Improper Withholding of Retention Results in Penalties

Posted on April 7, 2015

By: John Schroeder

The recent case of FTR International, Inc. v. Rio School District (2015) DJDAR 1141 has shifted the balance of power to contractors in public works projects. The FTR Court held that under Public Contract Code § 7107, a public agency could not justify their refusal to release the retention because of disputed change orders not related to the retention. Public works contractors should be expected to aggressively pursue public agencies for their retention once they have cleared all stop notices and there are no disputes related to the work that produced the retention.

The FTR Court had no trouble rejecting the holding of another Appellate Court in Martin Brothers Construction v. Thompson Pacific Construction, Inc. (2009) 179 CA4th 1401. The Martin Court held that a general contractor could refuse to pay their subcontractor their retention even if the only dispute was over outstanding change orders. The FTR Court held that a dispute over how much a contractor is owed for extra work cannot be a basis of a good faith dispute which would allow for the withholding of the retention. The apparent conflict between these two cases will lead to some stressful decisions for both public agencies and general contractors.

Absent a Supreme Court ruling clarifying these two decisions, attorneys for agencies and contractors will be called upon to decide whether to release retention payments and face the penalties of the wrongful withholding. The 2% per month penalty, plus attorney fees and costs, will force the parties to resolve these disputes or risks large awards. In FTR, over $3.85 million dollars was awarded in attorney fees and $1,537,404.96 in interest on a mere $676,436 in retained funds. The conflict between these two cases should cause some sleepless nights for construction attorneys.

The essence of the holding in FTR is that there cannot be a good faith dispute under Public Contract Code § 7107 if the dispute relates solely to additional change order work. The Court found that the term dispute as used in § 7107 would allow for withholding the retention until the stop notices were cleared. However, once the stop notices are cleared, the dispute was over issues outside the retention. Public Contract Code § 7101 was found to be a remedial statute, thus the statute was to be construed to promote the purpose of preventing improperly withheld retention. The Court went on to note that as a remedial statute § 7107 must be construed to prevent the mischief it was drafted to prevent. The Court held that there could not be a good faith dispute if the public agency admitted they owed the retention, but wanted to dispute the change orders. The Court found that the purpose behind the retention was to insure the contractor finished the work and cleared on the stop notices. Once that had been done, the retention must be paid.

There is no doubt that FTR will cause public agencies to carefully decide whether to release retention. The more difficult question is whether general contractors will feel the same pressure now that the FTR Court rejected Martin Brothers. Please call the firm if you believe retention is being wrongfully withheld or if you receive a letter demanding the release of retention. This request must be viewed with far greater caution in light of the FTR ruling.

John Schroeder is Of Counsel with Kring & Chung, LLP's Irvine, CA office. He can be contacted at (949) 261-7700 or jschroeder@kringandchung.com.