Have You Acted In Time To Avoid Losing Your Public Works
Stop Notice and Payment Bond Claim
William C. Last, Jr. And Frederick J. Northrop
As a result of the failure of a number of general contractors who perform California public works projects, payment and performance bond sureties have been become responsible for incomplete projects and paying the unpaid subcontractors and suppliers. In certain cases the payment bond surety will defend against the subcontractor's payment bond claim by asserting that the subcontractor failed to take the prerequisite steps for perfecting the bond claim in a timely manner.
This article will discuss the deadlines that a payment bond claimant must meet in order to avoid losing its payment bond clam. It will also discuss steps that a subcontractor can take to lessen the chances of the payment bond claim to be deemed untimely.
As earlier articles indicated, California Law provides two procedures whereby one who provides services to a public works construction project can obtain a more secure position. A properly served and perfected Stop Notice essentially garnishes undisbursed construction funds in the possession of the public owner. The Stop Notice procedures involves three basic steps: (1) If you do not have a contract with the original contractor, serving a preliminary 20-day notice; (2) Serving the Stop Notice; and (3) Filing a lawsuit to enforce the Stop Notice.
The Stop Notice on a state or local public work must be served within thirty (30) days after the recording of a valid Notice of Completion, Notice of Acceptance, or Notice of Cessation. (Civil Code §3184). 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 for a continuous period of thirty days. (Civil Code §3184).
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. (Civil Code §3186). 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 and the public agency given notice of the filing 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. (Civil Code §3210).
Subcontractors have a problem in determining when they must file their Stop Notice and the Court Actions. Frequently, they complete their work well in advance of the completion of the project and have difficulty in continuously monitoring the state of the project, but are waiting for completion in order to get their final payment. The public agency may not record a notice or may only do so after approving punch list work and submitting a resolution to the local city counsel or board of supervisors.
The safest course for a contractor who is not actually on the job is to file a stop notice for the final payment along with a request for notice of expiration. This requires paying a two dollar fee to the public agency. (Civil Code §3185). Some contracts may also provide a way for subcontractors to obtain this notice without actually filing a stop notice.
Under section 3185, the public agency, if given the fee, must notify the stop notice claimant within ten days of filing a notice of completion, accepting the project, or a cessation of labor. The notice must be served personally or by registered or certified mail. Receiving this notice assures the subcontractor that it will not miss the last date to file a lawsuit on the stop notice. If the public agency fails to provide the notice, neither it nor the contractor can assert the statute of limitations as a defense.
The other procedure is to perfect a claim against the payment bond given by the original contractor. There are two steps to perfecting such a claim: (1) giving notice to the surety; and (2) filing an action on the bond.
The notice can either be a preliminary 20-day notice to the surety or a written notice of a claim served on the surety and the prime contractor. The notice must be given within 15 days after the recording of a notice of completion or, if no notice is recorded, within 75 days after completion of the work. (Civil Code §3252(b)) A surety is likely to contend that "completion" includes a continuous thirty-day cessation of work. The notice must be by personal delivery or registered or certified mail. (Civil Code §3227).
The action on the claim must be filed within 6 months after the period in which stop notices may be filed. (Civil Code §3249). Thus the period is either 6 months and 30 days following recording of a notice of completion, acceptance, or cessation or 6 months and 90 days after completion or cessation. While the filing of a stop notice is not required in order to make a bond claim, doing so and requesting the notice of expiration will help avoid filing a late notice or claim.
When a surety receives notice, it will contact the claimant and ask for documentation and a notarized affidavit. Generally the surety then begins an "investigation." Bond claimants should not await the outcome of the investigation to file suit. At least some sureties will continue the "investigation" for months without accepting or denying the claim, but then assert that a lawsuit is barred by the statute of limitations. Claimants should not delay filing the action just because the surety hasn't denied the claim.
Subcontractors should carefully calendar these deadlines and not delay acting just because the public entity and the prime contractor or surety are trying to "work things out." The longer final payment is delayed, the more likely it is that the public entity will be back-charging the general contractor and thereby reducing the funds available for stop notice claims. If the general contractor and the surety want to delay lawsuits, claimants should at least obtain a waiver of the statutes of limitations from the general contractor, the surety and the public entity.
This article, 8 2005, was written by William C. Last, Jr. of Last & Faoro. Mr. Last is an attorney who has been specializing in Construction Law for over eighteen years. Mr. Last also holds a California A&B contractors license. If you have any questions Mr. Last can be contacted at 415-764-1990 or 650-425-7679. He has other articles on his web site: lhfconstructlaw.com. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.