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To Withhold or Not to Withhold: That Is The Question To Avoid Prompt Payment Penalties

By Paul Rogoff

California’s prompt payment statutes aim to penalize untimely payments to contractors and their subcontractors.  While the laws try to provide clear time frames for when payments must be made, how these dates are triggered in the life of a project is far from black and white.  A recent Court of Appeal decision provided a little more direction by ruling that an owner’s decision to stop withholding retention for the last half of a project is not equivalent to the payment of retentions that had been withheld previously.

In Blois Construction, Inc. v. FCI/Fluor/Parsons, a subcontractor (Blois) sued the general contractor (FFP) for late payment penalties in connection with retention payments Blois asserted were improperly withheld by FFP.  The prime contract called for a 10 percent retention.  The subcontract between FFP and Blois likewise allowed FFP to withhold 10 percent of the payments owed to Blois.  At the halfway point of construction, the prime contract  gave the owner the option to reduce or eliminate any further withholdings for retention.  Pursuant to this clause, after 50 percent of the work had been completed, FFP requested that the owner cease its withholding of retentions. While reserving its right to resume withholding, the owner agreed to FFP’s request. The owner, however, did not release the previously withheld retention funds, including the funds withheld for Blois’ work, until roughly 4.5 years later.

The appellate court affirmed the lower court’s judgment in favor of FFP and concluded that FFP was not liable for the 2 percent statutory penalties because when the owner ceased withholding retentions, the payments it then made to FFP going forward did not include funds previously withheld.  Said another way, the owner’s progress payments from that point forward constituted the total amount then due without any retention being withheld, but nothing more.  Thus, after the owner ceased taking retentions from its payments to FFP, FFP was then obligated to make future payments to its subcontractor Blois without withholding retentions.  FFP’s obligation to pay Blois its share of the previously withheld retentions, however, was not triggered until the owner actually paid the previously held retentions to FFP.

Since FFP had to wait roughly 4.5 years before it received the previously withheld retentions from the owner, Blois was subject to the same wait.  The Court of Appeal indicated that its ruling was in keeping with the prompt payment statutes’ guarantee that subcontractors not wait significantly longer for payment than direct contractors.

Although the construction project giving rise to the dispute between FFP and subcontractor was a public works project, the court’s ruling suggests the holding would be the same if a similar dispute arose in a private work of improvement because, though different prompt payment statutes would govern, the relevant language and purpose of the applicable prompt payment statutes would require the same result.

Thus, despite their name, the prompt payment statutes do not always bring about prompt payment to contractors.

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