California's Prompt Pay Statutes by Sam K. Abdulaziz
A number of years ago (in the 1990's) Assembly Member Delaine Eastin, a feisty champion of contractors and subcontractors, carried a bill that substantially changed the manner in which payments were to be made. This was primarily as a result of subcontractor trade associations pushing for it, and prime contractors agreeing to it because it also benefited them to some extent. Our office was very much involved. It came out of the Advisory Group to the Assembly Select Committee on Construction. In the first year of its existence, Johnny Zamrzla of Western Pacific Roofing was the Chair of that Committee. Johnny got tired and a new, younger person came into play, namely Sam Abdulaziz.
Some of these statutes say that one can withhold a certain percentage of the payment demanded if there is a good faith dispute. Other statutes say one can withhold a percentage if there is a bona fide dispute, and others are silent. Under the general law of the State of California, the dispute would normally have to be in good faith or bona fide to be valid even if the specific Prompt Pay section is silent. However, one could also argue that by leaving out the words "good faith" or "bona fide," the Legislature meant to not require good faith. This seems to be ludicrous and we would argue that "good faith" should always be applied in these situations.
I. PRIVATE WORKS
A. From Owner to Prime Contractor (Civ. Code 3260.1)
1. Progress Payments
a. The time for payment is 30 days after receipt of contractor's request for payment; unless it is modified in writing
b. The penalty is 2% per month in lieu of interest
c. Attorney's fees and costs go the to the prevailing party
d. The amount withheld shall be no more than 150% of the amount that is disputed in good faith
B. From Prime (Original) Contractor to Subcontractor (Civ. Code 3260)
1. Retention received by contractor
a. The time for payment is 10 days after receipt from owner; if payment is for a particular subcontractor, it shall be made if it is consistent with the terms of the subcontract; a waiver of this provision is against public policy
b. The penalty is 2% per month in lieu of interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the bona fide disputed amount
C. From Owner to Prime (Original) Contractor (Civ. Code 3260)
1. Retention
a. The time for payment is 45 days after Date of Completion or 45 days after issuance of Certificate of Occupancy; a waiver of this provision is against public policy
b. The penalty is 2% per month in lieu of interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the alleged disputed amount
D. From Any Prime Contractor or Subcontractor to Subcontractor (all tiers) (B & P Code 7108.5)
1. Progress Payment: Amount allowed contractor for work performed by subcontractor
a. The time for payment is 10 days from receipt of funds by contractor; unless otherwise agreed to in writing
b. The penalty is 2% per month in addition to interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the amount disputed in good faith
II. PUBLIC WORKS
A. From Any Prime Contractor or Subcontractor to Subcontractor (all tiers) (B & P Code 7108.5)
1. Progress Payment: Amount allowed contractor for work performed by subcontractor
a. The time for payment is 10 days from receipt of funds by contractor; unless otherwise agreed to in writing
b. The penalty is 2% per month in addition to interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the amount disputed in good faith
B. From State Agency to Contractor (Pub. Cont. Code 10261.5)
1. Progress Payments
a. The time for payment is 30 days after receipt of a proper request
b. The penalty is 10% per year which starts earlier if there is improper rejection by the state agency
C. From Any Prime Contractor or Subcontractor to a Subcontractor (Pub. Cont. Code 10262.5)
1. Progress Payment: Amount allowed contractor for work performed by subcontractor
a. The time for payment is 10 days from receipt
b. The penalty is 2% per month in addition to interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the amount disputed in good faith
D. From State Agency to Prime (Original) Contractor (Pub. Cont. Code 7107)
1. Retention
a. The time for payment is 60 days after Date of Completion; a waiver of this provision is against public policy
b. The penalty is 2% per month in lieu of interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the alleged disputed amount
E. From Prime (Original) Contractor to Subcontractor (Pub. Cont. Code 7107)
1. Retention received by contractor
a. The time for payment is 7 days after receipt; if payment is for a particular subcontractor, it shall be made if it is consistent with the terms of the subcontract; a waiver of this provision is against public policy
b. The penalty is 2% per month in lieu of interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the bona fide disputed amount
F. From California State University to Prime (Original) Contractor (Pub. Cont. Code 10853)
1. Progress Payments
a. The time for payment is 39 days after a proper payment request
b. The penalty is 10% per year; starts earlier if improper rejection by state agency
G. From Local Agency to Prime (Original) Contractor (Pub. Cont. Code 20104.50)
1. Progress Payments
a. The time for payment is 30 days after a proper payment request
b. The penalty is 10% per year; starts earlier if improper rejection by state agency
III. PUBLIC UTILITY CONTRACTS
A. From Any Prime Contractor to Subcontractor (Civ Code 3262.5)
1. Progress Payment: Amount allowed contractor for work performed by subcontractor
a. The time for payment is 15 working days from receipt of progress payments from public utility; unless it is otherwise agreed in writing by parties
b. The penalty is 2% per month in addition to interest
c. Attorney's fees and costs go to the prevailing party
d. The amount withheld shall be no more than 150% of the amount disputed in good faith
Now, as you can see in almost all cases, the payor can always withhold 150% of the disputed amount. However, we believe the dispute must be in good faith. You cannot just hold 100% of everything that is owed and say that that was because it was disputed.
This gives the payee substantial leverage in negotiations. Because of the prompt pay penalties, insurance companies and payors, who are the insureds, have a lot to lose if they are incorrect in classifying a payment that is due as not being due as a result of a good faith dispute.
Attorney Sam Abdulaziz of Abdulaziz & Grossbart has been practicing construction law for 30 years. He has written a book called "California Construction Law" which is updated annually. He represents numerous construction trade associations and contractors. He appears at Contractors State License Board meetings and has argued a number of cases before the appellate courts, including the California Supreme Court dealing with the "Pay-If-Paid Clause." Abdulaziz & Grossbart provides this information as a service to its friends & clients. The documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents. Sam Abdulaziz can be reached at Abdulaziz & Grossbart, P.O. Box 15458, North Hollywood, CA 91615-5458; (818) 760-2000, Facsimile (818) 760-3908; or by E-Mail at info@aglaw.net . On the Internet, visit our Website at www.aglaw.net |
