3- Using the Stop Work Option

How valuable is the right to stop work? For smaller contracts, probably not very. If you are not being paid, and if you have a good relationship with the Owner, because it’s a small contract and you are likely dealing directly with the Owner, then you will know when the Owner is having financial difficulty. If that is the case, you can probably work out some agreement to suspend the work rather than going through the effort of the Stop Work notification.

The more likely situation is on larger projects when the Owner stops making progress payments. On those types of projects, the Owner will always have some stated reason, however frivolous it may be, for not paying you. In that case, you cannot satisfy the key statutory element for stopping work; there’s no dispute over the entitlement to payment.

The stop work option is not something that should be done on impulse and without consultation with legal counsel. If it is done correctly, it can be effective. After all, if you are not being paid, you are financing the project for the Owner. If the Owner goes bust and there is no payment bond, you may be getting pennies on the dollar, if anything at all, and getting it long after you performed the work. Better to call the Owner’s bluff.

Conversely, from the Owner’s perspective, if you do not satisfy all the requirements in the statute, or if you don’t do the steps correctly, you may be in material breach if you pull off the project. The ball will then be in the Owner’s court and you will have an even bigger problem getting paid, if you get paid at all.



2- How It Works

If you have not been paid within 35 days after submitting your progress payment, and if there are no disputes with the Owner that would allow the progress payment to be withheld, the statute allows you to inform the Owner that if you are not paid within 10 days, you will stop work. After you have given 10 days written notice to the Owner, and all lenders and subs, you also need to post a further notice in a conspicuous place on the construction site 5 days ahead of the time that you will be stopping work.

In order to avail yourself of the stop work provision in the Code, there cannot be any dispute that the payment is due and owing. Typically the Owner will have some reason for not paying you, but assuming it is simply a cash flow issue that the Owner has and not a problem with your work, this stop work remedy is available. Plainly this factual prerequisite is going to be difficult to satisfy in most circumstances.

If you properly send the notice, and then properly post the notice on site, and if there is no dispute that you are owed the funds, you can stop work after the 10-day period. If you exercise this right, and do it properly, you have no liability for delays that the stop work may have caused. There is also a right to an expedited court hearing to determine whether you should be paid.

If the Owner pays you, or the situation is otherwise resolved, you need to provide notice that you will be returning to work. This notice is provided to the Owner, lender, and subs; all the folks that you informed in the first place that you would be stopping work on the project. The notice of your return to work and the cancellation or resolution of the dispute must be posted in a conspicuous place on the project.


1- The Stop Work Statute

Stopping work on a project can be dangerous. For one thing, it gives the other party to the contract a terrific defense to any claim that you may make. Any time work is stopped by one party, there will be the contention that it is unjustified, and therefore is a material breach of the contract that entitles the other side to suspend its own performance, demand your performance, or declare the contract breached and immediately sue for damages.

However, for private contract work, the Legislature has crafted a right that allows the contractor to stop work under certain circumstances. The right to stop work is actually a lot of work in and of itself, and it involves a fairly precise series of steps that need to be completed in the proper sequence or you may inadvertently find yourself in a breach situation, the very situation that you wanted to avoid by taking the proper steps to stop work.

The next series of blogs will tell you how the statute works and what you need to do to make it work for you.


7- Time Limits to File the Stop Notice Action

A lawsuit to perfect rights under the Stop Notice can be filed as early as10 days after the Stop Notice is filed, but no later than 90 days after the last day to file a Stop Notice. The last day to file a Stop Notice will be determined by whether the Owner’s records a Notice of Completion or Notice of Cessation. If the Owner does record the Notice, then a General/Prime has 60 days to file its Stop Notice and 90 days more to file suit; 150 days from completion. If no Notice is recorded, the General/Prime has 90 days to file the Stop Notice and 90 days to file suit.

A subcontractor’s time frame is slightly less if the Owner records the Notice. In that case, the sub has 30 days to file its Stop Notice and then 90 days to file suit. If no Notice is recorded, the sub has the same amount of time as the General/Prime; 90 days to file and 90 days to initiate the lawsuit. Review the discussion in the Mechanic Lien section about how the time limits apply, depending on whether the Owner does or does not record Notice, and depending on whether you are a General/Prime or a subcontractor. The same concerns are relevant for Stop Notices.

Within 5 days after filing the lawsuit, notice must be sent to all parties involved in the action informing them that the litigation has been commenced. The Notice of Commencement of action is ordinarily sent along with the lawsuit that is being served, but sometimes, and for tactical reasons, the lawsuit might not be immediately served on the other parties, so the Notice of Commencement is sent by itself. However you do it, be sure to serve the Notice of Commencement of Action on all parties involved in your Stop Notice action, especially on the Owner or lender. This is to assure that the lender and/or the Owner continue to hold the Stop Notice funds because they know there is a lawsuit related to those funds.

If there is a Stop Notice Release Bond in place, then the bond surety is the proper party to name in your foreclosure action. If there is a payment bond on the project, and the Owner or lender have relied on that bond and ignored your Stop Notice, then name the surety in the suit and provide notice to all of them; the Owner, the construction lender, and the bond surety. You want to be paid by one of these parties; you don’t care which one.

No Stop Notice action can come to trial before the conclusion of the 90-day period to file a Stop Notice. If you file your Stop Notice early, you still need to wait until the time period expires for filing Stop Notices on the project, and that time frame is dependent on the Owner’s recording (or not recording) a Notice of Completion or Notice of Cessation. If no Stop Notice action is brought within the applicable time frame, then the funds that were withheld must be released.

Be sure to monitor the recording of any Notice of Completion or Notice of Cessation. Be sure to calendar the time limits for filing your action. Do NOT miss this deadline. As we discuss later in the litigation section, you can file your action to preserve your rights, and then you can amend your lawsuit to bring in other claims. If you intend to bring the Stop Notice action, however, it must be brought within a specific time, so make sure you do.


6- The Stop Notice Foreclosure Action

In order to perfect your rights on the Stop Notice, you will need to file a lawsuit. The Stop Notice claim is typically part of a more involved and comprehensive lawsuit. It can be brought as a stand-alone litigation, but that is not typical. The Stop Notice foreclosure action is intended to determine your rights to the funds that are withheld. Unlike the Mechanic Lien foreclosure action, the Stop Notice lawsuit is not brought against the property but against the construction funds that are, or should be, available.

The parties to the Stop Notice foreclosure action are; 1- the lender or Owner, depending on whom you told to withhold the funds; 2- the party that you wanted the payment from in the first place, either the General or the Owner, whoever was not paying you; or 3, if there is a Stop Notice Release Bond or if there is a payment bond for the project, then the surety that issued the Bond is a required party. You do not need to name any other parties in the Stop Notice cause of action. The action is to determine your rights to the funds being withheld because of your Stop Notice.


5- The Stop Notice Option- How Do You Get Paid

You can serve your Stop Notice at any time during the course of a project but doing so just preserves the funds to pay you; it does not get you paid any sooner. It is also the case that if others serve Stop Notices on the project, then yours will just be one of the many that are on file with the Owner or Lender.

We will do a quick review of the timeframes for serving your Stop Notice because this is critical. As you know, you can serve the Stop Notice at anytime during the course of the work. Once the work completes though and depending on what the Owner does or does not do, you have different time limits to get your Stop Notice served.

For private works, if the Owner files a Notice of Completion or a Notice of Cessation and you are a subcontractor, the last day you can serve your Stop Notice is 30 days from the date the Notice is recorded. If you are a General and have filed a Stop Notice with a lender, then you have 60 days from the date the Notice of Completion is recorded.

If the Owner does not file either document but takes possession, or in some way indicates that the project is accepted, then regardless of your status, you have 90 days. By the way, these timeframes also apply to suppliers.

If the job just stops because it is for all intents complete, but the Owner does nothing, then after 60 days of continuous non-activity, you will have 90 days to serve the Stop Notice. If the work stops for that 60 day period, then the project is deemed complete. Therefore you have 150 days within which to serve the Stop Notice from the date the work stopped- 60 + 90. You can serve a Stop Notice anytime during the project and up until the last date that you could file a Mechanics Lien on the project.

It’s a little different for public works. First, only subs are going to file Stop Notices. Second, the same timeframes apply if there is a Notice of Completion or Cessation recorded- 30d to file your Stop Notice. It gets a little complicated if there is no of Completion or Cessation recorded.

If the work is stopped and not completed, then after 30 days it is deemed complete and you will have 90 days from that date to serve the Stop Notice; effectively 120 days (30 +90). However if the work is completed and the work is subject to acceptance by the public agency, and that Notice of Acceptance is provided, then you will have 90 days from that Notice of Acceptance date to serve your Stop Notice.

It is a confusing area of the law so be aware. Courts sometimes have difficulty with these different timeframes so be sure you understand what it happening and when you need to get the Stop Notice filed. One way to be sure to know when the last day to file a Stop Notice will be is to include $10 with your Stop Notice. This will require the public agency to let you know when a Notice of Completion or Notice of Acceptance is recorded.

You want to know this so that you can either serve additional and updated Stop Notices and/or you will know when the last day is for you to file your lawsuit. You have 90 days from the recording of either to file the litigation. If you pay the $10 but the public agency does not give you notice, then they cannot defend by asserting the statute of limitations has run. It is $10 well spent if you are working on a public project.


4- The Stop Notice Option- What To Include In Your Stop Notice

The Stop Notice must be reasonably accurate about the amount that is to be withheld. The Stop Notice must also refer to only one project. This is so even if there is an ongoing business relationship between the sub and the General, and they have done, or are doing, other projects and money is owed on another project. The Stop Notice can only apply to payments due on a particular project. If there are other projects where Private Works payments are not being made, then a separate Stop Notice for each project must be provided. You cannot add amounts from one project into the Stop Notice on another.

The Stop Notice can only hold funds for work that has been performed, not for work that may be performed or for costs that are anticipated in the future. For example, the Stop Notice should not include projected costs. It should not include amounts for work that has not been performed, or for delay and inefficiency costs that may be anticipated but that are speculative at the time of the Stop Notice.

If a Stop Notice is not accurate, and especially if it is grossly or willfully exaggerated, it may be declared invalid or void. When it comes time for a court to decide how much the claimant is entitled to, that determination may be zero if the Stop Notice was not reasonable in the first place. The claimant will not be entitled to any pro rata share of the funds if the court determines there was a willful misstatement of value in the Stop Notice.

The party impacted by the wrongful Stop Notice may also have a claim against the party that filed the Stop Notice for the cost of any Release Bond, and possibly other damages that might result from an improper or overstated Stop Notice. After all, the Stop Notice is stopping payments, and those payments are needed to pay other contractors and suppliers. If the Stop Notice claimant is using the Stop Notice process vindictively or punitively by grossly overstating the amount owed, there can be repercussions in the form of damages awarded to the General.

One interesting and unusual aspect of Stop Notices is the fact that an Owner can demand that all Stop Notices be filed at the beginning of the project. If the Owner makes this demand, then you must comply or you will lose your right to pursue Mechanic Lien rights, not your Stop Notice rights. How do you respond to this type of request? In a word- carefully. You must provide a Stop Notice with language that says that this is a conditional or preliminary Stop Notice, that it may change, and that if it changes in amount that you will advise the Owner. This is not something that an Owner will typically do, but be aware that an Owner has the right and, if they exercise that right, you need to comply. Yes, it is a bizarre rule.

Previously published © Desktop General Counsel 2012 All Rights Reserved


3- The Stop Notice Option- Public Works

The Stop Notice on a public works project serves the same function as it does on a private works project- it tells the Owner to hold payments from the General or Prime Contractor; and they will. Unlike private works, in public works there is no lender, at least not typically, so there is no need to serve anyone but the Owner. And of course, the General or Prime has no Stop Notice right and would never need one.

It is important that you serve your Preliminary Lien on the public owner in order to secure your Stop Notice rights and to assure that you can pursue your payment bond remedies. Just as an aside, on public works projects there is always a payment bond required from the General or Prime. If you are within the categories authorized to file a Stop Notice then you are likely to have payment bond rights. Those bond rights are secured when you serve your Preliminary Notice on the Public Owner; you don’t need to serve the payment bond surety with the Preliminary Notice.

To complicate the matter just a little bit more, and as we discussed in an earlier post, if you have a direct contract with the Owner or if you have a subcontract with a party that has a direct contract with the Owner, you don’t need to serve a Preliminary Notice. Don’t take the chance that you are correct in knowing the relationships- if you are a subcontractor, send the Preliminary Notice to the Public Owner and the General.

If you are serving a Stop Notice on a public works project, you do not need to bond it. The Public Owner is obligated by statute to hold the funds upon receipt of a valid Stop Notice. In fact, just as with a private works project, the Owner is permitted to hold 125% of the Stop Notice amount. If you serve a Stop Notice for $1000 the Owner will hold $1,250.

If the Stop Notice is valid, then the Owner will hold the money. All Stop Notices are presumed valid when received unless the General contests it. In public works there is a statutory mechanism to protest a Stop Notice if the General can satisfy the criteria. Basically, the General files an affidavit under oath stating that the Stop Notice is not valid because of one or more of following four reasons:

1- The Stop Notice is filed by someone that has no Stop Notice rights (i.e.- a supplier to a supplier to a subcontractor);
2- It is not timely;
3- It is grossly overstated; and
4- It is not the type of claim that is permitted in a Stop Notice.

The Owner sends the affidavit to the Subcontractor who has a limited time to respond, usually 20 days. If there is no response, the Owner can release the funds. If there is a response, then the Owner can decide to have a hearing or simply respond that it will hold the funds. If the General wants to contest it further, there is a right to a court hearing on an expedited basis.

A more likely response by a General to a Stop Notice, whether contested or not, is to post a Stop Notice Release Bond. In this situation, the surety issues a bond for the amount of the withheld funds (the 125%) and the funds can be released. BE AWARE that the Owner does not have to release the funds even if it gets the bond. Before you post a bond, confirm with the Owner that the funds will be released, and confirm it in writing. There is no point in paying a bond premium (the yearly cost of the bond) if you are not going to get the funds.

If the funds are released, then the General will have them money but will not need to pay the subcontractor. The bond is posted to secure the funds so the subcontractor is not paid, the General has the money, and the dispute goes on.


The Stop Notice Option- Private Works

Let’s assume you are a subcontractor on a private work project and the General will not pay you for the work that you have performed. You’ve been patient but the check is not coming and the dollars are getting significant. What are your options?

First you can stop work but that is a bit of a risk. If there is a good reason why the General is not paying you, and you walk off the job, then you might just have breached the contract. If you refuse to come back and finish the work, the General might hire someone else to finish the work and use the money left on your contract to pay that replacement sub. If the replacement sub costs more than you do, so that the funds left on your contract are not sufficient to complete the work, then the General might have a claim against you for the difference and of course the money that you were owed might become unavailable too. Bad things happen if you are in material breach of contract, and if you walk off the project without a really good reason, you just might be in material breach. Be very careful if you choose this course of action.

The other and more attractive option is to serve a Stop Notice on the Owner or the Lender, or both. In private works, the Stop Notice needs to be bonded in order for it to be effective at all. A bonded Stop Notice is one that is provided with a surety guarantee from your bonding company. If you don’t have a bonding company, call your insurance agent. He or she will know what to do.

If you don’t bond the Stop Notice, then the lender or the Owner can pretty much ignore it and pay out the funds to the General. Depending on the circumstances, this may or may not happen, but why take the chance? If you bond your Stop Notice and the Owner or Lender disregards it and pays out funds that should have been preserved, they are on the hook for the money. In order to fully secure your right to recover on a private work project, bond your Stop Notice.

Keep in mind here that your Stop Notice binds only the funds that are available at the time the Stop Notice is served. If you serve the Stop Notice at the end of the project, there may not be enough money left to pay your entire bill. Of course if there are other subs with Stop Notices, and there is not enough money left to cover all of them, then you get a pro rata share of the amount left regardless of when you serve it.

On private works projects, a General cannot serve the Owner with a Stop Notice; but why would they? However, if there is a Lender involved on the project, a General can, and should, serve a Stop Notice on the Lender. Make sure the lender holds the funds and does not release them to the Owner.

Whether you are the General or a subcontractor, you can serve your Stop Notice at any time, provided there is a basis for it, so if you are not being paid, serve the Stop Notice and make sure it is bonded.

Next up: Stop Notices on Public Works Projects


Intro to Stop Notices

Stop Notices are an effective and necessary way to secure the money that you are owed, but they do not actually get you that money for some time. In fact, just the opposite will happen; when you file a Stop Notice with the Owner or construction lender, you are all but guaranteeing that you will not get paid. A Stop Notice is just that- it stops the money from the Owner or lender to the contractor that owes you that money.

Stop Notices are not constitutional rights the way that Mechanics Liens are. A Stop Notice is a statutory right that attaches to the funds that are available to the project, not the project itself. Unlike the Mechanic Lien you cannot force the sale of the property to pay your bills, but whatever available funds will be withheld if you do the Stop Notice correctly. Unlike Mechanics Liens, the Stop Notice right is available on public works and on private works; the Mechanics Lien is only available on private works.

The same prerequisites that applied for Mechanics Liens apply to Stop Notices- for the most part.

First you need to be properly licensed at all times that you are performing the work. As we discussed in the Mechanics Lien posts, the licensing requirement is stringent and unforgiving. If you are not properly licensed the entire time that you are performing work on the project, not only will you not have any Stop Notice or Mechanics Lien rights, but you will not have any rights at all. Worse yet, if you get paid for work and the Owner or contractor wants that payment back, you need to give it back- all of it. California is very serious about licensing; you should be too.

The second criterion is the need to serve a Preliminary Notice on the appropriate parties. Again, this is done by sending the Notice by registered mail return receipt requested, certified mail, or personal delivery. Send it by mail so that you have a receipt and you also take the potential issue disputing receipt off the table.

The Preliminary Notice on a private works project needs to be sent to the Owner, General (Prime or Direct) Contractor, and the construction lender by any subcontractor at whatever tier and by any supplier. If you are a General (Direct or Prime) Contractor, you need to send the construction lender a Preliminary Notice.

It’s a little different for public works projects. If the work is public, then the Owner and the General get notice. If you are a first tier subcontractor, that is you have a contract with anyone that has a contract directly with the Owner, you are not required to provide the Notice. Do yourself a favor though, send it to the Owner and General regardless of your relationship to any other contractor on the project. If you know the surety that issued the payment bond (there is always a payment bond on public works projects) then it is prudent, but not necessary, to send the Notice to the surety as well.

The Preliminary Notice secures your rights to payment for the work that is done 20 days before the notice is served and thereafter. Don’t wait to send the Notice and don’t forget to send it. If you receive a contract, send the Preliminary Notice then and there.

If you are using a standard form that you purchase at a stationary store, make sure it is acceptable for use in California and make sure it is also appropriate for both Public and Private works. It should say so at the top of the form. Most forms are set up this way, but just be sure that yours is appropriate for the type of project that you are doing. There is also some required language for the Preliminary Notice. Click on the link below to see the language needed.