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ASAC Legal Forms:
STOP NOTICES
Protecting Your Claim On California
Public Works Projects: A Primer On Stop Notice and Payment Bond
Claims.
by William C Last, Jr.
The Mechanics' Lien remedy is unavailable to one providing labor,
services, equipment or materials to a California State or local government
public works project. Subcontractors, laborers and material men (but
not prime contractors) on state public works projects can, however, use
the Stop Notice remedy and make claims against the mandatory Payment
Bonds, in the event of nonpayment. The Stop Notice on a state public
works project constitutes a lien on the contractor's fee held by the
public agency. The two remedies are: (1) The Stop Notice or Notice
to Withhold; and (2) an action against a Payment Bond.
In order for a subcontractor, supplier, material man or laborer to
exercise the remedies certain legal requirements must be satisfied.
The remainder of this article will discuss those requirements.
Stop Notices
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Is it necessary to serve a preliminary lien notice?
The Preliminary Lien Notice procedure on a California public works
project is similar, but not identical, to that on a private
project. Some of these differences are noted below: First,
a Stop Notice claimant (other than a laborer for wages or an express
trust fund) who had no contractual relationship with the prime
contractor, must give the Preliminary Lien Notice. The
Preliminary Lien Notice must be served within twenty (20) days of the
first time that work, equipment or materials were furnished to the
project. Second, the contents of the Preliminary Notice varies
slightly between a public and a private work. On a public work,
the Preliminary Notice must contain a general description of labor,
service, equipment or materials furnished or to be furnished; the name
of the party to whom the labor, service, equipment or materials were
furnished; and the name of the furnishing party. Third, the
notice must be served by first class mail, registered mail, or
certified mail on the contractor or its subcontractor, either at his
residence or anywhere he maintains an office, or by personal service.
It must also be served on the department for whom the work is being
performed. In the case of public works constructed by the
Department of Public Works or the Department of General Services, the
department is to be served through the office of the disbursing
officer of the department constructing the work or by personal service
on the officer.
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When Must The Stop Notice Be Served?
The Stop Notice on a state or local public work must be served
within (30) days after the recording of a Notice of Completion, Notice
of Acceptance, or Notice of Cessation. Where no Notice of
Completion, Acceptance or Cessation has been recorded, the Stop Notice
must be served within ninety (90) days after actual completion or
cessation of work.
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On Whom Must The Stop Notice Be Served?
When serving a Stop Notice on a California state public works
project, it must be served on the director of the department which
awarded the contract. However, the agency may direct that the
stop notice be served on some other officer of the department.
For example, California General Services legal division will accept
service of the stop notice. Some agencies will accept service by
mail. It is strongly recommended that you check with the agency
to determine the appropriate manner of service, the address for
service and who will accept service.
On all other public works projects (e.g. County or City public works
projects), the Stop Notice should be served on the office of the
controller, auditor, or other public officer whose duty it is to make
payments under the contract, or on the commissioners, trustees,
officers, manger, board of supervisors, board of trustees, or
other body which awarded the contract.
The Stop Notice may be served personally or by registered or certified
mail.
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It Is Necessary for the Stop Notice to Be
Accompanied with a Bond?
In contrast to a Stop Notice to a lender on a private work, a
public works Stop Notice need not be bonded in order to be
effective. The information which must be contained in the Stop
Notice on a public work is the same as required on a private works
Stop Notice.
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What Must Be Done to Perfect the Stop Notice?
When a properly executed Stop Notice is served on the proper
public official, that official must withhold from the prime contractor
construction funds in an amount sufficient to satisfy the amount
claimed in the Stop Notice. He is not required to release the
money to the claimant, however, until the claimant has foreclosed on
the Stop Notice in a court action. A suit on a Stop Notice on a
public work must be filed within the following time period: Not
less than ten (10) days after the filing of the Stop Notice; and not
more than ninety (90) days after the expiration of the period within
which Stop Notices may be filed. If an appropriate fee is paid
to the public entity, it is required to give the stop notice claimant
notice of the expiration of the stop notice period ten days after a
notice of completion or after cessation of labor. The author
strongly suggests that you pay the appropriate fee so that you can
avail yourself of this service.
If the money withheld pursuant to all the properly filed Stop Notices
is insufficient to pay all the valid claims stated in the Stop
Notices, the money will be distributed pro rata among
all the claimants. There is no priority established between the
claimants based on when their Stop Notices were filed. Payment
is made based on the ratio that the respective claims bear to the
total amount of all valid Stop Notices.
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How can a Stop Notice be released?
When the prime contractor disputes the validity of any or all of
the Stop Notice claims, there are two procedures which it may use to
attempt to have the withheld funds released in an expedited
manner.
First, the public entity may, in its discretion, allow the contractor
to file a proper bond to obtain release of the withheld amounts.
The bond must be issued by a corporate surety, and be in an amount
equal to 125 percent (125%) of the claim stated in the Stop
Notice. The bond must provide that if the claimant eventually
recovers, he may also recover the costs of bringing the
action.
Alternatively, if the prime contractor claims that the Stop Notice is
invalid based on four limited reasons, he may attempt to obtain
release of the money by serving an affidavit on the public
entity. In turn, the public entity must serve the affidavit on
the stop notice claimant. If the stop notice claimant does not
serve a timely counter-affidavit the public entity is obligated to
release the funds. Obviously, this summary procedure is more
intricate. If you intend to use this method or are served with
such an affidavit, the author suggests that you consult with an
attorney.
PAYMENT BONDS
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When are Payment Bonds required?
Under California law, a prime contractor must file a Payment Bond
on all State Public Works Projects in excess of $5,000 and on all
other public works in excess of $25,000. The Public Entity
awarding the contract must approve the bond before work begins.
Until the Bond is posted, the Public Entity is not allowed to pay the
general contractor.
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Is it necessary to also make a Stop Notice Claim?
Claims on a Payment Bond are in addition to a contractor's right
to file a Stop Notice. It is not necessary to file a Stop Notice
Claim to make a claim on a Payment Bond, but they may be pursued at
the same time. Irrespective, it is not uncommon to have a
general contractor post an improper bond or a fraudulent bond.
In the event that a contractor determines that there may be a fraudulent
or improper bond on the project, he should immediately notify the
Public Entity. It is also possible under California law to
assert a claim against the Public Entity for failing to require the
prime contractor to post an appropriate bond.
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What are the conditions for pursing a Payment Bond
Claim?
In order to pursue a claim on a Payment Bond, the following
conditions must exist:
First, the claimant has not been paid. Second, the claimant is
allowed to pursue a claim for a stop notice in the same way the he may
pursue a claim on a Payment Bond. Third, the claimant is given a
Preliminary Lien Notice or a claimant on a public works project can
enforce his claim on a payment bond (a) by giving written notice to
the surety and the bond principal within 15 days after recordation of
a notice of completion, or (b) if no notice of completion has
been recorded, within 75 days after completion of the work of
improvement.
The foregoing alternative notice provision is an escape valve for a
contractor who fails to serve a preliminary 20-day notice. The
escape mechanism allows for a greater period of time to serve the
notice since the time for the alternative notice is tied to the
time the project is completed rather than the date the claimant
completes its work. However, the lien claimants should still
make it a practice to give a timely twenty day preliminary
notice. The claimant can only file a lawsuit if it is filed
within six months after the period to file a Stop Notice has
expired. It is also possible to recover attorneys' fees on a
payment bond.
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What must be done to perfect a Stop Notice Claim?
The author recommends that a notice of the claim be sent to the
surety as soon as it becomes apparent that it will be necessary to
make a claim. If the surety does not voluntarily pay the claim,
a lawsuit must be filed against the payment bond surety as follows:
(a) if the public entity files a notice of completion or cessation
notice, thirty (30) days six plus (6) months after the notice is filed
or (b) if neither a notice of completion or cessation is filed, the
lawsuit must be filed ninety (90) days after the period for filing a
Stop Notice expires plus six (6) months.
CONCLUSION
The stop notice and payment bond remedies offer a public works
subcontractor or supplier a valuable collection tool. However, to be
effective the subcontractor or supplier must meet the statutory
prerequisites for enforcing the stop notice. This article was
intended to give an overview of the process. If you have specific
questions the author strongly suggests that you contact an attorney who is
knowledgeable about the requirements and application of these remedies.
This article, ©2000, was written by
William C. Last, Jr., a member of the Bay Area chapter of ASA. Mr.
Last is an attorney who has been specializing in Construction Law for over
20 years. In addition to belonging to a number of construction trade
associations, Mr. Last holds a California "A" and "B"
license. He can be contacted at 415-764-1990 or 650-696-8350.
A number of his past articles can be found on his website (www.lhfconstructlow.com).
This bulletin is published periodically to provide general information
about current legal issues. The articles are not intended to be a
substitute for the advice of an attorney as to a specific problem.
If you have a specific legal question or need legal advice, you should
contact an attorney.
American Subcontractors Association
California, Inc.
P.O. Box 292867, Sacramento, California 95829-2867
Phone: 888-310-2722 Fax: 530-662-2865
e-mail |
©1999-2007, American Subcontractors
Association of California. Reproduction
of images or content belong to ASAC and may not
be borrowed, used or taken in any form whatsoever without written
permission.
Updated on:August 02, 2007 12:41 PM
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