In December 2015, in United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., the California Court of Appeals for the Second District addressed the withholding of retainage under the state's prompt payment statutes relating to privately owned construction projects (243 Cal.App.4th 151).

In October 2010, Coast was hired by Universal Studios as the prime contractor to construct a theme park ride based on the Transformers movies. Coast subcontracted with United to perform some of the work.

United performed additional work and was issued several change orders, which increased the amount due under the subcontract agreement. Coast withheld 10% of each monthly payment as retention. When the work was completed, Coast owed United nearly $150,000.00 in retention.

After the work was completed, Coast requested that United submit a final change order log identifying any open change order requests. United responded by submitting new change orders and demanding additional compensation for alleged mismanagement and delays, which Coast refused to pay.

United filed suit, alleging that Coast violated California Civil Code Sections 8814 and 8818, which require that contractors pay subcontractors their share of retention payments no more than 10 days after receipt by the contractor.

Failure to pay retention within 10 days results in a monthly penalty of 2% of the unpaid amount and attorney's fees.

An exception allows the prime contractor to withhold from the retention payment up to 150% of the estimated value of the disputed amount where a good faith dispute exists between the prime contractor and subcontractor.

Coast admitted it owed United the retention and paid two-thirds of the amount three weeks after the suit was filed. The balance was paid 10 months later.

The trial court found in favor of Coast and awarded attorney's fees. The trial court's order noted there was a good faith dispute that allowed Coast to withhold retention payments.

United appealed on the grounds that Coast was not entitled to withhold the retention payments solely because there was a good faith dispute between the parties. United argued that the good faith disagreement must relate to the subcontractor's entitlement to be paid the full amount of the retention, and that a dispute unrelated to the retention did not allow the contractor to raise the statutory exception.

The court agreed with United that the good faith dispute must relate to the retention for the prime contractor to withhold the payment. In this case, the dispute related to change orders, mismanagement, and delays, but not the subcontractor's entitlement to receive the full amount of the retention payment itself.

In California, it is customary for project owners to pay contractors on a monthly basis for completed work minus a certain percentage as retainage to guarantee complete performance. Several prompt payment statutes govern the payment of retention to contractors and subcontractors:

The court noted that to allow direct contractors to withhold retention payments for any dispute would give them unfair leverage over smaller subcontractors and may dissuade them from making valid claims for fear of delaying the receipt of retention.

Many view California's prompt payment statutes and retention rules as confusing because of the lack of consistent terminology. United Riggers provides welcome guidance for construction counsel, private project owners, and contractors about the interpretation of the law.

However, the opinion does point out the disparity among the second and third districts when construing public prompt payment requirements under Section 7107. The Court of Appeals for the Third District reached the opposite result in Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc., allowing the withholding of retention for any good faith dispute (179 Cal.App.4th 1401 (2009)).

The United Riggers court relied on its previous decision in East West Bank v. Rio School Dist., in deciding that the good faith dispute must relate to the amount of the retention in order for the contractor to withhold any part of the sum (235 Cal.App.4th 742 (2015)).