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Recognizing that litigation is a costly undertaking, the ability to recover attorney’s fees and costs often becomes a key consideration for contractors in deciding whether or not to pursue a claim. Fortunately for California contractors, subcontractors, and material and equipment providers, the “Mechanic’s Lien Laws” provide contractors with statutory authorization to recover attorney’s fees and costs even where no contractual basis for such a recovery exists.
The special rights afforded contractors can be traced to the adoption of the California Constitution. The California appellate court in Truestone, Inc. v. Simi W. Indus. Park II (1984) 163 Cal. App. 3d 715, 723, noted 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 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…. Moreover, the courts have uniformly classified the mechanics' lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen….”
The special creditor rights bestowed on contractors to lien real property has been justified by the notion “…that the recordation of a mechanics' lien, or filing of a stop notice, inflicts upon the owner only a minimal deprivation of property; that the laborer and materialman … have enhanced the value of that property; and that state policy strongly supports the preservation of laws which give the laborer and materialman security for their claims.” Connolly Development, Inc. v. Superior Court of Merced County (1976) 17 Cal. 3d 803, 828.
Given the rights afforded contractors by the California Constitution to enforce collection of their fees, it is not surprising that contractors have also been given a statutory right to recover attorney’s fees, costs, interest and even penalties. The exercise of this right, of course, often occurs in disputes over retention. Under the Civil Code, for a private work of improvement, a project owner must pay retention to the direct contractor within 45 days of project completion. Civil Code §8812(a). Within 10 days of the direct contractor’s receipt of the retention proceeds from the owner, the direct contractor is obligated to pay that portion of retention owed to each subcontractor. Civil Code §8814(a).
With retention tied to completion, oftentimes the issue is whether a project has actually been completed and, therefore, if the obligation to pay retention has matured. When disputes over retention arise, an owner can withhold from the direct contractor, or the direct contractor can withhold from a subcontractor, as applicable, 150 percent of the disputed amount until that dispute is resolved. Civil Code §8812(c) and §8814(c), respectively. If retention proceeds are not paid timely and a direct contractor prevails in its suit against the owner, or a subcontractor achieves the same result in a suit against a direct contractor, the direct contractor or the subcontractor is entitled to recover two percent per month on the wrongfully withheld monies, which translates to 24% per annum. Civil Code §8818(a). Further, the prevailing party – whether it be the direct contractor, subcontractor, or owner – is entitled to recover its attorney’s fees and costs. Civil Code §8818(b). Thus, a key issue at trial is substantiating that the disputed funds actually constitute retention in order to preserve a claim for fees, costs and interest under the Civil Code.
Though not as common as claims for retention and/or change orders, the Civil Code also provides certain rights for direct contractors with regard to claims for progress payments on private works of improvement. A project owner has 30 days after the direct contractor “demand[s] payment pursuant to the contract” to pay a progress payment. Civil Code §8800(a). If an owner violates its timing obligations with respect to progress payment(s), and the contractor prevails in a claim against the owner, the contractor is entitled to receive two percent per month on the wrongfully withheld progress payment(s), and its attorney’s fees and costs. Civil Code §8800(c).
For public works projects, a public entity is required under the Public Contract Code to release retention to a direct contractor within 60 days of a project’s completion. Public Contract Code §7107(c). Like private works projects, when a dispute occurs as to whether monies are actually due and owing, a public entity can withhold from the direct contractor, or the direct contractor can withhold from a subcontractor, 150 percent of the contested amount until the dispute is resolved. Public Contract Code §7107(c) and (e). In contrast to private works of improvement, however, a direct contractor for a public works project must pay retention owed to each subcontractor within 7 days as opposed to 10 days. Public Contract Code §7107(d). Nevertheless, the provisions applicable to private works of improvement allowing a prevailing direct contractor or subcontractor to collect two percent on amounts wrongfully withheld, and also recover attorney’s fees and costs, have also been adopted for public works projects. Public Contract Code §7107(f).
Similarly, the Business & Professions Code protects the right of subcontractors to recover progress payments. That is, regardless of whether a project is a private or a public work of improvement, direct contractors and subcontractors must pay their subcontractors or sub-subcontractors, as the case may be, “not later than seven days after receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts allowed the contractor on account of the work performed by the subcontractors, to the extent of each subcontractor’s interest therein.” Business & Professions Code § 7108.5(a). If the contractor does not make payment by that deadline and the subcontractor or sub-subcontractor brings suit and prevails in its action, that contractor may not only recover its attorney’s fees and costs, but is also entitled to collect two percent per month on the wrongfully withheld monies as a penalty. Business & Professions Code § 7108.5(b).
With respect to a contract between a public utility and a direct contractor, unless the direct contractor and subcontractor agree otherwise in writing, the direct contractor has twenty-one days after it receives a progress payment to pay its subcontractor the portion of the progress payment that is due to its subcontractor. Civil Code §8802 (a) and (b). If there is a claim by the subcontractor against the direct contractor with respect to an unpaid progress payment, the prevailing party is entitled to “2 percent of the disputed amount due per month for every month that payment is not made[,]” and in any action “the prevailing party is entitled to costs and a reasonable attorney’s fee.” Civil Code §8802(c).
It is relevant to note that no matter what section provides for 2% per month, 2% per month is 24% per annum, which is an envious rate of return on your money if you can get it.
In addition to the rights afforded by a mechanic’s lien, on a private works of improvement, subcontractors have a significant, if not more powerful, tool to recover fees through the use of a “stop payment notice.” Unlike a mechanic’s lien which attaches to an owner’s property, a stop payment notice allows a subcontractor to assert a claim directly against the construction fund. A stop payment notice is available on both private and public works projects. Civil Code §§8500 and 9350. On private works projects, subcontractors can take the additional step of obtaining a “bonded” stop notice which provides another potential means of recovering attorney’s fees and costs. Civil Code §8532. If a contractor decides to purchase a stop payment notice bond, in order to pursue a claim against a construction lender on a private works project, the “construction lender shall withhold from the borrower … sufficient funds to pay the claim stated in the notice[,]” so long as the contractor has met certain statutory prerequisites. Civil Code §8536(a). Thereafter, if the contractor decides to file a bonded stop notice claim and is the prevailing party in that action, the contractor is entitled to recover “reasonable attorney’s fees in addition to costs and damages[,]” in addition to interest at the legal rate. Civil Code §8558(a) and §8560.
Though sometimes there will be a payment bond on a private works project, with few exceptions payment bonds are a requirement of public works projects. Civil Code §9550(a). Because of this requirement, subcontractors have another mechanism by which to recover their attorney’s fees. “In an action to enforce the liability on the bond, the court shall award the prevailing party a reasonable attorney’s fee.” Civil Code §9564(c).
Contractors in California are afforded a host of recovery rights afforded to no other creditors. Contractors must not only be familiar with these rights in order to protect their interests and maximize the potential recovery that can be obtained in any litigation, they should know the applicable statutory prerequisites required to invoke those rights and ensure they are in compliance, in order to avoid any waiver of those rights. Of course, to actually obtain an award for fees, costs and interest a contractor needs to litigate the matter through judgment, which is rarely the case, as matters typically settle and most settlements call for the parties to bear their own fees and costs, but the opportunity is there if you willing to go all the way.
(Andrew Carlton is a partner of Carlton & Alberola in Lake Forest, California, and was a general contractor prior to becoming an attorney.)