LEGAL ISSUES The Retention Withholding Quandary


Differing Court Decisions May Necessitate State’s Top Court to Ultimately Step in for Final Say By Mary Salamone & Anthony Niccoli, AALRR


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alifornia’s prompt payment statutes generally require public owners to release any


retention they have withheld from general contractors within 60 days following completion of a public work of improvement, while private owners are required to release retention within 45 days of completion. Tese statutes also require general


contractors on public works to pay their subcontractors retention within seven days, while they require general contractors on private works to pay their subcontractors retention within 10 days of receipt of retention proceeds from the project owner. Failure to pay retention proceeds within these time periods results in liability for a penalty of two percent per month of any improperly withheld funds, including attorneys’ fees and costs.


Confusion Around Statues Public Contract Code § 7107


related to public works and Civil Code §§ 8812 and 8814 related to private works sets forth an exception to the prompt payment statutes, authorizing owners and general contractors to withhold from retention proceeds a sum equal to 150% of the value of a good faith dispute between the parties. However, these statutes are silent as to the type or nature of the “disputes” that qualify for the purposes of withholding retention proceeds, which led to a great deal of confusion and conflicting decisions regarding the effect of individual disputes on owners’ and general contractors’ prompt payment obligations. Te courts appeared to have


resolved this confusion in 2009 when the Tird District Court of Appeal decided in Martin Brothers Construction, Inc. v. Tompson Pacific


14 May/June 2016


trial court’s judgment holding that because there was no dispute regarding retention payments themselves, the district was required to pay the contractor within the time specified by statute, regardless of whether there was a bona fide dispute regarding duties not related to the retention amount. Te East West Bank decision created


Construction, Inc. that Public Contract Code § 7107 authorized withholding of retention proceeds for seemingly any good faith dispute or controversy, regardless of the nature or subject matter. Tus, Martin Brothers took a more liberal definition of dispute, giving owners and general contractors significant latitude when deciding whether to withhold retention. In April 2015, however, Division


Six of the Second District Court of Appeal in East West Bank v. Rio School District disagreed with Martin Brothers, issuing a decision that restricted the types of disputes that qualify for the purpose of withholding retention under Section 7107. Te Second District Court of Appeal held that Section 7107’s “safe harbor” withholding provision does not apply to disputes over the contract price, such as those dealing with extra work claims or differing site conditions.


The East West Bank Case In East West Bank, a school district


contracted with a contactor to build a high school. Te school district refused to pay for most of the contrac- tor’s change orders, to release retention payments, or to pay other damages upon completion of the project. Te contractor sued, and after a bench trial, the trial court found in favor of the contractor, awarding damages that included statutory penalties. Te appellate court affirmed the


a split of authority among Califor- nia’s appellate courts over the proper interpretation of Section 7107, reviving much of the uncertainty that existed prior to the Martin Brother’s decision. In December 2015, Division One


of the Second District Court of Appeal in United Riggers & Erectors v. Coast Iron & Steel, once again, explicitly declined to follow Martin Brothers and reaffirmed the East West Bank holding.


United Riggers Case In United Riggers, Coast Iron


and Steel (Coast) was the general contractor on a project for Universal Studios Hollywood. Coast in turn signed a purchase order that served as a subcontract agreement with United Riggers & Erectors, Inc. (United). In accordance with the subcontract, Coast withheld 10 percent of each progress payment to United as retention. At the project’s conclusion, in


addition to demanding payment, United also made a claim for unpaid change orders and delay and disruption damages. In response to United’s claim, even though Coast did not dispute the retention was due and owed, it withheld retention proceeds from United citing a good faith dispute over the fact that United had change order, delay and disruption claims against it. Te trial court found there was


a good faith dispute between Coast and United that entitled Coast to withhold the payment of retention and awarded Coast its attorneys’ fees as the prevailing party. United appealed.


California Constructor


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