how to avoid owner from making a bogus claim of defective work in order to avoid making the final payment to contractor?
contractor performs work per scope of work.
owner makes payments per agreed upon schedule.
after completion, owner refuses to make final payment and instead makes claim that work was defective and threaten to file claim with bond and general liability.
When an owner fails to release final payment, there are a number of tools available to force payment. Let’s look at an owner’s right to withhold payment in California, then at tools that might help force them to make payment.
Can a California owner withhold payment when there’s a dispute over the work?
Yes, to a limited degree. When there’s a dispute as to what’s owed – like when an owner alleges payment isn’t owed because the work is defective – an owner is entitled to withhold 150% of the amount in dispute from final payment (pursuant to Cal. Civil Code § 8800 through § 8812).
Clearly, though, there’s a limitation as to what may be withheld. An owner cannot withhold an entire final payment unless 150% of the alleged defective work would encompass that entire final payment. So, an owner generally cannot withhold an entire final payment due to minor alleged defects and issues.
Tools for pushing an owner to make final payment
When an owner refuses to make payment, there are a number of tools at a contractor’s disposal for recovering payment. Let’s break down a few options below.
Recovering payment through less formal and official means
Sending a little nudge like an invoice reminder can often compel payment. Invoice reminders might not be particularly effective to shake payment loose where an owner is adamant about withholding payment, but sometimes it only takes a little push to get payment talks moving in the right direction.
When an owner is truly refusing to make payment, sending a payment demand letter might be a bit more effective. By sending a demand letter, a contractor can let the owner know they’re serious about payment and that they’re unafraid to do what it takes to get paid.
Threatening a lien claim can force payment
When less-formal means aren’t appealing or haven’t been effective to force payment, threatening to file a lien claim may do the trick. Mechanics liens are generally the nuclear option when it comes to payment recovery, but because they’re such a strong recovery too, merely mentioning that a lien may soon be filed can push an owne to do the right thing and pay what’s owed on the job.
Sending a document like a Notice of Intent to Lien acts as a warning shot. It states that if payment isn’t made and made soon, a lien claim is coming. Considering the drastic nature of mechanics liens, owners will typically want to avoid them – especially when the potential for a lien comes as a result of the owner’s refusal to pay what’s owed. More on that here: What Is a Notice of Intent to Lien and Should You Send One?
Filing a mechanics lien
When a lien is filed, the owner’s property title is put into question, and that will make it a lot harder for them to sell, transfer, or otherwise loan the property in the short term. Plus, if the owner leaves the lien claim unattended and the claimant has to enforce their lien – the property could be foreclosed.
There are a number of different ways mechanics liens force payment – so when there’s an embroiled payment dispute on a job, a lien claim could help to finally obtain payment.
Other options for payment recovery
The above were just a few potential options, and a claimant could certainly obtain payment without the need for utilizing the mechanics lien process. Puruing a breach claim, prompt payment claims, or other legal theories could end up in payment. And, for smaller disputes, California small claims court may be an option.
Here’s good discussion of some options for payment recovery outside of the lien process:
How to respond to an owner’s threats regarding bond claims, CSLB complaints
No contractor wants a claim against their license bond, and no contractor wants to defend against a CSLB complaint. But, in either case, there’s an investigation into the alleged defects or wrongdoing. And, a contractor will generally have the opportunity to defend themselves against allegations regarding their work. If a claim is made, it will be helpful to have the documentation to disprove an owner’s claim of defective work, including photographs of the work.
But, when a contractor is under attack from an owner, it’s generally wise to consult with a California construction law expert. They’ll be able to review the specifics of your situation, help create a plan of attack, and help build a defense against claims of defective work.