If you are a subcontractor doing work in California, you almost certainly have heard a variation of one of these statements from a general contractor or owner/developer. Perhaps your company doesn't want to bother serving a preliminary notice on small jobs, or maybe you have agreed to do a favor for your general contractor by agreeing to not serve a preliminary notice on a job or two.
Of course, any sophisticated subcontractor doing business in California knows that they must timely and properly serve a preliminary notice or risk forfeiting its mechanics lien, stop payment notice, and payment bond claim rights. But many subcontractors are not aware that they must serve a preliminary notice on all contracts over $400.00 or face disciplinary action (including monetary fines of up to $5,000 per failure to act) by the Contractors' State License Board.
Don't take my word for it -- it is spelled out in California Civil Code section 8216:
If the contract of any subcontractor on a particular work of improvement provides for payment to the subcontractor of more than four hundred dollars ($400), the failure of that subcontractor, licensed under the Contractors’ State License Law (Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code), to give the notice provided for in this chapter, constitutes grounds for disciplinary action under the Contractors’ State License Law.
What this means is that the statutory obligation to timely and properly serve a preliminary notice will apply in a vast majority of cases for subcontractors. Disciplinary action can take the form of public citations, monetary penalties of up to $5,000 per failure to serve a preliminary notice when required, or even suspension of a subcontractor for ongoing willful violation of the statute.
I know the above may come to a shock to many subcontractors. I give a dozen or so construction seminars each year to industry suppliers and contractors and comes as no surprise that I always get a lot of open mouths and furrowed browns in the room when I discuss Civil Code section 8216. Not wanting to bother serving preliminary notices on small projects may be a an understandable criticism of the law, but it does not give the subcontractor a legal excuse to ignore its statutory obligation. There are many construction notice services out there that can economically serve preliminary notices for suppliers and contractors such as NCS, NACM (National Association of Credit Management), and many others.
It is also a misnomer that sending a preliminary notice may harm a business relationship. In fact, the opposite is true since preliminary notice requirements were enacted for the benefit of general contractors, owners, and construction lenders. These upstream parties and stakeholders depend on receiving preliminary notices to create their own checklist of who is providing labor or materials to their projects and to ensure each claimant is paid. Other than on a small residential project, a typical project stakeholder is going to receive many (perhaps several dozen) preliminary notices from various trades on each job.
At the end of the day, serving a preliminary notice demonstrates the professionalism of the contractor or supplier sending such notices in the standard course of their business. Subcontractors have enough to worry about other than facing disciplinary action by the Contractors State License Board for failing to comply with the preliminary notice requirement of Civil Code section 8216.
Written by Christopher Ng, Managing PArtner of Gibbs Giden Locher Turner
The content contained herein is published online by Gibbs Giden Locher Turner Senet & Wittbrodt LLP for informational purposes only, may not reflect the most current legal developments, verdicts or settlements, and does not constitute legal advice. Do not act on the information contained herein without seeking the advice of licensed counsel.
Copyright 2018 Gibbs Giden Locher Turner Senet & Wittbrodt LLP
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