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Public Contract Code Section 7107 Does Not Apply If Retention Funds Are Not Withheld

In Blois Construction, Inc. v. FCI/Fluor/Parsons (2016) 245 Cal.App.4th 1091, the Court of Appeal held a general contractor’s obligation to pay retention payments does not arise until the general contractor receives retention proceeds from a project owner. Specifically, Public Contract Code Section 7107, which requires public entities to release retention proceeds to contractors within 60 days of completion of the project, is not applicable if retention payments were not withheld.

Facts

This case involves prompt payment statutes, which are statutes that guarantee subcontractors do not have to wait for long periods of time for payment from contractors. In complicated public work projects, contractors may wait years before being paid retentions from an owner. As is typical in the industry, this case involves a project owner, Exposition Metro Line Construction Authority (Expo), which contracted with FCI/Fluor/Parsons (FFP) to serve as a general contractor in building a light rail line. FFP then subcontracted underground work to Blois Construction (Blois). Both the contract between Expo and FFP and the subcontract between FFP and Blois permitted withholding a percentage of the payments owed pending successful completion of the work.

In December 2009, FFP and Expo agreed Expo would cease withholding retentions. However, Expo did not release the previously withheld funds until May 2014. Over the course of Blois’ work, FFP withheld $500,000 in retentions. Blois finished its work in 2011.

In 2012, Blois filed suit against FFP for failure to pay for extra work performed and failure to pay the withheld retentions. The court ordered the case to a dispute review board. While the case was still pending, FFP paid Blois $534,909.89, the full amount Blois claimed was owed in retentions. Thereafter, the Board ruled in favor of Blois finding the retentions held in 2011 were owed.

The Board did not determine if FFP owed penalties for failure to pay the retentions under Section 7107. This issue was left to the trial court to decide. The trial court found Expo had not released retention funds to FFP until 2014, therefore, Blois was not entitled to penalties because FFP paid Blois the full amount before this time.

Holding

On appeal, the only issue was whether FFP had an obligation to pay Blois withheld retentions when Expo began paying FFP the full amount of progress payments. Blois argued FFP received retention proceeds requiring FFP to pay Blois when Expo made regular payments. The court reviewed the plain text of section 7107 and determined section 7107 does not apply when funds are not withheld. Here, Expo ceased withholding retentions in 2010, but did not pay the previously withheld funds until 2014. Thus, FFP’s obligation did not arise until 2014.

Blois argued the court’s ruling conflicted with the remedial purpose of the prompt payment statutes. However, the court found Business and Professions Code section 7108.5 further safeguards subcontractors regarding prompt payment for work performed. Section 7108.5(a) requires a contractor to pay a subcontractor within seven days “after receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts owed to the contractor on account of the work performed by the subcontractors.” Expo’s payments to FFP in 2010 were progress payments. It was at that time, FFP had an obligation to pay Blois the full amount entitled from each progress payment, without retaining funds. It appeared from the record FFP paid the progress payments.

The court found FFP had not received any retention payments from Expo until May 2014, therefore, FFP’s obligation to pay Blois retention payments did not arise until May 2014. No penalties were owed because FFP satisfied its obligation in 2013.

Be mindful of the progress payments and when retentions are withheld. Often, projects proceed rapidly with discussions and decisions being made quickly. Take the time to clarify payments if there is any ambiguity and take solace in the fact the statutory language of the prompt payment statutes protects contractors and subcontractors.

ABOUT THE AUTHOR: Jessica G. Heppenstall graduated from California Western School of Law in 2008. Ms. Heppenstall’s focus is on general liability, employment, and personal injury. Contact her at 858.263.4120 or jheppenstall@tysonmendes.com.