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California Supreme Court Clarifies Extent Of Exception To General Rule Requiring Timely Payment To Contractors

In United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., No. S231549, 2018 WL 2188916 (Cal. May 14, 2018), the Supreme Court of California determined that while a general contractor or owner may withhold monies from subcontractors in circumstances where a dispute has arisen between the parties, the exception is limited to only those amounts actually in dispute.

In 2010, Universal City Studios LLLP (Universal) entered agreements to build a new ride at its theme park. Universal selected Coast Iron & Steel Co. (Coast Iron) as one of its contractors. Universal agreed to pay Coast Iron on a monthly basis for amounts billed, minus a 10 percent withholding. Upon receipt, Coast Iron was contractually responsible for making corresponding payments to its subcontractors. One such subcontractor was United Riggers & Erectors, Inc. (United Riggers).

United Riggers completed its work to Coast Iron’s satisfaction and once all work on the project was finished, Coast Iron asked for a final bill from its subcontractor. In its final bill, United Riggers demanded additional amounts for increased expenses attributed to Coast Iron’s mismanagement and change order requests. Coast Iron disagreed with the amount of the additional charges. However, rather than simply withhold payment of the additional amounts, Coast Iron failed to remit any portion of the final bill. United Riggers filed suit and sought penalties for the delay.

In deciding the case, the California Supreme Court noted that late payment problems are notorious in the construction industry. As such, the California Legislature enacted statutory payment deadlines and imposed penalties on owners/contractors who delay paying their contractors/subcontractors. The legislature included an exception to the payment deadlines, stating that payments could be withheld if a dispute arose between the parties. The issue before the Court was to what extent this exception could be used to justify withholding payment.  

The Court ultimately determined that while a general contactor or owner had the right to withhold payments that were in dispute, it did not give authority to withhold all payments. Rather, the proper remedy was to pay United Riggers for the amount due and only withhold the amount actually in dispute.

Although this case involved a specific California statute, this case is a good reminder for contractors who operate in multiple states. It is important to ensure compliance with local and state ordinances and regulations that may impose different conditions regarding penalties for lack of payment.