What Can You Do If You Dispute
A Public Works Stop Notice
William C. Last, Jr.
When the prime contractor disputes the correctness, validity, or enforceability of a public works stop notice claim, it may use two procedures to attempt to expedite release of the funds before the claim has been resolved.
The first procedure involves tendering a release bond to the public entity. The second procedure involves a tendering an affidavit. Either or both the procedures may be used by a prime contractor who seeks the release of the withheld funds. This article will discuss the requirements for the use of the two procedures and their availability to a subcontractor.
Tender a Release Bond
The first procedure is to tender a release bond to the public entity. 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 for one hundred and twenty five 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. (Civil Code '3196).
The release bond must be issued by a different surety than the payment bond. Typically, the surety that issued the payment bond will have another surety, which is owned by a parent corporation; issue the stop notice release bond. These sureties will be jointly and severally liable to the stop notice claimant if the claimant prevails on the claim.
Some public entities may require that the bond be accompanied by a separate statement from the prime contractor that indicates that the prime contractor or its subcontractor disputes the correctness, validity or enforceability of the stop notice. Alternatively, they may require that the release bond include such a statement.
After the public entity accepts the release bond and releases the funds, it has no further liability and the stop notice claimant can no longer proceed against the public entity. The stop notice claimant must instead pursue its claim against the contractor (or subcontractor) and the release bond and payment bond sureties. One appellate court case upheld an award of attorney's fees to a public entity that was forced to respond to an action on a stop notice after the release bond was posted. A lawsuit against the release bond surety must be filed within three years of acceptance of the release bond by the public agency. (Code of Civil Procedure section 338(a))
The statute gives the public agency discretion in accepting or rejecting a release bond. Nonetheless, public entities rarely refuse to accept a release bond. While there are no reported appellate court decisions setting forth when a public entity abuses it discretion by refusing to accept a release bond, an argument could be made under the right circumstances that it is an abuse of discretion not to accept one.
While the statute provides that: AIf the original contractor or subcontractor disputes the correctness or validity or enforceability of any stop notice..@ (emphasis added), the statute does not allow subcontractors to post a release bond. However, some public entities will accept a release bond that was procured by the disputing subcontractor and which names the subcontractor as the principal on the bond. If the owner refuses to accept a subcontractor procured bond and the prime contractor refuses to post a release bond or serve an affidavit as hereinafter discussed, the statute provides no relief to the subcontractor.
Tender an Affidavit to the Public Entity
The second procedure involves tendering an affidavit to the public entity.
If the prime contractor claims that the Stop Notice is invalid due to one of the four following reasons, it may attempt to obtain release of the money by a different method. The four grounds are: (1) That the claim upon which the Stop Notice is based is not one which is a proper ground for a Stop Notice on a public work; (2) That the person claiming the Stop Notice is not a person who is entitled to a Stop Notice on a public work; (3) That the amount of the claim in the Stop Notice is excessive; or (4) That the claim as set out in the Stop Notice has no proper basis in law. (Civil Code '3197).
The affidavit, and one copy, is served on the public entity. (Civil Code '3198). The public entity then serves a copy of the affidavit and demand for release and a written notice on the Stop Notice claimant, stating that it will release the money as demanded unless the claimant files a counter affidavit within a designated period of time (10-20 days hence). (Civil Code '3199).
If the claimant desires to contest the contractor's affidavit, he must, within the time specified in the public entity's notice, serve upon the public entity a counter-affidavit and serve a copy on the prime contractor. This counter-affidavit must contain, in detail, the facts which support the claim in his Stop Notice, as well as facts which rebut the allegations of the prime contractor's affidavit. The claimant must also include proof that he has served a copy of the counter-affidavit upon the prime contractor.
If the claimant fails to file the counter-affidavit and proof of service within the proper time, the public entity may immediately release the funds to the contractor as demanded in the original affidavit. (Civil Code '3200). If a proper counter-affidavit is filed within the proper amount of time, either the prime contractor or the claimant may file an action in Superior Court for an expedited hearing on the validity of the Stop Notice.
It is important to note that public entity does not determine who is right or wrong. Once a counter-affidavit is served the agency must continue to hold the disputed stop notice funds. If prime contractor chooses to use the summary court proceeding by filing a petition in Superior Court to resolve the dispute, the affidavit and counter-affidavit constitute then pleadings in the action. The hearing on the proceedings must be held within 15 days after the petition is filed. The hearing can be: (1) jury or non-jury; and (2) with or without the presentation of further evidence during the hearing. Once there is a decision on the issues presented in the petition, the court's order becomes a final adjudication as to rights of the parties to the funds being held pursuant to the disputed stop notice. However, the court's decision does not prejudice either party's rights to sue the payment bond surety or each other relative to the underlying dispute. If the prime contractor does not wish to use the affidavit process to obtain an expedited hearing, the Stop Notice claimant must file a lawsuit within the prescribed period to enforce its Stop Notice.
The statutes that set forth the affidavit process do not address the issue of when, in relationship to the filing of a lawsuit to enforce a stop notice, the affidavit must be filed. Based on the author=s experience, most trial courts disregard a stop notice claimant=s failure to respond to an affidavit if the original affidavit was served after the lawsuit to foreclose on stop notice was filed.
If you dispute the validity of stop notice that has been served on your public works project, you can exercise one or both procedures. If you are a subcontractor whose funds are subject to the stop notice, you are left with no choice but to gain the prime contractors cooperation in using one or both procedures.
Since the use of the affidavit procedure has a number of legal ramifications, you should consult with an attorney who is familiar with the process before you serve an affidavit. If you are stop notice claimant and are served with an affidavit time is of the essence in preparing and serving a counter-affidavit.
This article, 82004, was written by William C. Last, Jr. 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 AA@ and AB@ 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.