Retention Not Withheld in California Case Where Dispute Existed

In 2010, Universal City (Universal) hired Coast Iron & Steel Co. (Coast Iron) to build a new ride at the Universal Studios Hollywood. Coast Iron subcontracted the installation of the metalwork to United Riggers & Erectors, Inc. (United Riggers). The initial subcontract between Coast Iron and United Riggers was for $722,742, but was increased by change orders to approximately $1.5 million. United Riggers completed its work to Coast Iron's satisfaction.

In August 2012, Universal made its final retention payment to Coast Iron. However, Coast Iron refused to pay any retention to United Riggers due to disputes over change order requests from United Riggers which increased the subcontract price by approximately $350,000. United Riggers then filed suit to collect these sums, including prompt payment penalties under California Civil Code Section 8814 for failure to timely pay retention. Coast Iron ultimately paid all of the $149,602.52 in retention owed to United Riggers during the litigation. After a bench trial, the trial court entered judgment in favor of Coast Iron. The Court of Appeal reversed the trial court's ruling on the statutory claim for failure to make timely retention payments. The California Supreme Court affirmed.

Under Section 8814, subdivision (a), if retention has been withheld throughout a project, a direct contractor must pay retention to its subcontractor within 10 days of receiving retention from the owner. However, under subdivision (c), "[i]f a good faith dispute exists between the direct contractor and a subcontractor, the direct contractor may withhold from the retention to the subcontractor an amount not in excess of 150% of the estimated value of the disputed amount." The question before the California Supreme Court was whether this exception allows withholding retention when there is any dispute between the parties, or only when there is a dispute directly relevant to the specific retention payment that would otherwise be due. The parties agreed that the adequacy of United Riggers' performance of the work, for which the retention was owed, was not in question. Instead, their dispute concerned whether United Riggers was owed monies over and above the subcontract price.

After considering the text, legislative history and purpose of Section 8814, the California Supreme Court concluded that the right to withhold retention from a subcontractor is limited to instances where there is a dispute over the specific payment in question. The Court noted that this interpretation comports with the statute's remedial purpose, which is "to ensure timely payment of undisputed amounts to contractors, without impairing the ability of payors to withhold amounts as security when the obligation to pay those specific monies is in doubt."

The Court held that a direct contractor may not withhold a retention payment that is part of an undisputed amount, simply because a dispute has arisen over whether additional amounts over and above the retention might also be owed. Allowing a direct contractor to withhold 150% of an undisputed amount would create a windfall—the direct contractor "would be able to secure for itself an interest-free loan of the additionally withheld amount … this is precisely the evil the Legislature sought to eliminate when it enacted [Section 8814]."

Luke Nicholas Eaton is an associate in the Construction Practice Group of Pepper Hamilton LLP, resident in the Los Angeles office. Luke's practice focuses on construction, business disputes and commercial collections, representing clients in both litigation and arbitration, in the United States and throughout Europe.

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Tuesday, 16 July 2019

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