BILL ANALYSIS �
AB 536
Page 1
Date of Hearing: April 16, 2013
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Richard S. Gordon, Chair
AB 536 (Wagner) - As Amended: April 8, 2013
SUBJECT : Contractors: payments.
SUMMARY : Excludes certain types of claims from the calculation
of a 'disputed amount' for purposes of an existing law that
authorizes the withholding of 150% of a disputed amount from
certain payments to contractors when good faith disputes arise
in public or private works contracts. Specifically, this bill :
1)Prohibits a prime contractor or subcontractor from withholding
the following progress payments and retention proceeds from a
subcontractor, in both public and private works:
a) Any amount exceeding the liquidated damages owed by a
subcontractor, for liquidated damages an owner or public
utility has assessed against the prime contractor;
b) Any amount exceeding what the owner or public utility is
permitted by law to withhold from the prime contractor for
a mechanics lien or stop payment notice; and,
c) A subcontractor's claim for additional compensation
against the prime contractor.
2)Prohibits, in a private work of improvement, the owner from
withholding the following progress payments or retention
proceeds from a direct contractor:
a) Any amount exceeding the liquidated damages assessed
against the direct contractor;
b) Any amount exceeding what the owner is permitted by law
to withhold from the direct contractor for a mechanics lien
or stop payment notice; and,
c) A direct contractor's claim for additional compensation
against the owner.
AB 536
Page 2
3)Prohibits, in a public works project, a public entity from
withholding the following progress payments and retention
proceeds from a prime contractor:
a) Any amount exceeding the liquidated damages assessed by
the public entity;
b) Any amount exceeding what a public entity is permitted
by law to withhold from the prime contractor for a
mechanics lien or stop payment notice; and,
c) An original subcontractor's or subcontractor's claim for
additional compensation against the public entity.
EXISTING LAW :
1)Contains various provisions relating to contracts for the
performance of private and public works of improvement,
including provisions for the withholding and disbursement of
retention proceeds, and provides that, with respect to those
contracts for works of improvement, the retention proceeds
withheld from any payment may not exceed 150% of the disputed
amount. (Business and Professions Code [BPC] Section 7108.5,
Civil Code Sections 3260 and 3260.1, and Public Contract Code
[PCC] Sections 7107 and10262.5)
2)Requires a prime contractor or subcontractor to pay a
subcontractor within seven days after receiving a progress
payment, unless otherwise agreed to in writing. Provides that
in the event of a good faith dispute over the amount due on a
progress payment, that the prime contractor or subcontractor
may withhold no more than 150% of the disputed amount.
Requires the contractor who violates the appropriate
withholding provisions to pay a penalty to the subcontractor
equal to 2% of the amount due each month until the
subcontractor is fully paid, and allows for the prevailing
party to be entitled to attorney's fees and costs. (BPC
7108.5)
3)Requires, for a public works contract, a public entity to
release the retention withheld within 60 days after the date
of completion. Requires a prime contractor to pay
subcontractors within seven days after receiving retention
proceeds. (PCC 7107)
AB 536
Page 3
4)Allows for the Contractors' State License Board (CSLB) to take
disciplinary action against a licensed contractor for
deliberating failing to pay for materials and services
rendered and for falsely denying liability. (BPC 7120)
5)Provides that mechanics, persons furnishing materials,
artisans, and laborers of every class shall have a lien upon
the property upon which they bestowed labor or furnished
material for the value of such labor done and material
furnished. Requires the Legislature to provide, by law, for
the speedy and efficient enforcement of such liens.
(California Constitution, Article 14, Section 3)
6)Requires a contractor that fails to timely pay wages to
laborers employed by the contractor to provide notice of the
non-payment to the laborer, to the laborer's bargaining
representative, and to the construction lender on the project,
or face discipline. (Civil Code Section 3097)
FISCAL EFFECT : None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS :
1)Purpose of this bill . This bill excludes certain types of
claims from the calculation of a "disputed amount" for
purposes of an existing law that authorizes the withholding of
150% of a disputed amount from the progress payments due to a
contractor or subcontractor. The excluded amounts proposed
under this bill are those in excess of liquidated damages
claims, those in excess of the withholding permitted for
mechanics lien or stop payment notices, and claims for
additional compensation. While the sponsor argues that this
bill partially addresses the abusive contracting practice of
intentionally disputing payments to withhold and delay
payments to contractors and subcontractors, opponents contend
that weakening of retention and withholding provisions limit
the ability of public entities to drive the performance of
contractors.
This bill is sponsored by the Engineering Contractors'
Association, California Fence Contractors' Association,
California Chapter of the American Fence Association, Marin
Builders Association, and the Flasher Barricade Association.
AB 536
Page 4
2)Author's statement . According to the author, "The Prompt Pay
statutes are turning into a mess of loopholes that prevent
contractors from being paid what they are legitimately owed.
They provide no relief to contractors against a sophisticated
owner. Worse, they provide those owners with excuses for
withholding more money due to a loophole within the existing
statute. The intent of this measure states what cannot be
included in a disputed amount."
3)Disputed amounts . Existing law requires that, in the event of
a good faith dispute over all or any portion of an amount due
on a contract progress payment or retention proceeds, the one
paying for construction services (a property owner, public
entity, or prime contractor) withhold no more than 150% of the
disputed amount from the one rendering services (a prime
contractor or subcontractor, labors, and material suppliers).
There is nothing in statute that defines a "disputed amount,"
although the dispute must be a bona fide dispute.
4)Bill responds to lawsuit regarding meaning of "disputed
amount" . The sponsors contend that the ambiguity of a
"disputed amount" has resulted in legal action over withheld
amounts. For example, in the 2009 case of Martin Brothers
Construction, Inc. v. Thompson Pacific Construction, 2009 Cal
App. 3d, a subcontractor, Martin Brothers, filed claims
directly with the general contractor, Thompson Pacific
Construction, for extra work and change orders valued at
roughly $400,000. In December 2004, Martin Brothers filed an
initial complaint in the case, seeking over $900,000 in
damages, interests, penalties, and attorney fees. Thompson
Pacific and Martin Brothers settled out of court for over
$600,000.
The Court sided with Thompson Pacific, reading the statute to
be clear on its face and inferring no restriction on the kinds
of disputes covered by the statute. The Court affirmed that
it was legally entitled to withhold payment from Martin
Brothers for a good faith dispute pursuant to existing law.
The relevant holding found that withholding applies to "any
good faith dispute" - including change orders and claims for
additional or extra work.
In response to that finding, this bill would explicitly
exclude from the disputed amount those amounts in excess of
AB 536
Page 5
liquidated damages claims, amounts in excess of withholding
permitted for mechanics liens and stop payment notices, and
claims for additional compensation.
5)Questions for the Committee . Existing law provides for
several ways for an unpaid worker to demand payment: an unpaid
worker can file a mechanics lien on a private property, file a
stop notice to require a public entity to withhold payment
from a prime contractor who has not paid subcontractors, file
a claim against a contractor's bond, file a complaint with the
CSLB, or sue for compensation. The Committee may wish to
consider whether existing law provides sufficient payment
remedies for an individual who has rendered labor or services
in connection with a construction project but has not yet been
paid.
In addition, this bill would prohibit a homeowner, public
entity, or prime contractor from withholding any claims for
"additional compensation" from a contractor or subcontractor,
even if there is a legitimate disagreement over the amount
due. Because the bill does not specify what "additional
compensation" might entail, it is not clear if the effect of
this bill would be to exclude claims in situations where a
general contractor contends that a subcontractor never
performed or incorrectly performed certain work, whether or
not the subcontractor believed he or she had a bona fide claim
for payment. The Committee may wish to consider whether or
not this bill would inadvertently restrict withholding over
legitimate disputes.
The Committee may also wish to enquire of the author for
specific examples of how the current operation of the
retention statute is prone to abuse, and how the changes
wrought by this bill would minimize that abuse without
impinging on amounts in a bona fide dispute.
6)Arguments in support . According to the sponsors, the
Engineering Contractors' Association, California Fence
Contractors' Association, California Chapter off the American
Fence Association, Marin Builders Association, and the Flasher
Barricade Association, "[The Prompt Pay statutes] provide
owners with excuses for withholding more money [from a
contractor]. Here's why: 'disputed amount' is not defined.
As a result, virtually every construction attorney is running
into these kinds of things:
AB 536
Page 6
"A) The owner orders time and material extra work. Daily
tickets are signed by the owner's job site representative,
confirming that the equipment and labor actually performed the
extra work. When the extra work is completed, the contractor
submits an invoice for $10,000 for the extra work? The owner
decides the total is too much, so he declares this to be a
disputed amount. Not only does the owner not pay for the
extra work, but because it is a 'disputed amount,' the owner
withholds what the law provides, which is 150% of that amount,
or $15,000.
"B) The job is delayed. The causes of the delay are
disputed. The owner assesses liquated damages of $10,000.
The contractor contests this assessment. The owner, in-turn,
declares this to be a 'disputed amount' and withholds [150% of
that amount, or $15,000].
"C) A cost-plus job is performed. Under the agreement, the
owner must pay all of the costs of the work. A dispute
develops near the end of the job. In response, the owner
stops paying and the contractor pulls off the job. The owner
hires another contractor to finish the work at a cost of
$10,000? to justify withholding [150% of that amount, or]
$15,000 from what is still owed to the original contractor for
costs of the work performed by the original contractor."
7)Arguments in opposition . According to the Construction
Employers' Association, "AB 536 would preclude general
contractors from withholding funds from subcontractors who
fail to pay their suppliers, fail to pay their insurance
premiums, fail to pay civil judgments, fail to rectify
defective work, etc. By specifically defining what
constitutes a 'disputed amount,' AB 536 would preclude
contractors from withholding funds for any number of
contractual violations that don't fall within the definition
of 'disputed amount.'"
According to the California Special Districts Association,
"Current law provides for the distribution of retained
proceeds on a public work of improvement to an original
contractor within 60 days, unless there is a dispute over
payment, in which case the public agency is allowed to
withhold 150% of the disputed amount until the dispute is
resolved. This provision helps to ensure prompt and
AB 536
Page 7
satisfactory completion of public works projects. Allowing a
public agency to withhold funds in the case of a dispute
provide [the agency] with a tool to correct defective or
incomplete work. Moreover, it ensures that agencies have
sufficient funds to honor stop payment notices filed by
subcontractors and suppliers. Ample remedies already exist
for contractors against owners who over-withhold, including
monthly interest on the improperly withheld amounts and
attorney's fees and costs if the withholding is not in good
faith?
"Additionally, not allowing the withholding of any amount in
excess of liquidated damages ignores other potential damages
to which the original contractor might be responsible, such as
attorney's fees or other liabilities. Not to mention, it
would limit a public agency's ability to withhold actual
damages that are not included in the liquidated damages. All
of these concerns raise the financial risk associated with
public works construction, ultimately leading to increased
utility bills, higher taxes, or fewer job-creating
infrastructure projects."
8)Previous Legislation . AB 2021 (Wagner) of 2012, was a similar
bill that would have revised the amount that an owner can
withhold from a contractor, and a contractor from a
subcontractor, for disputed private works of improvement. The
difference is that AB 2021 limited the total amount of
withholding based on a withholding formula, whereas this bill
(AB 536) would exclude certain types of payments from the
withholding calculation. AB 2021 was held on the Senate
Floor.
AB 2549 (Pacheco) of 2004, would have revised the law with
respect to retention proceeds for works of improvement. AB
2549 would have increased the amount that may be withheld from
progress payments or final payments, depending on the
circumstances, to a sum of various amounts and percentages, as
specified. The Governor vetoed AB 2549 with the following
message:
"Existing law, including lien protections and other
prompt pay requirements, afford most contractors with
sufficient protection to ensure payment on disputed
payments. Additionally, I believe this bill will
only further complicate the various disparate statutes
AB 536
Page 8
regarding disputed payments between contractors and
owners. This area of law that is very important to
both the consumer and contractor has been amended
piecemeal for far too long."
9)Double-referred . This bill is double-referred, and if passed
by this committee will be referred to Assembly Judiciary
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Engineering Contractors' Association (sponsor)
California Fence Contractors' Association (sponsor)
California Chapter off the American Fence Association (sponsor)
Marin Builders Association (sponsor)
Flasher Barricade Association (sponsor)
California Professional Association of Specialty Contractors
Southern California Contractors Association
Opposition
California Special Districts Association
Construction Employers' Association
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301