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 is not submitted in good faith. Prompt payment laws typically call for payment of subcontractors within stipulated number of days unless there is 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?

A California court recently grappled with the question. A trial court ruled that a prime contractor breached a subcontract through wrongful termination. The sub was awarded contract damages but was denied a two percent per month penalty under a prompt payment statute. The prime contractor 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, there was such support. The prime contractor took a consistent position with regard to a scope of work dispute and paid another company to come in and perform work not performed by the subcontractor. The prime believed in good faith that the subcontractor did not complete the work for which it had billed.

Other cases this week involved a delay damage disclaimer and consequential damages for breach of contract. A project owner was entitled to a new trial because the contractor may have been improperly awarded delay damages prohibited by the disclaimer. And direct damages were distinguished from consequential damages, the recovery of which was barred under the contract.