United Riggers & Erectors v. Coast Iron & Steel

Filed 11/23/15; pub. order 12/18/15 (see end of opn.)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
UNITED RIGGERS & ERECTORS, INC., B258860
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. VC062679)
v.
COAST IRON & STEEL CO. et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of Los Angeles County. Thomas
I. McKnew, Jr., Judge. Reversed in part, affirmed in part.
Law Office of Dirk Bruinsma and Dirk Bruinsma for Plaintiff and Appellant.
Westrup & Associates, R. Duane Westrup and Ian Chuang for Defendants and
Respondents.
____________________________________________
This case arises out of a payment dispute between a contractor, Coast Iron & Steel
Co. (Coast), and its subcontractor, United Riggers & Erectors, Inc. (United). After the
work on a project was finished, United sent a demand to Coast to pay for change orders
and for damages that United claimed Coast caused by mismanaging the project. Coast
refused to pay, and also delayed forwarding United’s share of retention payments Coast
had received from the owner of the project.
After a bench trial, the court found in favor of Coast. United appeals, contending
that the trial court erred in finding that Coast was not liable for the extra payments, as
well as for failing to assess penalties and attorney’s fees against Coast for its delay in
forwarding the retention payments.
FACTS AND PROCEEDINGS BELOW
In October 2010, Universal City Studios LLLP (Universal) contracted with Coast
to provide “miscellaneous metals” work in the construction of a new ride at Universal
Studios Hollywood based on the “Transformers” movie series. United in turn signed a
purchase order that served as a subcontracting agreement with Coast.
The subcontract initially called for United to be paid $722,742, but the general
contract between Universal and Coast, which was referenced in the subcontracting
agreement, created a process by which Coast could appeal to Universal for change orders
to increase its compensation when unexpected expenses arose. United submitted change
orders to Coast by means of the same process, and Universal approved change orders
that increased United’s compensation. Coast paid United for change orders totaling an
additional $773,237.60 over the contract price. On a monthly basis, Universal paid Coast
90 percent of the amount provided under the contract and the approved change orders.
Coast forwarded to United its share of the payments as it received them from Universal.
In accordance with the terms of the contract, Universal retained the remaining 10 percent
of all the payments as “retentions” pending final completion of the work. When work on
the project was completed, Universal paid the 10 percent retentions to Coast. Coast owed
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United $149,602.521 as its share of the retention payments. In March, 2012,
approximately two weeks after the work had been completed, Coast sent an email to
United stating, “[p]lease have [a United employee] forward your final [change order]
log along with any outstanding [change order requests] so we can review and coordinate
to make sure everything has been submitted for you.” United responded by sending a
letter demanding $274,158.40 as compensation for “the mis[]management and or
delayed deliveries caused by Coast,” along with $78,384 in outstanding change order
requests. Coast replied with an email reading, “I will see you in court!!”
In January 2013, United filed suit against Coast, seeking $446,857.42 in damages,
plus attorney’s fees, interest, and costs. The suit claimed that Coast owed $149,602.52
in retention payments and $23,186.50 for unpaid change orders, as well as $274,068.40
in damages it attributed to missing parts, lack of communication by Coast, fabrication
errors, delays in installation of steel, and lack of transportation access. In its third cause
of action, United alleged that Coast had violated Civil Code section 8814 (section 8814)
and Civil Code section 8818 (section 8818), which require that contractors pay
subcontractors their share of retention payments no more than 10 days after receipt by the
contractor. The remaining causes of action alleged breach of contract, breach of the
implied covenant of good faith and fair dealing, quantum meruit, and a claim on the
contractor’s bond against defendant Arch Insurance Company.
Three weeks after the case was filed, Coast paid approximately two-thirds of the
withheld retention payment. Ten months later, Coast paid the remaining $42,887. Coast
paid no interest along with its delayed payments. Nor did it pay any of the other damages
United claimed in its lawsuit.
After a bench trial in May 2014, the trial court ruled in favor of the defendants,
finding that United had failed to prove that Coast was responsible for the extra expenses
United incurred, and that United had failed to follow the procedure specified in the
contract when submitting its final change orders. The statement of decision, which Coast
1
This figure was approximately 10 percent of the sum of the original contract price
($722,742) and the approved change orders ($773,237.60).
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prepared and the trial court adopted, stated that “there was a good faith dispute between
Coast and United . . . that entitled Coast to withhold the payment of retention.”
Coast as the prevailing party moved for an award of attorney’s fees pursuant to
section 8818. The trial court granted Coast’s motion in the amount of $150,000. The
court also awarded Coast $5,289.05 in costs as the prevailing party. This appeal
followed.
DISCUSSION
On appeal, United argues that the trial court erred by ruling that Coast was
entitled, because a good faith dispute existed between Coast and United, to withhold the
retention payments. Likewise, United contends that, because it should have prevailed on
the retention claim, the attorney’s fees awarded to Coast must be reversed. United also
contends that the court erred by ruling against it on its other claims.
We agree with United regarding its retention claim and attorney’s fees, and
accordingly we reverse that part of the trial court’s judgment. Otherwise we affirm.
I. Retention Payments
It is common in the construction industry for the owner of a project to pay
contractors on a monthly basis for work as it is completed, but to retain a percentage
of the amount owed as a guarantee of satisfactory performance. A series of
“prompt payment” statutes govern the payment of retentions and other similar payments
to contractors and subcontractors. (These statutes include Civ. Code, § 8800 et seq.,
Bus. & Prof. Code, § 7108.5, and Pub. Contract Code, § 7107, among others.) United’s
entitlement to prompt payment of the withheld retention turns on the interpretation of
those statutes. Most relevant here is section 8814, which provides that, “[i]f a direct
contractor has withheld a retention from one or more subcontractors, the direct contractor
shall, within 10 days after receiving all or part of a retention payment, pay to each
subcontractor from whom retention has been withheld that subcontractor’s share of the
payment.” (Id., subd. (a).) There is an exception to this requirement, however: “If a
good faith dispute exists between the direct contractor and a subcontractor, the direct
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contractor may withhold from the retention to the subcontractor an amount not in excess
of 150 percent of the estimated value of the disputed amount.” (Id., subd. (c).)
At issue here is whether a contractor may withhold the retention when there is a
dispute of any kind between the contractor and a subcontractor, or only when the dispute
relates to the retention itself. If the provision applies to all disputes, then a contractor,
acting in good faith, may retain the retention pending the resolution of the dispute even
if the dispute relates to other matters. If, on the other hand, the provision limits the
withholding of the retention to only those disputes related to the retention itself, then
despite any other disputes, the contractor must forward the retention within 10 days.
Failure to do so subjects the contractor to a monthly penalty of 2 percent of the unpaid
amount and attorney’s fees. (§ 8818.)
Coast did not claim below or here that a dispute relating to the retention existed.
Rather, the dispute was about change orders and other claimed damages. Nonetheless,
the trial court found that Coast was justified in withholding the retention because it had a
“good faith dispute” with United.
At the time the trial court made its decision there was no case directly on point,
nor is there one now. But at the time of the decision there was case law interpreting
Public Contract Code section 7107 (section 7107), which functions identically to
section 8814 with respect to contracts with public entities. Just as section 8814,
subdivision (c), allows a contractor to withhold retention payments from a subcontractor
in case of a good faith dispute, section 7107, subdivision (e) provides that “[t]he original
contractor may withhold from a subcontractor its portion of the retention proceeds if a
bona fide dispute exists between the subcontractor and the original contractor. The
amount withheld from the retention payment shall not exceed 150 percent of the
estimated value of the disputed amount.”
When the trial court decided this case, the prevailing authority on section 7107
was Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. (2009)
179 Cal.App.4th 1401 (Martin Brothers), which held that a contractor with a good faith
dispute with a subcontractor could withhold the retention even if the dispute was not
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about the retention. Since then a different court of appeal has taken the opposite view
and held that withholding the retention is justified only if the dispute is about the
retention itself. (East West Bank v. Rio School Dist. (2015) 235 Cal.App.4th 742(East West Bank). We agree with East West Bank.
In Martin Brothers, a public school district contracted with the defendant to build
a high school, and the defendant subcontracted with the plaintiff to do clearing, grading,
and paving work. (Martin Brothers, supra, 179 Cal.App.4th at p. 1406.) Throughout
the course of construction, the subcontractor did extra work above what was called for
in the contract. (Ibid.) In some cases, change orders were approved to authorize the
extra work, but in other cases, the contractor disputed the subcontractor’s entitlement
to extra payment. (Ibid.) The subcontractor eventually filed suit, seeking the withheld
retention payments and compensation for unpaid extra work and change orders.
(Id. at p. 1408.) The contractor ultimately paid virtually the full amount that the
subcontractor demanded, but the subcontractor continued the suit in order to seek
penalties and attorney’s fees. (Id. at p. 1409.)
The Martin Brothers court affirmed the trial court’s judgment denying the
subcontractor relief. (Martin Brothers, supra, 179 Cal.App.4th at pp. 1417-1418.) The
court rejected the subcontractor’s argument that, because the statute was intended to
protect subcontractors, contractors were entitled to withhold retention payments only if
there was a dispute over the amount of retention owed. (Id. at p. 1411.) It concluded
that the statute was not ambiguous: “The statute contains no language restricting the
word ‘dispute’ to any particular kind of dispute other than it must be ‘bona fide.’”
(Id. at p. 1412.)
In reaching that conclusion, the court in Martin Brothers failed to pay sufficient
heed to our Supreme Court’s instruction that, when interpreting the plain meaning of
a statute, “[w]e do not examine [its] language in isolation, but in the context of the
statutory framework as a whole in order to determine its scope and purpose and to
harmonize the various parts of the enactment.” (Coalition of Concerned Communities,
Inc. v. City of Los Angeles (2004) 34 Cal.4th 733, 737.) As the Martin Brothers court
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acknowledged, the remedial purpose of the prompt payment statutes is “‘to encourage
general contractors to pay timely their subcontractors and to provide the subcontractor
with a remedy in the event that the contractor violates the statute.’” (Martin Brothers,
supra, 179 Cal.App.4th at p. 1410, quoting Morton Engineering & Construction, Inc. v.
Patscheck (2001) 87 Cal.App.4th 712, 720.) Yet its interpretation of “dispute” promoted
the opposite result.
The East West Bank court found the proper balance between the broader
remedial purpose of the prompt payment statutes and the right of contractors to insist
on satisfactory performance from subcontractors prior to final payment. Like Martin
Brothers, supra, East West Bank concerned the interpretation of section 7107.2 In East
West Bank, a school district contracted with a contractor to build a high school. (East
West Bank, supra, 235 Cal.App.4th at p. 745.) The school district refused to pay for most
of the contractor’s change orders, to release retention payments, or to pay other damages
upon completion of the project. (Id. at p. 746.) The contractor sued, and after a bench
trial, the trial court found in favor of the contractor, awarding damages that included
statutory penalties pursuant to section 7107. (Id. at p. 747.)
The East West Bank court affirmed the trial court’s judgment, holding that
because there was no dispute regarding the retention payments themselves, the district
was required to pay the contractor within the time specified by statute, regardless of
whether there was a bona fide dispute regarding duties not related to the retention
amount. (East West Bank, supra, 235 Cal.App.4th at pp. 748-749.) The court reasoned
that “[w]hen [a remedial statute’s] meaning is doubtful, it will be construed to suppress
the mischief at which it is directed.” (Id. at p. 748.) According to the East West Bank
court, “[s]ection 7107’s purpose of ensuring the prompt release of retention funds would
not be served if any dispute justified retaining the funds. There is no reason to allow a
public entity to retain the funds once their purpose of providing security against
2
Because this case involved a dispute between an owner and a direct contractor,
the relevant provision was section 7107, subdivision (c), which requires public entities to
pay retentions within 60 days unless there is a dispute.
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mechanics liens and deficiencies in the contractor’s performance has been served. Unless
the dispute relates to one of those purposes, the public entity will not be protected from
the statutory penalty.” (Id. at pp. 748-749.)
The East West Bank court’s interpretation allows primary contractors to withhold
retention payments to protect themselves from substandard or inadequate work by
subcontractors. The additional 50 percent of the 150 percent withholding provision
allows some margin for error, so that general contractors are protected even if it turns out
that the estimated amount is inadequate to correct for substandard work. At the same
time, subcontractors receive prompt payment of money that they are undisputedly owed.
In this case, Coast did not deny that it owed United the full $149,602.52 retention that it
withheld. The only dispute was over whether United was also entitled to other payments
it claimed. To excuse Coast in this case from paying United the retention payments
would unduly increase the leverage of owners and primary contractors over smaller
contractors and subcontractors by discouraging subcontractors from making legitimate
claims for fear of delaying the retention payment.
We thus hold that, pursuant to section 8814, subdivision (c), a contractor is
entitled to withhold a retention payment only when there is a good faith dispute regarding
whether the subcontractor is entitled to the full amount of the retention payment.
Accordingly, we reverse the judgment of the trial court as to this issue. On remand,
the trial court is directed, pursuant to section 8818, to award United penalties and, as
discussed below, attorney’s fees for the delayed retention payment claim.
II. Attorney’s Fees
The trial court granted Coast $150,000 in attorney’s fees as the prevailing party in
the litigation. Section 8818 provides that “[i]f an owner or direct contractor does not
make a retention payment within the time required by this article . . . (b) [i]n an action for
collection of the amount wrongfully withheld, the prevailing party is entitled to costs and
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reasonable attorney’s fees.”3 Because we have reversed the trial court’s judgment in
favor of Coast under this section, it is not the prevailing party with respect to the
retention payments. The trial court’s judgment relating to attorney’s fees is therefore
reversed. The court on remand shall determine and award attorney’s fees to United,
including attorney’s fees for this appeal as it relates to the retention claim.
III. Breach of Contract Claims
In addition to its claim for unpaid retentions, United also sought $297,254.90 in
damages for breach of contract, including for unpaid change orders and for additional
costs that United claimed Coast caused it to incur. The trial court ruled in favor of Coast
on these claims, finding that United had not followed the contractual procedure for
seeking additional compensation, and that, in any case, United had not proved its
damages. United challenges the court’s decision, contending that the court erred in its
ruling on the contractual requirements, and that this error tainted the court’s conclusion
on damages. We disagree and affirm the trial court as to these issues.
The contract between Universal and Coast created a method by which Coast could
claim additional compensation beyond the amount the original contract called for. Coast
3
In addition to awarding Coast attorney’s fees under section 8818, the trial
court stated that Coast was entitled to attorney’s fees pursuant to section 7107,
subdivision (f), and Business and Professions Code section 7108.5 (section 7108.5),
subdivision (c). Neither provision applies to this case. Section 7107 applies to the
construction of public works, not private construction contracts like those at issue here.
Section 7108.5 governs progress payments on ongoing work, not the repayment of
retention payments. At oral argument, Coast contended that even if we were to reverse
the trial court’s decision with respect to retention payments, Coast would still be entitled
to attorney’s fees because it prevailed with respect to United’s contract claims, and
United cited section 7108.5 in its complaint in support of those contract claims. In fact,
both Coast and United consistently and mistakenly believed throughout the course of this
case that section 7108.5 governed retention payments. As late as its brief on appeal,
Coast wrote that “[t]he attorney fee provisions of section 7108.5 [subdivision] (c) warn
contractors and subcontractors not to assert meritless retention claims.” The subject that
section 7108.5 covers, the timely payment of progress payments, was simply not part of
this case, and United’s contract claims cannot be understood as allegations of withheld
progress payments. Coast may not recover attorney’s fees under section 7108.5,
subdivision (c) simply because United cited that section in its complaint.
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was required to “give Universal written notice of any claim [for increased payment] not
later than three (3) days after the occurrence of the event giving rise to the claim, but
(except in the event of emergencies) prior to the incurring of any expenses by [Coast].
[Coast] expressly waives its right to an increase in the Contract Sum unless it complies
with the notice provisions of this paragraph.” Coast issued a purchase order to United
that constituted the subcontract between the parties. That purchase order stated that “[a]ll
work is to be performed in accordance with the General Contract and the Contract
Documents referred to in the General Contract . . . . [¶] [United] agrees to be bound to
Coast Iron & Steel Co. as Coast Iron & Steel Co. is bound to [Universal].”
United contends that it was not bound to follow the terms of the general contract
regarding additional costs because “the subcontract was not the same as the prime
contract; it merely incorporated provisions of the prime contract for the purposes of
effectuating the subcontract.” United further argues that the parties did not follow
the timing provisions of the contract, and that industry standards did not require strict
compliance with these timelines but allowed for United to wait as long as a month after
work was completed to submit change orders.
We need not reach the merits of United’s claims because United has failed to
show that the trial court erred in its determination that United failed to prove damages.
On appeal, United challenges the trial court’s ruling on damages in only one respect:
It contends that the court’s misinterpretation of the parties’ responsibilities in submitting
change orders “tainted its application of the modified total cost theory.” Nothing in
the record supports such a conclusion. The court found that United failed to meet the
requirements of the modified total cost theory on several bases independent of the change
order requirements of the contract.
Under this method, damages are the amount of the total cost of performance
reduced by the amount required to be paid under the contract. (Amelco Electric v. City of
Thousand Oaks (2002) 27 Cal.4th 228, 243.) To prevail on this damage theory, a
plaintiff must demonstrate the following: “(1) the impracticality of proving actual losses
directly; (2) the plaintiff’s bid was reasonable; (3) its actual costs were reasonable; and
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(4) it was not responsible for the added costs.” (Ibid.) “If some of the [sub]contractor’s
costs were unreasonable or caused by its own errors or omissions, then those costs are
subtracted from the damages to arrive at a modified total cost.” (Dillingham-Ray Wilson
v. City of Los Angeles (2010) 182 Cal.App.4th 1396, 1408.) The court found that
United failed to meet the requirements of the modified total cost theory on several
bases independent of the change order requirements of the contract: (1) United failed to
demonstrate how the absence of Coast’s representative on the work site caused damages;
(2) The lack of necessary parts did not add to United’s costs because United was always
able to shift to other available work while waiting for parts to arrive; and (3) United’s
expert failed to demonstrate that Coast was responsible for delays. These findings
preclude recovery under any theory of damages.
DISPOSITION
The judgment of the court is reversed with respect to retention payments and
attorney’s fees. The case is remanded to the trial court for further proceedings to
determine penalties and attorney’s fees to which United is entitled, including fees for this
appeal. The judgment is otherwise affirmed.
ROTHSCHILD, P. J.
We concur:
JOHNSON, J.
LUI, J.
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Filed 12/18/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
UNITED RIGGERS & ERECTORS, INC., B258860
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No. VC062679)
v.
CERTIFICATION AND
COAST IRON & STEEL CO. et al., ORDER FOR PUBLICATION
Defendants and Respondents.
The opinion in the above-entitled matter filed November 23, 2015, was not
certified for publication in the Official Reports. For good cause it now appears that the
opinion should be published in the Official Reports and it is so ordered.
ROTHSCHILD, P. J. JOHNSON, J. LUI, J.
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