BILL ANALYSIS �
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|Hearing Date:June 25, 2012 |Bill No:AB |
| |2021 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Curren D. Price, Jr., Chair
Bill No: AB 2021Author:Wagner
As Amended:June 7, 2012 Fiscal:Yes
SUBJECT: Works of improvement: disputed amounts.
SUMMARY: Revises the amount that an owner can withhold from a
contractor, and a contractor from a subcontractor, for disputed
private works of improvement.
Existing law, the Business and Professions Code (BPC):
1)Licenses and regulates contractors by the Contractors State License
Board (CSLB) within the Department of Consumer Affairs.
2)Requires a prime contractor or subcontractor to pay subcontractors,
to the extent of their interest therein, within 7 days of receipt of
any progress payment, unless otherwise agreed to in writing. In the
event of a "good faith" dispute over all or any portion of the
amount due, the prime contractor or subcontractor may withhold up to
150% of the "disputed amount."
(BPC � 7108.5)
a) Specifies that any violation of these provisions shall
constitute a cause for disciplinary action and shall subject the
licensee to a penalty, payable to the subcontractor, of 2% of the
amount due per month for every month that payment is not made.
b) Provides that in any action for the collection of funds
wrongfully withheld, the prevailing party shall be entitled to
attorney fees and costs.
c) Applies these provisions to private and public works of
improvement, except as specified.
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Existing law, the Civil Code (CC):
1)Unless otherwise agreed in writing, an owner shall pay a direct
contractor, within 30 days after receiving a notice demanding
payment under the contract, any progress payment due. In the event
of a "good faith" dispute over the progress payment due, the owner
may withhold up to 150% of the disputed amount of the progress
payment. (CC � 8800)
2)Requires an owner who has withheld a retention payment from a direct
contractor, to pay the retention to the contractor within 45 days
after completion of the work of improvement. In the event of a
"good faith" dispute over the retention payment due, the owner may
withhold up to 150% of the disputed amount from final payment. (CC
� 8812)
3)Requires a direct contractor who has withheld a retention payment
from a subcontractor, to pay the subcontractor the appropriate share
of the retention payment within 10 days after receiving all or part
of a retention payment. In the event of a "good faith" dispute, the
direct contractor may withhold up to 150% of the estimated value of
the disputed amount.
(CC � 8814)
This bill:
1)Requires an owner who withholds money from a contractor, and a prime
contractor or subcontractor from a subcontractor, for disputed works
of improvement involving progress payments, to withhold an amount
from a progress payment not to exceed the sum of the following:
a) The liquidated damages assessed against the contractor or
subcontractor;
b) 150% of the estimated cost to repair or replace contract work
that was not performed according to the contract.
2)Requires an owner who withholds money from a contractor, for disputed
works of improvement involving retention, to withhold from the final
payment an amount not to exceed the sum of the following:
a) The liquidated damages assessed against the contractor;
b) The amounts that are withheld due to a lien claim, lien
judgment, or bond payment claim;
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c) 150% of the estimated cost of uncompleted work, except for
those costs withheld under b); and,
d) 150% of the estimated cost to repair or replace contract work
that was not performed according to the contract, except for
those costs withheld under b) and c).
3)Requires a direct contractor who withholds money from a
subcontractor, for disputed works of improvement involving
retention, to withhold from the final payment an amount not to
exceed the sum of the following:
a) The liquidated damages assessed against the subcontractor;
b) That portion of any mechanic's lien or stop payment notice
claim by the subcontractor that has already been paid to the
subcontractor;
c) The amount that would have been withheld by the owner due to a
lien claim, lien judgment, or bond payment claim, but for a
release bond provided by the direct contractor, as specified;
d) 150% of the estimated cost of uncompleted subcontract work,
except for those costs withheld under b);
e) 150% of the estimated cost to repair or replace subcontract
work that was not performed according to the subcontract, except
for those costs withheld under b) or c).
4)Specifies the legislative intent to overrule Martin Brothers
Construction Inc. v. Thompson Pacific Construction Inc. (2009) 179
Cal.App.4th 1401 to the extent that it is inconsistent with the
provisions enacted by the bill.
FISCAL EFFECT: None. This bill has not been keyed "fiscal" by
Legislative Counsel.
COMMENTS:
1.Purpose. This bill is co-sponsored by California Chapter of American
Fence Association , California Fence Contractors Association ,
Engineering Contractors Association , Flasher Barricade Association ,
and Marin Builders Association .
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The Author states: "The Prompt Pay statutes are turning into a mess of
loopholes. 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: Section 7107 (e) of the Public Contract Code states: (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. Unfortunately,
"disputed amount" is not defined in the statute. As a result,
virtually every construction attorney is running into these kinds of
things:"
The Co-Sponsors state the following in order to illustrate the
loopholes in the current law:
The owner orders time and material and extra work. Daily
tickets are signed by the owner's jobsite 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 example) for the extra work.
That invoice is based upon the labor rates multiplied by the
labor hours on the tickets, the equipment rates multiplied by the
equipment hours on the tickets.
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
the amount the law authorizes, 150% of that amount, i.e. $15,000,
from money otherwise due. In other words, if the contractor had
never performed the extra work, that $15,000 would never have
been withheld from money otherwise due. However, since the
contractor did $10,000 in extra work, his cash flow is now
reduced by $25,000 ($10,000 paid out for the labor and equipment
for the extra work PLUS the $15,000 "disputed work" withheld).
The Co-Sponsors state: "While this action is blatantly unfair on
the part of an owner, the language in the existing prompt pay
statutes appears to sanction it - and sophisticated owners are
using this loophole in the law."
The job is delayed. The causes of the delay are disputed.
The owner assesses liquidated damages of $10,000. The contractor
contests this assessment. The owner, in-turn, declares this to
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be a "disputed amount" and withholds NOT the $10,000, but 150% of
the $10,000, i.e. $15,000, because the contractor has disputed
the liquidated damages assessment. Once again, the language in
the existing prompt pay statutes appears to sanction this
loophole in the law.
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 now hires another
contractor to finish the work at a cost of $10,000 (for example).
The owner then contends that the $10,000 it paid to the other
contractor - money it would have had to pay the original
contractor under the cost-plus contract - is a disputed amount.
Thus, the owner uses that argument to justify withholding $15,000
from what is still owed to the original contractor for costs of
the work done by the original contractor.
The Co-Sponsors state: "In summary, not only are owners using these
kinds of arguments to withhold payment, BUT they are also using them
to avoid the prompt payment penalties that were supposed to assure
prompt payment!"
1.Background. Existing law authorizes an owner or contractor to
withhold up to 150% of the value of the disputed work performed for
a private work of improvement. The Co-Sponsors contend that
existing law provides a loophole for a person or contractor to
dispute work in order to withhold payment to a contractor because
there is no definition for determining the value of disputed work.
This bill revises the amount that an owner can withhold from a
contractor, and contractor from subcontractor, for disputed private
works of improvement.
2.Related Legislation. AB 2549 (Pacheco, 2004) was a nearly identical
measure, although it applied to both public and private projects,
while this bill relates only to private works. That bill passed
both houses unanimously only to be vetoed by Governor
Schwarzenegger, who stated in part:
"While I understand the arguments behind this measure, I believe
the nuances of the changes proposed may be too complex for many
Californians who hire contractors to perform private works of
improvement on their homes and private property.
"Existing law, including lien protections and other prompt pay
requirements, afford most contractors with sufficient protection
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to ensure payment on disputed payments. Additionally, I believe
this bill will only further complicate the various disparate
statutes
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.
"I am asking the Legislature to work on crafting a measure that
would, not only simplify existing law, but ensure that
California consumers are adequately protected and that
contractors continue to be treated fairly while providing a
consolidation and reform of this entire body of law."
AB 341 (Huff, 2005) passed both houses unanimously and was again
going to be vetoed, so the bill was returned to the Legislature and
gutted.
3.Martin Brothers Construction Inc. v. Thompson Pacific Construction
Inc. The latest amendments to the bill include intent language to
"overrule Martin Brothers Construction Inc. v. Thompson Pacific
Construction Inc. (2009) 179 Cal.App.4th 1401 to the extent that it
is inconsistent with this act." The referenced decision by the
Third District Court of Appeal, effectively interpreted California's
"prompt payment statutes" (Public Contract Code � 7107, and BPC �
7108.5) to permit a general contractor to withhold progress payment
retention funds owed to a subcontractor when unrelated change order
work is in dispute; and to permit a general contractor to avoid
prompt payment requirements when payment in the agreement is
conditioned on the receipt of lien releases.
Specically, the decision involved Thompson Pacic, a general contractor
who was awarded a contract to construct two schools for the Elk
Grove Unied School District. Thompson Pacic subcontracted the site
clearing, grading and paving work to Martin Brothers. The contract
between the two specied that the subcontractor agrees that payment
is not due until all applicable adminis4.trative documentation and
lien releases are produced by the subcontractor. Martin Brothers
completed all of its work but asserted it was due nearly $500,000
for extra work that was not part of the contract. Thompson Pacic
initially disputed Martin Brothers claims for extra work but
eventually paid more than $630,000 for all outstanding progress
payment retention and all extra work. Martin Brothers then brought
suit Thompson Pacic for late payment penalties, interest and
attorney fees under Public Cont5.ract Code section 7107 and Business
and Professions Code section 7108.5.
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The Co-Sponsors of the bill argue that the Court's decision has had a
severe adverse impact on the ability of contractors and
subcontractors to receive their retention payments. In effect,
according to the Co-Sponsors, the decision permits owners and
general contractors to use the retention as an "interest free loan,"
and further states: "While ethical contractors and owners �will
not] engage in that kind of practice, those who do so gain a
competitive advantage in the marketplace . . . Thus, the result of
the decision is that unscrupulous owners and primes refuse to pay
retention money whenever there is any kind of dispute even if the
dispute has nothing to do with the payment of the retention."
As introduced, this bill sought to revise the terms and amounts that
may be withheld or final payments pertaining to both public and
private works of improvement. As noted by the Co-Sponsors, all
language pertaining to public works was amended out of the bill in
the March 29, 2012 amendments. As amended, the measure now only
pertains to private works of improvement.
6.Policy Issue . While this bill only deals with prompt payment
relating to private works of improvement, Martin Brothers
Construction Inc. v. Thompson Pacific Construction Inc. involves
public works of improvement under Public Contract Code � 7107.
Therefore, it appears unclear as to how the Co-Sponsors expect to
"overrule" a case involving public works when the bill deals with
private works of improvement. The Author or Co-Sponsors should
clarify this issue to the Committee.
NOTE : Double-referral to Judiciary Committee, Second.
SUPPORT AND OPPOSITION:
Support:
California Chapter of American Fence Association (Co-Sponsor)
California Fence Contractors Association (Co-Sponsor)
Engineering Contractors Association (Co-Sponsor)
Flasher Barricade Association (Co-Sponsor)
Marin Builders Association (Co-Sponsor)
Opposition:
None on file as of June 20, 2012
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Consultant:G. V. Ayers