Articles > Construction law in California

Construction Project “Stop Work Orders”
– Unintended Trap for Prime Contractors

by William L. Porter, Attorney at Law

California law provides “original” or “prime” 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 Order” specified in Civil Code section 3260.2. Unfortunately, the statute has a number of important shortcomings of which contractors, subcontractors and suppliers should be aware.

In general, the statute provides that original 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 Order” 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 Order the original contractor is still unpaid, the original contractor may then serve a “10 Day Stop Work Order” on the owner. If the 10 Day Stop Work Order 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 Order, 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 Order” 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 statute, in its entirety is as follows:

“3260.2. (a) If an original contractor is not paid all moneys which are owed pursuant to a written contract for a private work of improvement within 35 days from the date payment is due pursuant to the written contract, and there is no dispute as to the satisfactory performance of that original contractor, the original contractor shall have a right to serve upon the owner a "10-day stop work order" that states that unless all amounts then due the original contractor are paid within 10 days from the date notice is provided under this section, the original contractor will stop work on the project. At least five days before service upon the owner of a "10-day stop work order," the contractor shall post, in a conspicuous location at the job site and at the main office, if one exists, of the job site, a notice that the original contractor intends to file a 10-day stop work order pursuant to this section. A copy of the written notice shall also be served upon all subcontractors with whom the original contractor has a direct contractual relationship on the project at the same time the notice is served upon the owner. Within five days of receipt of written notice by an original contractor pursuant to this section, the owner shall forward to the construction lender, if any, at the address provided in the construction loan agreement, a copy of the notice by first-class mail.

Upon resolution of the dispute or cancellation of the 10-day notice by the original contractor, the original contractor shall post, in a conspicuous location at the job site and at the main office, and serve a notice to inform the subcontractors with whom the original contractor has a direct contractual relationship of this resolution or cancellation.
           
(b) The original contractor's right to stop work pursuant to this section is in addition to any and all other rights the original contractor may have under the law.

(c) Notwithstanding any other provision, the original contractor or his or her surety, or subcontractor or his or her surety, shall not be liable for any delays or damages that the owner or contractor of a subcontractor may suffer as a result of the original contractor serving the owner with a 10-day stop work order, and subsequently stopping work for nonpayment if all of the posting and notice requirements described in subdivision (a) are met. An original contractor's or original subcontractor's liability to a subcontractor or material supplier resulting from the cessation of work under this section shall be limited to the amount of monetary damages the subcontractor or material supplier could recover under the mechanic's lien law for goods and services provided up to the date the subcontractor ceases work, provided that

(1) liability shall continue for work performed and materials supplied up to and including the 10-day notice period and not beyond, and

(2) this provision does not apply to limit monetary damages for custom work, including materials which have been fabricated, manufactured, or ordered to specifications that are unique to the job.

(d) If the payment is not made within 10 days from the date the notice was served, the original contractor or his or her surety, may seek a judicial determination of liability for the amount not paid for work performed in an expedited proceeding in the superior court in the county in which the private work improvement is located.

(e) It shall be against public policy to waive the provisions of this section in any written contract for private work of improvement.

(f) This section shall apply to any contract entered into on or after January 1, 1999. However, nothing in this section shall be construed to apply to retentions withheld by a lender in accordance with the construction loan agreement.

(g) The stop work order specified in this section for private works of improvement may be served as follows:

(1) If the person to be notified resides in this state, by delivering the stop work order personally, or by leaving it at his or her address of residence or place of business with some person in charge, or by first-class registered or certified mail, postage prepaid, addressed to the person to whom notice is to be given at his or her residence or place of business address or at the address shown by the building permit on file with the authority issuing a building permit for the work, or at an address recorded pursuant to subdivision (j) of Section 3097.

(2) If the person to be notified of the stop work order does not reside in this state, by any method enumerated in paragraph (1) of this subdivision. If the person cannot be served by any of these methods, then notice may be given by first-class certified or registered mail, addressed to the construction lender.

(3) Service pursuant to this paragraph by certified mail is effective upon receipt. Service by registered mail is effective five days after mailing.”

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 Order 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 Order 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 Order 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 Order 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 Order.

Another danger inherent in using the Stop Work Order is that although the “Notice of Intent to File a Stop Work Order” must be served on all subcontractors and suppliers, as well as the owner, there is no corresponding requirement that the actual “Stop Work Order” 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 Order, 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 Order becomes effective. This may present a particular problem since there is no legal requirement that the actual Stop Work Order 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 Order, they will have no corresponding contract claim right against the contractor for goods or services inadvertently provided after the Stop Work Order 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 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 Order (or if the contractor terminates the subcontractor from the project for any other reason for that matter).

William L. Porter is a principal in Porter Law Group, Inc. in Sacramento, California.
He can be reached  at (916) 381-7868.