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There are two means by which a subcontractor, laborer or materialman^a can get paid when the general contractor on a public project doesn’t pay him - the Stop Notice and the Payment Bond. Each method is used differently. This article will address Stop Notices only; Payment Bonds will be addressed in the future. In this article, subcontractor, laborer and materialman will be jointly referred to as “subcontractor.” Additionally, the Civil Code will be abbreviated as "CC".

Mechanics’ Lien versus Stop Notice
The Mechanics’ Lien and the Stop Notice are sometimes confused. Basically, the Mechanics’ Lien is used against private property and the Stop Notice is used against public property. A Mechanics’ Lien allows an unpaid subcontractor to put a lien against the private owner’s property to ensure that he gets paid. The Stop Notice allows the unpaid subcontractor to put what constitutes as a lien on the contractor’s earnings held by a public agency. Mechanics’ Liens don’t apply to public property because liens against public property are not allowed.

Once a Stop Notice is filed it imposes a trust obligation on the public agency (agency), meaning that the agency must hold the contractor’s earnings in trust for the subcontractor until the agency can release it by one of the means allowed by law, as explained below.^b The contractor may file claims against both the Stop Notice and the Payment Bond at the same time. A stop notice must be preceded by a preliminary 20-day notice. A stop notice that is served after the money has been disbursed by the public agency has no effect.

Stop Notice versus Payment Bond
The main difference between the Stop Notice and the Payment Bond is with which entity the claim is filed. The subcontractor files both when the general contractor does not pay him. However, Stop Notices are filed with the public agency and they impose a duty on the agency to take certain steps to enable the unpaid subcontractor to get paid. Claims against Payment Bonds are filed with the surety (the bonding company) and they do not affect the agency. The agency’s only responsibility towards the Payment Bond is to require the general contractor to submit one when required by law to do so. Payment Bonds are required on all public works projects in excess of twenty-five thousand dollars ($25,000) as discussed below. Agencies will sometimes require the successful contractor to file a Payment Bond even when the agency is not required by law to request one.

The Preliminary Notice
A sub-contractor does not have a right to file a Stop Notice unless she first files Preliminary Notice. The Preliminary Notice says to the public agency "Heads up! If I don't get paid by the general contractor I will be filing a Stop Notice." If the agency receives a Stop Notice it should immediately look to see if the person filing it has already filed a Preliminary Notice. Basically, the subcontractor files a Preliminary Notice merely to protect her right to later file a Stop Notice in the event the general contractor fails to pay her. Therefore, an agency may receive many Preliminary Notices on a job but if the general contractor pays the sub-contractors that filed the Preliminary Notices the agency will never receive Stop Notices from those subs.

Author's Note: The Stop Notice Process is technical and riddled with deadlines. Additionally, the law changes from time to time so be sure to consult with your agency's counsel before taking any action.

The Preliminary 20-Day Notice Requirement

Who Must Give a Preliminary Notice?
A Stop Notice subcontractor^c who had no direct contractual relationship with the contractor must give a preliminary 20-day notice in order to maintain his right to file a Stop Notice later in the event that he is not paid by the general contractor.

To Whom Must the Preliminary Notice be Given?
This notice must be given both to the contractor and to the public agency.^d

When Must the Preliminary Notice be Given?
Traditionally, a subcontractor on a public works project who fails to give a preliminary 20-day loses all rights to proceed with a subsequent Stop Notice claim. However, Legislation in 1995 changed this requirement. Now, subcontractors may give their preliminary 20-day notice anytime within twenty days of the date or dates the subcontractors furnished labor or material. However, notice is only effective for labor, service or materials furnished within the 20-day period prior to the service of the notice. A subcontractor forfeits his right to recover for anything supplied or furnished prior to the 20-day period preceding the notice.

How Must the Preliminary Notice be Given?
Notice must be given either personally or by first-class mail, registered mail or certified mail, postage prepaid in an envelope addressed to the contractor and the Public agency concerned and not later than 20 days after the subcontractor has furnished labor, services, equipment, or materials to the job site.

What Must the Preliminary Notice Contain?
Notice must state with substantial accuracy a general description of the labor, service, equipment or materials furnished, or to be furnished, and the name of the party to whom the same was or will be furnished.

What is the Penalty for Failure to Give Preliminary 20-Day Notice?
Failure to give the preliminary 20-day notice results in complete loss of Stop Notice rights and where the cost of the work exceeds $400, failure of any licensed contractor to give this notice will subject him to disciplinary action by the Registrar of Contractors.^e

Right of Public Agency (Owner) to Demand Stop Notice
The Public agency has the right to demand service of stop notices and any potential claimant failing to serve a stop notice in response forfeits all rights, CC§3158. This procedure enables the Public agency to determine the existence of all potential lien claims on the project. Some owners follow the practice of demanding stop notices under CC§3158 immediately on receiving a preliminary 20-day notice. However this practice creates problems for a claimant who has not yet completed furnishing labor, or materials, and is not yet owed any money. Civil Code §3110 uses the past tense in describing entitlement to rights under the mechanics' lien law, and a claimant should be entitled to file a stop notice after he or she has furnished labor or materials and money is owed. (The interaction of CC§§3110 and 3158 on this issue is unclear, however, and claimants' attorneys should be cautious when advising their clients how to proceed.)

Time Line

1. The public agency collects the Payment Bond before the general contractor starts work.
2. The subcontractor must file a Preliminary Notice with the Public Agency and the general contractor within twenty days of the date or dates that he furnished labor or material. He must file the Preliminary Notice to protect his right to file a Stop Notice in the event the general contractor does not pay him for the labor and or material that he furnished.
3. If the general contractor does not pay the subcontractor, he must serve the public agency with a Stop Notice within 30 days after the recording of a notice of completion. If no notice of completion is recorded, the Stop Notice must be served within 90 days after completion or cessation of work on the project. The Stop Notice on public work does not have to be accompanied by a bond (as is required on private works.)
4. The public agency must give the subcontractor notice of the expiration of the Stop Notice period within 10 days after the filing of a notice of completion or after the cessation of labor has been deemed a completion or after the acceptance of completion, whichever is later. (The subcontractor must pay the public agency $2.00 at the time of the filing of the Stop Notice in order to receive this notice.)
5. If the subcontractor files an action to enforce the Stop Notice (generally a law suit), the suit may be filed at any time after 10 days, but no later than 90 days following the expiration of the Stop Notice period.

What are the Public Agency’s Duties?

1. The public agency has specific duties with regards to Stop Notices. The public agency is required to withhold the amounts claimed in a Stop Notice until and unless:
   1. it accepts a release bond from the contractor (see below); or
   2. the contractor files an affidavit for summary release and the subcontractor fails to file a counter affidavit within the time specified by the Public agency; or
   3. the subcontractor fails to commence a Stop Notice action within the time allowed. The time allowed is as follows:
      1. The Stop Notice must be served on the public agency within 30 days after the recording of a notice of completion (or notice of acceptance) or notice of cessation, if such notice is recorded. If no notice of completion is recorded, the Stop Notice must be service within 90 days after completion or cessation.
      2. The filing of a law suit to enforce the Stop Notice may be filed at any time after 10 days, but no later than 90 days following the expiration of the Stop Notice period; or
   4. the action to enforce a Stop Notice is dismissed; or
   5. judgment is rendered (by a court) against the subcontractor in a Stop Notice action or in a summary declaration of rights proceeding.^f
2. The public agency must give the subcontractor notice of the expiration of the Stop Notice period within 10 days after the filing of a notice of completion or after the cessation of labor has been deemed a completion or after the acceptance of completion, whichever is later.^g
   1. The subcontractor must pay the public entity $2.00 at the time of the filing of the Stop Notice in order to receive this notice.
   2. Service must be by personal service or registered or certified mail.
      This notice warns the subcontractor as to the last date on which an action can be filed on the Stop Notice. Even if the subcontractor has filed the action, notice may be important because the subcontractor cannot bring the action to trial nor have judgment entered until the expiration of the 90-day period following the expiration of the period within which Stop Notices must be filed. The filing of an action to enforce the Stop Notice may be filed at any time after 10 days, but no later than 90 days following the expiration of the Stop Notice period.
3. Once the subcontractor has given timely Preliminary Notice and has filed a Stop Notice with the public agency during the allowable time, the Public agency is under a mandatory duty to withhold funds.

Disputed Stop Notices
If the Stop Notice is disputed, the original contractor or subcontractor may either file a release bond (at the discretion of the public entity) or the original contractor may utilize the summary proceeding procedure or both.

What are the Subcontractor’s Duties?

^a A “materialman” is a person who supplies materials.
^b California Mechanics’ Lien Law and Construction Industry Practice, 6th Edition, by Matthew E. Marsh and Harry M. Marsh, Parker Publications, P.O. Box 9040, Carlsbad, CA 92018-9040
^c other than a laborer for wages (a laborer working directly for the general contractor) or an express trust fund
^d Civil Code 3098.
^e Civil Code Section 3098(b)
^f Civil Code Sections 3196-3203
^g Civil Code Section 3185
^h It shall be filed in the office of the controller, auditor, or other public disbursing officer whose duty it is to make payments under the provisions of the contract, or with the commissioners, managers, trustees, officers, board of supervisors, board of trustees, common council, or other body by whom the contract was awarded.

Copyright © 2004 by Karen Theriault, Esq., C.P.M.