School Board Must Pay Retainage Regardless Of Liquidated Damages Claim. And, Soon Public Entities May Have to Pay Interest On The Retainage Too!

Overview

Earlier this year the Louisiana Fourth Circuit Court of Appeals (“Court”) held that a public entity, the Orleans Parish School Board (“School Board”), had to promptly make the final payment of retainage to a Public Works contractor, Woodrow Wilson Construction, LLC (“Woodrow”), despite the fact that the School Board claimed it had a right to withhold liquidated damages from Woodrow per their contract (“Contract”).[1]  Because Woodrow filed a Petition for a Writ of Mandamus[2] to compel payment of the final amounts owed under La. R.S. 38:2191, the Court held that the School Board could not use the liquidated damages argument in the Mandamus Lawsuit as a justification to withhold the final payment to Woodrow.  The liquidated damages argument, according to the Court, could be made by the School Board in the separate, ordinary proceeding lawsuit to enforce the Public Works Contract (“Contract Action”) that Woodrow also filed.  The Court held that the retainage must be paid and Woodrow awarded its attorney’s fees.  Now, with an amendment to La. R.S. 38:2191 about to become effective, a contractor in Woodrow’s situation might also be able to recover interest charged at one-half percent accumulated daily on the retainage owed.

Drilling Down Into The Court’s Decision

(a) Factual Background

The School Board awarded Woodrow a $22 million Contract to build a new elementary and middle school at North Kenilworth Park (“Project”). The Contact stipulated that the Project be complete by the Summer of 2014 and included a liquidated damages clause of $5,000 per day. Construction began in February 2013, but Substantial Completion did not occur until February 2016, 517 days late. The School Board refused to pay Woodrow its final payment using the delay (and the liquidated damages clause) as justification.

(b) Litigation Background – The Road To The Appeal.

On April 24, 2017, Woodrow filed the Contract Action and the Mandamus Lawsuit.  In the Contract Action, Woodrow sought damages, overhead expenses, and general condition damages for the Project delays.  In the Mandamus Lawsuit, Woodrow claimed it was entitled to its final payment under La. R.S. 38:2191. As it was a summary proceeding, the trial court first heard arguments in the Mandamus Lawsuit on July 21, 2017. The trial court denied Woodrow’s mandamus request holding that there was an issue as to whether or not a final payment was due Woodrow under the Contract and that therefore La. R.S. 38:2191 was not applicable.   Thereafter, the trial court designated its denial of Woodrow’s mandamus request   a partial summary judgment, allowing Woodrow to file its appeal with the Court (the Louisiana Fourth Circuit Court of Appeal).

(c) The Appeal

The Court framed the issue on appeal as follows:

The question to be determined on appellate review is whether OPSB [School Board] may withhold final payment due under La. R.S. 38:2191 on the basis that the project was completed behind schedule, despite the fact that liability for the delays has yet to be adjudicated.

The Court analyzed La. R.S. 38:2191, holding that the statute:

      • Requires public entities to “promptly” pay all obligations arising under public contracts as they become “due.”
      • Mandates that final payment is “due” within forty-five days once the public entity: (1) makes formal, final acceptance; and (2) receives the clear lien certificate.
      • Grants a contractor who has not received final payment a legal remedy in which the court is required to compel the public entity to immediately pay the contractor, along with accumulated interest and the contractor’s attorney’s fees.
      • Cannot be waived by a public works contract, which prevents public entities from avoiding its requirements.

The Court zeroed in on the fact that the dispute stemmed from whether Woodrow’s final payment was “due” or not.  The Contract between the parties called for the School Board to pay Woodrow’s retainage upon the completion of six events:

    1. Substantial Completion being achieved.
    2. The Architect and the School Board approving and accepting the Certificate of Substantial Completion.
    3. Woodrow submitting an application for payment for retainage.
    4. Woodrow submitting subcontractors’ lien waivers.
    5. The 45–day lien period in La. R.S. 38:2242 expiring.
    6. Woodrow providing the School Board and the Architect with a clear lien and privilege certificate.

The Court held that Woodrow “fully satisfied” all six contractual requirements (and the statutory requirements) and thus the final payment became due and payable.

The Court did not buy the School Board’s argument that final payment was not due because the project was 517 days late and, through the liquidated damages clause, Woodrow owed the School Board more than the School Board owed to Woodrow.  Instead, the Court held that a dispute over the responsibility for the delay did not affect when the final payment was due because the payment became due as soon as the necessary requirements were met under both the contract and the statute.  And, the Court went on to hold, once these requirements are met, “no provision of the contract can serve to waive WWC’s right to receive final retainage payment.”

The Court also rejected the School Board’s argument that the delay in completion of the Project gave it “reasonable cause” to withhold the final payment. The Court held that La. R.S. 38:2191 is clear and unequivocal: that a public entity may not withhold a final payment that is due for any reason.  To allow the School Board to withhold final payment while the responsibility for the delay is litigated, the Court held, would counter the entire purpose and intent of the statute, which is for contractors be paid promptly.  The Court held that the School Board’s claim for damages for the delayed completion was simply a claim for damages rather than a right to damages.  Conversely, the Court held, La. R.S. 38:2191 grants contractors a statutory right to prompt final payment once that payment is due. Thus, Woodrow had a right to its final payment, while the School Board merely had a claim for delay damages, which the Court held must be adjudicated separately.[3]    

What’s The Story Going Forward?

Some think that the Woodrow decision is radical, as public entities have relied upon their alleged rights to liquidated damages to withhold retainage from contractors for time immemorial. However, the Court’s interpretation of the statute as regards final payment may be directly on point.  Currently, the Woodrow case is binding law on district courts in the parishes under the Court’s jurisdiction (i.e., Orleans, Plaquemines, and St. Bernard). As such, contractors and their counsel in these parishes would be well advised to take the same action as Woodrow and file a mandamus action, as opposed to only filing an ordinary proceeding to enforce the contract lawsuit when faced with a similar situation.[4]  Contractors and their counsel facing similar situations in other Louisiana circuits may want to think about testing the waters in these courts too.

Two other similar (albeit not identical) Louisiana circuit court decisions may give contractors hope that the Woodrow decision will be replicated across the state and be adopted by all five Circuit Court of Appeals (and possibly the Louisiana Supreme Court). In Wallace C. Drennan, Inc. v. St. Charles Parish,[5] The Louisiana Fifth Circuit Court of Appeals interpreted the same statute as the Woodrow Court. Similar to the Woodrow Court, the Drennan court held that the use of the word “shall” in La. R.S. 38:2191(A).

unequivocally expresses a public entity’s mandatory duty to fulfill its contractual obligations as they become due…. and should a public entity fail to fulfill its mandatory duty under La. R.S. 38:2191(A), subsection D, again employing the mandatory “shall,” subjects the public entity to mandamus to compel payment of the sums due under the contract.[6]

Then Louisiana Fifth Circuit Court of Appeals went on to state: “However, subsection D authorizes mandamus relief against public entities failing to make progressive stage payments when the non-payment is ‘arbitrar[y] or without reasonable cause.'”[7]  The Drennan case interpreted the statute as it pertains to “progressive stage payments” rather than “final payments.” And, La. R.S. 38:2191(D) allows for progressive stage payments to be withheld as long as the decision is not arbitrary or without reasonable cause but the language of the statute makes no such exceptions for final payments.  Therefore, if final payment, rather than a progressive payment, is at issue, as in the Woodrow case, the Fifth Circuit may very well adopt the reasoning of the Woodrow court.[8]

The First Circuit has also addressed a similar situation in Quality Design and Construction, Inc. v. City of Gonzales.[9]  There, Quality Design and Construction, Inc. (“Quality”) built a public playground for the City of Gonzales (“City”).  The City, citing defective workmanship, never made the final payment to Quality for the playground, so Quality filed suit and secured a judgment against the City. Quality subsequently filed a writ of mandamus to collect its judgment. The First Circuit stated:

Paragraph C of the statute prohibits waiver of the statutory provisions by contract, further supporting the lack of legislative intent to leave payment of these contracts to the discretion of the City in any way….Further, we find no merit to the City’s argument that its withholding payment of the judgment is reasonable in light of its pending suit against QDC for warranty work and defective products. As specifically ordered by the trial court, those claims encompass an entirely different and separate lawsuit.[10]

The distinction between the Quality decision and the Woodrow decision is that Quality had already secured a final judgment against the city, whereas Woodrow had not. Nevertheless, the First Circuit’s language about a public entity’s lack of discretion in making a final payment seems promising for contractors going forward, regardless of whether a final judgment has previously been rendered against the public entity.

Finally, the Louisiana legislature has recently amended La. R.S. 38:2191 to allow a contractor to collect interest on top of its due payment and attorney’s fees. La. R.S. 38:2191(B) will now read, in pertinent part:

B. (1) Any public entity failing to make any progressive stage payment within forty-five days following receipt of a certified request for payment by the public entity without reasonable cause shall be liable for reasonable attorney fees and interest charged at one-half percent accumulated daily, not to exceed fifteen percent. Any public entity failing to make any final payments after formal final acceptance and within forty-five days following receipt of a clear lien certificate by the public entity shall be liable for reasonable attorney fees and interest charged at one-half percent accumulated daily, not to exceed fifteen percent.

(2) Any interest received by the contractor pursuant to Paragraph (1) of this Subsection, shall be disbursed on a prorated basis among the contractor and subcontractors, each receiving a prorated portion based on the principal amount due within ten business days of receipt of the interest.[11]

This amendment provides more good news for contractors, as contractors are now statutorily entitled to interest when a public entity fails to make timely payments that are due. This amendment will place even more pressure on public entities to comply with the statute and make prompt final payment. Further, it demonstrates legislative intent that the provisions of La. R.S. 38:2191 are mandatory and do not grant public entities discretion to refuse final payment, supporting the holding of the Woodrow Court.

However, as Yogi Berra once said, “it ain’t over ‘til it’s over,” and this saga may only be entering the seventh inning stretch.  The School Board has timely filed a writ of certiorari with the Louisiana Supreme Court, which the Court has not yet ruled upon.   Also, even if the Louisiana Supreme Court does not choose to hear this case, another circuit could hold that a public entity may withhold a final payment if other issues are being litigated, which would lead to a circuit split that the Supreme Court would likely have to decide. For example, if the Fifth Circuit were to expand upon its ruling in Drennan and hold that a public entity may withhold final payment for reasonable cause, the Louisiana Supreme Court would be the final arbiter on whose interpretation of La. R.S. 38:2191 is correct. We will have to wait and see whether contractors can hold on to the lead they’ve built or if public entities come back for a ninth inning victory.

[1]           Woodrow Wilson Constr. LLC v. Orleans Par. Sch. Bd., 2017-0936, 2018 WL 1835817 (La. App. 4 Cir. 4/18/18) (“Mandamus Lawsuit”).

[2]           A summary proceeding which does not have the delays of normal, ordinary proceeding lawsuits.

[3]           The Court also required the School Board to pay Woodrow’s attorney’s fees under La. R.S. 38:2191.

[4]           Of course, if appropriate, filing both a mandamus action and a separate lawsuit to enforce the contract may be advisable.

[5]           16-177 (La. App. 5 Cir. 9/22/16); 202 So.3d 535.

[6]           Wallace C. Drennan, Inc. v. St. Charles Par., 16-177, p. 10 (La.App. 5 Cir. 9/22/16), 202 So.3d 535, 544.

[7]           Id. Emphasis added.

[8]           The Court endorsed this interpretation in St. Bernard Port, Harbor, and Terminal District v. Guy Hopkins Construction Co., Inc., 16-0907, (La. App. 4 Cir. 4/5/17); 220 So.3d 6, 17.

[9]           13-0752 (La. App. 1 Cir. 3/11/14); 146 So.3d 567.

[10]          Id. at p. 7; 572.

[11]          2018 La. Sess. Law Serv. Act 566 (S.B. 94) (emphasis added).