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It’s been a rollercoaster. But the ride appears to be over.

In United Riggers & Erectors, Inc. v. Coast Iron & Steel Co., Case No. S231549 (May 14, 2018), the California Supreme Court addressed whether a direct contractor can withhold payment from a subcontractor based on the “good faith dispute” exception of the state’s prompt payment laws if the “dispute” concerns any dispute between the parties or whether the dispute must be directly relevant to the specific payment that would otherwise be due.

California’s Prompt Payment Laws

California has a number of construction-related prompt payment laws scattered throughout the state’s Civil Code, Public Contracts Code and Business and Professions Code. Their application depends on the type of construction involved, whether public or private; the type of payment involved, whether a progress payment or retention; and who is paying, whether it’s a private owner, public entity, direct contractor, or subcontractor.

While the application of these statutes vary they are structured similarly and provide for payment by a private owner, public entity, direct contractor, or subcontractor to lower-tiered parties within certain time-frames, ranging from seven days to 45 days. The failure to comply can subject these entities to prompt payment penalties of two percent per month, which exceeds the interest rate on many credit cards. Penalties, in other words, can be substantial.

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

At issue in United Riggers, was whether the good faith withholding exception applies to any disputes between the parties or only to disputes directly related to the payment that is due. Thus, for example, can a direct contractor who is back charging a subcontractor for defective work withhold up to 150 percent from a pay application submitted by that subcontractor, or is the good faith withholding exception limited to disputes related to that specific pay application?

In United Riggers, the California Supreme Court, addressing this issue with respect to one of the state’s prompt payment statutes, Civil Code section 8814, found that the good faith withholding exception only applies if there is a “good faith” dispute as to a specific pay application.

California Supreme Court Addresses “Good Faith” Construction Disputes Under Prompt Payment Laws