Abdulaziz, Grossbart & Rudman

Law Talk - HOW TO USE THE CALIFORNIA PRELIMINARY NOTICE TO COLLECT ON PAYMENT BONDS

By Sam K. Abdulaziz
Attorney at Law

A relatively recent case has provided credibility to what we have been preaching for some time. The case dealt with a payment bond required on a public works project. We believe that the holding would be even stronger with respect to bonds used on private works of improvement.
Effective on or about 1995, the Legislature rewrote the Preliminary Notice statutes for both private and public works, as well as the statutes that explain the manner in which one makes a claim against a payment bond in both public and private works. Remember that in public works of improvement the bond is generally mandatory. In private works of improvement, there is no mandatory bond although the owner or another contractor may require a bond from those people working under him or her. During our seminars, we have always suggested that the one giving the Preliminary Notice send a copy of that notice to the bonding company. We have said that in private works of improvement, this is a substitute for the payment bond notice that had been previously required. This case strongly supports that position and actually discusses it with respect to a payment bond on public works improvement.

As stated above, the new Preliminary Notice as well as the statute dealing with claims against a bond allow for the service of a preliminary notice on the bonding company, owner or public entity as a substitute for a bond notice. The difference between the public works and private works statute is that the private work statute specifically provides for a “Preliminary Notice” to be served on the bonding company whereas the public works statute requires a “Preliminary Bond Notice.” However, the reference in the public works statute is to the public works Preliminary Notice and we believe that is one of the reasons that the appellate court held the way it did. They saw a “Preliminary Bond Notice” the same as a “Preliminary Notice.”

American Buildings Company (American) was a material supplier to a subcontractor on a public works project. Bay Commercial Construction, Inc. (Bay Commercial) was the prime contractor. The subcontractor to whom American supplied materials went bankrupt. American made a claim on the payment bond. American served a “Preliminary Notice on Payment Bond.” However, most of the work was done more than 20 days prior to furnishing the notice, though a minor amount was within the 20-day statutory period. Thereafter, no other notice was given to the bonding company. It is very important to note that the Preliminary Notice given in this case by American provided the same information as would have been provided in a Bond Notice, including the amount due and owing. It was also served by certified mail, as would a Bond Notice. A late served Preliminary Notice that did not state the amount owing might not be held to be valid notice on the bond.

The defense against this lawsuit was that the Preliminary Notice was not timely and there was no Bond Notice thereafter. The statutory scheme after 1995 was that one could give either a Preliminary Notice or a Bond Notice. The Preliminary Notice would have to have been given within 20 days after furnishing labor or material, whereas the Bond Notice would be given 15 days after recordation of a Notice of Completion, or if no Notice of Completion has been recorded, the time is extended to 75 days after actual completion of the work. This portion is true with respect to both public and private works.

The problem that American had in this case is that it did not comply with either of those alternatives. The Preliminary Notice, for the most part, was served more than 20 days after it furnished material. No other Bond Notice was given. Therefore, the defendants argued that only a very small portion of the amount owed to American could actually be claimed against the bond.

The appellate court in Placer County harmonized the two provisions and essentially stated that the Preliminary Notice statute and the Bond Notice statute were intended to compliment each other and make it easier on unwary subcontractors and material suppliers. Therefore, the court stated that the Preliminary Bond Notice, which was served more than 20 days after the furnishing of labor and materials, was in fact proper bond notice and could be used to claim all of the funds in the bond.

We believe that with respect to private works, the legislation only required a “Preliminary Notice” to be served rather than the “Preliminary Bond Notice.” We strongly urge people sending out Preliminary Notices to serve a Notice, whether it be called a Preliminary Bond Notice on Public Works or a Preliminary Notice on Private Works on the bonding company as well as others that are required to be served. However, we also urge you to send the Notices timely and with the correct name and other information.

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