School District Cannot Withhold Retention When the Only Dispute Is Whether Contractor Is Entitled to More Money for Change Orders

In a decision that should be self-evident to most readers, the California Second District Court of Appeals held that a school district could not avoid prompt payment act penalties when the “dispute” it relied upon to hold retention longer than 60 days after project completion was a dispute over the contract price owed to the contractor for change orders and delay and disruption. In East West Bank v Rio School District (April 1, 2015) 2015 DJDAR 3677, the District at the end of the project withheld $676,436 in retention after project completion and after all stop notices were released. It was still holding the retention 10 years after project completion when the trial court issued its decision.

The only dispute after project completion was whether the contractor was entitled to more money for 150 proposed change orders. Pointing out that the purpose of the statute was to prevent public entities from wrongfully delaying the payment of retention, the Court noted that once the withholding was no longer necessary to provide security against mechanic liens and deficiencies in the contractor’s performance the funds should be released.  The District had no business holding the retention hostage as leverage to resolve the other disputed issues. The Court upheld the trial court assessment of the statutory 2% per month penalty.