BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 2021 (Wagner)
As Amended June 7, 2012
Hearing Date: July 3, 2012
Fiscal: No
Urgency: No
RD
SUBJECT
Works of Improvement: Disputed Amounts
DESCRIPTION
This bill would revise certain existing statutes authorizing the
withholding of disputed amounts owed to a contractor to provide
for greater specificity and clarity in the amounts that may be
withheld in a pending dispute. The bill would state the intent
of the Legislature to overrule Martin Brothers Construction Inc.
v. Thompson Pacific Construction Inc. (2009) 179 Cal.App.4th
1401 to the extent that the decision is inconsistent with the
provisions of the bill. The bill would make other technical,
non-substantive changes.
BACKGROUND
Existing law, with respect to private and public works of
improvement, contains various "prompt pay" statutes requiring
that contractors and subcontractors be paid within certain
timeframes, unless there is a dispute over payment, in which
case the payor is allowed to withhold the disputed amount until
the dispute is resolved. These prompt payment statutes serve a
"'remedial purpose: to encourage general contractors to pay
timely their subcontractors and to provide the subcontractor
with a remedy in the event that the contractor violates the
statute.'" (S&S Cummins Corp. v. West Bay Builders, Inc. (2008)
159 Cal.App.4th 765, 777 �citation omitted].)
In 2004 and 2005, the Legislature passed two bills, AB 2549
(Pacheco, 2004) and AB 341 (Huff, 2005), which were
substantially similar to this bill and revised statutes
(more)
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authorizing the withholding of disputed amounts owed to a
contractor to provide for greater specificity and clarity in the
amounts that may be withheld in a pending dispute. Unlike this
bill, which by and large applies to private works of
improvement, those bills applied to both public and private
works of improvement. AB 2549 was vetoed by then-Governor
Arnold Schwarzenegger, and AB 341 was later gutted and amended
into another bill after it passed both houses unanimously.
In response to concerns that existing prompt pay statutes are
being abused by individuals who withhold excessive amounts
claiming they are "disputed," this bill would, with respect to
private works of improvement, revise existing statutes
authorizing the withholding of disputed amounts owed to a
contractor to provide for greater specificity and clarity in the
amounts that may be withheld in a pending dispute.
This bill was heard by the Senate Business, Professions and
Economic Development Committee on June 25, 2012 and passed out
on a vote of 8-0.
CHANGES TO EXISTING LAW
1. Existing law provides that a prime contractor must pay
subcontractors within seven days of receipt of any progress
payment, unless otherwise agreed to in writing. In the event
of a "good faith dispute" over the amount due, the prime
contractor may withhold up to 150 percent of the "disputed
amount." Existing law provides that this section applies to
all private works of improvement as well as to public works of
improvement except as specified under the Public Contract
Code. (Bus. & Prof. Code Sec. 7108.5.)
This bill would provide that the withholding amount may not
exceed the sum of liquidated damages assessed against the
subcontractor and 150 percent of the estimated cost of repair
or replacement of work that was not performed according to the
subcontract.
2. Existing law provides that on a private work of
improvement, the owner shall pay a direct contractor within 30
days of receiving a notice demanding payment pursuant to the
contract, any progress payments due as to which there is no
good faith dispute between them, as specified. Existing law
provides that if there is a good faith dispute between the
owner and direct contractor as to a progress payment due, the
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owner may withhold up to 150 percent of the disputed amount.
(Civ. Code Sec. 8800.)
This bill would provide that the withheld amount may not
exceed the sum of both the liquidated damages assessed against
the contractor and 150 percent of the estimated cost of repair
or replacement of contract work not performed according to
contract.
3. Existing law provides for the distribution of any proceeds
withheld by a project owner ("retention proceeds") within 45
days of completion of a work of improvement. However, an
owner may withhold 150 percent of any disputed amount. (Civ.
Code Sec. 8812.)
This bill would provide that the amounts that may be withheld
by an owner or original contractor may not exceed the sum of
all of the following:
the liquidated damages assessed against the contractor;
the amount withheld by the owner pursuant to specified
sections of law relating to certain liens and stop payment
notices;
150 percent of the estimated cost of uncompleted contract
work, except for those costs that are withheld as
specified; and
150 percent of the estimated cost to repair or replace
contract work that was not performed according to contract,
except for those costs withheld as specified.
4. Existing law provides that a direct contractor must pay
subcontractors from whom retention has been withheld the
subcontractor's share of the payment from the retention
payment received, within 10 days. Existing law provides that
if a good faith dispute exists between the direct contractor
and subcontractor, the direct subcontractor may withhold from
the retention to the subcontractor up to 150 percent of any
disputed amount. (Civ. Code Sec. 8814.)
This bill would provide that the amounts that may be withheld
by an owner or original contractor may not exceed the sum of
all of the following:
the liquidated damages assessed against the
subcontractor;
the portions withheld due to lien claims or stop payment
notice claim by the contractor for which the subcontractor
has already been paid
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the amount that would have been withheld by the owner,
as specified, but for a bond provided by the direct
contractor as specified;
150 percent of the estimated cost of uncompleted
contract work, except for those costs that are withheld as
specified; and
150 percent of the estimated cost to repair or replace
contract work that was not performed according to contract,
except for those costs withheld as specified.
This bill would state the intent of the Legislature to
overrule Martin Brothers Construction Inc. v. Thompson Pacific
Construction Inc. (2009) 179 Cal.App.4th 1401 to the extent
that the decision is inconsistent with the provisions of the
bill.
This bill would make other technical, non-substantive changes.
COMMENT
1. Stated need for the bill
The author writes:
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. Unfortunately, "disputed amount" is
not defined in the statute. . . . AB 2021 is intended to
correct this major loophole in the current prompt pay statutes
by defining disputed amount. This will ensure that the
process is fair and equitable to all sides.
2. Difficulties witnessed with prompt pay statutes
This bill would, with respect to private works of improvement,
revise existing statutes authorizing the withholding of disputed
amounts owed to a contractor to provide for greater specificity
and clarity in the amounts that may be withheld in a pending
dispute.
Proponents provide several examples of problems with the current
law, as follows:
�V]irtually every construction attorney is running into these
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kinds of things:
A). The owner orders time and material 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 the product of what the contractor
thought were agreed upon labor rates multiplied by the labor
hours on the tickets and what the contractor thought were the
agreed upon 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 what the law provides which is 150 �percent]
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" withhold).
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.
B). 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 be a "disputed amount" and withholds NOT the
$10,000, but 150 �percent] 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.
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
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
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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.
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!
As noted in the background, this bill is substantially similar
to two prior bills from 2004 and 2005 which attempted to address
these same problems but were ultimately vetoed or later gutted
and amended after passing the Legislature unanimously. The
Senate Judiciary Committee analysis to AB 2549 (Pacheco, 2004),
the first of these bills, noted that "�i]ndeed, the prompt pay
statutes which according to the bill's supporters are being used
in an unfair manner against subcontractors, were first placed in
statute to protect subcontractors."
Committee staff notes, as it did then, that with respect to the
payment issues raised by this bill, the problems seen on the
marketplace might not be easily fixed. A party that wishes to
be unreasonable in withholding payment will almost always be
able to find some legally justifiable reason in the contract to
withhold large payment amounts until the dispute is resolved
through litigation. For example, the new definitions of
disputed amount provided for by this bill still refer to
"estimated" amounts - estimates which can be inflated or
deflated with the flimsiest of justifications.
Nevertheless, the continued advocacy for changes in law by
subcontractor advocates, and the opposition of original
contractors and public entities to previous versions of the
bill, suggests that changes such as those proposed by this bill
do have some impact in the "real world" construction market. To
the extent that changes can prevent some abuses of the term
"disputed amount," those proposed by this bill appear to be
unobjectionable and sound public policy.
3. Intent to overrule Martin Brothers Construction Inc. v.
Thompson Pacific Construction Inc .
The June 6, 2012 amendments added language that states the
intent of the Legislature to "overrule Martin Brothers
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Construction Inc. v. Thompson Pacific Construction Inc. (2009)
179 Cal.App.4th 1401 to the extent that it is inconsistent with
this act." The plaintiff in that case, the subcontractor,
Martin Brothers Construction Inc., sought penalties, interest,
and attorneys' fees for allegedly late progress and retention
payments by the contractor defendant, Thompson Pacific
Construction Inc., arising out of work done on a public project
under two "prompt payment" statutes, Public Contracts Code
Section 7107 (relating to retention payments) and Business &
Professions Code Section 2108.5 (relating to progress payments).
By the time of the trial, the defendant had already paid the
disputed amounts that had been withheld, making the penalties,
interest and attorneys fees the sole issues at trial.
The appellate court, in ruling against the plaintiff, held that
a section of the Public Contract Code, which authorized the
withholding of retention payments when a bona fide dispute
existed in public works of improvement, was applicable to a
dispute regarding change order work and therefore the defendant
contractor had no liability under that section for delayed
payments of retention proceeds given the parties' dispute over
the additional work. Key to the court's decision was that the
meaning of "dispute" in that section was restricted only by the
requirement that it be bona fide-otherwise, the subject is
immaterial and could arise out of any number of subjects as a
result, including, but not limited to substandard performance,
timing of performance, or additional performance of work.
Ultimately, the court found that nothing in that section evinces
a legislative intent to limit the types of honest disputes that
would justify the withholding of retentions.
The court also held that the defendant contractor did not
violate Section 7108.5 of the Business and Professions Code,
which governs progress payments between a contactor and
subcontractor with respect to all private works of improvement
and most public works of improvement, by waiting until the
plaintiff provided the required documentation before making
progress payments to the plaintiff because the parties had
agreed to an alternative payment schedule and required
conditional lien releases before payment within the meaning of
that section. The court noted that the section specifically
provides that the payments shall be made within 10 days (the
current statute now says seven days), unless otherwise agreed to
in writing. The court held that if the Legislature intended that
language to permit a fixed payment schedule as the only
alternative to the section, "it would have said so." (179
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Cal.App.4th 1401 at 1415.)
Staff notes, again, that the underlying issues in that case
arose out of a public project. This bill, as introduced, would
have applied to both public and private works of improvement, in
virtually identical fashion as its predecessors, AB 2549
(Pachecho, 2004) and AB 341 (Huff, 2004). However, in March,
the bill was amended to apply to only those prompt payment
provisions in the private works of improvement sections of the
Civil Code. However, this bill does not amend the Public
Contracts Code Sections that were also included in AB 2549 and
AB 341. Insofar as recent language added to this bill would
declare the Legislature's intent to overrule the decision to the
extent that it is in conflict with this bill's provisions, it is
unclear how the provisions of this bill could impact a decision
relating to public works of improvement.
While the bill does amend Section 7108.5 of the Business and
Professions Code as well, a section that can apply to public
works of improvement and did apply in that case, this bill does
not in any way alter or otherwise impact the language that the
court relied upon in making its ruling. Thus, given the unclear
nature of how this bill would at all overrule a case relating to
public works of improvement, let alone one that was focused on
issues surrounding penalties, interest, and attorneys fees,
which were alleged to be owed because retention and progress
payments were withheld and which the court held were authorized
to be withheld under the applicable sections of law, the
following amendment is suggested to strike the intent language
from the bill:
Suggested Amendment :
On page 4, strike lines 29-32
4. Governor Schwarzenegger's veto of AB 2549
This bill is substantially similar to the enrolled version of AB
2549 (Pachecho, 2004), except that this bill by and large
relates only to private works of improvement and also includes
intent language to overrule specified case law. In vetoing AB
2549, Governor Schwarzenegger stated:
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
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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 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.
5. Technical amendments
The following technical amendments are suggested to correct
internal cross-references in the bill:
Suggested Amendments :
On page 3, line 34 after paragraph (2) add "or (3)"
On page 3, line 38 strike "(2) or (3)" and insert "(2), (3) or
(4)"
Support : None Known
Opposition : None Known
HISTORY
Source : California Chapter of American Fence Association;
California Fence Contractors' Association; Engineering
Contractors' Association; Flasher Barricade Association; Marin
Builders Association
Related Pending Legislation : None Known
Prior Legislation :
AB 341 (Huff, 2005) See Background. That bill passed the Senate
Judiciary Committee on a vote of 6-0.
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AB 2549 (Pacheco, 2004) See Background. That bill passed the
Senate Judiciary Committee on a vote of 7-0.
Prior Vote :
Senate Business, Professions & Economic Development Committee
(Ayes 8, Noes 0)
Assembly Floor (Ayes 74, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Business, Professions & Consumer Protection Committee
(Ayes 9, Noes 0)
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