Amended in Assembly April 8, 2013

California Legislature—2013–14 Regular Session

Assembly Bill No. 536

Introduced by Assembly Member Wagner

February 20, 2013

An act to amend Section 7108.5 of the Business and Professions Code, to amend Sections 8800, 8802, 8812, begin insert and end insert 8814 begin delete , and 8818 end delete of the Civil Code, and to amend Sections 7107 and 10262.5 of the Public Contract Code, relating to contracts.

LEGISLATIVE COUNSEL’S DIGEST

AB 536, as amended, Wagner. Contractors: payments.

Existing law allows specified persons to withhold begin delete for end delete begin insert from end insert a contractor or subcontractor no more than 150% of the disputed amount if there is a good faith dispute over the amount due on a contract payment.

This bill would exclude specified amounts from being considered disputed amounts begin delete and would provide that the authorized withholding is not wrongfully withheld end delete .

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 7108.5 of the Business and Professions
Code is amended to read:

7108.5.  

(a) A prime contractor or subcontractor shall pay to
any subcontractor, not later than seven days after receipt of each
progress payment, unless otherwise agreed to in writing, the
respective amounts allowed the contractor on account of the work
performed by the subcontractors, to the extent of each
subcontractor’s interest therein. In the event that there is a good
faith dispute over all or any portion of the amount due on a progress
payment from the prime contractor or subcontractor to a
subcontractor, the prime contractor or subcontractor may withhold
no more than 150 percent of the disputed amount.

(b) Any violation of this section shall constitute a cause for
disciplinary action and shall subject the licensee to a penalty,
payable to the subcontractor, of 2 percent of the amount due per
month for every month that payment is not made. begin delete The amount
withheld pursuant to subdivision (a) is not a violation of this section
and is not an amount due for purposes of this section. end delete

(c) In any action for the collection of funds wrongfully withheld,
the prevailing party shall be entitled to his or her begin delete attorney’s end delete
begin insert attorneys’ end insert fees and costs. begin delete The amount withheld pursuant to
subdivision (a) is not wrongfully withheld. end delete

(d) The sanctions authorized under this section shall be separate
from, and in addition to, all other remedies, either civil,
administrative, or criminal.

(e) This section applies to all private works of improvement
and to all public works of improvement, except where Section
10262 of the Public Contract Code applies.

(f) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
subcontractor.

end delete begin delete

(2) Any amount in excess of what the prime contractor or
subcontractor is allowed by law to withhold from the subcontractor
on account of a mechanics lien being recorded or a stop payment
notice being served for labor, services, equipment, or materials
allegedly provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the owner
against the prime contractor, any amount in excess of the
liquidated damages that are owed by the subcontractor.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices
for which the subcontractor is responsible, any amount in excess
of what the owner is permitted by law to withhold from the prime
contractor on account of the mechanics lien or stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed by the subcontractor or an
alleged breach of contract end delete by the begin delete prime contractor or end delete subcontractor
begin insert against the prime contractor end insert .

SEC. 2.  

Section 8800 of the Civil Code is amended to read:

8800.  

(a) Except as otherwise agreed in writing by the owner
and direct contractor, the owner shall pay the direct contractor,
within 30 days after notice demanding payment pursuant to the
contract is given, any progress payment due as to which there is
no good faith dispute between them. The notice given shall comply
with the requirements of Chapter 2 (commencing with Section
8100) of Title 1.

(b) If there is a good faith dispute between the owner and direct
contractor as to a progress payment due, the owner may withhold
from the progress payment an amount not in excess of 150 percent
of the disputed amount.

(c) An owner that violates this section is liable to the direct
contractor for a penalty of 2 percent per month on the amount
wrongfully withheld, in place of any interest otherwise due. In an
action for collection of the amount wrongfully withheld, the
prevailing party is entitled to costs and begin delete a end delete reasonable begin delete attorney’s fee end delete
begin insert attorneys’ fees end insert . begin delete The amount withheld pursuant to subdivision (b)
is not a violation of this section and is not wrongfully withheld. end delete

(d) This section does not supersede any requirement of Article
2 (commencing with Section 8810) relating to the withholding of
a retention.

(e) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
direct contractor.

(2) Any amount in excess of what the owner is allowed by law
to withhold from the direct contractor on account of a mechanics
lien being recorded or a stop payment notice being served for labor,
services, equipment, or materials allegedly provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the owner,
any amount in excess of the liquidated damages assessment.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices,
any amount in excess of what the owner is permitted by law to
withhold from the direct contractor on account of the mechanics
lien or stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed end delete by the direct contractor begin delete or an
alleged breach of contract by end delete begin insert against end insert the owner.

SEC. 3.  

Section 8802 of the Civil Code is amended to read:

8802.  

(a) This section applies to a contract between a public
utility and a direct contractor for all or part of a work of
improvement.

(b) Unless the direct contractor and a subcontractor otherwise
agree in writing, within 21 days after receipt of a progress payment
from the public utility the direct contractor shall pay the
subcontractor the amount allowed the direct contractor on account
of the work performed by the subcontractor to the extent of the
subcontractor’s interest in the work. If there is a good faith dispute
over all or part of the amount due on a progress payment from the
direct contractor to a subcontractor, the direct contractor may
withhold an amount not in excess of 150 percent of the disputed
amount.

(c) A direct contractor that violates this section is liable to the
subcontractor for a penalty of 2 percent of the disputed amount
due per month for every month that payment is not made. In an
action for collection of the amount wrongfully withheld, the
prevailing party is entitled to costs and begin delete a end delete reasonable begin delete attorney’s fee end delete
begin insert attorneys’ fees end insert . begin delete The amount withheld pursuant to subdivision (b)
is not a violation of this section and is not wrongfully withheld. end delete

(d) This section does not limit or impair a contractual,
administrative, or judicial remedy otherwise available to a
contractor or subcontractor in a dispute involving late payment or
nonpayment by the contractor or deficient performance or
nonperformance by the subcontractor.

(e) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
subcontractor.

end delete begin delete

(2) Any amount in excess of what the direct contractor is
allowed by law to withhold from the subcontractor on account of
a mechanics lien being recorded or a stop payment notice being
served for labor, services, equipment, or materials allegedly
provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the public
utility against the direct contractor, any amount in excess of the
liquidated damages that are owed by the subcontractor.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices
for which the subcontractor is responsible, any amount in excess
of what the public utility is permitted by law to withhold from the
direct contractor on account of the mechanics lien or stop payment
notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed by the subcontractor or an
alleged breach of contract by the direct contractor. end delete begin insert by the
subcontractor against the direct contractor. end insert

SEC. 4.  

Section 8812 of the Civil Code is amended to read:

8812.  

(a) If an owner withholds a retention from a direct
contractor, the owner shall, within 45 days after completion of the
work of improvement, pay the retention to the contractor.

(b) If part of a work of improvement ultimately will become
the property of a public entity, the owner may condition payment
of a retention allocable to that part on acceptance of the part by
the public entity.

(c) If there is a good faith dispute between the owner and direct
contractor as to a retention payment due, the owner may withhold
from final payment an amount not in excess of 150 percent of the
disputed amount. This withheld amount shall not be considered
wrongfully withheld.

(d) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
direct contractor.

end delete begin delete

(2) Any amount in excess of what the owner is allowed by law
to withhold from the direct contractor on account of a mechanics
lien being recorded or a stop payment notice being served for labor,
services, equipment, or materials allegedly provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the owner,
any amount in excess of the liquidated damages assessment.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices,
any amount in excess of what the owner is permitted by law to
withhold from the direct contractor on account of the mechanics
lien or stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed end delete by the direct contractor begin delete or an
alleged breach of contract by end delete begin insert against end insert the owner.

SEC. 5.  

Section 8814 of the Civil Code is amended to read:

8814.  

(a) If a direct contractor has withheld a retention from
one or more subcontractors, the direct contractor shall, within 10
days after receiving all or part of a retention payment, pay to each
subcontractor from whom retention has been withheld that
subcontractor’s share of the payment.

(b) If a retention received by the direct contractor is specifically
designated for a particular subcontractor, the direct contractor shall
pay the retention payment to the designated subcontractor, if
consistent with the terms of the subcontract.

(c) If a good faith dispute exists between the direct contractor
and a subcontractor, the direct contractor may withhold from the
retention to the subcontractor an amount not in excess of 150
percent of the estimated value of the disputed amount. begin delete This
withheld amount shall not be considered wrongfully withheld. end delete

(d) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
subcontractor.

end delete begin delete

(2) Any amount in excess of what the direct contractor is
allowed by law to withhold from the subcontractor on account of
a mechanics lien being recorded or a stop payment notice being
served for labor, services, equipment, or materials allegedly
provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the owner
against the direct contractor, any amount in excess of the
liquidated damages that are owed by the subcontractor.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices
for which the subcontractor is responsible, any amount in excess
of what the owner is permitted by law to withhold from the direct
contractor on account of the mechanics lien or stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed end delete by the subcontractor begin delete or an
alleged breach of the subcontract by end delete begin insert against end insert the direct contractor.

begin delete

SEC. 6.  

Section 8818 of the Civil Code is amended to read:

8818.  

If an owner or direct contractor does not make a retention
payment within the time required by this article:

(a) The owner or direct contractor is liable to the person to which
payment is owed for a penalty of 2 percent per month on the
amount wrongfully withheld, in place of any interest otherwise
due.

(b) In an action for collection of the amount wrongfully
withheld, the prevailing party is entitled to costs and reasonable
attorney’s fees.

(c) Amounts authorized to be withheld pursuant to this article
are not a payment required to be made and are not wrongfully
withheld.

end delete

begin delete SEC. 7. end delete
begin insert SEC. 6. end insert   

Section 7107 of the Public Contract Code is amended
to read:

7107.  

(a) This section is applicable with respect to all contracts
entered into on or after January 1, 1993, relating to the construction
of any public work of improvement.

(b) The retention proceeds withheld from any payment by the
public entity from the original contractor, or by the original
contractor from any subcontractor, shall be subject to this section.

(c) Within 60 days after the date of completion of the work of
improvement, the retention withheld by the public entity shall be
released. In the event of a dispute between the public entity and
the original contractor, the public entity may withhold from the
final payment an amount not to exceed 150 percent of the disputed
amount. For purposes of this subdivision, “completion” means any
of the following:

(1) The occupation, beneficial use, and enjoyment of a work of
improvement, excluding any operation only for testing, startup, or
commissioning, by the public agency, or its agent, accompanied
by cessation of labor on the work of improvement.

(2) The acceptance by the public agency, or its agent, of the
work of improvement.

(3) After the commencement of a work of improvement, a
cessation of labor on the work of improvement for a continuous
period of 100 days or more, due to factors beyond the control of
the contractor.

(4) After the commencement of a work of improvement, a
cessation of labor on the work of improvement for a continuous
period of 30 days or more, if the public agency files for record a
notice of cessation or a notice of completion.

(d) Subject to subdivision (e), within seven days from the time
that all or any portion of the retention proceeds are received by
the original contractor, the original contractor shall pay each of its
subcontractors from whom retention has been withheld, each
subcontractor’s share of the retention received. However, if a
retention payment received by the original contractor is specifically
designated for a particular subcontractor, payment of the retention
shall be made to the designated subcontractor, if the payment is
consistent with the terms of the subcontract.

(e) The original contractor may withhold from a subcontractor
its portion of the retention proceeds if a bona fide dispute exists
between the subcontractor and the original contractor. The amount
withheld from the retention payment shall not exceed 150 percent
of the estimated value of the disputed amount.

(f) In the event that retention payments are not made within the
time periods required by this section, the public entity or original
contractor withholding the unpaid amounts shall be subject to a
charge of 2 percent per month on the improperly withheld amount,
in lieu of any interest otherwise due. Additionally, in any action
for the collection of funds wrongfully withheld, the prevailing
party shall be entitled to begin delete attorney’s end delete begin insert attorneys’ end insert fees and costs. begin delete Amounts authorized to be withheld pursuant to this section are not
a payment required to be made and are not wrongfully withheld. end delete

(g) If a state agency retains an amount greater than 125 percent
of the estimated value of the work yet to be completed pursuant
to Section 10261, the state agency shall distribute undisputed
retention proceeds in accordance with subdivision (c). However,
notwithstanding subdivision (c), if a state agency retains an amount
equal to or less than 125 percent of the estimated value of the work
yet to be completed, the state agency shall have 90 days in which
to release undisputed retentions.

(h) Any attempted waiver of the provisions of this section shall
be void as against the public policy of this state.

(i) For purposes of this section, a “disputed amount” begin insert and “bona
fide dispute” end insert shall not include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
original contractor.

end delete begin delete

(2) Any amount in excess of what the public entity is allowed
by law to withhold from the original contractor on account of a
stop payment notice being served for labor, services, equipment,
or materials allegedly provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the public
entity, any amount in excess of the liquidated damages assessment.

end insert begin insert

(2) With respect to mechanics liens and stop payment notices
for which the subcontractor is responsible, any amount in excess
of what the owner is permitted by law to withhold from the prime
contractor on account of the mechanics lien or stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed end delete by the original contractor or
begin delete an alleged breach of contract by the public entity. end delete begin insert subcontractor. end insert

begin delete SEC. 8. end delete
begin insert SEC. 7. end insert   

Section 10262.5 of the Public Contract Code is
amended to read:

10262.5.  

(a) (1) Notwithstanding any other law, a prime
contractor or subcontractor shall pay to any subcontractor, not later
than seven days after receipt of each progress payment, the
respective amounts allowed the contractor on account of the work
performed by the subcontractors, to the extent of each
subcontractor’s interest therein. In the event that there is a good
faith dispute over all or any portion of the amount due on a progress
payment from the prime contractor or subcontractor to a
subcontractor, then the prime contractor or subcontractor may
withhold no more than 150 percent of the disputed amount.

(2) Any contractor who violates this section shall pay to the
subcontractor a penalty of 2 percent of the amount due per month
for every month that payment is not made. In any action for the
collection of funds wrongfully withheld, the prevailing party shall
be entitled to his or her begin delete attorney’s end delete begin insert attorneys’ end insert fees and costs. begin delete The
amount withheld pursuant to paragraph (1) is not a violation of
this section and is not wrongfully withheld. end delete

(b) This section shall not be construed to limit or impair any
contractual, administrative, or judicial remedies otherwise available
to a contractor or a subcontractor in the event of a dispute involving
late payment or nonpayment by a contractor or deficient
subcontract performance or nonperformance by a subcontractor.

(c) On or before September 1 of each year, the head of each
state agency shall submit to the Legislature a report on the number
and dollar volume of written complaints received from
subcontractors and prime contractors on contracts in excess of
three hundred thousand dollars ($300,000), relating to violations
of this section.

(d) For purposes of this section, a “disputed amount” shall not
include any of the following:

begin delete

(1) Any amount in excess of liquidated damages owed by the
subcontractor.

end delete begin delete

(2) Any amount in excess of what the prime contractor or
subcontractor is allowed by law to withhold from the subcontractor
on account of a stop payment notice being served for labor,
services, equipment, or materials allegedly provided to the project.

end delete begin insert

(1) With respect to liquidated damages assessed by the public
entity against the prime contractor, any amount in excess of the
liquidated damages that are owed by the subcontractor.

end insert begin insert

(2) With respect to stop payment notices for which the
subcontractor is responsible, any amount in excess of what the
public entity is permitted by law to withhold from the prime
contractor on account of the stop payment notice.

end insert

(3) The amount of any claim for additional compensation begin delete arising
out of alleged extra work performed by the subcontractor or an
alleged breach of the subcontract by the prime contractor or
subcontractor. end delete begin insert by the subcontractor against the prime contractor. end insert