STOP NOTICES- WHAT TO DO WHEN YOU ARE NOT GETTING PAID

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.

STOP NOTICES- WHAT TO DO WHEN YOU ARE NOT GETTING PAID

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

STOP NOTICES- WHAT TO DO WHEN YOU ARE NOT GETTING PAID

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.

STOP NOTICES- WHAT TO DO WHEN YOU ARE NOT GETTING PAID

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