A prime contractor recently came to me with a problem involving a stop payment notice. It seemed that a supplier to a subcontractor on a project had a dispute with the subcontractor. As a result, the supplier filed a stop payment notice on the project. The problem was that the cumulative unpaid billings from the supplier amounted to no more than $65,000, while the stop notice filed was for approximately $75,000. In my subsequent conversation with the supplier, he acknowledged that there was only $65,000 in unpaid principal. He said he filed a stop notice in the higher amount because he wanted to be sure to cover anticipated interest, fees, costs and lost profits. I advised him that filing the stop notice in such an amount and for such a purpose was improper and requested he release the stop notice. He refused. I confirmed the conversation in writing and promptly took him to court.
In some cases, when a California Stop Payment Notice is served, the direct contractor will serve an “Affidavit” on the public entity, demanding that the public entity release all funds withheld. Upon receipt of such an Affidavit, the public entity will serve the subcontractor or supplier who served the Stop Payment Notice with a copy of the Affidavit, along with a Demand For Release of Funds. If the Stop Payment Notice claimant does not respond with a “Counteraffidavit” by the date stated on the notice sent by the public entity, then the public entity will release the funds to the direct contractor and the Stop Payment Notice claimant will relinquish its Stop Payment Notice rights. If the Stop Payment Notice claimant is served with such an Affidavit and Demand For Release of Funds, the claimant should fill out the “Counteraffidavit” form (available at www.porterlaw.com) and serve it on the public entity and the direct contractor. This should at least temporarily stop release of the funds by the public entity and preserve the Stop Payment Notice remedy. (See Civ. Code §§ 9400-9414.)
California law provide “original”, “prime” or “direct” contractors with apparent relief from their contractual obligations when owners of property on which the original contractor works fail or refuse to pay them. This law can be found in the “10 Day Stop Work Notice” specified in Civil Code sections 8830-8848. Unfortunately, the applicable statutory procedures have a number of important shortcomings of which contractors, subcontractors and suppliers should be aware.
The payment bond is a valuable source for payment to subcontractors and suppliers who have not been paid for work performed on California construction projects. Although a payment bond is typically associated with public works projects, payment bonds can also be used on private works projects. If there is a payment bond on the project there are important deadlines which must be followed. If the original contractor was required to post a payment bond for the project, then follow the deadlines described below. (See California Civil Code sections 8600 - 8614 for private works and §§ 9550-9566 for public works).
Federal public work construction projects are unique in that there are no Stop Payment Notice or Mechanics Lien remedies available. Furthermore, although a remedy is available by proceeding against the original contractor’s payment bond under a federal law known as the “Miller Act” and its corresponding Federal Regulations (40 USCS 3131 et seq. and 48 CFR 28.101-1 et seq.), this remedy is not available to all subcontractors or suppliers. In addition, there are circumstances where a different form of security can be substituted for the payment bond (40 USCS 3131(b)(2)).
Certain phrases in our language originated as legal concepts. “Ready, willing and able” and “acts of God” are examples. Another such phrase is “Time is of the essence.” What is the legal significance of including this phrase in a contract?
This is a follow-up to my August 2008 article advising that, based on a series of recent cases, California courts would be entitled to order any building contractor or subcontractor who performed construction work with a contractor’s license that was suspended during part of the project to refund all sums the contractor was paid for all work on the entire project. This rule would apply not only to work performed by the contractor while the license was suspended, but also to work performed while the license was properly in place. This follow up article is to inform you that the Sacramento Superior Court has clearly adopted this doctrine.
The above title would tend to trigger a “double take” and at least a few questions: Did I read that correctly? Do you mean that if my contractors’ license is suspended at any point during a construction project, I could be required to repay every penny I received for my work throughout the entire project? Even for work done while my license was properly in place? Contractors and Subcontractors may be surprised to learn that the answer to all of these questions is “Yes.” Here is why...
