By James G. Higgins

Prompt payment laws can pose significant risk to owners and contractors.  In S&S Cummins Corp. v. West Bay Builders, Inc. 2008 Cal. App. LEXIS 160, *, a public works general contractor was stung under Public Contract Code section 7107 for delaying retention payments to an electrical subcontractor.

The general contractor was hired to build an elementary school.  The overall project was delayed 337 days until its completion.  After a protracted fight with the owner, the general contractor was finally paid $517,000 in retention.  This retention payment included $131,000 in retention withheld from the subcontractor’s progress payments.

Although the owner paid the general contractor its full retention, the general contractor did not pay the subcontractor its share.  Under Public Contract Code section 7107(d), a subcontractor must be paid its share of retention within seven days from the time the general contractor receives all or any portion of the retention proceeds from a public agency.  And under section 7107(e), a general contractor may withhold from a subcontractor up to 150% of its portion of retention, but only if a bona fide dispute exists between the subcontractor and the general contractor.

Here, the general contractor argued that the subcontractor delayed the project, which in turn caused the general contractor to incur liquidated damages and additional overhead costs.  The jury found that the subcontractor did not delay the project and that the general contractor did not have a good faith justification for withholding the retention.  The trial court awarded $131,000 in unpaid retention plus $114,000 in prompt payment charges to the subcontractor.  The general contractor appealed.

On appeal, one issue was whether the trial court properly calculated statutory prompt payment charges.  Public Contract Code section 7107(f) states that where retention payments are not timely made, "the owner or original contractor withholding the unpaid amounts shall be subject to a charge of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due."   The subcontractor argued that the trial court erred by finding that the 2 percent per month charge was not applied on a compounded basis.  The subcontractor also argued that the 2 percent per month charge did not stop accruing upon entry of judgment.

The Court noted that whether prompt payment charges were compounded was an issue of first impression.  Based on its review of the statutory language and analogous case law, the Court held that section 7107(f) did not provide that the 2 percent charge was compounded.  Thus, section 7107(f) authorizes a 2 percent charge only for the improperly withheld amount rather than that amount plus any accrued but unpaid charges.  The Court reasoned that any other reading of the statute would produce "harsh and absurd" results.  For example, the general contractor here would have had to pay an additional $56,000 in compounded interest.

As to the second issue on appeal, the Court held that the 2 percent charge did not continue to accrue after entry of judgment.  Instead, the Court held that the "charge" defined in section 7107(f) was assessed in the same manner as interest.  And, under the California Constitution, interest is capped at a rate of 10 percent per annum after entry of judgment.  (Cal. Const., art. XV. § 1.)

For further information please contact James Higgins.  James Higgins is an associate in the Construction, Environmental, Real Estate and Land Use Litigation Practice Group in the firm’s San Francisco office.