The Court of Appeal for the Second District (which includes Los Angeles, Ventura, Santa Barbara, and San Luis Obispo counties) recently held that a contractor may withhold a retention only when the dispute with the subcontractor relates to the retention itself. United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2015) 243 Cal.App.4th 151.
The facts arose out of a project at Universal Studios. After work on the project was finished, United sent a demand to Coast to pay for change orders and for damages that United claimed Coast caused by mismanaging the project. Coast disputed the claimed amounts and withheld payment of the retention due to United. United filed suit, alleging violations of Civil Code 8814 and 8814, which require that contractors pay subcontractors their share of retention payments no more than 10 days after receipt by the contractor.
The trial court found that a good faith dispute existed and that Coast was entitled to withhold payment of the retention. The Court of Appeal, however, reversed the trial court’s decision, finding that allowing a party to withhold payment indisputably owed “would unduly increase the leverage of owners and contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.” Accordingly, the retention may be withheld only when the dispute relates to the retention itself.
Coast has petitioned the California Supreme Court for review of the Court of Appeals decision. In light of the United holding by the Second District Court of Appeal and a conflicting holding by the Third District Court of Appeal (Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. (2009) 179 Cal.App.4th 1401), the Supreme Court may ultimately render a controlling interpretation of the law.
Civil Code 1511(1) allow parties “to specify in a contract that a party intending to avoid the effect of its failure to perform by asserting that the other party’s act caused the failure must give written notice of this intention within a reasonable time.” Greg Opinski Construction, Inc. v. City of Oakdale (2011) 199 Cal.App.4th 1107.
In Greg Opinski Construction, Inc. v. City of Oakdale, the contract required the party seeking an extension to obtain a change order either by mutual agreement or by submitting a claim to the engineer with a request for a formal decision in writing. The Court allocated liquidated damages against the contractor because neither procedure was used, so the time for completion was not extended (regardless of which party was to blame for the late completion). The Court stated that the purpose of Civil Code section 1511 was to “allocate to the contractor the risk of delay costs – even for delays beyond the contractor’s control – unless the contractor follows the required procedures for notifying the owner of its intent to claim a right to an extension.”
The U.S. District Court for the Northern District of California recently allowed a case to proceed against a third-party engineer who provided a report for a public works project. Apex Directional Drilling, LLC v. SHN Consulting Engineers & Geologists, Inc. (2015) 2015 WL 4749004.
The City of Eureka retained SHN to conduct geological studies of the project site and to prepare reports based on its findings. SHN’s Geotechnical Baseline Report was furnished to potential bidders for the project, to estimate the necessary inputs for completing the work and to determine whether and how much to bid for the project. Apex relied on the representations in SHN’s report in submitting its bid to the City (which was the lowest qualifying bid). After beginning its work, Apex encountered conditions contrary to SHN’s representations contained in its report.
Apex filed suit, alleging causes of action of professional negligence and negligent misrepresentation. SHN moved to dismiss the suit for failure to state a claim.
Regarding the negligent misrepresentation claim, the District Court found that, as pleaded, SHN, through its report, intended to influence the substance of bids. Further, SHN supplied its information to a closed universe of third parties: those interested in bidding the project. Finally, SHN supplied its information for the sort of use from which Apex’s alleged loss arose (bid prepared on conditions described). Accordingly, the District Court also denied SHN’s motion to dismiss the negligent misrepresentation claim and allowed the case to proceed. The parties agreed to mediation and the case is proceeding.