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ConstructionWebLinks.com
In
California, subcontractors and suppliers not under direct
contract with the property owner must serve a preliminary
20-day notice to protect their rights to a mechanic's lien,
stop notice or payment bond claim on a privately owned project.
The notice, which must be filed within 20 days after the
contractor's work begins, tells the property owner and general
contractor that work is being performed and that, if not
paid, may result in a lien against the property. Besides
contact information, the notice must provide "a general
description of the labor, service, equipment, or materials
furnished, or to be furnished, and an estimate of the total
price thereof." Civil Code §3097 (c) (1). The
Court of Appeal recently ruled on the "estimate"
requirement of the statute. Rental Equipment, Inc. v.
McDaniel Builders Inc., 91 Cal.App.4th 445, 109 Cal.Rptr.2d 922 (2001).
The
case involved a 1997 demolition project in Santa Fe Springs.
The property owner hired McDaniel as general contractor
who, in turn, hired subcontractor Specialty Steel who, in
turn, rented equipment from Rental Equipment, Inc. REI served
two $10,000 20-day notices. Specialty Steel substantially
completed the project but never paid REI's bill, which had
grown to $160,000. REI recorded a mechanic's lien and sued
to foreclose. McDaniel assumed the owner's defense to the
foreclosure.
In
a non-jury trial, the trial court held that REI lost its
mechanic's lien rights when REI failed to provide a proper
estimate in its 20-day notice. REI's designated person most
knowledgeable about the lien testified that he did not know
how REI derived the estimate. The trial court ruled that
the statute required "a derived figure, arrived at
by rational analysis" and that while estimate does
not mean "precision or exactness," it does mean
more than "guess, conjecture, or surmise." The
trial court concluded that REI had not provided such an
estimate and characterized the dollar amount in REI's notice
as "made up of whole cloth."
The
Court of Appeal upheld the trial court's ruling. The appellate
court noted that while mechanic's lien statutes are to be
liberally construed to protect the worker's rights to payment,
the preliminary 20-day notice also protects the property
owner's rights to notice of the amount of potential claims.
REI
argued on appeal that the statute only required an estimate
that was reasonable at the time it was made. If so, REI's
notice was reasonably based on the value of the equipment
rented at the time of the notice. Noting that the statute
required an estimate of equipment "furnished, or to
be furnished," the appellate court rejected the argument.
The notice must estimate the total cost of equipment that
will be furnished to the project.
REI
also argued that a prior case, Blair Excavators, Inc.
v. Paschen Contractors, Inc., 9 Cal.App.4th 1815 (1992),
supported reversal. That case concerned a similar preliminary
notice requirement for a stop notice on a public work project.
The notice is governed by an entirely separate statute for
public works projects that requires a "general description"
with "substantial accuracy" of the work to be
provided. There, the court held that requirement of "substantial
accuracy" did not prevent recovery above an estimated
amount stated on the notice unless the inadequate notice
somehow prejudiced the public entity. The appellate court
here, however, distinguished the case. In REI's situation,
the issue was not simply whether REI was entitled to recover
more than the amount listed in its notice, but whether REI
had even made the estimate required by law.
REI
further argued that the case should be reversed as a matter
of equity because McDaniel created the situation leading
to the inadequate estimate by accepting a too-low bid from
Specialty Steel and failing to require a payment bond. The
appellate court rejected the argument resting on an "unclean
hands" theory by pointing to the fact that REI had
provided a $10,000 preliminary estimate that "is shocking
to the conscience of this court" in comparison to the
$160,000 final charge listed in the lien.
The
case stands for the proposition that in order to protect
mechanic's rights on private projects under California law
(and likely also stop notice and payment bond claim rights),
subcontractors and suppliers must provide a preliminary
20-day notice with an estimate that is derived by a rational
process based upon relevant factors. A mere guess will not
suffice. For each job involving a preliminary 20-day notice,
the subcontractor or supplier should keep a well-documented
file through which it can later justify the amount of its
estimate and the estimating process.
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