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| The following information is intended for California residents only, applies California law, and is only intended
as a general discussion of an area of law. While other states may have similar laws or provisions, a local attorney should be consulted
with any situation involving persons or businesses outside of the state of California or the United States. This website is not intended as legal advice
for any individual's or business' specific situation. A layperson should not rely on the limited information provided on this website to make decisions concerning
specific cases or issues. No attorney-client relationship is established simply by reading this general information; no relationhsip with the Law
Office of Steven R. Lovett exists until a written retainer agreement is signed by all parties. |
CONSTRUCTION LAW
PREVENTIVE LAW
While most individuals go
to a medical doctor for periodic checkups, the patient does not
typically come to a lawyer until a dispute is hemorrhaging. There
are many preventive measures that can be taken to reduce the need or
eliminate the need for legal intervention. First, it is critical to
make a record of all proposals. Even if the amount involved does not
justify a formal contract, there is no reason that a confirming
letter or facsimile cannot be sent. The preferred mechanism is to
send an engagement letter with a signature line for the prospective
client to sign and a self-addressed, stamped envelope. Even without
the client's signature, if an engagement letter or fax is sent to a
client, and the client does not object, and the contractor or
architect rendered services based upon that letter, the law will
create an enforceable contract whatever terms are set forth in that
letter.
Such record-keeping is especially important when
extras and change orders come into play. These are among the most
commonly litigated issues and can be easily eliminated by a
confirming letter. Recognizing the realities of construction
administration and the difficulty of obtaining a signature on a
construction site, at the very least a confirming fax should be sent
the next day which sets forth the nature of the extra, the cost of
the extra, the individual who authorized the extra work and the
effect of the extra work on any time schedule. These type of
preventive measures both minimize the need for an attorney
involvement and make it much easier once an attorney has to be
involved.
Documentation
If a pre-printed contract is
used, a contractor or design professional should ensure that the
contract addresses California state requirements. For example, if a
national form such as an American Institute of Architects (AIA) form
is employed, that form may not address requirements unique to
California. For example, effective January 1, 1993, extensive notice
provisions have been added for all residential construction. In
addition, if the contract involves home improvement to a residence,
there are certain additional requirements that must be contained
within the contract that are not found within national forms. Also,
architects are required to have prescribed information in a written
contract.
Along the lines of documenting proposals, I would
like to mention the need to document disputes, or the lack there of.
If, in the process of collection, somebody in your office contacts a
client who tells you that a check is in the mail, or that they are
having a cash-flow problem, or they have not been paid by the owner,
it is good practice to send a confirming letter to document the fact
that the reason you have not been paid is because of a cash-flow
problem. This helps to negate disputes that are often concocted on
the steps of the court house or arbitrator's office.
In
order to maximize one's legal position, one should avoid abandoning
a job before its completion whenever possible. This will eliminate
the owner being able to receive a credit or back charge in the
amount of the sums necessary to have the work completed by other
contractors. Typically, this sum will far exceed the amount of money
you would have to spend to complete the work. Also, in many
instances this may be warranty work which would cost you virtually
nothing. Prior to taking any measures, it is important to look at
the appropriate termination section of any contract. Most contracts
require written notice and a set time period prior to taking any
steps to terminate the contract.
It should be kept in mind
that when you agree to perform services for somebody and to be paid
over time, you are essentially agreeing to extend credit to the
individual. Unless
you are being paid directly from a bank or you
have adequately protected your mechanics' or designers' lien rights,
one should scrutinize the credit history of the customer. I have
encountered many situations where a contractor or architect goes
into a project knowing full well that there will be financing
problems or a monetary short fall. These circumstances should
present a red flag to the contractor that there will be a payment
problem. Even if one does not do a formal credit report on a
prospective client, it is good practice to elicit as much
information as possible as to the type of entity, principals
involved, bank references, credit references etc.. It is also good
practice to copy all incoming checks. This is helpful for several
reasons. First, it can help to tell you what type of entity with
which you are dealing. It is not uncommon to be contracting with one
entity, but to receive a check from a limited partnership which has
been established for the purposes of paying construction-related
debts. Secondly, in the event that an arbitration award or judgment
has to be enforced, the contractor or designer can levy on that bank
account and not have to spend a lot of money looking for assets.
Many companies extend substantial amounts of credit to an entity
whose form they are unsure of and do not perfect lien rights. It can
be critical to know with whom you are dealing, because in the event
of a corporate obligation, it is good practice to attempt to attain
a personal guarantee.
Arbitration
Most construction
contracts contain an arbitration clause. The most common reasons for
using arbitration (and the probable reason arbitration clauses are
inserted in form AIA copntracts) is that such procedures are
traditionally less expensive, quicker, and avoid the risk of a jury
trial. However, a simple, undisputed case can often be resolved
quicker and less expensively by the obtaining of a default or
summary judgment in the court process. Similarly, as arbitration
administrative fees escalate, a client may wind up spending $500.00
to obtain a
judgment in a situation where they could obtain the
same judgment for roughly $150.00 in court costs by simply filing a
lawsuit and obtaining a default judgment. Furthermore, the American
Arbitration Association has initiated pretrial conferences which can
slow down and increase the expense of the arbitration process.
Finally, many people do not like the arbitration process because of
the limited scope of review of an arbitration award. While a
capricious judge or jury can be attacked by an appeal, a bad
arbitration award can only be vacated based upon very limited
grounds and for a very limited period of time. Notwithstanding this,
from an errors and omissions standpoint, arbitration will be
preferred because it will tend to limit one's exposure since an
arbitration award is generally going to be substantially less than a
jury award.
Changes and lien releases
Effective
January 1, 1994 there have been changes in California to the
prescribed forms for Conditional Waiver and Release Upon Progress
Payment and for Unconditional Waiver and Release Upon Progress
Payment. Any enforceable releases after this date must substantially
comply with these revisions. The revisions make it clear that the
lien releases only apply to release mechanics' lien, stop notice,
and bond rights and not the underlying contract rights between the
parties. In addition, the amendments make it clear that the lien
releases do not affect retentions retained before or after the
release date, extras furnished before the release date for which
payment has not been received, or extras or items furnished after
the release date. Significantly, the amendments make it clear that
if there is a written change order which has been fully signed by
both parties, rights based upon work performed or items furnished
under the change orders are covered by the release unless
specifically reserved by the claimant in the release.
Significantly, subsection (b) of Civil Code section 3262
provides that whether the release is conditional or unconditional,
the lien is invalid if the payment is not actually
received.
Owner's measure of damages
The California
Supreme Court held in Ehrlich v.
Menezes that where a contractor's negligence causes a homeowner only
economic injury and property damage (not physical injury), only
contract damages lie and a claim for emotional distress is
precluded. The available damages for defective construction are thus
limited to the cost of repairing the home, including lost use or
relocation expenses, or the diminution in value.
When a
contractor, subcontractor or design professional is found liable to
the owner for defective construction, the measure of damages has
always been either diminution in value or the cost of restoration,
whichever is less. The owner cannot receive both diminution in value
and restoration costs since that would constitute a double recovery.
However, in 1990, the court of appeal held in Orndorff v. Christiana
Community Builders that if the homeowner has a "personal reason" for
repairing construction defects in his home, the owner may be awarded
the costs to repair the home, even if that cost is greater than a
loss in value to the property created by the defects.
Limitation on Liability
In Markborough California v.
Superior Court, the California court of appeal sanctioned a
construction professional limiting liability to the amount of the
construction fee. Even though the provision in question was in a
standard form contract, it was mailed with a cover letter that
stated: "If the contract documents were acceptable to you, we can
begin work as soon as we receive a copy of the signed contract. We
would, of course, have to approve any requested changes for
proceeding." This provision suggested that the customer was not
stuck with the contract and liability clause, but had the
opportunity to make changes.
The contract in question
contained a limitation of liability clause limiting the engineer's
liability to the greater of $50,000.00 or to the engineer's
consulting fee. The engineer was paid $67,640.00 for its services
and this provision was effective to limit any claim for errors and
omissions to $67,640.00. Given the fact that the plaintiff claimed
over 5 million dollars in expenses to remedy the design problem in
issue, this was a very significant provision. The court probably
would not have upheld this provision, however, absent some evidence
that the contract was negotiable. In addition, based upon the
court's application of Civil Code section 2782.5, it is unlikely
such a provision would be upheld in another type of
contract.
MECHANICS' LIENS, DESIGNERS' LIENS, AND STOP
NOTICES IN A NUTSHELL
The Preliminary 20-Day Notice
In
discussing lien rights, many architectural firms have traditionally
been reluctant to serve a preliminary notice at the inception of the
relationship. However, a preliminary notice must be filed at the
beginning of the job or else it will only relate back 20 days from
the date of the service. A preliminary notice is the only way to
protect an architectural firm or subcontractor when they have been
hired by somebody other than the owner of the property. If there is
a direct contractual relationship with the owner, a preliminary
notice need not be filed. Similarly, if one is originally hired
as a subcontractor, but then establishes an independent relationship
with the project owner, a preliminary notice may be unnecessary. The
use of the preliminary notice is a business decision and must be
weighed against the public relations consequences.
The
mechanics' lien area is a very complicated area with very strict
formal requirements. For example, the preliminary notice must be
sent by certified-mail, return receipt requested, to the owner,
general contractor, and any known bank. The green return receipt
must be kept. It is very common for these notices to be sent by
ordinary mail, or for someone to lose the return receipt. It is
equally common for the preliminary notice to be served at the end of
the project when it is too late.
Lien Time Tables
In
California, prior to the initiation of construction, only a
designer's lien is available. This lien will be discussed below.
Once construction has been commenced, the mechanics' lien is the
only mechanism for the subcontractor to create a relationship with
the owner of the property. Similarly, the stop notice is the only
mechanism to create a relationship with the lending institution
which may be financing the construction.
It should be kept
in mind that unless one is a general contractor ( i.e., one has a
direct relationship with the property's owner) is necessary to send
the 20-day preliminary notice to the general contractor, owner
and financial institution. The 20-day preliminary notice is required
before a mechanics' lien or stop notice can be filed on a private
job.
It should be kept in mind that after completion, the
commencement of the lien period occurs 60 days after cessation of
the job, 30 days after notice of completion has been filed
or upon acceptance of the work or occupation of the project by
the owner. A cessation is a cessation of work on the project, not
necessarily a cessation of work that has been performed by your
company.
From that time period, one has 90 days to record a
mechanics' lien. Accordingly, there may be a 150-day period to
record the lien, consisting of 60 days after cessation of labor,
followed by 90 days after the end of the cessation.
After
the mechanic's lien has been recorded, if the job has been
completed, one must file a lawsuit within 90 days to perfect lien
rights. If a lawsuit is not filed, and the project has been
completed, the lien should be released because it is no longer in
effect and merely serves as an illegal cloud on title. In such a
situation, the wrongful lien claimant may be subject to monetary
damages.
The Designer Lien
Effective January 1, 1991,
a new weapon to ensure payment of a design professional's fees was
created in California. Under previous law, architects, engineers,
land surveyors, and designers were limited to the same remedy as a
contractor or materialman, i.e., filing a mechanic's lien. By
filing such a lien, the design professional could file suit to
foreclose on a lien if properly perfected, and seek the reasonable
valuable of the services or the contract price, whichever is less.
However, when plans were drafted or services were performed, but no
construction commenced, no mechanics' lien rights came to
bear.
California Assembly Bill 1789 created a new design
professional's lien. This bill created sections 3081.1 through
3081.10 of the California Civil Code. From that point on, any
certificated architect, registered professional engineer, or
licensed land surveyor may be eligible to file a design
professional's lien. Unlike a mechanic's lien, the absence of
commencement of actual construction of the planned work of
improvement does not bar foreclosing on the design professionals'
lien. However, no such lien can be filed unless a building permit or
other governmental approval has been obtained in connection with the
services rendered by the design professional. (see Civil Code
section 3081.2). Thus, while commencement of construction is the
triggering mechanism of the mechanics' lien, obtaining a building
permit or other governmental approval is the triggering mechanism
for the design professionals' lien.
For a design
professional to be entitled to a lien, all of the following must
occur:
1. A building permit or other governmental approval
must be obtained.
2. There must be a written contract between
the design professional and the land owner.
3. The land owner
must default in payment or refuse to pay the design professional in
accordance with the written contract.
4. The design
professional must make a written demand for payment specifying that
a default has occurred and the amount of the default. This written
demand must be mailed by first-class registered or certified mail,
postage prepaid, but no return receipt is required. This notice must
be given at least 10 days prior to recording a notice of
lien.
Like a mechanics' lien, the design professionals' lien
expires 90 days after recording a notice of lien, unless the design
professional files suit to foreclose on the lien within 90 days of
recordation. In addition, the design professionals' lien expires on
commencement of the work of improvement (since the mechanics' lien
is available at that point). The only other limitation on filing a
design professionals' lien is that the notice of lien must be
recorded no later than 90 days after the design professional knows
or has reason to know that the land owner is not commencing the work
of improvement.
THE EFFECT OF RECORDATION OF A PRELIMINARY
NOTICE
California law was revised in 1988 to require the
county recorder to notify a subcontractor when a notice of
completion or a notice of cessation is recorded on a particular
private works project. Since the deadline for filing a mechanics'
lien depends upon when either of these notices are recorded, this
new procedure will help prevent missing the critical time period. As
such, in many instances the new procedure will enable the claimant
to get paid on a project and not lose important lien rights.
California Civil Code section 3097 (o) permits a claimant to
file its 20-day preliminary notice with the recorder's office in the
county where the jobsite is located. This is in addition to the
requirement of mailing this notice by certified mail, return receipt
requested, as described above. There is a nominal filing fee and the
recorder's office requires both the claimant's signature and date
must be an original (not a copy). If you include an extra copy of
the notice with a self-addressed, stamped envelope, the recorder's
office will mail a conformed copy which indicates the date and time
it was filed. Afterwards, once an owner records a notice of
completion or a notice of cessation, the recorder's office will mail
the claim and a notice of when either of these documents has been
recorded. Once the claimant receives this notice, it should
immediately record a mechanics' lien, serve a bonded stop notice and
a notice of surety on payment bond (if appropriate), or consult an
attorney for advice on these matters. Once these steps have been
taken, it is then crucial to calendar a follow-up date to ensure the
lawsuit is filed within the prescribed time periods. Similarly,
regarding California public works projects, California Civil Code
section 3185 provides that if the claimant, at the time of filing
its stop notice, pays to the public entity a prescribed sum, the
public entity must give to each stop notice claimant, notice of the
expiration of the stop notice period by personal service or
certified mail. This notice must be given to stop notice claimants
no later than 10 days after the filing when notice of completion or
after the cessation of labor has been deemed a completion of the
public work, or after the acceptance of completion, whichever is
later. There is a nominal fee for obtaining this information which
is payable to the public entity.
THE UTILITY OF THE BONDED
STOP NOTICE
On a private project in California, an additional
procedure that can be used to protect rights is to serve a bonded
stop notice on the construction lender. This notice must be
completed within the time period that any mechanics' lien could be
recorded against the project. Needless to say, the longer the wait,
the less funds will be held by the lender due to the disbursements
being made as the job progresses.
To accomplish this
procedure, the claimant or its insurance agent could contact a
bonding company. The company should be advised that you desire to
obtain a bond for a stop notice on a private work. They will ask you
various questions concerning the project and will have you complete
an application for a bond. Please have them send the original bond
directly to your office. Upon receipt, an attorney can prepare a
stop notice and serve it on the branch where the construction funds
are being held. It is critical to serve the right branch or else it
can result in a stop notice being defective. In some factual
circumstances, the filing of the stop notice may be the only means
to recover money. For example, if a contractor is insolvent, and the
owner files bankruptcy, the bonded stop notice may still get the
claimant paid. Many contractors have a practice of serving a stop
notice on a lending institution when the notice is not bonded. Most
lending institutions will simply ignore such a notice and they are
not required to pay attention to it absent the bond.
While
provisions limiting liability have been upheld in construction
contracts, provisions which seek to eliminateliability for
negligence or willful misconduct are void as against public policy.
See California Civil Code section 2782.
[ Law Office of Steven R. Lovett • • telephone: (818) 999-9397 • facsimile:(818) 999-5048 • ]
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