Can an Owner Withhold Payment of Disputed Amount to Contractor?
In the recent decision in Vought Construction, Inc. v. Stock, the appellate court answered this question "Yes, but rendered a split decision.
Vought Construction Inc. (Vought) appealed from a judgment following a bench trial on its claims against homeowner Jay Stock.
Vought sought recovery of the balance due on his contract for the renovation of a house owned by Stock, additional compensation pursuant to a disputed change order, and penalties for the violation of a prompt-payment statute, Civil Code section 8800 (section 8800).
Stock did not dispute the unpaid amount Vought had earned for finished work under the terms of their agreement as modified by approved change orders, but he disputed the claim for additional compensation and asserted an offsetting claim for liquidated damages for delay.
The trial court held that Vought was entitled to the undisputed balance due plus approximately half the disputed amount it claimed in additional compensation; that Stock was entitled to approximately half the amount he claimed as liquidated damages; and that Stock had not violated section 8800 by withholding final payment pending resolution of the controversy.
The trial court held that neither side had prevailed, so that neither was entitled to attorney fees under section 8800 or to costs of suit under Code of Civil Procedure section 1032.
The appellate court concluded that the trial court correctly ruled that the recent case of United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. did not prohibit Stock from temporarily withholding payment, and did not abuse its discretion in holding that neither party was the prevailing party for the purpose of awarding attorney fees under section 8800.
However, Vought was found to be the prevailing party for the purpose of recovering costs under Code of Civil Procedure section 1032.
In September 2019, Stock and Vought entered a modified form contract for a home renovation project.
They replaced the form’s references to “architect” with “owner” because Stock’s architect had retired, and Stock intended to perform the project-administration role that the form provides will be performed by the project’s architect.
The contract stated a “contract sum” of $374,000 to be paid in installments for the specified work. It required Vought to substantially complete the work by January 13, 2020, subject to potential adjustments.
If Vought failed to complete the work by the adjusted date, Stock was entitled to $300 per day of delay as liquidated damages. Vought was required to submit a biweekly application for payment (AFP).
Stock was to pay, within seven days of receiving an AFP, a sum calculated as follows: Determine the portions of the contract sum allocable to completed work and to materials and equipment procured, subtract payments already made, and subtract any amount for which Stock had wholly or partly withheld or nullified an AFP based on, inter alia, evidence that the project would not be completed by the deadline and that the unpaid contract balance would not cover liquidated damages due for delay.
Over the course of the project, Stock approved eight change orders or other adjustments that raised the agreed contract sum by a total of $69,000, to $442,000. The parties also agreed to extend the substantial completion date to February 11, 2020.
The problems arose from a “relatively small” component of the project described as installation of some fairly particular and involved railings that would match ones that Stock already had on the interior of the home.
The court found that the railings were sophisticated and complicated and required a significant amount of detail.
Further, Stock was under the impression that these railings could be purchased, ordered, and installed, without a sophisticated set of architectural drawings, because in his experience that had not been required for the work done inside his house.
The court found that it was not until January 24, 2020—four months after work began in September 2019, and three weeks before the adjusted substantial completion date of February 11, 2020—that Vought confronted the need to have architectural drawings and the need to get firm prices for the materials that it would take to make this installation, and raised the issues with Stock.
Because of ensuing delays in obtaining the requisite drawings and materials—exacerbated by the onset of the COVID-19 pandemic—Vought was unable to finish installing the railings until August 2020. Work on all other parts of the project was substantially complete and approved by inspectors by late May 2020.
Vought sent Stock an AFP showing an updated contract sum of $73,000 then unpaid but did not request immediate payment.
Vought sent another AFP effectively identifying the same $73,000 as unpaid, valuing the work left to perform as $41,000, and demanding immediate payment of $32,000. Stock made no payment.
Vought sent an AFP and a proposed $50,000 change order for the railings. The June AFP included the $50,000 and sought immediate payment of $78,000, equaling the difference (with minor variances) between the agreed, adjusted contract price of $437,000 (not including the unapproved $50,000 change order) and the payments to date of $363,000. Stock rejected the change order and made no payment.
Vought recorded a mechanic’s lien against the property for $78,000, and filed this action.
Vought sent an AFP with a proposed change order for $10,000 in legal costs and interest on unpaid progress payments. The AFP demanded payment of $142,000 (including the value of both unapproved change orders). Stock made no payment.
The project was completed, and the work was satisfactory and priced by agreement at a value at least $73,000 more than Stock had paid, but Stock claimed he was entitled to withhold liquidated damages of $53,000. Four months later, Stock paid Vought $20,000.
At trial, Stock testified that "I realized I could [with]hold more than my liquidated damages claim, according to the law, but I didn’t want more than my liquidated damages claim.”
The trial court made findings establishing that the undisputed difference between the agreed total price of the work and the amount already paid was $79,000 as of August 2020, and $59,000 as of December 2020. On Vought’s claim for $50,000 in additional compensation for the railings, the court found Vought entitled to $31,000.
On Stock’s claim for liquidated damages, the court found that, no later than 30 days after Vought began work—that is, by October 18, 2019—it should have begun to investigate what it would have to do to timely procure and install the railings.
The court thus found that 98 of the 178 days’ total delay, from October 18, 2019, to January 24, 2020, were attributable to Vought, that none of the delay after January 24 was attributable to Vought, and that neither party “really controlled the outcome” after that date.
The court thus awarded Stock $29,000 on his cross-claim for liquidated damages (98 days at $300/day).
As of one week after the completion date, the court thus held, the true unpaid balance—taking into account both the undisputed claims and the disputed claims as resolved at trial—was $81,000. After Stock’s $20,000 payment in December 2020, the unpaid balance was $61,000.
The court awarded Vought contractual interest at 1.5 percent per month on a balance of $81,000 from August 14 to December 4, 2020, and on a balance of $61,000 from that date onward.
It found that each party had acted unreasonably in part, but in good faith, in withholding or demanding greater payment, and each had prevailed in part.
At a hearing four weeks later the trial court stated that it has a fair amount of discretion in determining which party is the prevailing party, and considering the case in its totality, the court held that neither party is the prevailing party.
It ruled that fees under Section 8800 are not appropriate because there was a good faith dispute between the parties as to what needed to be paid.
Vought’s opening brief on appeal made four main contentions: (1) that Stock violated section 8800 as a matter of law; (2) that also as a matter of law Vought is the prevailing party under Code of Civil Procedure section 1032 and therefore the prevailing party for purposes of attorney fees under section 8800; (3) that delays due to Stock’s bad-faith performance of his role as architect bar his liquidated damages claim; and (4) that the court erred in failing to order foreclosure of the mechanic’s lien.
Section 8800 states, (a) Except as otherwise agreed in writing, the owner shall pay the direct contractor, within 30 days after notice demanding payment pursuant to the contract is given, any progress payment due as to which there is no good faith dispute between them.
(b) If there is a good faith dispute between the owner and direct contractor as to a progress payment due, the owner may withhold from the progress payment an amount not in excess of 150 percent of the disputed amount.
An owner who violates the statute is liable for penalties, costs, and attorney fees.
Vought contends that section 8800 did not allow Stock to withhold the $79,000 progress payment undisputedly earned and unpaid in August 2020 based on his disputed claim for liquidated damages and the disputed change orders.
Vought relied on United Riggers which involved a dispute between a direct contractor (contractor) and a subcontractor under a parallel prompt-payment statute, Civil Code section 8814. That statute governs retention payments from contractors to subcontractors, but the analysis in United Riggers applies to all prompt payment statutes, including section 8800.
The holding in United Riggers had no application here, to a good faith dispute over an amount that would reduce, rather than increase, the net amount otherwise due.
Thus, Stock was not prohibited from withholding the $79,000 otherwise due based on his good faith claim for liquidated damages, which gave him a good faith argument for why all or a part of the withheld monies themselves were no longer due.
Although Stock claimed only $53,000 in liquidated damages, section 8800 authorized him to withhold 150 percent of that amount, slightly more than the $79,000 otherwise undisputedly due Vought as of August 14, 2020.
In short, the trial court properly held that Stock did not violate section 8800 by withholding payment of the amount due Vought pending resolution of his claim for liquidated damages.
Section 8800, subdivision (c) states, “In an action for collection of the amount wrongfully withheld, the prevailing party is entitled to costs and a reasonable attorney’s fee.”
Arguing that the definition of “prevailing party” in section 1032 controls, Vought’s opening and reply briefs contend it is the prevailing party because it secured a “net monetary recovery.”
However, the definition in section 1032, discussed below, does not govern the meaning of the term in other statutory provisions that authorize an award of attorney fees.
Indeed, Stock arguably was the prevailing party here because the court correctly held that he did not violate section 8800 by withholding less than 150 percent of the disputed amount of liquidated damages.
However, the appellate court agreed with the trial court that it had the discretion to determine which, if either, party prevailed.
Subdivision (a)(4) of Code of Civil Procedure section 1032 defines the prevailing party for the purpose of recovering routine costs in a civil action.
Prevailing party includes the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant. If any party recovers other than monetary relief and in situations other than as specified, the prevailing party shall be as determined by the court.
Vought is unquestionably the party with a net monetary recovery, specified in the first sentence. It recovered $61,000, plus interest. It is clear from the statutory language that when there is a party with a net monetary recovery (one of the four categories of prevailing party), that party is entitled to costs as a matter of right; the trial court has no discretion to order otherwise.
The parties’ contract did not include an attorney-fee provision.
The trial court did not resolve Vought’s cause of action to foreclose on its mechanic’s lien.
Vought contends the court erred in failing to adjudge a lien on the property in the sum of $78,241.57 plus interest, and to order foreclosure, as Stock raised no defense to the lien.
Stock responded that the judgment is for a lesser amount $77,870.70 than the requested lien.
But if a lien is excessive in amount, absent evidence of fraud the court should simply order it reduced to the amount due.
Vought proved the elements of a cause of action to foreclose on a mechanic’s lien: the fact that its labor, services, and materials were used in a work of improvement, the reasonable value of its contribution, and the date the work was complete.
It is entitled to a judgment ordering foreclosure on the lien—subject, of course, to Stock’s right of redemption (Civ. Code § 2903) and to Vought’s duty to credit against the lien any payment received pursuant to its personal judgment against Stock (§ 8468, subd. (b)).
The judgment was affirmed insofar as it awarded Vought the principal sum of $61,105.45 plus contractual prejudgment interest.
The order striking Vought’s cost memorandum was reversed, and the matter was remanded so that the trial court may award Vought contractual prejudgment interest through the date of entry of a revised judgment, award it routine litigation costs pursuant to Code of Civil Procedure section 1032, subdivision (a)(4), and order foreclosure on Vought’s mechanic’s lien.
LESSONS:
1. Except as otherwise agreed in writing, the owner shall pay the direct contractor, within 30 days after notice demanding payment pursuant to the contract is given, any progress payment due as to which there is no good faith dispute between them.
2. Fees under Section 8800 are not appropriate if there was a good faith dispute between the parties as to what needed to be paid.
3. The elements of a cause of action to foreclose on a mechanic’s lien are (1) labor, services, and materials were used in a work of improvement, (2) the reasonable value of its contribution, and (3) the date the work was complete.