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    DON’T LOSE YOUR BALANCE WHEN IT COMES TO WITHHELD PROJECT FUNDS AND RECOVERING ATTORNEY’S FEES

    The recent California case of Vought Construction Inc. v. Stock provides clarity on California’s prompt payment statutes and their attorney’s fees provisions. In Vought, a contractor (Vought Construction) brought an action against a homeowner (Stock) seeking recovery of unpaid contract balances for work at Stock’s house, compensation for change order work, and penalties for violation of California’s prompt payment statutes. Stock alleged liquidated damages claims for delay against Vought Construction and withheld project payments to Vought on this basis.

    The trial court entered judgment for Vought Construction on the undisputed balance due and judgment in part on its claim for change order work. But the court also held that Stock was entitled to liquidated damages and had not violated the prompt payment statute at issue. And even though Vought Construction had a net monetary recovery, the court determined that neither party was the prevailing party for purposes of awarding attorney’s fees or costs. Vought appealed.

    The first issue reviewed on appeal was whether or not Stock’s withholding of funds from Vought Construction violated the applicable California prompt payment statute. Here, the statute at issue was Civil Code section 8800, which requires an owner to pay a general contractor within “30 days after notice demanding payment pursuant to the contract is given”.1  But section 8800 also allows an owner to withhold up to 150 percent of an amount due if there is a “good faith dispute” between the owner and general contractor as to a progress payment due. If an owner withholds funds without a good faith dispute, such improper withholding subjects an owner to a “penalty of 2 percent per month on the amount wrongfully withheld”.

    Citing the 2018 case of United Riggers, the Court of Appeal found that Stock was not prohibited from withholding funds otherwise due Vought Construction because there was a good faith dispute based on Stock’s liquidated damages claims, which were offsets to any sum due to Vought.

    The second major issue addressed by the appellate court was whether Vought Construction was the prevailing party for purposes of awarding attorney’s fees; Vought argued that it was the prevailing party pursuant to Code of Civil Procedure section 1032, which defines who a “prevailing party” is. However, here, the source of attorney’s fees claimed was section 8800, not section 1032. The court addressed the difference.

    Citing prior holdings in other California cases, the appellate court stated that unlike section 1032, the prompt payment statutes do not define the term “prevailing party.” And courts in other cases involving statutes that provide that the prevailing party shall recover attorney fees (like section 8800) have found that the determination of whether there is a prevailing party is to be made “on a practical level” after considering what each party accomplished in the litigation. Reviewing the evidence from trial, the appellate court affirmed the trial court’s finding that each party acted in good faith; Vought failed to prove that Stock violated section 8800; and both parties recovered approximately half of what they sought. Therefore, the trial court did not abuse its discretion in finding that neither party was the prevailing party entitled to recover its attorney fees. But the appellate court reversed the trial court’s finding that Vought could not recover its costs because Vought had a net monetary recovery and the court lacked discretion to rule otherwise under section 1032.

    Vought Construction v. Stock illustrates the need for owners and contractors to perform proper analysis on whether or not project funds may be properly withheld. Parties also need to be informed and have proper counsel when analyzing the possibility of recovering attorney’s fees.

    Dustin Lozano is a Shareholder attorney at Hunt Ortmann handling complex construction and business litigation. If you would like additional information about the subject matter of this HuntLaw Update, please contact Dustin Lozano at lozano@huntortmann.com.

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    1 California also has prompt payment statutes that govern payment of retention by owners to general contractors and the timing of progress and retention payments from general contractors to subcontractors.

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    Dustin Lozano

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