In California, a general contractor must file a payment bond on all public works projects over $25,000. Payment bonds are a form of guarantee ensuring that a subcontractor or supplier will be reimbursed for costs incurred on a public works project, including interest and attorney’s fees if a lawsuit becomes necessary. In the event a subcontractor or material supplier is not paid for materials furnished or labor supplied and used in a bonded public works project, that subcontractor or supplier has the right to make a claim for payment against the bond, as long as certain requirements (discussed below) are met. In fact, the issuer of the bond (the surety) becomes liable to an unpaid subcontractor or material supplier (the claimant), immediately upon the non-payment/default by the contractor named in the bond (the principal). The surety, however, may assert any defense to the claim that is available to the contractor named in the bond (i.e. the claimant’s failure to complete its work.)
To protect its payment bonds rights, a claimant must serve the public entity and the general contractor with a valid preliminary notice. If a valid preliminary notice was not served, a claim against a payment bond may be made by giving written notice to the principal named in the bond and the issuing surety within fifteen days of the recordation of a notice of completion or, if no notice of completion is recorded, within seventy-five days of the date the project was completed. Due to changes in the law, beginning January 1, 2012, this remedy is no longer available if the contractor named in the bond was paid for the work performed by the claimant.
In the event the surety denies the claim, or the surety is taking too long to respond to the claim, claimant should file its lawsuit against the surety as follows:
(a) if the public entity records a notice of completion or cessation notice, the lawsuit must be filed thirty (30) days plus six (6) months after the notice is recorded; or
(b) if neither a notice of completion or cessation is filed, the lawsuit must be filed ninety (90) days plus six (6) months.
Thus, payment bonds are one of the best remedies available to claimants on a public works project. However, to be effective, the subcontractor or supplier must meet the statutory prerequisites for enforcing the payment bond.