Show Me the Money: The Good Faith Dispute Exception to Prompt Payment Penalties | California Construction Law Blog

California has a quantity of prompt payment penalty statutes on the textbooks. Among them is Civil Code portion 8800 which necessitates venture owners on private is effective initiatives to pay back development payments to direct contractors inside 30 times just after demand from customers for payment pursuant to agreement or be issue to prompt payment penalties of two % (2%) for each thirty day period on the amount wrongfully withheld. Like California’s other prompt payment penalty statutes, nevertheless, there is an critical  carve out: If there is a excellent religion dispute in between the challenge proprietor and the direct contractor the challenge owner may withhold up to 150% of the dispute quantity. And, that, is a better-tiered party’s “get out of jail free” card.

In Vought Building Inc. v. Stock (2022) 84 Cal.App.5th 622, the 1st District Courtroom of Appeals examined whether a challenge owner’s assert for liquidated damages constitutes a superior religion dispute less than Civil Code section 8800.

The Vought Building Situation

In September 2019, Vought Construction, Inc. entered into a development contract with Jay Inventory for a home renovation job.  The contract expected Vought to comprehensive its perform by January 13, 2020 and involved a liquidated harm provision furnishing that Vought would be liable in the volume of $300 for each working day for each working day Vought did not finish construction inside the time agreed on. For the duration of the challenge quite a few alter orders have been accepted which prolonged the completion date to February 11, 2020.

Towards the stop of the project an issue arose regarding the set up of railing outdoors the household. The outside the house railing was supposed to match railing inside the home and each Vought and Stock, in accordance to their testimony, were beneath the impression that the railing could be ordered and set up with out a set of architectural drawings. Turns out that was no the situation. Three weeks ahead of the day set for task completion, Vought informed Stock that architectural drawings would be required to fabricate the railing. Even more, due to the onset of the COVID-19 pandemic, Vought was not able to set up the railings until August 2020. Perform on the remaining parts of the home, however, had been accomplished in May well 2020.

In April 2020, Vought sent an bill to Stock for $73,000, and when this was not paid, despatched an additional bill to Inventory in May perhaps 2020, which was also unpaid. In June 2020, Vought despatched a proposed adjust purchase to Inventory for $50,000 for the railings. Inventory rejected the improve purchase and continued to refuse to make payment on the early invoices. In July 2020, Vought recorded a mechanics lien for $78,000 and in August 2020 despatched a proposed modify get to Inventory for $10,000 in “legal costs” and passions on unpaid progress payments. In reaction, Inventory claimed that he was entitled to liquidated damages of $53,000, and in December 2020 compensated Vought $20,000, or about the distinction involving Vought’s bill for $73,000 and Stock’s liquidated harm declare of $53,000. The parties made the decision to litigate.

In November 2021, following a four day bench trial, the trial court found that Vought was entitled to $59,000 in unpaid invoices (the variance concerning the whole contract price and amounts paid by Inventory together with the $20,000 paid by Stock in December 2020) additionally $31,000 in additional compensation for the exterior railing, and that Inventory was entitled to an offset of $29,000 for liquidated damages, for a full award in favor of Vought of $61,000 in addition prejudgment desire in the total of $17,000.

The trial court further more ruled that neither occasion was the prevailing social gathering and that Vought was not entitled to prompt payment penalties of 2% for each thirty day period less than Civil Code part 8000 since “there was . . . a fantastic religion dispute between the get-togethers as to what essential to be paid out.”

Vought appealed.

The Appeal

On charm, Vought argued that Stock violated Civil Code part 8000 as a make a difference of regulation, that it (Vought) was the prevailing get together as a make a difference of regulation and, consequently, entitled to recuperate its attorneys’ service fees beneath Area 8000, that Stock’s liquidated destruction declare was barred because of to his poor-religion, and that the trial court erred in failing to buy foreclosure of its mechanics lien.

As to Vought’s Civil Code section 8000 rivalry, the Court docket of Charm held that the development payments withheld by Inventory on account of liquidated damages was a “good religion dispute” less than Section 8000, which permits a project operator to withhold payment “[i]f there is a excellent faith dispute in between the owner and immediate contractor as to a progress payment because of,” since the get-togethers deal specifically allowed Stock to “withhold [payment] in total or in component to this sort of extent as could be needed . . . to protect the Owner from reduction . . . simply because of . . . acceptable proof that the Do the job will not be done in just the Deal Time, and that the unpaid stability would not be ample to protect actual or liquidated damages for the anticipated hold off . . .” The Court also distinguished the situation from United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, a scenario we wrote about before, on the ground that United Riggers involved a dispute over change orders that would have improved amounts then because of not liquidated damages that would have diminished amounts then because of.

As to Vought’s prevailing bash rivalry, the Court of Charm held that the trial court was in just its discretion to obtain that neither celebration was the prevailing celebration under Civil Code part 8000 which presents that the prevailing celebration is entitled to the restoration of affordable attorneys’ expenses. Nonetheless, the Court of Appeals held that because Vought received a web monetary restoration towards Inventory, that underneath Code of Civil Treatment area 1032, Vought was the prevailing get together and entitled to restoration of its expenses.

As to Vought’s liquidated injury declare, when acknowledging that present situation regulation authorized a contractor to challenge liquidated damages in scenarios wherever delay “was triggered by matters over and above [a contractor]’s management and was solely excusable,” the Court of Attractiveness held that the trial court “correctly held that Vought was not relieved of the obligation to pay back liquidated damages for the hold off that it induced even though it was not liable for the total delay.”

Ultimately, the Courtroom of Enchantment discovered that Vought experienced glad the features of its foreclosures of mechanics lien and remanded the scenario back again to the demo courtroom for an order allowing for Vought to foreclose on its mechanics lien.

Conclusion

This is a incredibly exciting scenario the two frequently and mainly because I’m at the moment litigating a scenario involving prompt payment penalties. When the case involved a distinct prompt payment penalty statute, Civil Code portion 8000, the scenario, I imagine, has applicability to all of the prompt payment penalty statutes. The circumstance is appealing in that the Court docket of Appeals dependent its conclusion on the two the prompt payment penalty statute as properly as the fundamental agreement among the functions but will make no distinction as to no matter if both by yourself was enough to help its selection. Though liquidated damages are a product of agreement, would the Courtroom of Enchantment achieved the same summary if the parties’ contract did not expressly provide that payment might be withheld to address liquidated damages and, rather, merely stated, as most liquidated hurt provisions do, that liquidated damages are owed if a venture is not timely completed but with no reference to a hold back?