If you have performed high-quality work on a construction project, but are not getting paid what can you do? In this podcast, we’ll talk about three methods that, in addition to simply pursuing your rights under contract, may assist you in getting paid. These are:
- Mechanic’s liens;
- Stop payment notices; and,
- Actions on payment bonds
Hello I’m Brian Bertossa, a partner here at the firm. Welcome to Cook Brown’s podcast series. As you may know, this series is designed to identify major employment, construction, and labor law issues for employers here in California. In this installment we’re going to be talking about payment remedies available to construction contractors on construction projects performed in California.
Before we start, I’d like to remind everyone that this podcast is for informational purposes only. It doesn’t create an attorney-client relationship between Cook Brown and the listener. It should not be treated as advice specific to your situation. And inside or outside of California, it is important that you consult a local attorney for specific advice.
I assume that since you clicked on the link, that folks listening here are involved in construction projects and as such you might be a prime contractor – also referred to as a direct contractor – a subcontractor or others.
So, let’s assume you do your usual high quality work on a contract in California but for some reason you’re not getting paid. What can you do – what can you use – to get paid? What we’re going to talk about today are three methods that, in addition to simply pursuing your rights under contract, may assist you in getting paid. These are:
- Mechanic’s liens;
- Stop payment notices; and,
- Actions on payment bonds
Before we talk about any of those specifically, it’s important to mention that the gateway to all of these remedies is preparation and service of what is called a “California Preliminary 20-Day Notice.” Without that notice having been prepared and served, these three rights (these three ways to help you get paid) that we’re going to talk about may not be available to you. That form is easy to fill out and available on line. It’s a necessary prerequisite and cases go wrong in a hurry if that document cannot be produced.
There are limited exceptions to the requirement to prepare and serve a Preliminary Notice. Of course it is best practice. However, there’s never any downside to serving the Preliminary 20-day notice and there’s a huge downside to not serving it if it’s required. So in all circumstances, I suggest having a routine of preparing and serving a 20-Day Preliminary Notice on any project that you might perform work on. Let’s dive into these three potential remedies.
The Mechanic’s Lien
The first is a mechanic’s lien. A mechanic’s lien is a cloud on the title of the property on which you performed work. It is only available on private work but it is a great tool because it immediately gets the attention of the owner of the property because they can’t do anything with the property until they deal with your mechanic’s lien. It is particularly useful if you are a subcontractor and the direct contractor has perhaps not shared with the owner that you have not been paid, and the owner is unaware of the problem. Recording a mechanic’s lien will get their attention immediately.
Who is entitled to a mechanic’s lien? Anyone who has furnished labor, materials, equipment, or services to the project. And what is the amount that you can include in a mechanic’s lien? Well it’s the lesser of the contract amount or the reasonable value of the labor, materials, equipment, or supplies that you actually furnished – not that you were contracted to furnish – but that you actually furnished.
So a mechanic’s lien cannot include things like attorney’s fees, delay damages, or materials not incorporated into the project. That’s important to remember so you don’t get challenged for recording a fraudulent lien.
A lien has to be recorded in the County Recorder’s Office in the county where the property was located. That’s an important consideration. If you’re a Sacramento contractor doing work in Placer County and you recorded your lien in Sacramento County, you are out of luck.
An important point to remember on mechanic’s liens is not to perform work after recording. You need to make sure you are done with your work before you record your lien.
A mechanic’s lien has to be recorded after completion of the project, (which is a complicated term sometimes) and within 60 days after a notice of completion is recorded or 90 days from completion if there’s no notice of completion recorded.
As you can tell, there are some tricky dates and cut-offs to remember so it’s important to have the rules down before you attempt to use this remedy. Once you record your lien, you actually have to file a lawsuit within 90 days in that same county where you recorded it. If you record a lien and forget about it, that lien becomes “stale” on the 91st day and an owner can cause you lots of difficulties at that point because that lien can then be removed forcibly by the owner. The owner can then recover from you their cost in doing so, which can include reasonable attorneys’ fees.
So when you take advantage of any of these remedies, it’s important that upon resolution of the case you remove the remedy from the equation so that you’re not faced with an angry owner or direct contractor after you’ve resolved it.
The Stop Payment Notice
The second device that we want to talk about today for getting paid is what is called a “stop payment notice.” It used to be called a Stop Notice but the law changed in the last few years to change the wording to stop payment notice.
A stop payment notice is a method for freezing funds. You can use this by service on an owner or a lender, or a public entity to preserve funds – and it’s particularly useful if you believe that the party above you in the contractual chain is squandering money and there will be little or nothing left to pay you if you don’t freeze these funds.
A stop payment notice on a private work can be served on a lender but the lender doesn’t have any obligation to hold the funds unless the stop payment notice is bonded.
On several of these remedies there is a distinction between what you can do on a public work and what you can do on a private work. So it’s important to understand which kind of project you’re working on and to act accordingly.
The time limits for serving a stop payment notice are generally the same as a mechanic’s lien, which is to say that they are relatively tricky, and you will want to research them carefully before calendaring your date for action after serving the stop payment notice.
Action on a Payment Bond
The third remedy I wanted to touch on and identify for you is an action on a payment bond. So in the event that you are working for somebody who is financially insolvent, having a payment bond, which is a form of insurance policy on the project, is particularly advantageous as it is a deep pocket available for recovery.
The bad news is that a payment bond is overwhelmingly available only on public works and not private (although it’s occasionally available on private works and you should determine in the course of your contract negotiations whether there is a payment bond available).
The advantage of a payment bond, as I said, is it’s a deep pocket and also the prevailing party is entitled to recover their attorneys’ fees and costs.
A final advantage is that you have a much longer period of time to file your lawsuit to pursue this remedy than you might have on a stop payment notice or a mechanic’s lien. Specifically, you have six months after the time within which you could have served a stop payment notice to bring an action on a payment bond.
In closing, I just wanted to say that I have frequently seen that contractors who early on tell the party above them in the “food chain,” so to speak, who’s not paying them that they are aware of these rights and are ready to pursue them if needed, generally get much prompter response and a much better resolution than contractors that may be ignorant of these remedies and who the owner or the direct contractor might feel will not pursue these remedies.
So hopefully, knowledge is power and you will all get paid as you deserve to be paid for the work that you perform. Thanks so much for your attention.