Prompt Payment – What Do Owners and Generals Have the Right to Withhold?

Under California Civil Code section 8814, if a direct contractor has withheld a retention from a subcontractor, the direct contractor must pay the subcontractor the retention amount within 10 days of receiving a retention payment, unless a “good faith dispute exists between the direct contractor and the subcontractor.” In turn, section 8818 provides that if an owner or direct contractor does not make retention payments as required by section 8814, then the owner or direct contractor is liable for a penalty of 2 percent per month on the amount wrongfully withheld.

So what then constitutes a “good faith dispute?” Under Martin Bros. Constr. Inc. v. Thompson Pacific (2009) 179 Cal.App.4^th 1401, a “good faith dispute” for private projects included both contract price disputes and change order disputes; however, in East West Bank v. Rio Sch. Distr. (2015) 235 Cal.App.4^th 742, the Court of Appeals held that a “good faith dispute” in a public project did not extend to disputes over change orders. Once the legitimate purpose for retaining the funds ends, the public entity must release the funds or suffer the statutory penalties.

Seems straightforward enough, right? On private projects, a good faith dispute means contract price disputes and change order disputes, on public projects it only means contract price disputes.

Enter United Riggers & Erectors v. Coast Iron & Steel, Co. (2015) 243 Cal.App.4^th 151, which extends the East West Bank decision from the public works context to private projects. In the matter, Coast Iron withheld retention from United Riggers for claimed additional change order costs and damages related to mismanagement. The trial court found in favor of Coast Iron, citing Martin Bros.; however, the Court of Appeals reversed, citing East West Bank, holding that allowing Coast Iron to withhold retention when there was no dispute that it was owed (under the contract) would “unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.”

The takeaway – There is a current split of authority in the California Court of Appeals as East West Bank, and United Riggers came out of two different districts. Now we wait to see if the California Supreme Court will take up the issue.