Construction payment laws can be tough to navigate. Between lien laws, retainage rules, and prompt payment provisions, a construction business can easily struggle to stay between the lines. Making matters worse, these rules are often both complex and, at points, vague. After a recent California Supreme Court case, the California retainage laws make a lot more sense.
California Retainage Laws Clarified
We’ve got a handy breakdown of the California retainage laws here. But let’s break them down here anyway.
In California, if the project’s owner withholds retention from a direct contractor, the withheld retainage must be released by 45 days from the completion of the project. When a direct contractor has some amount of retainage withheld, they typically also withhold some retainage from their subcontractors.
Once retainage is released from the project owner to the direct contractor, that direct contractor then has 10 days to release retainage amounts to their subs. Unless…
The Good Faith Exception
There’s an exception to the above rules, found at § 8812(c) of the California Civil Code:
“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.” (Emphasis added)
…that’s it. The statute doesn’t go on to say what a “good faith dispute” entails, and it doesn’t even rein in the subject matter of the dispute. As a result, some construction businesses have interpreted the exception to mean that if there is any good faith payment dispute present on a project, extra retention can be withheld. Luckily, the California Supreme Court stepped in to make sense of this mess.
California Retainage Laws Clarified
You can read the full opinion here, and Sheppard Mullin has a great, in-depth breakdown of the issue here.
Let’s get straight to it. The Supreme Court of California determined that the good faith exception should limited. To quote the court, “reading the statute in light of its broader purpose… supports the conclusion that only withholding for disputes over the retention payment itself is allowed.” (Emphasis added)
There were actually quite a few quotable moments in this opinion. The court also reiterated the purpose of prompt payment statutes: “to ensure timely payment of undisputed amounts to contractors, without impairing the ability of payors to withhold amounts as security when the obligation to pay those specific monies is in doubt.”
The end of that quote got a little wordy, so let’s put it in simpler terms: Prompt payment laws ensure that undisputed amounts are paid timely, while also protecting the party making payment when there’s a possible dispute.
To cap it off with one more quote, the court stated: “…we conclude 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.” (Emphasis added)
Takeaway
This is absolutely the right call, so kudos to the Supreme Court of California. If everything goes according to plan, it still takes a long time to receive payment. An owner doesn’t have to release retainage until 45 days after the project is complete. Their subs may have to wait 55 days – almost 2 months! – to receive payment.
That’s a long time. To add insult to injury, previously, any “good faith” dispute could’ve extended this timeframe. Now, at least it will be more predictable whether a retainage issue will pop up.
The companies affected by these laws are often local small businesses working on tight margins. Even the slightest hiccup can throw the them into a tailspin. By reducing uncertainty surrounding retainage payments, the California retainage laws serve their purpose: to promote fair construction payment practices.
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