February 02, 2015
Construction Law Alert
Author(s): Matthew A. Richards
A new California Court of Appeal decision raises questions regarding the circumstances under which California public entities may withhold retention on public works projects.
A new California Court of Appeal decision, FTR International, Inc. v. Rio School District  “FTR International”), appears to place new limits on the circumstances under which a California public entity may withhold retention on public works projects under Public Contract Code section 7107(c). FTR International introduces uncertainty into a seemingly well-settled area of California construction law for public entities and public works contractors alike, and raises a host of new questions. The decision also creates a court of appeal split that the California Supreme Court may address sooner rather than later.
Following the completion of construction of a new school for the Rio School District, the general contractor, FTR, sued the District, seeking: (1) additional compensation for proposed change orders (“PCOs”) submitted during construction; and (2) release of retention, along with associated statutory penalties and attorneys’ fees. The District brought a cross-complaint, alleging False Claims Act violations based on FTR’s submission of the PCOs. The District also defended against FTR’s claim for release of retention on the grounds that because it had initially (and properly) withheld funds beyond the 60-day period while stop notices were being resolved, it was privileged to continue doing so while the dispute over PCOs was pending. The trial court granted judgment in favor of FTR and awarded contract damages (including for extra PCO-related work performed by FTR and delay caused by the District), statutory penalties under section 7107, attorneys’ fees and prejudgment interest and costs. The trial court also granted judgment in favor of FTR on the District’s False Claims Act cross-complaint. The District appealed.
On appeal, the Second Appellate District panel upheld the award of penalties under section 7107 for the District’s improper withholding of retention due to FTR.  In doing so, the panel made the following key holdings:
FTR International is the first published case to directly construe the duties of public entities to release retention to general contractors under section 7107(c). In doing so, FTR International expressly rejects Martin Brothers Construction, Inc. v. Thompson Pacific Construction, Inc. and appears to narrow the Martin Brothers holding that any “bona fide dispute” between the parties on a public works project justifies the continued withholding of retention.
Martin Brothers, decided in 2009, dealt with the duties of public works general contractors to release retention to their subcontractors under section 7107(e), which had been presumed to apply equally to the relationship between public entities and general contractors under section 7107(c). In Martin Brothers, the Third Appellate District held that a “bona fide dispute” is any good faith “controversy, debate or quarrel” regardless of the subject matter of the dispute, concluding that the “subject is immaterial to its nature as a dispute.”  Subsequent courts similarly held that a good faith dispute exists so long as there is a legally tenable basis for the dispute. 
FTR International clearly rejects Martin Brothers and its progeny. The FTR International court twice  expressly states that its primary holding—“a dispute over the contract price [i.e., a change order dispute] does not entitle a public entity to withhold funds due to a contractor”—is at odds with Martin Brothers, a decision authored by current California Chief Justice Tani Cantil-Sakauye.
Given the uncertainty that FTR International has introduced into what had been an apparently settled area of California construction law and the Chief Justice’s authorship of the contrary case authority, it may be that the California Supreme Court will choose to address and resolve the conflict between FTR International and Martin Brothers sooner rather than later. If and when the high court does so, the Chief Justice’s role in deciding Martin Brothers may portend the early demise of FTR International.
FTR International seems to raise more questions than it resolves, among them:
For California public entities and public works contractors, the answers cannot come soon enough.
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