California Court of Appeal Clarifies Definition of Retention Payments Under Civil Code § 3260

Posted on July 7, 2010 by K&L Gates

Yassin v. Solis, 184 Cal. App. 4th 524 (Cal. Ct. App. 2010)

By: Carlo L. Rodes and Brett D. Bissett, K&L Gates, Los Angeles

In this case, the court of appeal set forth a definition for retention that applies whenever a contractor seeks an award of penalties for improperly withheld retention under a California prompt payment statute.

The plaintiff-contractor, Diaa Yassin was hired by the defendants-owners, (collectively “Solises”), to improve the Solises’ home.  Under the contract, Yassin was to receive a series of payments throughout various stages of construction and the last payment was to be made upon completion of the work and before occupancy.  Yassin ultimately sued the Solises for money allegedly owed under the contract.  Although the court addressed other matters, a principal issue was the status of the final two payments of $15,000 and whether those amounts qualified as retention payments under California Civil Code § 3260.  Under section 3260, if an owner fails to make retention payments within the time prescribed by that section, a contractor may recover a penalty in the amount of 2 percent per month on the improperly withheld amount plus attorney fees.

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Court Determines That A Builder May Seek Equitable Indemnity Against A Manufacturer Under California's Right to Repair Act

Posted on February 3, 2009 by K&L Gates

Greystone Homes, Inc. v. Midtec, Inc. 168 Cal.App.4th 1194 (Cal. Ct. App. 2008)

California’s Right to Repair Act (Civil Code section 895 et. seq. or the “Act”) establishes a set of standards for residential construction and provides tort liability for failing to meet those standards. The Act was enacted in response to the California Supreme Court’s decision in Aas v. Superior Court, 24 Cal.4th 627, 636 (2000), which held that “[i]n actions for negligence, a manufacturer’s liability is limited to damages for physical injuries; no recovery is allowed for economic loss alone.” In other words, under Aas, the “economic loss rule” precluded recovery for damages such as “the difference between price paid and value received, and deviations from standards of quality that have not resulted in property damage or personal injury.” The Act, however, abrogated the Aas decision by permitting a homeowner that established a violation of the Act to recover economic losses from a builder, among others, without having to show that violation caused property damage or personal injury.

In the recent case of Greystone Homes, Inc. v. Midtec, Inc., the California Court of Appeal ruled on the following two issues that had not been previously addressed under the Act: (1) whether a builder may recover for economic loss caused by a product manufacturer’s violation of the Act through a claim for equitable indemnity against that manufacturer; and (2) whether that builder may bring a direct action for negligence against the manufacturer to recover its economic losses. As discussed below, the court concluded that a builder may bring an action for equitable indemnity to recover economic loss as a result of a manufacturer’s violation of the Act, but a direct claim for negligence is not permitted.

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Trial Court Erred in Granting Summary Judgment in Favor of School District on Claims Stemming from Completion Contract

Posted on June 12, 2008 by K&L Gates
Los Angeles Unified Sch. Dist. v. Great Am. Ins. Co., 163 Cal. App. 4th 944 (2008)

In this case, the District had contracted with a construction company to build a new elementary school for approximately $10.1 million.  Unsatisfied with the work, the District adopted a declaration of emergency under Public Contract Code § 20113, allowing the District to enter into a completion contract without inviting bids.  Defendant Hayward Construction Company was awarded the contract and Great American Insurance Company issued a performance bond for $4.5 million.  In the completion agreement, Hayward guaranteed that the maximum amount payable by the District for the cost of the work plus the contractor’s fee would not exceed $4.5 million.  Hayward’s scope of work included items listed on two “pre-punch lists,” identifying the remaining work to be completed or corrected.

Hayward subsequently informed the District that unforeseen circumstances concerning work that was not included in either of the pre-punch lists required an increase of the contract price beyond the contract maximum.  Payment was made to Hayward under a separate agreement preserving the District’s right to recover the money from all responsible parties, including Hayward and its surety.  When Hayward and its surety refused the District’s demand for return of more than $1 million, the District filed a complaint for breach of contract, breach of performance bond and declaratory relief.  Hayward cross-claimed for breach of contract, rescission and declaratory relief. Continue Reading...
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Under Business and Professions Code § 7031, Contractor Must be Licensed Prior to Preparing Shop Drawings or Ordering Materials for Construction Project

Posted on May 7, 2008 by K&L Gates
Great West Contractors, Inc. v. WSS Ind. Constr., Inc., 162 Cal. App. 4th 581 (2008)

WSS Industrial Construction, a steel subcontractor, sued general contractor Great West Contractors, to recover for work performed on a public works project in Riverside, California.  At the time that WSS submitted its bid proposal to Great West, WSS had applied for but not yet obtained a corporate contractor’s license.  WSS did receive a license after the bid was accepted, but only after it had already ordered multiple sets of shop drawings and some of the material necessary for the project.  WSS initiated the lawsuit by suing Great West and its surety, Fidelity and Deposit Company of Maryland, for $91,000 due under the contract and subsequent change orders.

At trial, Great West and Fidelity moved for a nonsuit on the grounds that WSS was statutorily barred, pursuant to Business and Professions Code section 7031, from any recovery because WSS was not duly licensed at all times during performance of the contract.  The trial court determined that WSS’s president had held valid individual licenses at all times and that, in any event, WSS was not required to have a license for the work that it performed prior to receiving its license.  The court held that “there was substantial compliance with the licensing during the contract and work was performed in good faith.”  The jury awarded WSS $220,000 in damages, including statutory penalties and interest.  Great West and Fidelity appealed after the court rejected their post-trial motions for a new trial, vacation of judgment and judgment notwithstanding the verdict. Continue Reading...
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Federal Arbitration Act Does Not Preempt California Code of Civil Procedure § 1281.2; California Court May Refuse to Enforce Arbitration Agreement To Prevent Possibility of Conflicting Rulings

Posted on April 18, 2008 by K&L Gates
Best Interiors, Inc. v. Millie and Severson, Inc., 2008 WL 1122182 (Cal. Ct. App. Apr. 11, 2008)

A dispute arose between general contractor Millie and Severson, Inc. and subcontractor Best Interiors, Inc. related to the construction of a hospital in Whittier, California.  Best sued M&S, the hospital and two building inspectors, alleging various delay and disruption damages caused by improper management and inspection of the project.  M&S petitioned to compel arbitration of the dispute and to stay Best’s lawsuit, based on arbitration clauses in the subcontract and the prime contract.  Best opposed on the grounds that (1) the building inspectors could not be compelled to arbitrate; (2) the arbitration might result in inconsistent results; and (3) the court had authority under California Code of Civil Procedure § 1281.2 to refuse to enforce the arbitration clause.  The trial court granted Best’s petition.  On appeal, M&S raised two arguments.  First, M&S argued that the Federal Arbitration Act, 9 U.S.C. § 1 et seq., applied to the arbitration agreement and did not give the trial court discretion to deny arbitration.  Second, M&S argued that, even if California law applied to the arbitration agreement, there was no possibility of conflicting rulings. Continue Reading...
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Court Examines Definition of Progress Payments in Connection with California's Prompt Payment Penalty Statute

Posted on January 19, 2008 by K&L Gates

Murray's Iron Works, Inc. v. Boyce, 158 Cal. App. 4th 1279 (2008)

In this case, the California Court of Appeal addressed whether the prompt payment penalty statute was properly applied against the owner and, in doing so, provided a definition for progress payments under the statute.

California requires that an owner pay its contractor any progress payment due as to which there is no good faith dispute within 30 days following receipt of a demand for payment.  If there is a good faith dispute between the owner and contactor, the owner may withhold no more than 150 percent of the disputed amount.  Any amount wrongfully withheld by the owner is subject to a penalty of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due.  The prevailing party is also entitled to attorney’s fees and costs.  (Cal. Civ. Code § 3260.1.)  Other statutes establish similar requirements for progress payments between contractors and subcontractors (Bus. & Prof. Code § 7108.5) and for payment of retention (Cal. Civ. Code § 3260).

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California Business and Professions Code § 7031(a) Bars Recovery for Unlicensed Contract Work Even if Contractor Receives a License Prior to Completion; Contractor Must Have License Before Starting Work

Posted on January 1, 2007 by K&L Gates
MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc., 36 Cal. 4th 412 (2005)

In this case, the California Supreme Court expanded on the body of licensing law set forth in Hydrotech Sys. Ltd. v. Oasis Water Park, 52 Cal. 3d 998 (1991).

In MW Erectors, subcontractor Niederhauser Ornamental & Metal Works Company was hired to perform specialized metal work on a project.  Niederhauser awarded two contracts to MW Erectors, one for “structural” steel work and one for “ornamental” steel work.  MW Erectors began work on the structural contract on December 3, 1999, but did not receive a steel contractor’s license until December 21, 1999.  MW Erectors began work on the ornamental contract in early January.  MW Erectors subsequently sued Niederhauser and its payment bond surety for amounts due on both contracts.  The trial court granted summary judgment in favor of Niederhauser.  The court of appeals reversed, and held that MW Erectors was entitled to prove amounts due for its work on the structural contract after the license was issued.
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Existence of "Good Faith Dispute" Allows Contractor to Withhold Payments and Avoid Prompt Payment Penalties

Posted on January 1, 2007 by K&L Gates
Alpha Mech., Heating & Air Conditioning, Inc. v. Travelers Cas. & Sur. Co. of Am., 133 Cal. App. 4th 1319 (2005)

In this case, subcontractor Alpha Mechanical, Heating & Air Conditioning sued general contractor RAS Builders and payment bond issuer Travelers after RAS withheld a final payment on the grounds that Alpha Mechanical had damaged other trades’ work.  At trial, Alpha Mechanical argued that RAS failed to comply with California prompt payment statutes because RAS failed to give timely notice of any good faith dispute.  Travelers countered that the existence of a good faith dispute precluded the award of prompt payment penalties, and that RAS offered evidence that Alpha Mechanical had been notified of every backcharge.  The trial court awarded Alpha Mechanical the principal amount owed, penalty interest, prejudgment interest and attorneys fees and costs.
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Economic Loss Rule Does Not Bar Tort Recovery If Tort Claim is Based on Duty that Exists Independent of Parties' Contract

Posted on January 1, 2007 by K&L Gates

Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal. 4th 979 (2004)

In this case, helicopter manufacturer Robinson Helicopter Co., Inc. sued parts supplier Dana Corporation after Dana delivered nonconforming parts to Robinson.  Dana had contracted to supply Robinson with clutches for Robinson’s helicopters.  Dana provided the parts according to Robinson’s specifications for roughly twelve years, but then changed its manufacturing process without notifying Robinson.  For the next sixteen months, Dana delivered nonconforming parts which failed at a much higher rate than the conforming parts.  Robinson notified Dana of the higher failure rate and Dana subsequently switched to a conforming manufacturing process.  Although there were no accidents that lead to physical injury or property damage, Robinson was required to recall and replace the defective parts. 

Robinson sued Dana and the trial awarded Robinson $1.5 million in compensatory damages and $6 million in punitive damages, based on Dana’s knowing misrepresentation or concealment of material facts with the intent to defraud.  Dana appealed.  The court of appeals affirmed the award of compensatory damages but reversed the award of punitive damages, finding that Robinson could not recover in tort when it had only suffered economic loss.

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Surety Liable for Attorneys Fees and Statutory Penalties Awarded Against Principal

Posted on January 1, 2007 by K&L Gates
Nat’l Tech. Sys. v. Superior Court, 97 Cal. App. 4th 415 (2002)

In this case, subcontractor National Technical Systems sought to enforce a stop notice release bond against surety United Pacific Insurance Company.  In a prior trial in which UPIC was not joined as a party, NTS had obtained a judgment against a general contractor, including attorneys fees and statutory penalties.  In a subsequent claim against UPIC, NTS had sought to introduce evidence of the judgment and attendant attorneys fees and penalties.  UPIC filed two motions in limine to exclude the evidence.  The first motion sought to exclude evidence of the judgment on the grounds that UPIC was not a party to the prior action and thus not bound by the judgment.  The second motion sought to exclude evidence of the attorneys fees and statutory penalties on the grounds that these awards were not recoverable under the stop notice release bond and that UPIC could only be liable for labor, service and materials furnished on the project.  The trial court granted UPIC’s motions, and NTS sought a writ of mandate directing the court to vacate the order granting the motions.
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Contractor Cannot Recover Damages for Abandonment or Quantum Meruit from Public Entity

Posted on January 1, 2007 by K&L Gates
Amelco Elec. v. City of Thousand Oaks, 27 Cal. 4th 228 (2002)

Amelco Electric was granted a prime contract for electric work related to the construction of a civic arts plaza for the City of Thousand Oaks.  During construction, the City issued over a thousand sketches to clarify or change the original contract drawings, of which 248 sketches affected electrical work.  Amelco requested 221 change orders, and the City and Amelco agreed upon 32 change orders.  As a result of the change orders, Amelco received $1 million over the contract price of $6.2 million.  Amelco later submitted additional change orders which were not accepted.  Upon completion of the project, Amelco submitted a $1.7 million claim for costs resulting from the noncaptured costs of the change orders.  By the time of trial, Amelco’s claim had increased to $2.2 million.  The City rejected the claim and Amelco sued for abandonment and breach of contract.  At trial, the jury determined that the City had both breached and abandoned the project and awarded Amelco $2.1 million.  The court of appeals affirmed the award and concluded that, as a matter of law, a public works contract can be abandoned.
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Economic Loss Rule Bars Recovery for Construction Defects that do not Cause Property Damage

Posted on January 1, 2007 by K&L Gates
Aas v. Superior Court, 24 Cal. 4th 627 (2000)

In this case, a condominium homeowners association and condominium owner sued the developer, general contractor and subcontractors who participated in the construction of the condominiums.  The plaintiffs alleged a variety of construction defects related to nearly all components and aspects of the construction, and sought repair costs and damages for diminution in value of their residences.  The defendants sought a motion in limine to exclude evidence relating to alleged construction defects that did not cause property damage.  The trial court granted the defendants’ motions as to the plaintiffs’ tort claims, and the court of appeal denied the plaintiffs’ subsequent petition for a writ of mandate.
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"No Damage for Delay" Clause Does Not Preclude Delay Damages Caused Solely by Owner's Failure to Disclose Material Information Related to Potential Delays

Posted on January 1, 2007 by K&L Gates
Howard Contracting, Inc. v. G.A. MacDonald Constr. Co., 71 Cal. App. 4th 38 (1999)

This case arose out of a public works contract relating to a construction project to rehabilitate the Venice Canals located in Los Angeles.  The project was owned and designed by the City of Los Angeles, which awarded the general contract to G.A. MacDonald Construction Co., Inc.  The contract between the City and MacDonald contained a limited “no damage for delay” clause, which stated that a contractor was entitled to an extension of time to complete work delayed by unforeseen events but was not entitled to collect damages attributable to the delay.  The contract did provide an exception, however, which specifically provided for payment for unreasonable and unanticipated delays caused by the City.  MacDonald subcontracted portions of the work to Howard Contracting and Soil Retention Systems (“SRS”). Continue Reading...
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"Pay if Paid" Clauses Are Void and Unenforceable as Against Public Policy Because They Interfere with Subcontractor's Constitutional Right to Assert Mechanic's Lien

Posted on January 1, 2007 by K&L Gates
Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882 (1997)

In this case, general contractor Keller Construction Company was hired to perform work on a commercial building.  Keller entered into subcontracts with various subcontractors, including Wm. R. Clarke Corporation, and each subcontract contained a “pay if paid” provision.  An addendum to each subcontract stated that the “pay if paid” limitation did not waive the subcontractor’s lien rights and provided that each subcontractor’s mechanic’s lien rights were to be the subcontractor’s sole remedy in the event that the owner failed to pay Keller.  Pursuant to the terms of the prime contract, Keller obtained a payment bond from Safeco Insurance Company that was intended to protect the owner from mechanic’s lien claims brought by any subcontractor.  The bond terms stated that, if Keller failed to pay claims brought by subcontractors, Safeco would assume the obligation to pay.  The building owner became insolvent and stopped making payments to Keller, and Keller declined to pay subcontractors who had recorded mechanic’s liens and filed actions on the payment bond.  The trial court ruled in favor of the subcontractors on the payment bond claim against Safeco.  Safeco appealed, the court of appeals affirmed, and Safeco appealed to the California Supreme Court.
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California Business and Professions Code § 7031(a) Bars All Claims for Recovery for Unlicensed Contract Work Regardless of Equities

Posted on January 1, 2007 by K&L Gates
Hydrotech Sys. Ltd. v. Oasis Water Park, 52 Cal. 3d 998 (1991)

Hydrotech Systems Ltd., a New York manufacturer of wave simulation machinery, was hired by a general contractor to build a surfing pool for a California water park.  Hydrotech did not possess a valid California contractor’s license, but the general contractor and Oasis Water Park persuaded Hydrotech to proceed.  The general contractor and Oasis Water Park promised to help arrange for Hydrotech to receive a license and promised to pay for the equipment and services provided by Hydrotech regardless of Hydrotech’s license status.  Hydrotech performed the work without securing a California license.  A payment dispute arose and Hydrotech sued.
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Excessive Changes to Contract Can Justify Abandonment Claim Even if Contract is Completed; Abandonment Damages May Be Calculated According to Total Cost

Posted on January 1, 2007 by K&L Gates
C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. 3d 628 (1985)

In this case, Container Corporation of America appealed from a trial court judgment in favor of contractor C. Norman Peterson Company (“CNP”).  CCA had hired CNP to perform work to modernize a paper mill.  During the performance of the contract, numerous errors and changes to plan resulted in significant delays and extra costs.  CNP sued for the extra costs associated with the project, claiming the extra costs were caused by CCA’s excessive changes to the plan.  CCA argued that both parties were aware at the time the contract was formed that the plan would require significant revisions.  The trial court found for CNP, holding that CCA’s excessive changes after the project was commenced constituted breach of contract and abandonment.  CNP was allowed to recover its total costs expended and lost profit. CCA appealed.
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