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Entitlement To The 2% Late Payment Penalty And Attorney's Fees For Failure To Pay Retention Is Based On The Quantum Of The Bona Fide Dispute At The Time Of The Failure To Pay, Not At The Time Of Trial

Surety and Construction Law Briefings

Summer 2001

Denver Darling, Inc. v. Controlled Environments Construction, Inc.
89 Cal.App.4th 1221, 108 Cal.Rptr.2d 213

In this case, the court found that whether a subcontractor is entitled to statutory penalties and attorneys fees where retention is wrongfully withheld is based on the amount of the Abona fide dispute at the time the decision to withhold retention was made, not at the time of trial.

A general contractor on a private works project hired a subcontractor to construct the concrete flooring.  The owner ultimately paid all amounts due under the general contract.  Nonetheless, the general contractor refused to pay the retention to the subcontractor asserting that the concrete flooring failed to comply with the plans and specifications.  Amazingly, a great deal of the trial was spent on that issue.  At the end, the trial court ruled that the subcontractor causes no injury to the general contractor and that the subcontractor was entitled to its retention.

Based on that ruling, the subcontractor insisted that it was entitled to statutory penalties and attorneys fees under California Civil Code §3260.  Subdivision (d) provides that, within 10 days from the time the original contractor receives its retention, it must pay each subcontractor is share of the retention.  Subdivision (e) allows the original contractor to withhold up to 150% of the amount of a bona fide dispute from the subcontractor.  Subdivision (g) provides that if payment is not made, the original contractor shall be subject to a 2% per month charge, in lieu of interest, and attorneys fees.

The trial court denied the subcontractors the 2% penalty and attorneys fees, noting that there was a bona fide dispute and that 150% of the amount of the dispute was more than the withheld retention.  In reversing, the court of appeals confirmed that there was a genuine dispute finding that the plans and specifications were ambiguous. However, the appellate court found that the entitlement to statutory penalties and attorneys fees is based on the amount of the Abona fide dispute at the time the decision to withhold retention was made.  At trial, the general contractor asserted that the cost of repair was well over 150% of the retention.  However,  at the time the general contractor first denied the subcontractors request for payment, the general contractor had estimated a cost to repair at significantly less than the unpaid retention. Accordingly, the appellate court remanded to the trial court to determine the appropriate amount of statutory penalties and attorneys fees.

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