BILL ANALYSIS
AB 2036
Page 1
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2036 (B. Berryhill) - As Introduced: February 17, 2010
As Proposed to be Amended
SUBJECT : PUBLIC AND PRIVATE WORKS OF IMPROVEMENT: PAYMENT
KEY ISSUE : CONSISTENT WITH THE COMMITTEE'S SUPPORT LAST YEAR OF
AN IDENTICAL PROVISION IN A RELATED BILL, SHOULD A PUBLIC ENTITY
BE PRECLUDED FROM WITHHOLDING FUNDS TO COVER ITS LITIGATION
COSTS IN STOP NOTICE CASES UNLESS THE PUBLIC ENTITY FIRST
TENDERS ITS DEFENSE TO A GENERAL CONTRACTOR AND THE DEFENSE IS
NOT PROMPTLY ACCEPTED?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill, sponsored by various contractor and builder
associations, seeks to change the law relating to payment of
contractors on public works projects. As proposed to be
amended, the bill limits the existing right of public entities
to withhold payment to contractors and subcontractors when a
stop notice is received such that the right could be exercised
only if the original contractor fails to promptly accept a
tender of defense of the public entity in the litigation. As
such, it is identical to a provision in last year's AB 396
(Fuentes), which was passed by this Committee unanimously but
was held on suspense in Assembly Appropriations. Like last
year's identical measure, the bill is opposed by the Coalition
for Adequate School Housing, which contends that the stop notice
provision removes the financial disincentive for unnecessary
stop-notice litigation.
SUMMARY : Revises procedures regarding stop notice claims on
public and private works of improvement. Specifically, this
bill limits the existing right of public entities to withhold
payment to contractors and subcontractors when a stop notice is
received to provide for reasonable litigation costs associated
with the stop notice such that the right could be exercised only
if the original contractor fails to promptly accept a tender of
defense of the public entity in the litigation.
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EXISTING LAW imposes a duty on a public entity to withhold
sufficient payment due or to become due the original contractor
to answer a claim stated in a stop notice and to provide for the
public entity's reasonable cost of any litigation on the matter,
as specified. (Civil Code section 3186.)
COMMENTS : This bill, sponsored by various contractor and
builder associations, seeks to change the law relating to
payment of contractors on public works projects. As proposed to
be amended, the bill limits the existing right of public
entities to withhold payment to contractors and subcontractors
when a stop notice is received such that the right could be
exercised only if the original contractor fails to promptly
accept a tender of defense of the public entity in the
litigation. As such, it is identical to a provision in last
year's AB 396 (Fuentes), which was passed by this Committee
unanimously but was held on suspense in Assembly Appropriations.
As now proposed to be amended, the measure seeks to modify a
general contractor's obligation when defending a stop notice
claim on behalf of the owner the existing right of public
entities. Specifically, when a stop notice is received, this
bill limits the existing right of public entities to withhold
payment to contractors and subcontractors to provide for
reasonable litigation costs associated with the stop notice such
that the right could be exercised only if the original
contractor fails to promptly accept a tender of defense of the
public entity in the litigation.
In support of the bill as introduced, the sponsors write:
"Subcontractors often serve lawsuits to foreclose stop notices
on public agencies as a vehicle to get attention; in essence, to
be the squeaky wheel, to assure prompt payment. Until recently,
the public agencies have routinely tendered the defense of any
such lawsuits on those stop notices to the prime contractor, who
then usually works out a settlement with the contractor."
Proponents of the bill as introduced argue that outside counsel
are using this process as a means to charge prime contractors
attorney fees that should never have been incurred.
Background on the Stop Notice Procedure : The California
Constitution expressly states: "Mechanics, persons furnishing
materials, artisans, and laborers of every class, shall have a
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lien upon the property upon which they have bestowed labor or
furnished material for the value of such labor done and material
furnished . . .." Despite the Constitutional guarantee of a
lien, Civil Code section 3109 provides that the mechanic's lien
provisions do not apply to public works.
In reconciling that prohibition with the Constitutional
guarantee of lien rights, California's Fourth District Court of
Appeal has noted there can be no lien for labor or supplies on
property belonging to the public and used for public purposes.
To allow such would produce unthinkable results which could
seriously affect the public interest. In order to protect both
claimants and the public and public property, the Legislature
has, on public works projects, provided the stop-notice
procedure without lien rights for intercepting funds due from a
public agency to the contractor. The underlying objective,
whether with the lien privilege on private works, or without it
on public works, is the same.
Withholding Funds for Litigation Costs in Stop Notice Cases .
Under existing law, it is the duty of public entities, upon
receipt of a stop notice, to withhold from the original
contractor, or from any person acting under his or her
authority, money or bonds for the work of improvement that are
due or to become due to that contractor in an amount sufficient
to answer the claim stated in the stop notice and to provide for
the public entity's reasonable cost of any litigation. This
bill would limit that right by specifying that a public entity
shall withhold payment only if the original contractor fails to
"promptly" accept a tender of defense of the public entity in
the litigation. This provision is significant because
litigation costs can be quite large.
The Coalition for Adequate School Housing opposed the bill as
introduced, writing:
The C.A.S.H. opposition is based upon the proposed
disturbance of a long
standing traditional and fundamental balance between
the protections of public funds and the rights of
contractors and subcontractors, in dispute, in
receiving funds due them from the public entity. This
bill unjustifiably favors the private sector over the
public sector.
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As the bill moves forward, the author and sponsors will no doubt
wish to explore whether there are reasonable alternatives that
public entities will view as more workable.
Author's Proposed Amendment. To lessen opposition concerns and
maintain consistency with the Committee's prior policy action in
this area, the author prudently proposes to amend the bill so
that it is identical to last year's AB 396 (Fuentes),
substituting the current language of the bill for the following:
3186. It shall be the duty of the public entity, upon
receipt of
a stop notice pursuant to this chapter, to withhold from
the original
contractor, or from any person acting under his or her
authority,
money or bonds ( where , if bonds are to be issued in payment
for
the work of improvement) improvement, that are due or to
become
due to that contractor in an amount sufficient to (a)
answer the
claim stated in the stop notice and to (b) provide for the
public
entity's reasonable cost of any litigation thereunder, if
the original
contractor fails to promptly accept a tender of defense of
the public
entity in the litigation. The public entity may satisfy
this duty by
refusing to release money held in escrow pursuant to
Section 10263
or 22300 of the Public Contract Code.
Prior Related Legislation . AB 396 (Fuentes) of 2009, as
discussed above, contained an identical provision to this bill.
That measure was passed by the Judiciary Committee, but was held
in Assembly Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support (to the bill as introduced)
American Fence Association - California Chapter
Associated General Contractors of California (AGC) (sponsor)
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Associated Builders and Contractors (ABC)
California Fence Contractors' Association
Engineering Contractors' Association
Flasher/Baricade Association
Marin Builders' Association
Opposition (to the bill as introduced)
California's Coalition for Adequate School Housing
Analysis Prepared by : Kevin G. Baker and Cheryl Lema/ JUD. /
(916) 319-2334