Court Examines Definition of Progress Payments in Connection with California’s Prompt Payment Penalty Statute

Murray’s Iron Works, Inc. v. Boyce, 158 Cal. App. 4th 1279 (2008)

In this case, the California Court of Appeal addressed whether the prompt payment penalty statute was properly applied against the owner and, in doing so, provided a definition for progress payments under the statute.

California requires that an owner pay its contractor any progress payment due as to which there is no good faith dispute within 30 days following receipt of a demand for payment.  If there is a good faith dispute between the owner and contactor, the owner may withhold no more than 150 percent of the disputed amount.  Any amount wrongfully withheld by the owner is subject to a penalty of 2 percent per month on the improperly withheld amount, in lieu of any interest otherwise due.  The prevailing party is also entitled to attorney’s fees and costs.  (Cal. Civ. Code § 3260.1.)  Other statutes establish similar requirements for progress payments between contractors and subcontractors (Bus. & Prof. Code § 7108.5) and for payment of retention (Cal. Civ. Code § 3260).

Phillip Boyce (“owner”) hired Murray’s Iron Works (“contractor”) to build and install decorative ironwork at the owner’s residence.  The contractor completed its work on July 16, 2002 and submitted its final invoice on that date.  The owner called the contractor back to the home to address certain punchlist items, which were completed by December 31, 2002.  The owner made a partial payment on the final invoice, but $66,222.40 remained outstanding.  Eventually the contactor sued the owner for the amount of the unpaid invoice.  The owner contended that the contractor did not complete the work necessary to seal and waterproof the ironwork under the contract.  The contractor argued that it substantially, if not fully, completed its work and that any additional work was so trivial that the owner could have easily fixed it.  The contractor also sought an award of prompt payment penalties for the owner’s failure to pay its July 16, 2002 invoice in full where there was no good faith dispute to withhold payment.

The matter proceeded to trial and the jury awarded the contractor the full amount of its requested contract damages ($66,222.40) and prompt payment penalties of $49,004.65, pursuant to Civil Code section 3260.1 (the “prompt payment statute”).  After post-trial motions, the court also awarded the contractor $110,090.23 for attorney’s fees and costs under the prompt payment statute.

On appeal, the court was not persuaded by the owner’s argument that the contractor could not recover under the contract because there was substantial evidence to support the jury’s conclusion that the contractor completed or substantially completed the contract.  The court, however, agreed with the owner and reversed the trial court’s award of penalties and attorney’s fees on the ground that the contractor’s final unpaid invoice was not a “progress payment” under the prompt payment statute.  The contractor argued that, as used in the construction industry, a progress payment is a contractually required payment made as the job progresses and before the project is completed.  The owner argued that the unpaid amount was a final payment, not a progress payment, because it was not due until the project was complete.

The court noted that the term “progress payment” is not defined by the prompt payment statute.  After considering various cases and secondary authority, the court held that “a payment made after construction is completed is not a progress payment because a contractor no longer has the remedy of stopping work and rescinding the contract.  Simply put, the contractor upheld his side of the bargain and the construction is completed.”  Accordingly, the court further held that the term progress payment has a particular meaning in the construction industry and that, as enacted in the prompt payment statute, “a progress payment is a payment other than a down payment that is to be made before the project is completed.”  Because the contactor’s agreement called for payment of the net due upon satisfactory completion of the project, the court concluded that there was no evidence that the owner wrongfully withheld a “progress payment.”  The award of penalties and attorney’s fees was reversed.