An interesting decision involving a construction contract was recently issued by the Second District California Court of Appeals. See Regency Midland Construction, Inc. v. Legendary Structures, Inc., Case No. B292602 (Cal. App. 2nd Dist. November 7, 2019). The result of the litigation turned on this retention clause in the contract:

“Ten percent (10%) of Subcontractor’s contract amount shall be withheld and will be released 35 days after completion of subcontractors work.”

Note the absence of a possessive apostrophe in the second-to-final word. That lack of apostrophe allowed the two parties to offer differing interpretations of the clause, leading to intense and expensive litigation. The case is interesting for an example of how California courts interpret contracts that contain misspellings and strike-outs and hand-written additions. Fortunately for Regency, the absence of that second apostrophe did not result in a litigation loss. But, at the same time and as noted, the missing apostrophe resulted in expensive litigation which created an unnecessary risk of a litigation loss had the court ruled differently. The case provides a good example of why it is imperative to retain an experienced San Diego corporate attorney to carefully draft and review your business contracts.

The facts of the case were these: The general contractor, Regency Midland Construction, Inc., hired a subcontractor, Legendary Structures, Inc., to do concrete work for a 71-story apartment building project. As is customary in the building trades, Regency retained 10% of each payment to Legendary as a guaranty of performance. When Legendary stopped working on the project, Regency hired a new concrete subcontractor to finish the project. Regency took the position that it was entitled to keep the 10% withheld from Legendary. Legendary took the position that it was entitled to payment of the 10% retention when the replacement subcontractor finished the job. Litigation ensued.

Legendary interpreted the meaning of the words “subcontractors work” — no apostrophe — in the retention clause to mean that Legendary was entitled to payment of the retained sums if any concrete subcontractor finished the concrete work. Regency’s position, by contrast, was that the two words meant Legendary’s work specifically. Since Legendary did not finish the work, Regency was entitled to keep the retention funds.

The trial court ruled in favor of Regency and the Court of Appeals affirmed. The retention clause itself was interesting because, in its original form, it contained strikeout wording, a typed substitute insertion, and two sets of handwritten initials in the margin to show approval of the wording change. The original clause read: “Ten percent (10%) of Subcontractor’s contract amount shall be withheld and will be released 30 days after final completion of the building.” The final eight words were stricken out and replaced with a typed insertion of the following: “35 days after completion of subcontractors work.” (no possessive apostrophe).

Because of the nature of the contract and because of other provisions in the contract, ultimately, the court held that the absence of the apostrophe was “a simple error.” The court noted that the contract defined “subcontractor” as Legendary. The court also noted that, generally in the construction industry, the purpose of a retention clause is to guaranty that the work gets done. Further, it is customary for the retention money to be forfeit if the work is not done by the subcontractor at issue. Based on all the considerations, the award for Regency was affirmed.

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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