Before you withhold payment on a Public Works Project

The Court in East West Bank v. Rio School District dealt with withholding payments on a public works project. The court dealt with the Prompt Pay Statute Public Contract Code Section 7107. The Court dealt with a contractor who was awarded a $7 million plus contract for the Rio School District. It submitted over 150 change order requests which were mostly denied. The school district withheld almost $700,000 and the contractor sued for damages and wrongfully withholding the retention funds under 7107. The school district contended that it could withhold funds based upon a bona fide dispute. The Court rejected the school districts argument stating that the purpose of the retention was to provide security against potential mechanics liens and and to insure the contractor completed the work and repaired deficiencies. While there is a split of authority between the circuit courts, public entities and general contractors must be very cautious in not paying based upon disputes, bona fide or not. They should immediately discuss such decision with a construction attorney and try to resolve the issue.