One of the greatest financial risk for a building contractor is not receiving payment from the project owner. California law provides two major protections for parties who provide labor, material or services in connection with construction projects: mechanic's liens and stop work notices. Both processes are intended to ensure that contractors, sub-contractors, suppliers and laborers get paid, but each works in a different manner. We will cover stop work notices in this post, and we will deal with mechanic's liens in a later installment.
An owner's failure to make timely payments to a contractor is one of the most common causes of contract disputes. A stop work notice gives a contractor the right to tie up the owner's financing by serving a notice that complies with the state statute governing such notices.
If an owner fails to pay a contractor an amount due to a written contract within 35 days of the due date, the contractor can serve a notice on the owner stating that work on the project will stop if payment in full is not made within 10 days. The contractor must also post a notice of intent to stop work at the construction site. The owner must give a copy of the stop work notice to all parties who are providing construction financing.
The contractor must also post a bond equal to 125% of the amount in dispute. This bond is intended to secure the owner in the event that the contractor fails to prove that it is owed the amount claimed.
Once the proper notices have been served, the case must be set for an expedited trial. Such cases are intended to take precedence over all other cases, except cases of a similar nature.
Any construction lender who receives a stop payment notice must withhold the amount in dispute from all current and future payments. Withheld moneys can then be used to pay the contractor if it proves its claim.
The procedures for drafting, serving and filing stop payment notices are complex. The failure to follow each step could defeat an otherwise solid claim. Any contractor who is having difficulty getting paid may wish to consult an experienced construction attorney for advice on serving a stop payment notice and how to protect its claim for payment.
Source: FindLaw.com, "California Mechanics' Liens and Stop Notices: Remedies You Can Use to Improve Collections," accessed on April 18, 2016