Construction Contracting & Claims
Construction contracting is a complex and important process that is as important to the success of a construction project as the work itself. Stephen Moses has over two decades of experience representing contractors, tradesman, design professionals and owner with the construction contracting process.
For contractors and design professionals protecting their work and the right to get paid while also limiting their liability, begins with the construction contract. Defining the scope of work, delivery, responsibility for delays, how to process change orders and limiting the overall liability to the construction project requires a detailed contract based on the construction or design work performed by a contractor or design professional.
Construction contracting requires an understanding of the contracting process. Construction products are built using a complex web of documents that include the design contracts with architects and engineers and the prime contract between the owner and the general contractor or construction manager and multiple tiers of subcontracts. The prime contract can take many forms, such as a flat-fee contract, or flat-fee plus a guaranteed profit, or design-build, or a time and materials basis. The terms and conditions of related agreements, such as the subcontracts and purchase orders for materials, will reflect the terms and conditions of the prime contract. One of the main purposes of a contracting scheme is to flow down liability to its most basic level, which results in a construction project where each tier of contractor and design professional shares some measure of responsibility for the construction project. Construction contracting requires understanding this process and where in it any particular general contractor, trade contractor, design professional or material supplier might be in order to determine their liability for their work and the construction project as a whole.Home Improvements
The Business & Professions Code governing contractors requires a contractor who performs work on residential property to enter into a written contract with the owner that contains very particular terms and conditions regarding residential construction. The home improvement contract requirements apply to all contractors entering into a contract for construction on residential property in excess of $500, even though contractors are no longer required to obtain a improvement license before performing such work. Stephen Moses represents contractors, suppliers and homeowners with home improvement contracts and issue arising from home improvements for over two decades.Construction Claims and Disputes
It is not uncommon to experience claims and disputes during and after a construction project. Disputes can arise for a number of reasons, including delays to the schedule, differing site conditions, failure of a party to perform and defects in the design or work. It is often the case that such claims can be resolved by referring to the construction contract, but often times they become a bigger dispute. If claims begin to accrue on a project and payment is delayed or cut-off as a result, it is important for the parties to understand the rights and obligations that arise from the mechanics’ lien process.
California law offers two safeguards for parties that contribute labor, material or equipment or other construction services to a construction project: mechanics’ liens and stop notices. (The Mechanics Lien Law, Civil Code, sections 8000-9566 (Stats. 2010, c. 697, SB 189, §20), operative July 1, 201.2) A third source of protection, the payment bond, is not required on private works of construction, but is often used in connection with public works. Enforcement of payment bond remedies is similar to the enforcement of a stop notice, but the claim is made with a surety.
California law divides mechanics lien remedies between “private works of improvement” and “public works of improvement.” The Mechanics Lien Law defines a “private work of improvement” as follows:
- “Work of improvement” includes, but is not limited to:
- Construction, alteration, repair, demolition, or removal, in whole or in part, of, or addition to, a building, wharf, bridge, ditch, flume, aqueduct, well, tunnel, fence, machinery, railroad, or road.
- Seeding, sodding, or planting of real property for landscaping purposes.
- Filling, leveling, or grading of real property.
- Except as otherwise provided in this part, “work of improvement” means the entire structure or scheme of improvement as a whole, and includes site improvement. (Civ. C. §8050.)
In contrast, a public work of improvement is a construction project owned by a government entity, such as a city, county, state or federal government. Public works are contracted through a complex bidding process and awarded to the lowest responsible bidder. Because public property cannot be liened against, the remedies for payment for public works projects follow the stop notice and payment bond procedures.A. Mechanics Liens (Civ. C. §§8400-8494)
A mechanics lien is a claim against the owner’s title to real property (land) that is benefited by construction activity. The lien becomes security for payment to a person (a business, corporation, partnership or individual) who had directly contributed labor, material, design services or other services to a work of improvement on the property or a site improvement adjacent to the property. If a person is not paid in the ordinary course of business, recording a mechanic lien may ultimately result in the property owner paying for the work, even if the owner has already paid the party it hired to perform the construction. Because of this possibility, claimants must follow lien procedures precisely. Lien rights may be lost due to seemingly minor technical errors.
To establish the right to enforce a mechanics lien, a claimant must meet certain requirements.1.- Claimant Must Contribute to a Work of Improvement
First, the claimant must have provided labor, material, equipment or services were actually used or consumed in constructing a structure or other improvement to real property. (§8422(c).) Prior to filing a mechanics lien, the work subject to the lien must be complete.2.- The Twenty-Day Preliminary Notice (Civ. C. §§8200-8216)
Second, a potential lien claimant must serve a 20-day Preliminary Notice, sometimes called a “pre-lien” notice. There are only a few groups of potential claimants that are not required to serve a Preliminary Notice on a private work: a person who has a direct contract with the owner (i.e., the general contractor), and a person who works for hourly wages, without a contract (i.e., an employee of the owner).
The purpose of a Preliminary Notice is to advise the owner, construction lender and surety of contributions to the project that might give rise to lien claims. With notice, the owner, general contractor and construction lender can monitor payments to subcontractors and suppliers during the project, minimizing the risk of lien claims against the property. It also helps to ensure timely payment to those who provide such labor, materials, equipment and other services to a construction project.
One of the major recent changes to the Mechanics Lien Law was the requirement that the Preliminary Notice must be sent to the owner or reputed owner, the direct contractor or reputed direct contractor and the construction lender or the reputed construction lender. Compliance with this requirement is a prerequisite to enforcement of a lien claim or stop payment notice.
The Preliminary (20-day) Notice must be served within twenty (20) days after the claimant first furnished labor, materials, equipment or other services to the work of improvement. Service must be given by either personal delivery, registered, certified or express mail or by what is referred to as “sub-service,” leaving the notice at the business address and mailing a copy of the notice as provided in §415.20 of the Code of Civil Procedure for service of summons and complaint in a civil action.3.- Recording a Mechanics Lien
Lien rights are established by recording a claim of lien with the County Recorder for the county in which the construction project is located. Except with respect to direct contracts, a mechanics lien may only be enforced if the claimant properly served the Preliminary (20-Day) Notice.
The mechanics lien must be served on the owner or the reputed owner by registered mail, certified mail, or first-class mail, evidenced by a certificate of mailing, postage prepaid, addressed to the owner or reputed owner at the owner’s or reputed owner’s residence or place of business or business address or at the address shown by the building permit on file with the authority issuing the building permit for the work. (§8416(c).) Failure to properly serve the mechanics lien will make the claim of mechanics lien unenforceable as a matter of law.
The amount claimed in a lien is limited to the reasonable value of the labor, materials, equipment or services the claimant provided, or the contract price, whichever is less. (§8430(a).) If there was a breach of contract, or the contract was abandoned or rescinded, then a lien claimant can include in its lien the reasonable value of labor, material, equipment or services if the amount claimed exceeds the price under the written contract. However, claimants cannot claim the value of delays or disruptions, or other indirect costs (e.g., office overhead), in a mechanics lien. A claimant who willfully overstates a lien claim forfeits all lien rights. (§8422.)
The deadline for any claimant, other than the original contractor, to record a lien is 30 days from the date a notice of completion or notice of cessation has been recorded for the project or 90 days after the claimant completes its work. (§8414(b).) The general contractor has 60 days from the recording of a notice of completion or notice of cessation to record a mechanics lien or 90 days after the completion of the work of improvement. (§8412.) If there is no notice of completion or cessation filed, then a mechanics lien must be filed within 90 days from the completion of the work of improvement. Actual completion occurs when the owner accepts the projects, occupies or puts the project to its intended use or no work has been performed for 60 days. (§8180.)
Perhaps the single most important improvement in the new Mechanics Lien Law effective July 1, 2012 is contained in section 8190. Prior the new law taking effect, there was no requirement for the owner or the general contractor to provide notice of a recorded notice of completion or notice of cessation. However, section 8190 requires that the owner provide both the general contractor and anyone who provided the owner with a Preliminary Notice with notice of a recorded Notice of Completion or Cessation within 10 days from the date the Notice of Completion or Cessation is recorded. The failure of the owner to provide notice makes the notice ineffective to shorten the time to file a mechanics lien. (§8190(c).)4.- Foreclosing the Mechanics Lien
A Claimant who has recorded a mechanics lien has 90 days to enforce the lien by filing a lawsuit. (§8460.) If the Claimant does not commence an action to enforce the lien within that time, the claim of lien expires and is unenforceable, unless the owner agrees to an extension of credit and the terms of the extension of credit are recorded 90 days after the recordation of the claim of lien. An action may then be commenced within 90 days after the expiration of the credit, but in no case greater than one year from the completion of the work of improvement.
The Claimant has 20 days after commencing the action to record a Notice of Pendency of Action (i.e., lis pendens) in the office of the county recorder. (§8461.) An encumbrancer or purchaser is not deemed to have constructive notice of the pendency of the action until the lis pendens is recorded. Therefore, the lis pendens should be recorded commensurately with the lawsuit.
Unlike other civil actions, which must be brought to trial within 5 years, an action to enforce a mechanics lien must be brought to trial within 2 years from the commencement of the action. (§8462.)
If there are two or more lien foreclosure actions against one property, the lawsuits must be joined together. If there is not enough equity in the property to satisfy all lien claims, the proceeds of the sale will be divided pro rata among the claimants with valid liens.B. Stop Notices (Civ. C. §§8500-8560)
The Stop Notice (sometimes referred as a “Notice to Withhold”) requires the owner or lender to hold funds that are designated for a construction project until payment claims are resolved. Although the Stop Notice remedy is separate and distinct from a mechanics lien, it is commonly asserted along with the lien claim.
The Stop Notice piggy-backs off of the requirements pertaining for the Preliminary (20-Day) Notice and the Mechanics Lien with respect to notice and enforcement.C. Private Works Payment Bond Claims (Civ. C. §§8600-8614)
Another important source of payment on private and public projects is the labor and materials, or payment bond. This section deals only with bonds on private projects. Public works payment bonds are discussed below in Part II of this Guide.
The parties to a payment bond are the purchaser of the bond (the principal), which is usually the general contractor, the bonding company issuing the bond (the surety), and the person or class of persons for whose benefit the bond is purchased (the beneficiaries or obliges). Private work payment bonds are most commonly provided in connection with subdivision improvements, such as streets, sewers, water lines and facilities that will be turned over to a public owner, such as schools or parks.
The payment bond must be distinguished from the other form of bond typically used in construction, the performance bond. The performance bond insures the general contractor’s performance in completing the construction project. If the general contractor goes bankrupt during the course of the project and stops performing, the owner can use the performance bond to pay a new general contractor to complete the project. The payment bond, however, is not intended to insure the completion of the project, but payment for all of the labor, materials, equipment and services used in the project.
If an owner records a copy of the general contract and payment bond in an amount of not less than 50% of the contract price with the County Recorder, the owner’s liability for mechanics liens is limited to the amounts owed to the general contractor under the terms of the general contract. (§8600.) Recording the bond also limits the amount that a construction lender can withhold to the amount claimed by an original contractors, or a subcontractors, less any amounts claimed by sub-subcontractors or suppliers. In addition, recording the general contract and the payment bond precludes filing stop notices. However, Claimants should note that in order to make a valid payment bond claim, the Claimant must have served a valid Preliminary (20-Day) Notice.
Construction contracting and disputes is a complex process with intricate problems that requires an attorney with extensive experience in construction contracting and claims in order to be done well. Stephen Moses has over two decades of experience representing contractors, tradesman, suppliers, design professionals and owners in construction contracting and disputes.Representative Cases and Construction Projects
- Contract Manager for $450 million construction project in the Middle East.
- Represented owner of construction project stalled by three mechanics lien foreclosure actions and a frozen construction loan, resulting in the dismissal of all three lawsuits, access to the construction loan and a completed construction project.
- Represented structural engineer in defects dispute involving earthquake retrofit of a building in Frank Ogawa Plaza in Oakland, CA.
- Negotiated public works contracts for civil engineering projects in Northern California for civil engineering company.
Represented trade contractor in mechanics lien dispute involving construction of commercial property with favorable results for the client.