California Supreme Court Holds That Contractors May Not Unreasonably Withhold Retention Payments

Until recently, there has been a split in the courts of appeal in California regarding the extent to which contractors are excused from the prompt payment requirement for retentions. One rule permitted contractors to withhold retention payments to subcontractors if there was any good faith dispute between them, whether or not the dispute was directly related to the work for which the retention was given. The other rule limited a contractor's ability to withhold retention payments to good faith disputes which specifically involved the work for which the retention was held.

At the heart of the issue was the interpretation of California Civil Code Section 8814. The statute states:

(a) If a direct contractor has withheld a retention from one or more subcontractors, the direct contractor shall, within 10 days after receiving all or part of a retention payment, pay to each subcontractor from whom retention has been withheld that subcontractor's share of the payment.

(b) If a retention received by the direct contractor is specifically designated for a particular subcontractor, the direct contractor shall pay the retention payment to the designated subcontractor, if consistent with the terms of the subcontract.

(c) If 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 percent of the estimated value of the disputed amount.

The case before the California Supreme Court, United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., involved work for Universal Studios in Los Angeles. Contractor Coast Iron and Steel Co. (Coast) entered into an agreement with Universal. Coast subcontracted some of the work to United Riggers and Erectors (United). Subcontractor United's invoices to contractor Coast included charges not specifically envisioned in the agreement between the parties. The additional charges arose out of change orders and added costs due to to Coast's alleged mismanagement of the project. Coast accepted United's work under the parties' agreement, but disputed the additional charges. On that basis, Coast withheld the entire final due payment to United, including the retention associated with the accepted work. United sued Coast, alleging that...