This blog is taken from a webinar that was presented by SunRay Construction Solutions and features William L Porter, the Founder and President of the Porter Law Group. He chaired the committee of attorneys who rewrote all the laws that govern lien laws in California. The focus of this webinar is on mechanic’s liens, stop payment notices, and payment bond claims in California.
First, we will start with construction contracts. You need to understand what each clause in the contract means. If you do not understand a clause, then you want to seek legal counsel to help you with that.
Also, there are classes on the subject of understanding, interpreting, and negotiating your contract.
When you get your contract, you cannot just sign these things. You need to review them carefully.
a. Offer edits – limit delay in payment reasonably
If you see something that is unfair, offer an edit to it. Edits should be initialed by both sides in the negotiation. Do not sign the construction contract until all the edits are initialed by both sides. Now you want to get paid quickly so you want to focus when you review the contract on clauses that talk about when you get paid.
You mostly have to deal with the issue of not allowing the other side of the contract into the negotiation to have a clause that says you will get paid when they get paid. That possibly stretches it out for years because those clauses generally include provisions.
For example, if you are a subcontractor, the general contractor and the property owner are going to have to fight it out. It could go years in court before you get paid. So somewhere along the line in your negotiations and changes to the contract. You want to change it to a reasonable amount of time.
If you could say that no longer than either the period of time within which you must file a mechanic’s lien, stop notice or payment bond claim. That seems very reasonable. In fact, it is extremely reasonable on behalf of a claimant because it will come up very quickly. But it sounds reasonable in terms of an edit.
Now, there have been a couple of cases that you may or may not be knowledgeable about.
b. Clarke v. Safeco
One is Clarke v. Safeco. It is a fairly old California Supreme Court case. Let us say you are a subcontractor; the contracts cannot say that you do not get paid if the other side does not get paid. Because that means if they do not get paid, you never get paid. That is not right. You did your work, and you need to get paid.
This is why the times for payment are extended to a reasonable amount of time. But that could go on for years and years. So anytime you encounter those, you want to fight it on the basis of Clarke v. Safeco. Sometimes an attorney will just write ‘illegal in California, Clarke v. Safeco’ in the margin.
c. Crosno v. Travelers
The other case is called Crosno v. Travelers. This is the kind of case that tries to shorten the deadline for when you get paid. You cannot have an indefinite pay deadline. What they were criticizing, is the kind of case that says, ‘you get paid when I get paid,’ even if it is years and years and years down the line.
In this particular case, it seems that as far as the public works payment bond case goes, in Civil Code §8122, the most that you should wait to be paid, is six months plus 90 days after the project is completed.
So that is a much shorter period of time than waiting for a case to go through court and then the Court of Appeals. Right now, in many counties, they are setting trails out in trial setting conferences for two years from the time of that trial setting conference.
You want to use these to get paid quicker. In the negotiation stage, you want to focus on making the period of time within which you get paid, when there is a dispute to be much less than would otherwise be the case.
Now there are some other things you want to put in your contract.
d. Attorney fee clause
This is very important because you want to have an attorney fee clause. The reason for this is that you want to be able to give the argument when you are in the right, when you are correct, and when there is no reason for them not to pay you, that you want to get an attorney fee clause in there.
You want to tell the other side to listen to you because you have not been paid. That is okay because you are in the right, you are owed money, and when you go to court, you are going to win, and the other side is not only going to pay their own attorney, but they are going to pay your attorney too.
That is the attorney fee clause. It is really important for a quick resolution if you see a contract where it does not have an attorney fee clause coming down from, say, a general contractor to a subcontractor. Then you need to put it in because when the case goes forward, with all the other subcontractors, you might be the only one who has an attorney fee clause.
Because you push for it and that would be key to you settling out your case, getting paid early, and the other side will have to go months and months or years and years down the line.
e. Arbitration, no mediation
Also, if you want to get paid quicker, avoid the mediation clause. Arbitration is fine, it will proceed much quicker, but sometimes mediation is used as a delaying tactic or what is called a discovery device. This is so the other side can find out about your case.
Also in your contract negotiation, make sure that you have an interest clause, so if the other side is late paying, you get interest. You can probably go one and a half percent a month. If you go higher than that, the court is probably going to knock it down and say that it is usury. That means you are like a loan shark.
g. Indemnify is okay. Avoid ‘defend.’ Avoid ‘solely’ exception
With the indemnification clause, which is always a very important clause, if you can avoid the word ‘defend’ that would be good. Because that means you will pay for the other side’s attorney. Also look for the word ‘solely’ or ‘sole.’ Because you do not want to be liable except in the event that it is solely the other party’s fault.
Because it is almost never ‘solely,’ or is very rarely solely someone else’s fault. So you do not want to get caught up in having to ‘defend,’ or ‘indemnify’ except when it is ‘solely’ the other person’s fault.
h. ‘Comparative fault’ is okay
In comparison, ‘comparative fault,’ is okay. This is fault-based on how much you are responsible for the thing that occurred that is the problem as compared to everyone else. Say you are only 10% at fault, then that is all that is going to be a part of your liability.
So, push for compare default. You should get out of defending and avoid the word ‘solely’ in the contract that you are forced to sign.
i. Follow claims procedures to the letter
Also, if you have claims, you want to follow the claims procedures in your contract to the letter. Do not get it wrong because that will delay you getting paid.
j. Sign only after all edits initialed and signed by other party
You only want to sign a contract after all the edits have been made and are initialled by both parties. Preferably the other party signs it, and you sign last, but it is very important that both sides initial everything.
If you have handwritten them in or in some other way, both sides have to initial all changes. Every time a change is made in negotiation, it is a counterproposal. Counterproposals can go back and forth.
h. During the project, always communicate in writing and document issues
Then of course during the construction project, sometimes it is a pain to have to do, but you always want to communicate in writing as much as you can. You want to document every issue and you want to document them favorably towards your position of the facts. But you need to be accurate, or you go into the field of inaccuracy. Then it blows your credibility.
So be accurate but be fierce towards your position, sound credible and save everything. Save all your writing so that later on if you have a dispute, what usually happens is, the party with the most paperwork generally wins.
There is some truth to that, so document everything as much as you can.
Mechanic's Lien California, Stop Payment Notices, and Payment Bond Claims
Now let us talk about mechanic’s liens, stop payment notices, and payment bond claims. These are great leverage.
a. Preliminary Notice
What is very important to remember here is that you have to do the preliminary notice because in many cases, if you do not do the preliminary notice, then you are not going to have a right to a construction lien California, a stop payment notice, or a payment bond claim.
i. Prerequisite for all subcontractors and suppliers in private works
The preliminary notice is a prerequisite for all subcontractors and material suppliers on a private works project.
ii. Prerequisite for general contractors on private works where construction loan in place
It is a pre-requisite for general contractors on private works projects where there is a construction loan in place. Otherwise, general contractors do not have to do a preliminary notice. But if they want to go after that construction loan, then general contractors do.
iii. In public works, not general contractor, but prerequisite other than first-tier subcontractors
In public works, the general contractor never has to send a preliminary notice, but it is a prerequisite for everyone other than the first-tier subcontractor. If you are supposed to do a preliminary notice, under high standards and you do not, then you are likely not going to have a right to either a mechanic’s lien, stop payment notices, or a payment bond claim.
If you do not have that right, you do not have the leverage.
b. Civil Code 8132
Now we will talk about releases. As a project progresses, you are going to have to do conditional and unconditional releases on progress payment and on final payment. They are in 8132 to 8138 of the Civil Code.
Do them properly otherwise you will perpetually delay your payment. You have to go along with that game and if you do not, everyone else is going to get paid except for you. So do it right.
c. Mechanic’s Lien
Now we come to the mechanic’s lien. The mechanic’s lien is great because it allows you as a subcontractor or supplier to jump over the general contractor and go directly against the owner’s property. If you are not paid, you can have the owner’s property sold so that you get paid.
So you can imagine that that puts great pressure on the owner and the owner puts great pressure on the general contractor to get things resolved. This is a huge leverage. There are rules when these things have to be done, so when you record your mechanic’s lien, if you are a subcontractor or supplier, it is 30 days after there is a valid Notice of Completion.
If you are the general contractor, it is going to be 60 days after a valid Notice of Completion. If there is no valid notice, then it is going to be 90 days after the project is completed in its entirety by everyone, except for warranty and repairs.
But if the main contract work is completed, and there is no Notice of Completion, you have 90 days to record your lien. Then you have 90 more days to record a lawsuit. If you miss the 90-day deadline or the 30-, 60-, or 90-day deadline, then you are going to lose your right to the mechanic’s lien.
d. Stop Payment Notice
The Stop Payment Notice stops money from flowing either from the lender or the owner to the general contractor. That is great leverage against the general contractor to get you paid. You need to send it within 30 days of the Notice of Completion, or if there is no Notice of Completion, then 90 days after the project is completed.
You always want to hit these deadlines. If you are unsure of the deadlines, and you want to be sure to get it right, send whoever it is from your office in charge to a class on mechanic’s liens, stop payment notices, and payment bond claims.
You can go to your local builder’s exchange, and they are all over the state. Take a class there.
e. Payment bond claims
Payment bond claims are a real leverage against the general contractor because the payment bond company will pay you for your claim if you have a legitimate claim and then they are going to come against the general contractor to indemnify themselves.
So really, it is going against the general contractor, but you have this pool of money of rational people who will not play games with you. They may delay you a little bit but ultimately, they will pay you, and that puts a lot of pressure on the general contractor.
All these things – the mechanic’s lien, the stop payment notice, and the payment bond claim put pressure on the other side. These are the kinds of things you need to use to your benefit to get yourself paid as quickly as you can.
f. Arguments to resolve quickly
These are some of your arguments to resolve things quickly, and obviously you want to be right. So if you are wrong then you have to honestly say that you are wrong on this. Then get the best deal you can because you are wrong.
But if you are right, then you can argue things like paying you or they are going to end up paying your attorney fees and their attorney fees. They are going to pay interest. Let us say this is 1½% a month. These are your arguments – they are going to pay the attorney fees you are owed, you are going to pay interest at 1½ % a month.
i. ‘Prompt Payment’ Interest
Then there is also Prompt Payment Interest. This is under various code sections; there is Civil Code, a Public Contract Code, and the Business and Professions Code. You can probably find an article if you Google ‘California Construction Prompt Payment remedies 'you will probably see a list or table which shows them all.
What they generally state is that if you are a general contractor, for example, and the owner does not pay you, then you can get 2% a month. That's good because that is 24% a year. Then if you are a subcontractor, and the general contractor has been paid for your work, and has not paid you (passed it on to you), then you can get that 2% a month.
But also under some of the statutes, not only can you get the 2% a month, but you can get your own interest in the contract because some of these statutes say 2% in lieu of interest, meaning that excluding the interest in your contract, you will get 2% a month.
Some of the other statutes on point for payment remedies say 2% a month in addition to interest. So if you get the 2% a month and then you have your contractual interest percent of 1½ % a month, then the math works out to 42% annual interest. Theat is really good, and you would wish that you could get that all the time in investments. You could get rich quickly, getting 42% every year.
These are the arguments. So not only do you say that you are owed money and in fact, but the other side got paid and did not pass payment on to you. This is a violation of Contractor’s License Law as well. You need to tell them to pay you now otherwise it is going to be worse much later.
It is all the process of you using the document process with a good contract while paying attention to your deadlines on mechanic’s liens, stop payment notices, and payment bond claims. Keep in mind Prompt Payment interest that is available, having your attorney fee clause and your interest in your contract.
These are the tools that you can use to protect yourself and above everyone else who does not do these things, be the squeaky wheel that gets the grease and gets your case settled. Get your situation settled so you get the money in your pocket instead of going 5 years down the line on a big project and paying out a huge amount of attorney fees.
Ultimately you will end up settling the case, perhaps for the same amount that you could have settled it if you had paid attention to these things early on.