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Payments, Payments, Payments. When Are They Partial And When Final?

When is a payment to a contractor a progress payment and when is it a final payment?  Why does it matter?

Well, penalties may apply, and then again they may not.  Under California Civil Code section 3260.1, a progress payment withheld without a good faith dispute may require payment of a two percent per month penalty.  The penalty is based on the amount in dispute if the payment is unjustifiably withheld.  Otherwise, if there is a good faith basis for the dispute, then the owner may legitimately withhold 150% of the disputed amount of the progress payment. 

On the other hand, if the dispute involves a final payment -- as opposed to a progress payment -- then the statute doesn't apply at all.  No need for a good faith dispute, no penalties apply; nothing. 

You know.  Zip.  Zero.  Nada.

That's the ruling in Murray's Iron Works, Inc. v. Boyce, a California appellate decision handed down yesterday.  Here's the facts: 

Phillip Boyce contracted with Murray's Iron Works to install decorative railings in his home. As required by the contract, Boyce paid MIW 50 percent of the contract price upon signing, the balance upon completion. MIW completed the job in July 2002.  Boyce gave MIW a punch list.  MIW completed satisfied the punch list in December 2002. Boyce paid $50,000, but withheld the balance of $66,222.40.

In February 2003, Boyce told MIW he wanted actual gold leaf on the railings, not imitation gold leaf.  MIW argued with Boyce and said the contract did not require actual gold leaf.  Boyce still did not pay the balance.

MIW then refused to return to touch-up some sealant. defects, which would have taken only a couple of hours.  MIW next sued Boyce.  Boyce testified that he was quite happy with MIW's work until he discovered the imitation gold leaf.

The jury awarded MIW the $66K in dispute and then $49,004.65 in penalties under Civil Code § 3260.1.  The Court of Appeal upheld the $66K award reasoning the jury could have easily determined the work as substantially complete. The Court reversed the penalties, awarding MIW no penalties since it determined the last payment did not qualify as a progress payment, making the statute inapplicable. 

Posted by J. Craig Williams on Wednesday, January 16, 2008

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