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California Civil Code Section 3260

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(a) This section is applicable with respect to all contracts
entered into on or after July 1, 1991, relating to the construction
of any private work of improvement. However, the amendments made to
this section during the 1992 portion of the 1991-92 Regular Session
of the Legislature are applicable only with respect to contracts
entered into on or after January 1, 1993, relating to the
construction of any private work of improvement. Moreover, the
amendments made to this section during the 1993 portion of the
1993-94 Regular Session of the Legislature are applicable only with
respect to contracts entered into on or after January 1, 1994,
relating to the construction of any private work of improvement.
   (b) The retention proceeds withheld from any payment by the owner
from the original contractor, or by the original contractor from any
subcontractor, shall be subject to this section.
   (c) Within 45 days after the date of completion, the retention
withheld by the owner shall be released. "Date of completion," for
purposes of this section, means any of the following:
   (1) The date of issuance of any certificate of occupancy covering
the work by the public agency issuing the building permit.
   (2) The date of completion indicated on a valid notice of
completion recorded pursuant to Section 3093.
   (3) The date of completion as defined in Section 3086.
   However, release of retentions withheld for any portion of the
work of improvement which ultimately will become the property of a
public agency, may be conditioned upon the acceptance of the work by
the public agency. In the event of a dispute between the owner and
the original contractor, the owner may withhold from the final
payment an amount not to exceed 150 percent of the disputed amount.
   (d) Subject to subdivision (e), within 10 days from the time that
all or any portion of the retention proceeds are received by the
original contractor, the original contractor shall pay each of its
subcontractors from whom retention has been withheld, each
subcontractor's share of the retention received. However, if a
retention payment received by the original contractor is specifically
designated for a particular subcontractor, payment of the retention
shall be made to the designated subcontractor, if the payment is
consistent with the terms of the subcontract.
   (e) If a bona fide dispute exists between a subcontractor and the
original contractor, the original contractor may withhold from that
subcontractor with whom the dispute exists its portion of the
retention proceeds. The amount withheld from the retention payment
shall not exceed 150 percent of the estimated value of the disputed
amount.
   (f) Within 10 days of receipt of written notice by the owner from
the original contractor or by the original contractor from the
subcontractor, as the case may be, that any work in dispute has been
completed in accordance with the terms of the contract, the owner or
original contractor shall advise the notifying party of the
acceptance or rejection of the disputed work. Within 10 days of
acceptance of the disputed work, the owner or original contractor, as
the case may be, shall release the retained portion of the retention
proceeds.
   (g) In the event that retention payments are not made within the
time periods required by this section, the owner or original
contractor withholding the unpaid amounts shall be subject to a
charge of 2 percent per month on the improperly withheld amount, in
lieu of any interest otherwise due. Additionally, in any action for
the collection of funds wrongfully withheld, the prevailing party
shall be entitled to his or her attorney's fees and costs.
   (h) It shall be against public policy for any party to require any
other party to waive any provision of this section.
   (i) This section shall not be construed to apply to retentions
withheld by a lender in accordance with the construction loan
agreement.

Last modified: February 13, 2012