Pacific Western Bank v. Stronghold Engineering CA4/3

BACKGROUND

I.

PUBLIC CONSTRUCTION CONTRACTS AND SECTIONS 22300 AND 7107

A brief explanation concerning retention funds and security deposits in construction contracts, as well as sections 22300 and 7107, provides a useful backdrop for the history of this case and analysis of the appellate issue.

“‘[I]t is common for construction contracts to contain terms that protect an owner’s construction funds. Owners and contractors generally structure their contracts to provide for installment payments to the contractor as the work progresses, typically as the work reaches specified stages of completion. [Citation.] “This payment system adds incentive for the contractor to complete the work and reduces the risk of nonperformance for the owner. A percentage of funds held until completion of all of the work is called retainage and is intended both to reduce the risk of nonperformance by the contractor and to assure the completion of the work in accordance with the contract terms.”’ [Citation.] If the contractor defaults on the construction contract ‘then the owner is entitled to use the retained funds to complete the contract. In fact, this is one of the primary reasons for which the owner…