The concept of a “good faith dispute” arises in several situations in construction contracting. For instance, a contract or statute may call for recovery of attorney fees or other sanctions if a claim was not submitted in good faith. Prompt payment laws typically call for payment of subcontractors within a stipulated number of days unless there was a good faith dispute regarding the amount owed. But what is this concept of good faith? It does not necessarily require that a party prevail on the merits of its position. So how is it measured or determined?
A California court recently grappled with the question. A trial court ruled that a prime contractor had breached a subcontract through wrongful termination. The sub was awarded contract damages but denied a two percent per month penalty under a prompt payment statute. The prime contractor had believed in good faith that it did not owe the subcontractor the invoiced amount.
An appellate court said this was the wrong standard. It is not the sincerity or subjective belief of the prime contractor that establishes good faith. There must be objective, extrinsically observable evidence to support the prime contractor’s belief. In this case, however, there was such support. The prime contractor had taken a consistent position with regard to a scope of work dispute and had paid another company to come in and perform work not performed by the subcontractor. The prime believed in good faith that the subcontractor had not completed the work for which it had billed.
How do you measure “good faith” in the context of a claim or dispute? Do you apply the same standard to your own operation as you do to others? Do you feel a lack of good faith is a significant problem in construction contracting and construction disputes?
As always, I invite your comments below.
Featured in next week's Construction Claims Advisor:
- Architect’s Uncertainty Results in Constructive Change
- Compliance with Government Specs Relieved Contractor of Continuing Obligation
- Builder Disqualified as Expert Witness
