FAILURE TO PAY SUBCONTRACTORS CAN BE COSTLY
Business & Professions Code § 708.5 requires that contractors pay any subcontractor no later than 10 days after receipt of a progress payment. Violation of the section subjects the contractor to a penalty of 2% per month plus the payment of attorney’s fees and costs. Until recently there was a question whether the penalty could be collected in a civil suite by an aggrieved subcontractor, or only by the Contractors’ State License Board.
The issue was recently settled in the case of Morton Engineering & Construction v. Patscheck (2001) 87 Cal.App.4th 712. The California Court of Appeal ruled that Business & Professions Code § 708.5 applied to civil actions by subcontractors against contractors for failure to pay promptly amounts due. Moreover, according the to the Court of Appeal, an aggrieved subcontractor can collect prejudgment interest on the penalty as well as the amount due.
If there is a good faith dispute with the subcontractor, the contractor will not be liable for the penalty if no more than 150% of the amount due is withheld.
