Contractors Required to Pay Retention Funds Owed to Their Subcontractors Only Upon Receipt of Funds From Project Owner – Not Earlier

In 2006, the Exposition Metro Line Construction Authority ("Expo") contracted with FCI/Fluor/Parsons ("FFP") to serve as the general contractor for the Exposition light rail line, connecting downtown Los Angeles with Culver City and ultimately with Santa Monica. Blois Construction, Inc. ("Blois") contracted with FFP to serve as a subcontractor for the project, responsible for underground work. Both the primary contract and subcontract contained a provision allowing for a portion of progress payments to be retained pending successful completion of the work. Specifically, Expo, as the project owner, was permitted to withhold ten percent of the payments owed to FFP, and FFP, as general contractor, was entitled to withhold ten percent of the payments owed to Blois.

In December 2009, after fifty percent of the work had been completed, Expo stopped withholding retention funds from its payments to FFP. Expo did not, however, release previously withheld retention funds to FPP until May 2014.

In 2011, Blois finished its work on the project. By that time, FFP had withheld over $500,000 in retentions from Blois. In 2012, Blois filed a lawsuit against FFP alleging that FFP had failed to timely pay Blois the retentions it had withheld. Blois sought the full amount of unpaid retentions plus penalties. In the fall of 2013, while the case was still pending, FFP paid Blois $534,909, the full amount that Blois claimed it was owed in retentions. The trial court, however, denied Blois's demand for penalties. The trial court reasoned that Blois was not entitled to penalties because Expo had not released the retained funds to FFP until 2014 and FFP had paid Blois the full amount of its retention by end of 2013.

Blois appealed and argued that it was entitled to statutory penalties under Public Contract Code Section 7107. Section 7107 states that "within seven days from the time that all or any portion of the retention proceeds are received by the original contractor, the original contract shall pay each of its subcontractors from whom retention has been withheld, each subcontractor's share of the retention received." The statute also provides that a contractor who fails to pay a subcontractor within that time is subject to a penalty of two percent per month on the improperly withheld amount. (Pub. Contract Code, § 7107 subd. (d) & (f).) Blois argued that after December 2009, when Expo made its regular progress payments to FFP without retention, FFP was required to Blois its share of the amount previously retained within seven days or face penalties.

The Court of Appeal rejected Blois's arguments and affirmed the trial court's decision. The Court held that because FFP did not receive any retention proceeds from Expo until May 2014, its obligation to pay Blois under Section 7107 did not arise until at least that date. As the Court explained: "In a complicated public works project, a contractor may wait years before being paid retentions from the owner. The prompt payment statutes guarantee only that subcontractors do not wait significantly longer for payment than direct contractors do. . . . Under the prompt payment statutes, contractors are required to pay subcontractors the retentions owed them upon their receipt from the owner but not earlier."

Blois Construction, Inc. v. FCI/Fluor/Parsons (2016) 245 Cal.App.4th 1091.