CA Supreme Court Clarifies Contractor Prompt Payment Provisions by Chris A. McCandless

(United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082)

By Chris A. McCandless, Esq.

Contractors are not in the business of financing construction projects. Far too often, though, owners holding construction funds due to prime contractors, and prime contractors holding funds due subcontractors, find reasons to delay payment, even when work had been diligently and correctly performed. California’s prompt payment laws are intended to combat such problems and ensure contractors and subcontractors are timely paid. The California Supreme Court’s recent decision in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082 (United Riggers) resolves ambiguity and limits the extent of the “good faith dispute” exception found in many of these prompt payment statutes.

Prompt payment statutes are found in multiple code sections, primarily in the Business and Professions Code (§§ 7108.5 and 7108.6), the Civil Code (§§ 8800, 8802, 8812, and 8814), and the Public Contract Code (§ 7107 and 10262.5). Generally, these sections require owners to pay contractors, and contractors to pay subcontractors, within specified time periods. Thus, for these parties that might otherwise lack leverage, the statutes are intended to provide recourse in the event they are not timely paid. These laws accomplish this by providing a legal remedy and, in most cases, a right to recover additional interest or penalties in lieu of interest, plus attorneys’ fees and costs, making the remedy significant and the incentive to avoid a violation substantial.

With that said, many of these statutes contain exceptions making them inapplicable. One such exception is commonly referred to as the “good faith dispute” exception. Business and Professions Code section 7108.5, for example, requires contractors to pay subcontractors within seven days of receipt of each progress payment, unless otherwise agreed to in writing. But, where there is a “good faith dispute,” the contractor may withhold up to 150 percent of the disputed amount. Over the years, the scope and application of this exception, and similarly worded exceptions in other prompt payment statutes, has been debated and litigated, with some courts applying the exception so broadly that the exception all but swallowed the rule.

Most notably, in Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. (2009) 179 Cal.App.4th 1401 (Martin Brothers), the Third District Court of Appeal considered the exception in Public Contract Code section 7107, which allows a prime contractor to withhold up to 150 percent of a disputed amount from a subcontractor's portion of retention proceeds if a “bona fide dispute” exists. There, the Court of Appeal concluded that the exception applies “to any good faith dispute between a general contractor and subcontractor,” including a subcontractor’s claim for extra work. In that case, therefore, even though the subcontractor had performed its work and had otherwise earned its retention, the prime contractor avoided the application of prompt payment statutes by relying on a dispute unrelated to the retention payment it withheld.

For years, contractors and their lawyers have relied on the broad interpretation of the good faith dispute exception discussed in Martin Brothers. Now, through its United Riggers decision, the Supreme Court has expressly disapproved of the Martin Brothers Court’s interpretation. Instead, the Court holds that the good faith dispute exception applies only when there is a dispute directly relevant to the specific payment that would otherwise be due.

In United Riggers, the Court specifically considered Civil Code section 8814, a prompt payment statute that applies to private works, and requires prime contractors to pay retention to subcontractors within 10 days of receipt of funds from the owner. Section 8814, like other prompt payment statutes, includes a good faith dispute exception. In that case, there was no dispute over the quality of the subcontractor’s work, and no dispute that the prime contractor withheld retention funds after receiving the same from the owner. Like the subcontractor in Martin Brothers, however, the subcontractor claimed additional compensation for extra work, and the prime contractor disputed those claims. In turn, the prime contractor relied upon the dispute to justify its retention withholding, and to avoid a violation of the prompt payment law. The Supreme Court rejected this justification.

In the decision, the Court referred collectively to California’s prompt payment statutory scheme and remedial purpose, finding that all prompt pay statutes share the same intent and policy and should, therefore, be harmonized and construed similarly, notwithstanding slight variations in statutory language. Considering their remedial purpose, the Court declared that “prompt payment statutes are best understood uniformly, as requiring that all monies not themselves in dispute be paid over in a timely fashion.” The Court explained:

The dispute exception excuses payment only when a good faith dispute exists over a statutory or contractual precondition to that payment, such as the adequacy of the construction work for which the payment is consideration. 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 undisputed.

Finally, the Court summarized the effect of its decision, explaining that “timely payment may be excused only when the payor has a good faith basis for contesting the payee's right to receive the specific monies that are withheld.” Therefore, while the United Riggers decision will not prevent all withholding disputes, it does add some teeth to the prompt payment laws by ensuring that those withholding payment are at least obligated to demonstrate a direct relationship between the withholding and the specific work for which the payment otherwise is due.

For additional information about the United Riggers decision, California’s prompt payment laws generally, or any other construction laws, feel free to contact:

Chris A. McCandless