Prompt Payment – What Do Owners and Generals Have the Right to Withhold?

By on July 21, 2017
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Under California Civil Code section 8814, if a direct contractor has withheld a retention from a subcontractor, the direct contractor must pay the subcontractor the retention amount within 10 days of receiving a retention payment, unless a “good faith dispute exists between the direct contractor and the subcontractor.” In turn, section 8818 provides that if an owner or direct contractor does not make retention payments as required by section 8814, then the owner or direct contractor is liable for a penalty of 2 percent per month on the amount wrongfully withheld.

So what then constitutes a “good faith dispute?” Under Martin Bros. Constr. Inc. v. Thompson Pacific (2009) 179 Cal.App.4th 1401, a “good faith dispute” for private projects included both contract price disputes and change order disputes; however, in East West Bank v. Rio Sch. Distr. (2015) 235 Cal.App.4th 742, the Court of Appeals held that a “good faith dispute” in a public project did not extend to disputes over change orders. Once the legitimate purpose for retaining the funds ends, the public entity must release the funds or suffer the statutory penalties.

Seems straightforward enough, right? On private projects, a good faith dispute means contract price disputes and change order disputes, on public projects it only means contract price disputes.

Enter United Riggers & Erectors v. Coast Iron & Steel, Co. (2015) 243 Cal.App.4th 151, which extends the East West Bank decision from the public works context to private projects. In the matter, Coast Iron withheld retention from United Riggers for claimed additional change order costs and damages related to mismanagement.  The trial court found in favor of Coast Iron, citing Martin Bros.; however, the Court of Appeals reversed, citing East West Bank, holding that allowing Coast Iron to withhold retention when there was no dispute that it was owed (under the contract) would “unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.”

In March of last year, the California Supreme Court granted Coast Iron’s petition for review. Brief were submitted July 2016.

The take-away – The law, as it stands right now is: On private projects, a good faith dispute means contract price disputes and change order disputes, on public projects it only means contract price disputes. Of course, that may change once the Supreme Court rules on United Rigger. Stay tuned!

Filed under Good Faith Dispute, Prompt Payment Laws

Reminder! – As of January 1, 2016, Contractor’s Bond Amount Increases

By on March 8, 2016
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Pursuant to California Business & Professions Code Section 7071.6(a), the required Contractor’s Bond amount increased from $12,500 to $15,000. If you have not contacted your bonding agent, do so as soon as possible, to ensure your bond is properly funded.

Filed under Contractor’s Bond

Prompt Payment – What Do Owners and Generals Have the Right to Withhold?

By on February 18, 2016
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Under California Civil Code section 8814, if a direct contractor has withheld a retention from a subcontractor, the direct contractor must pay the subcontractor the retention amount within 10 days of receiving a retention payment, unless a “good faith dispute exists between the direct contractor and the subcontractor.” In turn, section 8818 provides that if an owner or direct contractor does not make retention payments as required by section 8814, then the owner or direct contractor is liable for a penalty of 2 percent per month on the amount wrongfully withheld.

So what then constitutes a “good faith dispute?” Under Martin Bros. Constr. Inc. v. Thompson Pacific (2009) 179 Cal.App.4th 1401, a “good faith dispute” for private projects included both contract price disputes and change order disputes; however, in East West Bank v. Rio Sch. Distr. (2015) 235 Cal.App.4th 742, the Court of Appeals held that a “good faith dispute” in a public project did not extend to disputes over change orders. Once the legitimate purpose for retaining the funds ends, the public entity must release the funds or suffer the statutory penalties.

Seems straightforward enough, right? On private projects, a good faith dispute means contract price disputes and change order disputes, on public projects it only means contract price disputes.

Enter United Riggers & Erectors v. Coast Iron & Steel, Co. (2015) 243 Cal.App.4th 151, which extends the East West Bank decision from the public works context to private projects. In the matter, Coast Iron withheld retention from United Riggers for claimed additional change order costs and damages related to mismanagement. The trial court found in favor of Coast Iron, citing Martin Bros.; however, the Court of Appeals reversed, citing East West Bank, holding that allowing Coast Iron to withhold retention when there was no dispute that it was owed (under the contract) would “unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.”

The takeaway – There is a current split of authority in the California Court of Appeals as East West Bank, and United Riggers came out of two different districts. Now we wait to see if the California Supreme Court will take up the issue.

Filed under Contractor, Good Faith Dispute

Disappointed Bidders Can Now Sue Lowest Bidder in Public Works Project

By on September 11, 2015
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May the second place bidder on a public works contract state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage? According to the California Court of Appeals, the answer is yes.

In the case of Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., 234 Cal. App. 4th 748 (2015), plaintiffs, Roy Allan Slurry Seal, Inc. and Doug Martin Contracting, Inc., accused awarded low bidder, American Asphalt South, Inc., of under cutting their labor costs on public works projects from 2009 to 2012 by failing to pay state-mandated prevailing wages to its employees. Plaintiffs were able to establish standing by demonstrating that combined they were the second-lowest bidders 23 public works contracts and but for defendant’s deflated labor costs Plaintiffs would have been award the contracts.

After receiving conflicting rulings in the lower courts, the California Court of Appeals, reviewed the case and found that Plaintiffs, as the lawful and second lowest bidders, had a reasonably probable economic expectancy that they would be awarded the contracts. Note the holding is limited only to the second lowest bidder that can actually prove it should have been the lowest bidder.

The takeaway here is that contractors who fail to pay the prevailing wage may now be liable under tort law in addition to prevailing wage laws.

Filed under Public Works Project Bids

Choose Local, Choose California – Even if the Project is Federally Funded

By on April 2, 2015
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Up until this past year, California’s “local preference” requirement was unenforceable if federal funds were involved in a public project. However, this law is changing. In fact, 2015 FTA-funded projects are prohibited from enforcing the federal preemption. What this means for California public agencies is that, in letting certain public works projects, they may now give local preference to California companies, even when there is FTA funding involved.

On March 3, 2015, U.S. Transportation Secretary Anthony Foxx announced a one-year pilot program that will allow state and local transportation agencies to utilize local hiring preferences on federal-aid highway and transit projects. Previously, the U.S. Department of Transportation (DOT) has interpreted these preferences as conflicting with federal law, which requires federal-aid contracts to be awarded through a competitive, low-bid system, unless otherwise specified in another part of the statute. In launching the pilot program, U.S. DOT is citing a 2013 legal opinion from the U.S. Department of Justice, which now interprets federal law as giving U.S. DOT discretion to permit local hiring preferences provided they do not “unduly limit competition” in federal-aid procurement. The year-long pilot is proposed as an experiment under the Federal Highway Administration’s (FHWA) “Special Experimental Project No. 14 (SEP-14) and Federal Transit Administration (FTA)” experimental authorities, provisions made possible by Congress to allow the agencies leeway in finding new and more effective means of building, maintaining and managing federal transportation projects.

Filed under Department of Transportation, Federal Funding, Federal Transit Administration

The CSLB Is on the Prowl – Protect Your Company From Unlicensed Work

By on October 14, 2014
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The Contractors State License Board (CSLB) Statewide Investigative Fraud Team (SWIFT) recently started conducting random raids throughout California construction projects looking to bust contractors and qualifiers for unlicensed work pursuant to a recent change in the law.

Before, if the CSLB discovered contractors performing unlicensed work, the penalty was the issuance of a citation; however pursuant to SB 261 and 262 – which went into effect on Jan. 1, 2014 – the CSLB can now take its own disciplinary action – and it is.

Under SB 261 and 262 the CSLB can take disciplinary action against:

  • any person who uses a canceled, revoked, suspended, or altered contractor’s license, uses a forged contractor’s license, or uses or allows another to use a contractor’s license not issued to them; or
  • a qualifier and the licensee they are qualifying if the qualifier is not actively involved in the construction activities of the licensee.

This means that the CSLB can take direct administrative action against any licensed or unlicensed contractor who commits violations related to the fraudulent use of a contractor license. So, even if you are properly licensed, if you are aware that an unlicensed contractor is working on your project, your company may be: 1) liable for injury caused by the work of the unlicensed contractor; and 2) charged with a misdemeanor, serve up to six months in jail, and pay a fine of $3,000 to $5,000.

The takeaway: Keep your contractor’s license current and check and re-check the status of your subcontractors’ licenses throughout the duration of a project. You don’t want to serve time for someone else’s crime.

Filed under Contractors State License Board, Disciplinary Action, Unlicensed Work

Insurance Broker Sold You a Worthless Policy? Tough Luck

By on March 17, 2014

Guess what? Your insurance broker does not owe you a duty to get you the insurance coverage you need on a project.  According to a recent California Court of Appeal case, San Diego Assemblers, Inc. v. Work Comp For Less Insurance Services, Inc. (2013) 220 Cal.App.4th 1363, an insurance broker is only obligated to procure the insurance you ask for, not necessarily the insurance you need.

Prior to beginning construction, San Diego Assemblers (Assemblers) contacted Work Comp For Less (the broker) to get general liability coverage for a restaurant remodel project.  The broker procured policies and provided them to CON BLOG_policyAssemblers.  After the project was completed, an explosion and resulting fire occurred at the restaurant.  Assemblers tendered the claim to its two insurance carriers; both denied coverage, essentially telling Assemblers that one policy had an exclusion for damages first manifesting during the policy and the other had an exclusion for prior completed work.  In English, the two policies together didn’t cover any of Assemblers’ work on the project.

Although Assemblers told the broker that it needed insurance specifically for the remodel project, the policies the broker sold Assemblers did not actually cover Assemblers’ work.  In essence, the broker sold Assemblers the wrong policies.  Nevertheless, the court held that the broker did not owe a duty to Assemblers to determine what kind of coverage was needed, but rather only owed a limited duty to “use reasonable care, diligence, and judgment in procuring the insurance requested by [the] insured.”

The moral of the story? Know what kind of insurance you need; your broker doesn’t owe you a duty to find out for you.

Filed under Insurance