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.