INVESTMENT OF THE RETAINED PERCENTAGE OF MONEYS EARNED IN PUBLIC WORKS CONTRACTS

CONTRACTS - PUBLIC WORKS - INVESTMENT OF THE RETAINED PERCENTAGE OF MONEYS EARNED IN PUBLIC WORKS CONTRACTS

Section 1, chapter 38, Laws of 1970, relating to the investment of the retained percentage of moneys earned in public works contracts, is not applicable to contracts which were executed prior to its effective date.

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                                                                 October 5, 1970

Honorable George H. Andrews
Director of Highways
Highways-Licenses Building
Olympia, Washington 98501

                                                                                                                 Cite as:  AGO 1970 No. 21

Dear Sir:

            By letter previously acknowledged, you have requested the opinion of this office upon a question which we paraphrase as follows:

            Does § 1, chapter 38, Laws of 1970, relating to the investment of the retained percentage of moneys earned in public works contracts, apply to contracts which were executed prior to the effective date of the act?

            We answer your question in the negative for the reasons which appear in the analysis below.

                                                                     ANALYSIS

            Prior to May 14, 1970,1/ RCW 60.28.010 required that every contract by a public body for public improvement or work provide for the retention of a certain percentage of the moneys earned by the contractor.  This statute also created a lien in favor of mechanics, subcontractors, materialmen, and others against this retained amount.  However, that lien was not enforceable unless the claim was filed within thirty days following the final acceptance of the contract in accordance  [[Orig. Op. Page 2]] with the provisions of RCW 39.08.030 through RCW 39.08.060.

            Notably, this version of RCW 60.28.010 provided only that the money be retained by the public body.  However, during the recent 1970 legislative session, the statute was amended by chapter 38, Laws of 1970.  The essence of this amendment was to provide that the contractor should have an option to invest the amounts which are retained.

            Chapter 38 became effective on May 14, 1970.  The critical amendment was contained in § 1 of the act, and added the following subsection to RCW 60.28.010:

            "(2) The moneys reserved under the provisions of subsection (1) of this section, at the option of the contractor, shall be:

            "(a) Retained in a fund by the public body until thirty days following the final acceptance of said improvement or work as completed; or

            "(b) Placed in escrow with a bank or trust company by the public body until thirty days following the final acceptance of said improvement or work as completed.

            "When the moneys reserved are to be placed in escrow, the public body shall issue a check representing the sum of the moneys reserved payable to the bank or trust company and the contractor jointly.  Such check shall be converted into bonds and securities chosen by the contractor and approved by the public body and such bonds and securities shall be held in escrow.  Interest on such bonds and securities shall be paid to the contractor as the said interest accrues."

            As may be seen from the above, the contractor now has an option which he alone may exercise.  The moneys that have been retained may be placed in escrow with a bank or trust company and may be invested in bonds and securities chosen by the contractor and approved by the public body.  The contractor is entitled to the interest as it accrues.  The moneys must be invested in such a way that the escrow can  [[Orig. Op. Page 3]] convert the securities into money thirty days following final acceptance of the work.  If the contractor does not choose to exercise the option, the public body retains the moneys as it has done in the past.

            The Washington supreme court stated the rule with respect to the retrospective application of statutes in Pape v. Dept. Labor & Ind., 43 Wn.2d 736, 740, 741, 264 P.2d 241 (1953), as follows:

            ". . .  A retrospective law, in the legal sense, is one which takes away or impairs vested rights acquired in the existing laws, or creates a new obligation and imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past.  50 Am.Jur. 492, Statutes, § 476.

            "The question whether a statute operates retrospectively, or prospectively only, is one of legislative intent.  In determining such intent, the courts have evolved a strict rule of construction against a retrospective operation, and indulge in the presumption that the legislature intended statutes or amendments thereto to operate prospectively only.  50 Am.Jur. 495, Statutes, § 478. . . ."

            See, also, 1 Sutherland Statutory Construction, 3rd ed., § 1936.  Thus, in order to answer the question presented here, it is necessary to determine whether the legislature intended that chapter 38, Laws of 1970, be applied retrospectively.

            The legislature did not adopt any language in the statute which would indicate that the amendment was to be applied retrospectively.  However, it is not necessary that the legislature expressly state that a statute is to operate retrospectively if the purpose and method of enactment show an intent to do so.  Pape v. Dept. Labor & Ind.,supra.  In examining the purpose of this legislation, there is nothing to suggest that the legislature intended a retrospective operation.

            It is true that if a statute merely changes a remedy or procedure, the presumption against retrospective operation does not apply.  Pape v. Dept. Labor & Ind., supra.  2  [[Orig. Op. Page 4]] Sutherland Statutory Construction, 3rd ed., § 2210.  In our opinion, however, chapter 38, Laws of 1970, is not a remedial or procedural act.  It does not merely change a remedy or procedure.  It grants a new right which did not exist before and changes vested rights of potential lien holders which were acquired under the statutory framework as it existed in the past.  Accordingly, its provisions are substantive, not procedural.

            The basic statute in question, RCW 60.28.010, is mandatory in its operation.  Subsection (1) thereof provides that:

            "Contracts . . . by the state, . . . or other public body, . . .shall provide, and there shall be reserved . . . from the moneys . . . a sum . . . said sum to be retained . . . as a trust fund . . .  Every person performing labor or furnishing supplies . . . shall have a lien upon said moneys so reserved: . . ."  (Emphasis supplied.)

            Thus, every contract in the class described by the statute must provide for the retention of moneys under which the statutory lien could attach.2/   Every such contract has three interested parties:  the public body, the contractor, and the potential lien holders.  Prior to May 14, 1970, the potential lien holders had a contractual right to obtain a lien against an absolutely secure fund.  The potential lien holders, those persons enumerated by RCW 60.28.010, stand in the position of third party beneficiaries to the contract.  It is not necessary that the third party be identified at the time the contract is made, only that he be identifiable at the time performance is due.  Boise Cascade Corp. v. Pence, 64 Wn.2d 798, 802, 394 P.2d 359 (1964), 4 Corbin on Contracts 70, § 781.  The clear purpose of this statute is to guarantee payment to laborers, materialmen and others who do work or  [[Orig. Op. Page 5]] furnish material under the contract.

            In the case ofUnited States v. Maryland Casualty Company, 64 F.Supp. 522 (1946), the United States entered into a contract with the firm of Ruddy & Son for the construction of certain public works.  Ruddy executed a bond with the defendant as surety under the provisions of the Miller Act.  The Miller Act required that those persons who did not have direct contractual relationship, express or implied, with the contractor had to give notice within ninety days after the completion of the work in order to collect on the bond.  The plaintiff in this case rented certain equipment to a subcontractor of Ruddy & Son.  The plaintiff sued for that rental.  The contract between Ruddy & Son and the subcontractor provided that Ruddy & Son would pay materialmen and would retain ten percent of the money earned until thirty-five days after completion of the work and acceptance thereof.

            The court held that the plaintiff materialman was the third party creditor beneficiary of the contract between Ruddy & Son and the subcontractor.  The plaintiff thus had a direct contractual relationship with Ruddy & Son and did not have to give the notice required by the Miller Act.  Therefore, plaintiff could collect on the bond executed with defendant.  That contract contained a provision which, in substance, is almost identical to that required by RCW 60.28.010, supra.  The court held that this type of provision created a contractual relationship between the contracting parties and the materialman.  The same relationship would exist on any contract which falls within the ambit of RCW 60.28.010.  See, 17 Am.Jur. 2d 255, Contractors' Bonds, § 80.

            The Supreme Court of the United States had held that the third party beneficiary's right is protected by the constitution against impairment by the state.  International Steel & Iron Co. v. National Surety Co., 297 U.S. 657, 80 L.Ed. 961, 56 Sup.Ct. 619 [[S.Ct. 619]](1936); see, also, 4 Corbin 59, § 779-J.  The rule of construction in Washington is that a retrospective operation is looked upon with disfavor and the statute will not be given that effect if to do so would impair existing rights, unless it clearly appears that such was the legislative intention.  Pape v. Dept. Labor & Ind.,supra, Hammack v. Monroe St. Lbr. Co., 54 Wn.2d 224, 339 P.2d 684 (1959); Sterrett v. White Pine Sash Co., 176 Wash.  [[Orig. Op. Page 6]] 663, 30 P.2d 665 (1934).  Chapter 38, Laws of 1970, does not display any intention by the legislature that it be applied to contracts executed prior to its effective date.

            The 1970 amendment to RCW 60.28.010 provides that the fund may be invested in bonds and securities.  The integrity of the fund is no longer protected by the credit of the public body if the moneys are placed in escrow.  Those contracts executed prior to May 14, 1970, cannot now be varied by retroactive application of chapter 38, and there is no expression of legislative intent that such a variation be made a part of those contracts executed prior to May 14, 1970.  We, therefore, must conclude that § 1, chapter 38, Laws of 1970, relating to the investment of retained percentage of moneys earned in public works contracts, does not apply to public works contracts executed prior to May 14, 1970.

            We trust the foregoing will be of assistance to you.

Very truly yours,

SLADE GORTON
Attorney General

THOMAS G. HOLCOMB, JR.
Assistant Attorney General