Payment Bonds and Stop Notices

Payment Bonds and Stop Notices

A very important area of evaluating claims and assessing liability is the issue of bonds and stop notice requirements for public entities.

Claimants may be secured in contracting with public agencies by means of payment bonds or stop notices. A stop notice is a form of garnishment and is accomplished by a written notice, signed and verified by the claimant or its agent. The notice must state the type of work performed and of the work agreed to be performed.

Civil Code § 3098 provides requirements for subcontractors or material suppliers to file a preliminary 20-day notice with a public entity in order to preserve stop notice rights on a public works project. Once the preliminary notice has been filed, the subcontractor or material supplier may file the stop notice. Upon receipt of a stop notice, the public agency or construction lender is obligated to withhold money due the contractor to satisfy the claim.

The time for filing a stop notice is set forth in Civil Code § 3184. By filing a stop notice with the owner or construction lender, a subcontractor or supplier gains a lien against the construction funds that would otherwise be paid to the claimant's alleged debtor. In order to recover on a stop notice, a suit must be filed. The time requirements for filing such a suit are set forth in Civil Code §§ 3210-3212.

When the validity of a stop notice is in dispute between a contractor and a subcontractor, a stop notice may be released by the public entity by allowing the prime contractor to file a bond. The public entity then releases the stop notice and disburses the money withheld pursuant to such notice. The subcontractor's cause of action is then on the bond, not on the stop notice.

In addition, the prime contractor awarded a public works contract is required to post a payment bond with the public entity if the contract is in excess of $25,000. The amount of the payment bond to be posted varies, depending upon the contract amount. In order to recover on the payment bond, a claimant must provide a 20-day written notice. Other requirements for filing an action on the payment bond are also set forth in the same statutes. A suit must be filed in a timely manner to perfect a claim on the payment bond.