Existence of “Good Faith Dispute” Allows Contractor to Withhold Payments and Avoid Prompt Payment Penalties

Alpha Mech., Heating & Air Conditioning, Inc. v. Travelers Cas. & Sur. Co. of Am., 133 Cal. App. 4th 1319 (2005)

In this case, subcontractor Alpha Mechanical, Heating & Air Conditioning sued general contractor RAS Builders and payment bond issuer Travelers after RAS withheld a final payment on the grounds that Alpha Mechanical had damaged other trades’ work.  At trial, Alpha Mechanical argued that RAS failed to comply with California prompt payment statutes because RAS failed to give timely notice of any good faith dispute.  Travelers countered that the existence of a good faith dispute precluded the award of prompt payment penalties, and that RAS offered evidence that Alpha Mechanical had been notified of every backcharge.  The trial court awarded Alpha Mechanical the principal amount owed, penalty interest, prejudgment interest and attorneys fees and costs.

Travelers appealed.  Alpha Mechanical argued that the prompt payment statutes, specifically
California Business and Profession Code § 7108.5 and Civil Code § 3260, require that contractors pay subcontractors within ten days of receiving progress payments or retention payments unless there is a written agreement otherwise.  Alpha Mechanical further argued that RAS had failed to notify Alpha Mechanical of any good faith dispute within ten days of discovery.

The court of appeals noted that there was no evidence indicating that RAS lacked belief that there was a “good faith dispute” and refused to interpret Civil Code § 3260 as requiring notification of a “good faith dispute” within ten days.  The court of appeals noted that there was no legislative history or any other indication that Civil Code § 3260 was intended to apply a ten day notification requirement to good faith disputes.  Ultimately, the court of appeals reversed the award of penalty interest but allowed the award of the principal and attorneys fees stand.

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