California Supreme Court Clarifies the Use of Good Faith Withholdings in Payment Disputes

Jun 27, 2018

The Legislative intent of prompt payment statutes must be taken into account.

Both common law and statutory law prompt payment provisions allow a prime contractor to withhold payment to a subcontractor if there is a legitimate, good faith, issue concerning whether the subcontractor is owed the amount it claims.

The issue before the California Supreme Court in United Riggers & Erectors, Inc. v. Coast Iron and Steel Co., Case No. S231549 (May 14, 2018) was whether the prime contractor, Coastal, could withhold payments to its subcontractor, United, based upon disputes over other issues not directly related to the specific payments in dispute.

Decisions in lower California courts were split on this issue. Garret Murai’s article in the California Construction Law Blog, outlines the Supreme Court’s decision that provides a final ruling on this matter.

California has statutes that “provide a “’good faith” or ‘bona fide’ exception, in which a higher tiered party can withhold from a lower-tiered party up to 150% of any amount disputed in ‘good faith’ or in which there is a ‘bona fide’ dispute, without being subject to prompt payment statute’s credit card-like penalties for non-payment.”

In this case, in addition to a demand for unpaid retainage and related penalties for failure to promptly pay them, United demanded compensation for unpaid change orders and “‘damages attributed ‘to missing parts, lack of communication by Coast, fabrication errors, delays in installation of steel and lack of transportation access.’”

Coast claimed there was a “good faith” dispute over all the contested payments and therefore, relying upon California Civil Code section 8814, argued it could withhold 150% of all these items. This would have amounted to more than the unpaid retainage “that was never in dispute.”

The Supreme Court rejected Coast’s argument because it would have created a “windfall” for the defendant that was contrary to the intent of the relevant statutes.

Source—

California Supreme Court Addresses “Good Faith” construction Disputes Under Prompt Payment Laws, Garret Murai, California Construction Law Blog, May 29, 2018.