California Court of Appeal Clarifies Definition of Retention Payments Under Civil Code § 3260

Yassin v. Solis, 184 Cal. App. 4th 524 (Cal. Ct. App. 2010)

By: Carlo L. Rodes and Brett D. Bissett, K&L Gates, Los Angeles

In this case, the court of appeal set forth a definition for retention that applies whenever a contractor seeks an award of penalties for improperly withheld retention under a California prompt payment statute.

The plaintiff-contractor, Diaa Yassin was hired by the defendants-owners, (collectively “Solises”), to improve the Solises’ home. Under the contract, Yassin was to receive a series of payments throughout various stages of construction and the last payment was to be made upon completion of the work and before occupancy. Yassin ultimately sued the Solises for money allegedly owed under the contract. Although the court addressed other matters, a principal issue was the status of the final two payments of $15,000 and whether those amounts qualified as retention payments under California Civil Code § 3260. Under section 3260, if an owner fails to make retention payments within the time prescribed by that section, a contractor may recover a penalty in the amount of 2 percent per month on the improperly withheld amount plus attorney fees.

The trial court awarded the Solises $50,000 in damages and $36,205.14 in attorney fees pursuant to section 3260(g). The trial court reasoned that because the final payment was not due until the certificate of occupancy was issued, the final payment was retention because the amount was withheld until the work was completed and approved.

On appeal, the court overruled the Solises’ fee award on the ground that the last payment did not constitute a retention and, thus, Civil Code Section 3260(g) was inapplicable. The court interpreted a retention to be funds withheld from payment, and not the payment itself. Specifically, the court held that a retention has to be an amount that, by contract, has been retained from an amount owing for work already done, but not presently paid, rather than an unpaid sum or last payment due upon completion. According to the court, the contract at issue did not include retention terms, which are generally a percentage of each progress payment.

The court noted the prior case of Murray’s Iron Works, Inc. v. Boyce, which held that a down payment and final payment are not progress payments under section 3260.1. Murray’s, 71 Cal. Rptr. 3d 317, 330-31 (Cal. Ct. App. 2008). The Yassin court explained, however, that this does not mean that “a final payment due at the conclusion of performance under an installment contract is a retention. It is simply the last installment.” Yassin, 184 Cal. App. 4th at 537.

The Yassin court concluded that section “3260.1 imposes a penalty for the wrongful withholding of a progress payment, [and] it makes sense that § 3260 imposes a penalty on the wrongful withholding of amounts retained from progress payments—i.e. the retention. The remedy [here] for the failure to pay a last installment payment upon completion of services is simply damages for a breach of contract.” Id. The court, consequently, held that the Solises were not entitled to attorney fees under section 3260(g) for improperly withheld retention.