California law provide “original”, “prime” or “direct” contractors with apparent relief from their contractual obligations when owners of property on which the original contractor works fail or refuse to pay them. This law can be found in the “10 Day Stop Work Notice” specified in Civil Code sections 8830-8848. Unfortunately, the applicable statutory procedures have a number of important shortcomings of which contractors, subcontractors and suppliers should be aware.
In general, the statute provides that direct contractors who have indisputably satisfactorily performed their work but who have not been paid by the owner within 35 days after the payment is due may serve on the owner and on all subcontractors and suppliers and conspicuously post on the job site and at the main office of the job site a “Notice of Intent to File a Stop Work Notice” which states that unless all amounts then due the original contractor are paid within 10 days from the date such notice is provided, the original contractor will stop work on the project. The owner is required to serve a copy of the same document on its construction lender within 5 days after receipt. If, after five days from the time the Notice of Intent to File a Stop Work Notice the original contractor is still unpaid, the original contractor may then serve a “10 Day Stop Work Notice” on the owner. If the 10 Day Stop Work Notice is sent by certified mail it must actually be received by the owner. If sent by registered mail it is deemed served five days after mailing, even if the owner never receives it. Registered mail is therefore suggested. After the 10 day period has passed from service of the 10 Day Stop Work Notice the original contractor may cease working on the project. If the issues between the owner and the original contractor are later resolved the original contractor is required to post a “Notice of Cancellation of Stop Work Notice” at a conspicuous location at the job site and at the main office of the job site and serve all of its subcontractors and suppliers with a copy of the Notice.
The relevant statutes, in their entirety are as follows:
8830. “Stop work notice” means notice given under this article by a direct contractor to an owner that the contractor will stop work if the amount owed the contractor is not paid within 10 days after notice is given.
8832. If a direct contractor is not paid the amount due pursuant to a written contract within 35 days after the date payment is due under the contract, and there is no dispute as to the satisfactory performance of the contractor, the contractor may give the owner a stop work notice. The notice shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1.
8834. A direct contractor that gives an owner a stop work notice shall give the following additional notice:
(a) At least five days before giving the stop work notice, the contractor shall post notice of intent to give a stop work notice. The notice shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1. In addition to posting the notice pursuant to Section 8114, the notice shall also be posted at the main office of the site, if one exists.
(b) At the same time the contractor gives the stop work notice, the contractor shall give a copy of the stop work notice to all subcontractors with whom the contractor has a direct contractual relationship on the work of improvement.
8836. Within five days after receipt of a stop work notice from a direct contractor, the owner shall give a copy of the notice to the construction lender, if any. The copy of the notice shall be given in compliance with the requirements of Chapter 2 (commencing with Section 8100) of Title 1.
8838. (a) The direct contractor or the direct contractor’s surety, or a subcontractor or a subcontractor’s surety, is not liable for delay or damage that the owner or a contractor of a subcontractor may suffer as a result of the direct contractor giving a stop work notice and subsequently stopping work for nonpayment, if the notice and posting requirements of this article are satisfied.
(b) A direct contractor’s or original subcontractor’s liability to a subcontractor or material supplier after the direct contractor stops work under this article is limited to the amount the subcontractor or material supplier could otherwise recover under this title for work provided up to the date the subcontractor or material supplier ceases work, subject to the following exceptions:
(1) The direct contractor’s or original subcontractor’s liability continues for work provided up to and including the 10-day notice period and not beyond.
(2) This subdivision does not limit liability for custom work, including materials that have been fabricated, manufactured, or ordered to specifications that are unique to the job.
8840. On resolution of the claim in the stop work notice or the direct contractor’s cancellation of the stop work notice, the contractor shall post, and give subcontractors with whom the contractor has a direct contractual relationship on the work of improvement, notice of the resolution or cancellation. The notice shall comply with the requirements of Chapter 2 (commencing with Section 8100) of Title 1. In addition to posting the notice pursuant to Section 8114, the notice shall also be posted at the main office of the site, if one exists.
8842. A direct contractor’s right to stop work under this article is in addition to other rights the direct contractor may have under the law.
8844. (a) If payment of the amount claimed is not made within 10 days after a stop work notice is given, the direct contractor, the direct contractor’s surety, or an owner may in an expedited proceeding in the superior court in the county in which the private work of improvement is located, seek a judicial determination of liability for the amount due.
(b) The expedited proceeding shall be set for hearing or trial at the earliest possible date in order that it shall be quickly heard and determined, and shall take precedence over all other cases except older matter of the same character and other matters to which special precedence has been given.
8846. It is against public policy to waive the provisions of this article by contract.
8848. (a) This article applies to a contract entered into on or after January 1, 1999.
(b) This article does not apply to a retention withheld by a lender pursuant to a construction loan agreement.
This all generally sounds very good, but the statute has shortcomings which must be considered. One of the traps for the original contractor in relation to the Stop Work Notice is that the original contractor can only serve the Stop Work Order if “there is no dispute as to the satisfactory performance of that original contractor.” A great likelihood that any owner served with a Stop Work Notice will dispute whether the original contractor has been satisfactorily performing the contract should be anticipated. This puts any contractor seeking to use the Stop Work Notice procedure at risk. Under circumstances where it is later found that the contractor was not in fact satisfactorily performing its work the contractor will likely find itself subject to a successful claim for breach of contract and the substantial damages that typically flow from delay and the need for an owner to obtain a substitute contractor mid-project, usually at a substantial premium. If the contractor has breached the contract and had no actual legal right to serve the Stop Work Notice or to stop work, the contractor loses the protection of the statute. Contractors must therefore be extremely certain of their position before invoking the Stop Work Notice.
Another danger inherent in using the Stop Work Notice is that although the “Notice of Intent to File a Stop Work Notice” must be served on all subcontractors and suppliers, as well as the owner, there is no corresponding requirement that the actual “Stop Work Notice” be served on the subcontractors and suppliers. Thus, a subcontractor or supplier may incorrectly assume that since it did not receive the actual Stop Work Notice, the differences between the original contractor and the owner must have been resolved. The subcontractor or supplier might rely on this assumption and continue performing work for the original contractor or delivering materials to the site when in fact the original contractor may have legitimately and legally ceased its work on the project.
The statute provides that once the original contractor stops work under the properly exercised legal authority of the statute, the original contractor is not liable to its subcontractors and suppliers for damages which tend to flow from the work stoppage or for goods or services intended for the prime contractor and provided to the project by subcontractors and suppliers after the Stop Work Notice becomes effective. This may present a particular problem since there is no legal requirement that the actual Stop Work Notice be served on subcontractors and suppliers. While a supplier or subcontractor may be able to maintain mechanics’ lien rights against the property owner for any work or material supplied after the Stop Work Notice they will have no corresponding contract claim right against the contractor for goods or services inadvertently provided after the Stop Work Notice became effective.
One saving grace available to subcontractors and suppliers under the statute is that there is an exception to the statute in case of “custom work, including materials which have been fabricated, manufactured, or ordered to specifications that are unique to the job”
Another problem with the statute is that it is silent on the obligations between subcontractors and the suppliers and “sub-subcontractors”. For example, subcontractors may have contracted with suppliers and lower tier subcontractors in relation to the project and they have legal obligations to take delivery of materials or services, regardless of the actions of the prime contractor. The statute does not provide any contract relief as between subcontractors and their suppliers or lower tier subcontractors. Subcontractors to the original contractor should therefore be sure to insert in their contracts with suppliers and lower tier subcontractors protections in the event the prime contractor exercises the right to invoke the Stop Work Notice (or if the contractor terminates the subcontractor from the project for any other reason for that matter).
Article written by William L. Porter, Esq. and revised in 2014. Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868.