California Appellate Court Upholds Public Entities Obligation To Have Prime Contractor Post A Payment Bond
California Appellate Court Upholds
Public Entities Obligation to
Have Prime Contractor Post A Payment Bond
William C. Last, Jr.
Attorney at Law
On February 23, 2005, a California Appellate Court held, in a case entitled N.V. Heathorn, Inc. v. County of San Mateo (— Cal.Rptr.3d —-, 2005 WL 419462), that the County of San Mateo was liable to an unpaid subcontractor since the County failed to require the prime contractor to obtain a payment bond in accordance with Civil Code section 3247.
The Court’s decision was predicated on the County’s failure to satisfy its mandatory statutory duty to obtain a payment bond from the original contractor who later filed bankruptcy. The Heathorn Court relied on an earlier appellate court decision entitled Walt Rankin & Associates v. City of Murieta (2000) 84 Cal. App. 4th 605. In that case, a public entity was held liable to pay a subcontractor when the payment bond that was posted by the prime contractor turned out to be fraudulent. That decision made it clear that a public entity had an affirmative duty to investigate and approve the payment bond that was tendered by the prime contractor.
The Mechanics’ Lien remedy is unavailable to one providing labor, services, equipment or materials to a California State or local government public works project. There are, however, two remedies available. 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 remainder of this article will discuss payment bonds and other remedies available to an unpaid subcontractor or supplier.
1. 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.
2. When Must The Stop Notice Be Served ?
The Stop Notice on a state or local public work must be served within thirty (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. If a local public entity (rather than a state agency) has not accepted the project and the work has stopped for a continuous 30 day period, the stop notice must be filed within ninety days after the thirtieth day that the work stopped. Thus, if there is a continuous stoppage of the work for thirty days, the stop notice must be filed within one hundred and twenty days from the date the work ceased.
2. 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, manager, 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.
3. 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.
4. 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 Notice claims.
5. 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 a 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.
1. 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.
2. 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.
3. What are the conditions for pursuing 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 that 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 it work. However, 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.
4. 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.
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, ©2005, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 25 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 866-904-4725 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.