"Good Faith" In Prompt Payment Disputes


In California, the payment of contractors is governed by so-called "prompt payment statutes" which are sprinkled through various legislative codes, and which impose sanctions on the paying party for non-compliance. Progress payments by general contractors to their subcontractors on private and most public works of improvement are governed by section 7108.5 of the Business & Professions Code. Retention payments to subcontractors on public works of improvement are governed by section 7107 of the Public Contracts Code, and on private works of improvement by section 3260 of the Civil Code. In some cases the statutes permit withholding of payments only where there is a "good faith" dispute. But what constitutes "good faith"?

All of these statutes provide that monies must be released to subcontractors within a certain time except under special circumstances, i.e., where a dispute is involved or where the parties agree to an alternative payment scheme. Thus, where there is a "good faith dispute over all or any portion of the amount due on a progress payment," the general may withhold up to 150 percent of the disputed amount. Bus. & Prof. Code § 7108.5(c) (emphasis supplied). On a public project, "if a bona fide dispute exists between the subcontractor and the original contractor" the latter may withhold from retention up to 150 percent of the estimated value of the disputed amount. Cal. Pub. Cont. Code § 7107(e) (emphasis supplied). And on a private project, 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 . . . [not to] exceed 150 percent of the estimated value of the disputed amount." Cal. Civ. Code § 3260(e) (emphasis supplied). Hence, a key factor as to when monies may be withheld from a subcontractor without exposing the general contractor to sanctions is whether there is a bona fide or good faith dispute between the parties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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