if the “good faith dispute” relates to a payment dispute involving the retention. In other words, to avoid violating the Prompt Payment Statutes, all retention proceeds must be paid when there is no dispute about the amount of retention owed the subcontractor.  

In United Riggers, Coast Iron & Steel Co. (“Coast”) withheld retention from its subcontractor, United Riggers & Erectors, Inc. (“United”), because United asserted extra work claims against Coast.

When the project completed, there were disputes between Coast and United about increased costs and extra work claimed by United. The amount of retention owed was, however, not in dispute. Nevertheless, because of the other payment dispute over extras, Coast withheld 150 percent of the disputed amount from the retention payment under the safe harbor provision of the Prompt Payment Statutes. 

Coast argued, unlike the other prompt payment laws, section 8814 does not specify that a good faith dispute must relate to the type of payment being withheld (i.e., progress or retention). Instead, any good faith dispute was sufficient. United argued, however, that such a restriction is implicit in the law because section 8814 deals with retention payments only.

Therefore, United asserted that a contractor could only withhold retention funds when a dispute existed about payment of the retention. 

The Supreme Court agreed with United. It held that not any dispute would insulate a contractor from violating the Prompt Payment Statutes and found that this section should be interpreted in conformance with the other prompt payment laws within this legal scheme, which specify that a good faith dispute must relate to the type of payment being withheld.

The Court balanced the remedial purpose of prompt payment legislation – to ensure timely payments – with the ability of payors to withhold amounts as security when an obligation to pay those specific monies is in doubt. 

The United Riggers case reinforces the importance of understanding California’s Prompt Payment Statutes. Contractors would be wise to observe this ruling and make a point to understand how to avoid these hazards.

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