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Prevailing Owners Are Entitled to Recover Prompt Payment Attorney Fees in California
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February 27, 2006
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ConstructionWebLinks.com
In a decision that raises the stakes in many construction lawsuits, the California Court of Appeal has held that an owner who prevailed in a lawsuit by a contractor who sought prompt payment penalties was entitled to recover its attorney fees and costs. Taylor v. Van-Catlin Construction, 130 Cal.App.4th 1061 (2005).
Over the last decade, California has enacted many statutes that impose prompt payment requirements and penalties for violation of these requirements. Civil Code §3260 is one such statute, which requires owners to make retention payments to contractors within 45 days after completion of a project and requires contractors to pass along the money to the subcontractors within 10 days after the contractor is paid by the owner. Non-compliance can result in penalties of 2 percent a month on the wrongfully withheld amount plus liability for attorney fees. The owner or contractor is entitled to withhold 150 percent of any amounts over which there is a bona fide dispute.
In Taylor, an owner retained a contractor to remodel a residence. When the owner refused to pay the contractor the full amount due under the contract, the contractor filed a demand for arbitration, and the owner asserted a counterclaim. The arbitrator awarded the owner damages of $156,166.73, subject to an offset of $47,782.58. The arbitrator also awarded the owner $74,310.38 in attorney fees.
The owner filed a petition in Superior Court to confirm the arbitration award. The contractor argued that the award of attorney fees was beyond the arbitrator's authority under the Civil Code §3260 prompt payment statute. The Superior Court found that the arbitrator "seemed to conclude" that there was a bona fide dispute between the parties and that under Darling v. Controlled Environments, 89 Cal. App.4th 1221 (2001), "a party is entitled to attorney's fees only in cases where a bona fide dispute did not exist." The Superior Court reversed the arbitrator's award of attorney fees.
The Court of Appeal reversed and reinstated the award of attorney fees. It noted that in the arbitration, the contractor had requested attorney fees and had asserted that Civil Code §3260 applied to the action. In making its decision, the court was required to address the Darling decision.
In Darling, a subcontractor who installed a concrete floor filed suit to collect retention money due under the subcontract. The contractor did not pay the subcontractor the money because of a dispute over whether the floor flatness met the requirements of the subcontract. Ultimately, the court found that the subcontractor's interpretation was correct and awarded the subcontractor damages.
The subcontractor requested an award of attorney fees as the prevailing party, arguing that whether there was a bona fide dispute was irrelevant. The court held that there was a bona fide dispute between the parties and held that when there is a bona fide dispute, there is no basis for awarding the 2 percent a month prompt payment penalty. The court further held that when there can be no award of the 2 percent penalty, there can be no award of attorney fees.
Ultimately, the Darling court found that the contractor had withheld more than 150 percent of the disputed amount, and the court remanded the case to the Superior Court for further factual determinations and an award of attorney fees. The court held that in determining whether a party withheld more than 150 percent, the court is to look at the circumstances that existed at the time that the payment was not made and not at the circumstances at the time of trial.
In Taylor, the court interpreted the sentence in §3260 providing: "Additionally, in any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney's fees and costs." The court found no ambiguity in this language, stating:
If the funds are NOT wrongfully withheld, the owner will prevail in the contractor's action to recover them. Having prevailed, the owner then "shall be entitled to his or her attorney's fees and costs."
The court in Taylor disagreed with broad language in the Darling decision implying that if the contractor had been the prevailing party, it would have been denied attorney fees because it had acted in good faith (there was a bona fide dispute). If this were the case, the court noted, a prevailing contractor never would be able to recover attorney fees in an action by a subcontractor. The contractor would prevail by showing that the amount withheld was based on a bona fide dispute and the contractor was wrong (as in Darling), in which case neither side recovers attorney fees, or the contractor could prevail by showing that the withheld amounts were based on a bona fide dispute when the contractor was correct (as in Taylor, where the owner was correct).
The Taylor decision is potentially significant. It is common practice in construction litigation to include, in a complaint by a subcontractor against a contractor or a contractor against an owner to collect money due under a contract, a demand for prompt payment penalties. Under Taylor, this triggers the right to recover attorney fees by BOTH the subcontractor and contractor and by the contractor and owner. Under Darling and Taylor, the following rules apply (using the contractor/owner scenario, which would be the same as the contractor/subcontractor scenario):
|  | Owner prevails on the withheld amount: Owner entitled to fee (Taylor).
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| | Contractor prevails on the withheld amount, bona fide dispute found as to withheld amount: No fees to either party. (Darling).
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| | Contractor prevails, no bona fide dispute as to withheld amount: Contractor entitled to fees (Darling).
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Under Darling, a court makes a determination as to the amount in dispute based on the facts as they exist at the time that the withheld amount is not paid. Given that an award of attorney fees now will be available to owners who prevail against contractors and contractors who prevail against subcontractors when prompt payment penalties are demanded, contractors and subcontractors may need to consider, on a case by case basis, whether to include such a demand. Owners and contractors should make a written record, at the time of non-payment, of the basis of non-payment, making sure that the 150 percent exceeds the balance due.
Contractors and subcontractors may wish to implement a procedure, when payment is not received, of issuing a letter to the owner or contractor asking why payment has not been made. If no explanation if forthcoming, this would tend to support inclusion of a request for prompt payment penalties in the complaint. If the response is a detailed breakdown of a backcharge or series of backcharges that appear to have substantial validity, the contractor or subcontractor may hesitate to include a request for prompt payment penalties in the complaint.
Certainly lawyers representing contractors and subcontractors no longer can blithely include a demand for prompt payment penalties in every complaint in any construction collection action.
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