LEGAL ISSUES


High Court Addresses ‘Good Faith’ Disputes Under Prompt Payment Laws


By Garret Murai, Wendel, Rosen, Black & Dean, LLC


I


t’s been a rollercoaster ride. But the ride appears to be over. In United Riggers & Erectors,


Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, the California Supreme Court addressed whether a direct contractor can withhold payment from a subcontractor based on the “good faith dispute” exception of the state’s prompt payment laws if the “dispute” concerns any dispute between the parties or whether the dispute must be directly relevant to the specific payment that would otherwise be due. Te United Riggers decision


resolves the split of authority between Martin Brothers Construction, Inc. v. Tompson Pacific Construction, Inc. (2009) 179 Cal.App.4th 1401, which held that any bona fide dispute can justify withholding of retention, and East West Bank v. Rio School Dist. (2015) 235 Cal.App.4th 742, which held that only disputes related to the retention’s security functions can justify withholding payment.


United Riggers & Erectors, Inc. v. Coast Iron & Steel Co.


In 2010, Universal Studios, LLLP


contracted with Coast Iron & Steel Co. to provide “miscellaneous metals” work for Universal Studio’s then new Transformers ride, creatively named, Transformers: Te Ride. Coast, in turn, subcontracted with United Riggers & Erectors, Inc. to perform work on Te Ride. Not atypically, Coast’s subcon-


tract with United provided that Coast would withhold 10 percent of amounts billed by United as retention to be paid at the end of the project. By the


18 March/April 2019


end of the project, Coast owed United $149,602.52 in retention. As the project was getting close


to completion, Coast sent an email to United requesting that United submit its final change order log together with any outstanding change order requests. In response, United sent a letter to Coast demanding $274,158.40 as compensation for “the misman- agement and or delayed deliveries caused by Coast” as well as $78,384 in outstanding change order requests. In response, Coast sent an email to United stating, “I will see you in court!!” You can’t get better than that, even in the movies. In January 2013, United filed suit


against Coast seeking $446,857.42 in damages comprised of $149,602.52 in retention, $23,186.50 in unpaid change orders, and $274,068.48 in damages attributed to “missing parts, lack of communications by Coast, fabrication errors, delays in installation of steel and lack of transportation access.” United also alleged that Coast was subject to prompt payment penalties under Civil Code section 8814, which requires that direct contractors pay their subcon- tractors retention within 10 days after receipt of payment from the owner or be subject to prompt payment penalties of two percent per month unless there is a “good faith dispute.” Following a bench trial, the trial


court issued a statement of decision denying relief to United on all of its claims, finding that United had failed to follow the subcontractor’s proce- dures for submitting change orders and that United had failed to show that Coast was responsible for the extra expenses incurred by United. Te trial court further found that prompt payment penalties were not appropriate


because “there was a good faith dispute between Coast and United . . . that entitled Coast to withhold the payment of retention.” On appeal,


the Second District Court of Appeal affirmed as to United’s common law claims but reversed as to United’s statutory claim under the prompt payment statute, finding that limiting the good faith withholding exception to disputes specifically related to the specific payment at issue was more consonant with what the state legis- lature had contemplated when enacting the prompt payment statute. In short, Coast could not use the parties’ dispute over mismanagement of the project as the basis for a good faith withholding of United’s retention.


The Supreme Court Decision Te California Supreme Court


took the case on writ. While Civil Code section 8814 states that in cases of a “good faith dispute” the direct contactor may withhold up to “150 percent of the estimated value of the disputed amount,” noted the Supreme Court, the statute does not identify whether the “good faith dispute” must concern the work underlying the specific payment sought or whether the good faith dispute could involve any dispute between the parties. While the language of Civil Code


section 8814 is prone to competing constructions, stated the Supreme Court, “statutes relating to the same class of things, and sharing the same


Continued on page 19 California Constructor


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24