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Construction Industry News

Court Strictly Applies Prompt Payment Law in Favor of Subcontractor


April 2, 2001


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Howrey LLP

Morton Engineering and Construction, Inc. was hired by Stanley Patscheck as concrete subcontractor on a project for the El Tejon Unified School District. Patscheck failed to pay Morton for its work, claiming that it was suffering from financial problems caused by another subcontractor. When Patscheck received the retention proceeds from the public agency, he offered Morton $42,800 as full and final settlement of all claims arising out of the project. This was the amount Patscheck admitted was due Morton under the contract but excluded the cost of extra work, interest and penalties. Morton rejected the offer.

Morton obtained a judgment that included penalties for failure to make progress payments and to pay retention within the time required by California Business and Professions Code §7108.5 and California Public Contract Code §7107. Patscheck appealed, asserting that the penalty in §7108.5 only can be awarded in a disciplinary action before the Contractors State License Board and that the trial court miscalculated the interest and penalties. The appeal was rejected. Morton Engineering and Construction, Inc. v. Stanley Douglas Patscheck, 2001 DAR 2413 (2001)

Section 7108.5 provides that upon receipt of a progress payment, the contractor must pay subcontractor within 10 days the amounts allowed the contractor for the work performed by the subcontractor. The contractor may withhold from a progress payment up to 150 percent of any amount over which a good faith dispute exists.

Two sanctions are provided if the contractor fails to pay the subcontractor as required: 1.) a disciplinary proceeding and 2.) a penalty of 2 percent a month on the balance payable to the subcontractor.

Patscheck argued that only CSLB and not a court could impose the 2 percent a month penalty on a contractor. The court held that because §7108.5 does not limit recovery of the 2 percent penalty only to disciplinary proceedings, the plain meaning of the statute allows recovery of the 2 percent penalty in either a disciplinary proceeding or a civil action.

Patscheck also argued that allowing recovery of prejudgment interest pursuant to Civil Code §3287 and the 2 percent penalty would result in a double recovery for the subcontractor. The court disagreed, holding that both interest and penalties are recoverable. Prejudgment interest is intended to compensate the subcontractor for loss of use of the funds. The 2 percent penalty is intended to penalize the contractor for failing to comply with statutory requirements. The court held that "to preclude recovery of both the 2 percent penalty and prejudgment interest would defeat the purpose of the statute and reduce the impact of the 2 percent penalty."


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©2001 Howrey LLP

More than 500 online news and legal reports on construction law, including claims, payment remedies, damages, government contracting, insurance, building codes, licensing, technology, arbitration, engineering, architecture, infrastructure

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