• Managing Risk on California Construction Projects
  • January 8, 2010 | Author: David W. Zimmerman
  • Law Firm: Holland & Hart LLP - Salt Lake City Office
  • Successful contractors take, and manage, risks. One aspect of managing risk involves gaining a working knowledge of the contractor’s protections and risks in the event of non-payment by the owner. While no contractor begins a project anticipating problems, its working knowledge of the protections afforded, and risks created, by state law is one aspect of a contractor’s risk management efforts. Fortunately, significant similarities exist between the laws of many western states with respect to the construction industry. There are, however, significant differences in the laws of the State of California that materially affect contractors’ risks on California construction projects. This article briefly describes a few of those risks.

    Licensing

    While most general contractors have taken care of appropriate licensing matters and generally do not even consider licensing issues as a project commences, they should at least pause to consider licensing issues when working in California. For various business reasons, many contractors form different entities under which they perform services in different states.

    Frequently, the name of an entity that is not licensed in California may inadvertently appear in a contract to perform work in California. In most western states, this error would be of little consequence. Because of the draconian nature of California contractor licensing laws, the California Contractors Board will frequently find an error of this nature to be an infraction of California licensing laws and assess a fine. Furthermore, California courts strictly construed the California licensing code provisions against unlicensed contractors, including contractors that are “unlicensed” in only a technical sense because the wrong entity is named in a contract, regardless of the entity that actually performed the work.

    The extent of the risk that may be created by a small oversight can be seen in one provision of the licensing code that provides that the owner may bring an action to recover all of the amounts paid to an unlicensed contractor.

    Pay-When-Paid and Pay-if-Paid

    Under California case law, California courts have held that pay-if-paid clauses are unenforceable in the State of California. Accordingly, all pay-if-paid clauses are construed as pay-when-paid and a contractor is required to pay its subcontractors within a “reasonable time” after its subcontractor has performed its work.

    Accordingly, the owner’s failure or refusal to pay the contractor is not a defense to a subcontractor’s claim for payment for work performed. A new statutory provision allows a contractor to walk from a project in response to non-payment by the owner, but this does little to remedy non-payment by upstream parties when downstream parties must ultimately be paid.

    Limitations on Mechanic’s Liens

    In California--contrary to most western states--a contractor is not entitled to recover its attorneys’ fees in connection with recording and foreclosing on a mechanic’s lien. This gives increased leverage to irrational owners that seek to extract unwarranted concessions at the end of the project. Furthermore, there are some questions concerning the general contractor’s ability to file a mechanic’s lien seeking to recover for delay costs.

    Also, the California mechanic’s lien statute can, in some instances, start the clock for the time when a contractor must record a lien well before the contractor achieves final completion on the project. This may cause lien rights to expire much faster than the contractor anticipates, eliminating a significant protection against non-payment.

    Stop Notices

    In contrast to many aspects of California law which restrict contractor rights, California law allows contractors to serve stop notices on entities which hold funds identified to pay for work on a construction project. Thus, contractors may serve stop notices on banks and other lenders to preclude further disbursement of funds without ensuring payment to contractors.

    Effective use of stop notices requires service of the stop notice before the balance of funds held by the disbursing entity falls below the amount of funds necessary to satisfy contractor claims.