Actions a Contractor Can Take to Help Survive Tough Economic
William C. Last, Jr.
Attorney at Law
The construction industry is experiencing severe retraction due, in part, to financing for projects being restricted and government budgetary limitations. It has become increasingly common for a partially completed project to be halted or for payments for an ongoing project not to be paid in a timely manner. As a result, more than ever contractors must be vigilant and proactive in protecting their interests. This article will discuss some of things that can be done to minimize the risk of going unpaid on a project.
First and foremost, contractors must be diligent in looking for the signs that a project maybe in trouble. Those signs include: (1) slow and delayed progress payments; (2) scheduling deadline slippage due to subcontractors who are not performing; (3) predecessor subcontractors and suppliers who are decreasing their manpower and slowing deliveries; (4) future phases and releases of the project being terminated; (5) the project lender being taken over or going out of business; (6) other projects that are being developed by the owner being terminated; (7) project subcontractors or suppliers going out of business; (8) the project lender starting the foreclosure process; (8) if part of the project is completed, the completed units are not being sold or rented; and (9) if it is a public project, the public entity has had the funding for the project stopped or delayed.
If you detect any of the warning signs you must take immediate action to protect your interests. Such actions should include, but not be limited to:
1. Review the status of your preliminary lien notices: Mechanic's liens, stop notices and payment bond claims are unique remedies that are available to contractor to ensure that he or she will be paid. But to be effective, the contractor must comply with all of the applicable statutory prerequisites for recording and foreclosure of the lien. There are three prerequisites for enforcing such remedies. These are the timely service of a Preliminary 20-Day Lien Notice; the timely recordation and/or service of the lien, stop notice and/or bond claim; and the timely filing of a lawsuit to perfect such remedies. If you have yet to serve a 20-Day Lien Notice and you are obligated to do so, you should serve one if your work is not completed. By doing so, you can use the aforementioned remedies for the goods and services provided up to 20 days before the notice was served as well as for the period after the service.
Under Civil Code §3097(o), if a 20-Day Lien Notice is properly filed with the County Recorder, that Recorder has the good faith duty to notify the filing party within five (5) days following recording of a Notice of Completion or a Notice of Cessation. This extra step of filing the Preliminary 20-Day Lien Notice with the Recorder in the county where the property is located, will aid you in determining when a Notice of Completion is filed. However, the system is not fool-proof since the Country Recorder has no liability should it fail to notify the contractor that a Notice of Completion has been filed.
Also, you must ensure that the 20-Day Lien Notice includes the proper names and address of the relevant parties. If the notice does not include the correct project owner name then the notice will be ineffective. If you are a subcontractor or supplier do not necessarily rely on information given to you by a general contractor, as it may be incorrect. The most reliable source for property owner information is at the recorder's office in the county where the project is located.
2. Monitor the project status and make ongoing inquiries: When you are working on the project keep in contact with other subcontractors and suppliers to discuss the status of their payments. Many counties have websites that allow you to access legal filings. Such filings can indicate if a contractor and/or owner is being sued by subcontractors for non-payment. Those filings are listed by party name. They can show when lawsuits were filed and the parties.
If any of the following occurs, discuss the impact of the event with competent construction law counsel: (1) the project owner or the project general contractor changes; (2) work on the whole project is stopped for more than 20 days; and/or (3) a bankruptcy filing by the owner, general and/or your subcontractors and suppliers. Any of the foregoing events may necessitate you to take prompt legal action to protect your rights.
3. Review Contract Notification and Dispute Provisions: If a project is stopped you should consider how the delay will impact your future performance. For example, you may be forced to remove your equipment from the site and then bring it back, or your jobsite overhead costs may increase as the time it takes to complete the project is extended. If that occurs you may be entitled to additional compensation. However, you must give notice to the other party. Many construction subcontract clauses require the subcontractors to give notice of change orders, delay/disruption claims and other disputed items. Those types of clauses typically condition the subcontractor's right to recovery on timely notification, followed with a timely, detailed, and documented claim.
Most contracts also have dispute resolution clauses. They may require the parties to mediate a dispute before an arbitration demand or a lawsuit is filed. You should immediately consult with competent legal counsel if those requirements will interfere with fulfilling the requirements for recording and filing an action on a lien, serving and taking legal action on stop notices and payment bond claims.
4. If payments are being delayed consider how best to respond: If the project owner or the project general contractor changes, or the owner or surety takes over the project, be sure to discuss with a competent construction law attorney how to protect your lien rights. The same holds true if there is a bankruptcy filing by the owner, general and/or your subcontractors and suppliers.
The time limits within which all liens must be recorded, payment bond claims made and/or stop notices must be served are based on when the project is completed, or work on the project stops short of actual completion. The specific time limitation for recording a lien, serving a payment bond claim and/or serving a stop notice is based on: (a) whether actual completion occurs, or there is an equivalent to completion; and (b) whether or not the owner shortened the recording deadlines by recording a Notice of Completion or Notice of Cessation. After you leave the project monitor the project to ascertain if there were any short term work stoppages. Also monitor the project to determine when substantial completion was obtained or if a Notice of Completion was recorded.
The time limits within which all liens must be recorded on private works are based on when the project is completed, or work on the project stops short of actual completion. When actual completion has not been obtained, California law defines what constitutes completion so that the contractor will know when time for recording a lien commences to run.
Specifically, Civil Code §3086 states: "Completion" means, in the case of any work of improvement other than a public work, actual completion of the work of improvement. Any of the following shall be deemed equivalent to a completion: (a)The occupation or use of a work of improvement by the owner, or his agent, accompanied by cessation of labor thereon; (b) The acceptance by the owner, or his agent, of the work of improvement; (c) After the commencement of a work of improvement, a cessation of labor thereon for a continuous period of 60 days, or a cessation of labor thereon for a continuous period of 30 days or more if the owner files for record a notice of cessation.
The general rule is that when all the work on the project actually has been completed all possible lien claimants must record their liens within ninety (90) days from the date of actual completion. (Civil Code §§ 3115-3116).
If the project is not completed, but all work on the project stops for a specific period, California law deems the work complete after a certain period of time passes. If there is a cessation of labor for a continuous period of sixty (60) days, California law declares that such cessation is deemed to be an equivalent to the completion of the work. After that sixty (60) day period elapses, all possible lien claimants must record their liens within ninety (90) days from that date. (Civil Code §3092).
For example, if the owner runs out of money and cannot complete the original agreed-upon scope of work and, as a result, all work stops before the project is complete, the contractor has one hundred and fifty (150) days from the total and complete stoppage of all work to record a mechanic's lien so long as no Notice of Cessation was recorded.
If, however, during the first fifty-nine (59) days of the work stoppage, the original agreed-upon scope of work recommences, the time for recording a mechanic's lien will be restarted and subject to the same rules relative to: (a) whether actual completion occurs, or there is an equivalent to completion; (b) whether or not the owner shortened the deadlines by recording a Notice of Completion or Notice of Cessation; and (c) whether or not the contractor has a direct contract with the owner of the project.
The deadlines when a Notice of Completion or a Notice of Cessation have been recorded are:
· Notice of Completion: When an owner records a valid Notice of Completion (i.e. 10 days after actual completion of work on the project) (Civil Code §3093): (a) Prime contractor in direct contract with the owner must record his or her lien within sixty (60) days of the recording of the Notice of Completion (Civil Code §§ 3115-3116); (b) All others must record their liens within thirty (30) days of the date the Notice of Completion is recorded. (Civil Code §3116).
· Notice of Cessation: When an owner, after thirty (30) days of continuous cessation of labor, records a valid Notice of Cessation (this is the equivalent of recording a Notice of Completion). (Civil Code §3092): (a) Prime contractor in direct contract with the owner must record his or her lien within sixty (60) days of the recording of the Notice of Cessation; (b) All others must record their liens within thirty (30) days of the date the Notice of Cessation is recorded. (Civil Code §§ 3115, 3116).
In addition to recording a mechanics lien a contractor can also serve a bond stop notice on a private works lender. On a public works project, a contractor can serve a stop notice and also pursue the payment bond surety. These remedies are cumulative. When the economy turns down it is always to pursue every available remedy.
In the current construction environment it is increasingly common for a contractor to learn that a project is going to be stopped or that the owner doesn't have the funds to pay for the work that has been performed. In such an event it the contractor must determine how the stoppage will impact there ability to collect for the work performed and how it can impact the overall cost of the project. It becomes important to document when the project was stopped so that key dates for recording liens, serving stop notices and/or bond claims can be calendared and subsequently acted on.
©2009 William C. Last, Jr. wrote this article. Mr. Last is an attorney who has been specializing in Construction Law for over 29 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 650-425-7679. A number of his past articles can be found on his website (lhfconstructlaw.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.