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Every civil litigator knows that unless there is an avenue to recover attorneys’ fees, litigation is a dangerous undertaking. Litigation costs to take a matter from complaint to judgment, even if it is a simple single issue, can cost hundreds of thousands of dollars. Moreover, and more often than should be the case, the issues of the case often become secondary to the issue of recovery of attorneys’ fees.
As is often the case, litigation is commenced with expectations of fairness and justice. Thereafter comes the point of no return, and then comes the realization that survival as a business hinges on whether or not one may recover attorneys’ fees. In reality, the system is for the well to do and has little to do with justice or fairness. If you don’t have an avenue to recover attorneys’ fees, unless the amount of controversy is significant, the best advice for a client may be to write it off as a lesson learned.
Though some attorneys may be able to litigate on a shoestring budget, most winning litigators will leave no stone unturned. Turning over all those stones, of course, costs money. The fact is, attorneys have an obligation to look at every conceivable issue at every conceivable angle, all the while knowing that much of the work will be for not, all of which costs their clients a lot of money.
Fortunately for California contractors, subcontractors and material and equipment providers, even where there is no contractual basis to recover attorneys’ fees, there are statutory options. Some of these statutory options are part of what is known as the “Mechanic’s Lien Laws”. A mechanic’s lien, of course, allows a contractor to lien, and ultimately foreclose upon, the real property it caused to improve, in the event the contractor is not paid by the entity it contracted with, so long as the contractor has met certain statutory prerequisites.
The special rights afforded contractors can be traced back to the formation of California’s Constitution. In 1976 the California Supreme Court said that: “Holders of mechanics' liens are protected by constitutional mandate. ‘The mechanics' lien derives from the California Constitution itself; the Constitution of 1879 mandated the Legislature to grant laborers and materialmen a lien upon the property which they have improved; no other creditors' remedy stems from constitutional command. …. Indeed this state, from the earliest days, and consistently thereafter has asserted its interest in protecting the claims of laborers and materialmen. In 1850 the first session of the California Legislature enacted a mechanics' lien law….”
There being no question that paramount is the interest of California’s contractors, and that their interest is a constitutional mandate, it should come as no surprise that the right for contractors to recover attorneys’ fees, costs, interest -- and even penalties -- has been codified.
For example, typically retention is withheld from a contractor until the project’s completion. Under California’s Civil Code, on a private work of improvement, the retention monies are to be paid by a project’s owner, to the prime contractor, within forty-five days of the project’s completion. Within ten days of the prime contractor’s receipt of the retention monies from the owner, the prime contractor is obligated to pay each of its subcontractors their portion of the retention.
Where retention proceeds are not timely paid, and a prime contractor prevails in its suit against the owner, or where a subcontractor prevails in its suit against the prime contractor, not only is the prime contractor or the subcontractor, as the case may be, entitled to two percent per month on the wrongfully withheld monies, which translates to twenty-four percent per annum, but the prevailing prime contractor or subcontractor is entitled to its attorneys’ fees and costs incurred in the action. Not a bad deal. It goes without saying, it is key to prove at trial that the disputed money is, in fact, retention monies, in order to trigger the right to the fees, costs and interest under the Civil Code.
In addition, for prime contractors on private works of improvement, under the Civil Code, the same holds true for their progress payments. That is, an owner has thirty days after a “demand for payment in accordance with the contract” to pay a progress payment – which simply means, in the real world, after being invoiced. Where the owner fails to pay a progress payment or payments, and the prime contractor sues the owner to recover one or more progress payment(s), if the prime contractor prevails on its claim against the owner, it is entitled to two percent per month on the wrongfully withheld progress payment(s), and is entitled to collect its attorneys’ fees and costs incurred in the action.
On public works projects, under California’s Public Contract Code, within sixty days of the project’s completion, the public entity is obligated to release to the prime contractor its retention payment. Similar to private works projects, where there is a dispute as to whether or not the money is due and owing, until that dispute is resolved, the public entity can withhold from the prime contractor, or the prime contractor can withhold from its subcontractor, as the case may be, one-hundred and fifty-percent of the disputed amount. Unlike private works of improvement, where a prime contractor has ten days from receipt of the retention monies to pay its subcontractors, on public works of improvement the prime contractor is obligated to pay each subcontractor their portion of the retention within seven days. Similar to private works of improvement, where retention proceeds are not timely paid and a prime contractor prevails in its suit against the public entity, or where a subcontractor prevails in its suit against the prime contractor, not only is the prime contractor or the subcontractor, as the case may be, entitled to two percent per month on the wrongfully withheld monies, which, again, translates to twenty-four percent per annum, but as the prevailing party the contractor is entitled to its attorneys’ fees and costs incurred in the action.
California’s Business & Professions Code offers similar protections tailored specifically for subcontractors’ progress payments. That is, whether the project is a private or a public work of improvement, within ten days of receipt of payment, a contractor must turn around and pay its subcontractors. In the event a contractor fails to timely pay its subcontractor, and the subcontractor brings suit and prevails in its action against the contractor, the subcontractor may recover not only its attorneys’ fees and costs incurred, but the contractor must pay, as a penalty, two percent per month on the wrongfully withheld monies. With the two percent per month penalty, and the ten percent of interest otherwise recoverable, a subcontractor may potentially recover thirty-four percent per annum on the sum due and owing it. These are certainly special rights not afforded other types creditors.
It is relevant to note that certain code sections refer to the two percent per month recovery as a “charge” and also state that said charge is “in lieu of any interest otherwise due.” Other code sections define the two percent per month as a “penalty” and do not state that said interest is in lieu of interest otherwise due. Thus, it is important to know the applicable code sections, as it may be the case that in addition to fees and costs, interest on top of interest may be available.
Another vehicle for a contractor to recover its attorneys’ fees and costs, on a private work of improvement, is the bonded stop notice. That is, though the contractor must purchase a stop notice bond, which requires adequate financials and a bonding company that will issue the bond, in the event a contractor is not paid for its work performed, so long as the contractor has met certain statutory prerequisites, when the lender is served it “shall withhold funds pursuant to a bonded stop notice”. In the event a contractor pursues an action on the bonded stop notice, the party prevailing is entitled to recover from the entity the court deems liable the “reasonable attorney’s fees in addition to other costs and in addition to any liability for damages.”
The payment bond is but another avenue for the recovery of attorneys’ fees for the subcontractor, which bonds are required on most public works projects. That is, public entities typically require that the prime contractor obtain a payment bond, which bonds provide that the payment bond surety shall pay any subcontractor, among others, that is not paid for its work on the project. In fact, the same California Civil Code section requiring that payment bonds be issued for the benefit of subcontractors also requires that the language of the bonds themselves provide that the payment bond sureties will pay reasonable attorneys’ fees, in the event suit is brought on a payment bond.
In short, contractors in California are afforded a host of rights that no other creditors possess. It is critical to know those rights, in order to take advantage of them. It is also critical to satisfy certain statutory prerequisites, so as to not waive those rights.