Pay Your Retention Fund Forward

Fortin Law Group

Published: January 30, 2019

It is common for a contractor to retain a small percentage of payments to a subcontractor as protection against non-performance and potential liens. If the subcontractor does not perform or asserts a lien, the contractor has funds to complete the project or make payment. (United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal. 5th 1082, 1086).

The contractor must forward retained funds to the subcontractor within 10 days of receiving payment from the owner. (Id. at 1089). However, Civil Code §8814 provides an exception: if there is a good faith dispute about payment, the contractor may withhold 150 percent of the retention fund. (Id.; Civil Code §8814 (c)). In United Riggers, the California Supreme Court recently addressed a split of authority and held that this exception is limited to disputes that are directly relevant to the retention fund. (supra at 1085).

There, Coast Iron Steel & Co. subcontracted with United Riggers for the installation of metal on Coast Iron's project. Coast Iron agreed to make monthly progress payments, minus a 10 percent retention. (Id. at 1086). After a series of change orders and increased expenses, United Riggers' final bill was $274,158.40 over the original contract amount. (Id.). Once the project was complete, Coast Iron refused to pay United Riggers any of the retention funds because it disputed the increased final bill. (Id.).

United Riggers sued Coast Iron for penalties from delayed payment. (Id.). The trial court entered judgment for Coast Iron. On appeal, United Riggers argued the good faith dispute exception should be limited to disputes specifically related to the retention funds, not disputes related to increased bills. The appellate court agreed and reversed, finding the good faith dispute exception inapplicable. (Id. at 1087).

Coast Iron appealed to the California Supreme Court, urging the Court to interpret Civil Code §8814 broadly to provide an exception for all disputes because the statute is not explicitly limited to disputes over retention funds. (Id. at 1089, 1095). The Court affirmed the Appellate Court's ruling because reading a broader exception in to the statute would disregard the legislative intent-to ensure that parties are timely paid, and to provide recourse if they are not. Coast Iron did not dispute that it owed the retention funds to United Riggers. Allowing Coast Iron to withhold 150 percent of the retention fund would create a windfall, where Coast Iron secures an interest free loan of the additionally withheld amount. (Id. at 1092). Disputes over the final contract price should be resolved separately from retention funds. All undisputed bills must be paid in a timely fashion. (Id. at 1093). The Legislative history of similar laws supports this finding, although there is no express provision limiting the good faith dispute exception to retention funds. (Id. at 1093-1094).

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This article was provided by Fortin Law Group, Costa Mesa, California. This article is intended to provide the reader with general information regarding current legal issues. It is not construed as specific legal advice or as a substitute for the need to seek competent legal advice on specific legal matters.

Tags: 2019, Construction

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