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California High Court Finds Contractor Liable for Penalties Where Retention Withheld for Unrelated Dispute

By June 12, 2018May 23rd, 2024No Comments

May a contractor withhold retention payments when there is a
good faith dispute of any kind between the contractor and a subcontractor not
involving the retention itself?

The California Supreme Court has said no in the recently decided
case of United Riggers & Erectors, Inc. v. Coast Iron & Steel Co
After an in depth analysis of the statutory language and the legislative
intent, the court said they agree with a narrower construction. “Controversies
concerning unrelated work or additional payments above the amount both sides
agree is owed will not excuse delay; a direct contractor cannot withhold
payment where the underlying obligation to pay those specific monies is

“What a direct contractor may not do is withhold a retention
that is simply part of that undisputed minimum amount, because a dispute has
arisen over whether additional amounts over and above the retention might also
be owed. In effect, the payor must be able to present a good faith argument for
why all or a part of the withheld monies themselves are no longer due.”

Coast Iron, the prime contractor and United Riggers, the
subcontractor, disagreed about whether Coast Iron owed United Riggers
additional amounts for increased expenses it incurred as a result of Coast
Iron’s mismanagement of the project. Coast Iron refused to pay.

In the meantime Coast Iron received the retention that covered
United Riggers’ performance and withheld United Riggers’ retention
payments on the basis of this dispute, citing Civil Code Section 8814(c), which
provides that “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 resolution of the disagreement thus turned on whether Civil
Code Section 8814(c)’s exception to timely payment of retention applied to any
good faith dispute or only a dispute that was directly relevant to the
retention payment.

The court held there “was never any good faith argument over
Coast [Iron]’s underlying obligation to pay over the retention, which it
eventually did, but the intervening delay granted Coast [Iron] a no-interest
loan and punished United Riggers for seeking additional compensation, in
contravention of the Legislature’s purposes to end such loans and reduce
payors’ abuse of their superior leverage.”

Read the entire
Supreme Court opinion here.

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