User talk:Amazanne

Amazanne, you deleted the information on performance and payment bonds I posted in the article on mechanic's liens as "erroneous." What was erroneous about it? Or did you mean "irrelevant?" Anoneditor 03:01, 6 July 2007 (UTC)

I deleted:

"Construction bonds perform a similar role on public projects. Construction bonds in the form of so-called "Payment Bonds" perform a similar function for private construction projects. However from the perspective the contractors they are superior because they do not require that the contractor have enforceable mechanics' lien rights. So-called "Performance bonds" do much more because, within their limits, they assure the property owner that the contractor's contract will be performed in all respects, not merely payment of the bills for labor or materials secured by mechanics' liens. See, e.g., R. Kratovil and R. Werner Modern Mortgage Law and Practice (2nd Ed. Prentice-Hall 1981) § 25.27(f)"

The “Construction Bonds” previously referenced include two separate, distinct types of bonds: the Performance Bond and the Payment Bond. These may be utilized on either public works (on land owned by a fed/state/municipal government) or private works projects, but they are rare on private projects. As you know, mechanic’s lien rights only attach to private works.

Payment bonds guarantee payment to a subcontractor for work performed, in the event the prime contractor does not pay (in this regard, you were technically correct regarding the “similar function,” but the “for private construction projects” that follows that phrase is misleading and/or erroneous). Performance bonds guarantee the property owner, public agency or prime contractor that the work will be completed in the event the sub is unable/unwilling to complete the work. Perf bonds have absolutely nothing to do with the payment of bills for labor or materials, as was stated in the portion I deleted (“So-called "Performance bonds" do much more because, within their limits, they assure the property owner that the contractor's contract will be performed in all respects, NOT MERELY PAYMENT OF THE BILLS for labor or materials secured by mechanics' liens.”) Neither perf nor payment bonds have anything at all to do with mechanics liens.

I think this article should reference wiki entries on Performance and Payment bonds, and there is a current Perf Bond entry, but Payment Bond needs to be added. More importantly, however, would be an entry for Stop Notices, which I will try to add as time allows. The Stop Notice is actually more like a Mechanic’s Lien. Where a Mechanic’s Lien attaches to the real property itself, the Stop Notice attaches to the construction loan for the project. Similar court proceedings are required to enforce the Stop Notice. Stop Notices on private works must be accompanied by a bond of 125% of the amount claimed (in California, I’ll have to check on other states).

Does this answer your question?


 * Thank you for your quick response. Yes, you've answered my question, but I'm not sure I completely agree with all you've said.


 * First, in my experience, the use of surety bonds in private constructions projects is not all that rare. This has been true in the bonding of general contractors and certain critical subcontractors in the construction of hotels and shopping centers.  An article in the ABA Probate and Property Magazine (http://www.abanet.org/rppt/publications/magazine/1997/nd97small.html) takes the position that these bonds are "the customary protection against a contractor default and liens."  A call to friends of mine in the mechanic's lien underwriting section of a national title insurance company seems to confirm this, too.


 * Second, though you take the conventional view that performance bonds have no connection to the payment of construction bills, it may not be entirely correct. The performance bonds run to the owner of the property.  In them, the surety guarantees the performance of the contractor under its contract as long as the owner performs its obligations under the contract too.  I haven't seen a commercial construction contract that didn't require the contractor to see to the payment of all construction bills and to provide a product free of mechanic's liens.  Therefore, the failure of the contractor to do this may invoke the obligation of the surety to perform that portion of the contract unless the terms of the bond exclude it.  You can find numerous statements to the effect that the surety is obligated to perform the obligations of the contractor under the contract.  For example:


 * A performance bond guarantees the owner that the principal will complete the contract according to its terms including price and time. (Dan Donohue and George Thomas, Assistant Vice-President, Contract Surety Claims, Fireman’s Fund Insurance Company) http://www.attny.com/gci32djd.html


 * Construction performance bonds guarantee that obligations undertaken by the principal will be completed under the terms of the bonded contract. Should the principal (usually the original contractor) default, the surety is liable to the beneficiary for all expenses and losses resulting from the default. (Law offices of Kerosky and Associates – San Francisco) http://www.youradwokat.com/business/business_mattersg.html


 * Performance Bond: A written instrument whereby a surety has undertaken to guarantee that a named principal shall perform in accordance with the terms and conditions of an underlying agreement with the obligee. In essence, the performance bond protects the owner from financial loss should the contractor fail to perform the contract. (Surety Information Office – Washington, D.C.) http://www.sio.org/html/claims.html


 * These statements are consistent with the general propositions of suretyship. If they are true to the full extent of their language, then there may be an obligation to deal with mechanic's liens.  I haven't been able to get my hands on the commonly used AIA Performance Bond form to see its exact language of obligation, or the surety's options if called on to perform, which I should have done before writing the amendment to the article. (And, of course, it's not the only form in use.)  The problem is that the AIA wants to sell it and I don't want to pay for it.  Do you have a copy you can share?


 * With respect to the payment bonds, I believe your statement that, "Neither perf nor payment bonds have anything at all to do with mechanics liens," is true only in a narrow legal sense. In a practical sense, mechanic's liens either will not occur or will be released if the relevant contractor is paid, and the payment bond is specifically designed for this purpose.


 * Finally, I think that the concept of the Stop Notice, though not unique to California, doesn't exist in most of the states. But, like you, I haven't done the research necessary to confirm that either. Technically, it's not a mechanic's lien, but it is certainly as effective in obtaining payment in many cases.


 * This is a really fascinating subject. Anoneditor 01:53, 7 July 2007 (UTC)

RESPONSE TO ANONEDITOR:

I’m not sure you have understood the ABA article you cited above, in the context of this wiki entry on mechanic’s liens. It is, of course, true that bonds exist to protect against a contractor default or construction liens. The portion I deleted states “"Payment Bonds" perform a similar function [to mechanic’s liens, referenced in the preceding paragraph] for private construction projects” This statement is incorrect. Bonds are NOT similar to mechanic’s liens. Let me explain how each remedy works, and who it benefits:

Mechanic’s Lien: Contractor A has a direct contractual relationship with the homeowner (prime contractor). He works on the property. Homeowner doesn’t pay. Contractor A can record a lien, and later foreclose on lien if not paid.

Or, Contractor A has a direct contractual relationship w/ the homeowner. He subs out portions of the work to Contractors B and C. If B and C are not paid (whether A received payment or not), they have lien rights and can record and foreclose on a lien if not paid.

Payment Bond: Contractor A has a direct contractual relationship w/ the homeowner. He subs out portions of the work to Contractors B and C. The payment bond guarantees that B and C are paid and thus the Homeowner will not be on the hook for any subsequent mechanic’s lien for non-payment. This is what the ABA article you cited is discussing; it is protection for the property owner (“against a contractor default and liens”), NOT another enforcement remedy for a contractor to use against the owner, such as a mechanic’s lien or stop notice.

Performance Bond: Property owner hires Contractor A for a project. Contractor A subs out portions of the work to Contractors B and C. Homeowner may require A to secure a performance bond. Contractor A may require B and C to obtain performance bond. In either case, the performance bond guarantees that the work will be performed in accordance with the contract. If B is unable to complete his portion of the work (for example due to insolvency), the performance bond will pay for Contractor XYZ to be hired to finish the work that B was unable to complete according to his contract. This, absolutely, has nothing to do with mechanic’s liens, and, again, is for the protection of the property owner, not a remedy by which a contractor can obtain payment for his contribution to a work of improvement.

For what it’s worth, the CEB practice guide (http://www.ceb.com/CEBSite/product.asp?catalog%5Fname=CEB&product%5Fid=RE32680&Page=1#) does contain a brief discussion on the potential for a performance bond to be available to a third party beneficiary lien claimant, “if the contract calls for payment for labor and material and is incorporated into the bond or if the bond itself binds the surety for the payment,” (e.g., it is a combined performance/payment bond, as discussed in 243 Cal.App.2d 445 http://login.findlaw.com/scripts/callaw?dest=ca/calapp2d/243/445.html). In this context, it may be appropriate to include a tangential mention of the combined performance/payment bond in an article relating to mechanic’s liens, but only insofar as it is a means by which a property owner can avoid judgment in favor of the contractor in a lien foreclosure action. However, inclusion of performance bonds, alone, in this article is misleading. If there is a payment bond from which they can recover, lien claimants are prohibited from bringing an action against a performance bond (see 57 Cal.App. 580, Maryland Cas. Co. vs. Shafer, an old case which I cannot locate a “free” link to, but if you have access to Westlaw or Lexis you can find it there).

YOU WROTE: “Second, though you take the conventional view that performance bonds have no connection to the payment of construction bills, it may not be entirely correct.”

The portion I deleted states, “So-called "Performance bonds" do much more because, within their limits, they assure the property owner that the contractor's contract will be performed in all respects, not merely payment of the bills for labor or materials secured by mechanics' liens. See, e.g., R. Kratovil and R. Werner Modern Mortgage Law and Practice (2nd Ed. Prentice-Hall 1981) § 25.27(f)” Performance bonds are a remedy for property owners, not contractors, so to imply that they do “much more” in the context of a discussion regarding remedies available to contractors to secure payment for work performed is clearly misleading and/or erroneous.

Perhaps this will be helpful to you: http://www.abdulaziz-grossbart.com/PDF/mechanicslienchecklisthandoutforPDF.pdf

If you are so determined to include construction bonds on this page, perhaps a worthwhile addition would be a discussion of bonding over the lien with a Release Bond. I haven’t had a chance to post this yet, but it is extremely relevant to any discussion of mechanic’s liens (or stop notices). If you are unfamiliar with release bonds, please see 94 Cal.App.3d 652 http://login.findlaw.com/scripts/callaw?dest=ca/calapp3d/94/652.html (at issue here is a public project, so this opinion specifically discusses the release bond in the context of the stop notice, but it has been cited as authority for releasing mechanic’s liens as well); and 47 Cal.3d 456 http://login.findlaw.com/scripts/callaw?dest=ca/cal3d/47/456.html

Also notably absent in this article is any mention of waivers and releases. Alas, there are only so many hours in the day. I’ll add to it as I can, but I hope someone beats me to it. If you are so inclined, this is a good starting point: http://www.cslb.ca.gov/forms/MechanicsLiens.asp


 * Amazanne, Thank you for your links to the bonding information. I'm sure I'll find them useful for further study.


 * Unfortunately, I think we are beginning to talk past each other. I am completely aware that bonds and mechanic's liens are not the same thing. What I was trying to convey (though perhaps not succinctly or elegantly) was that the existence of the bonds in a project reduces the liklihood of the filing or enforcement of mechanic's liens because the sureties under the bonds provide payment for wrongly unpaid construction work.  My statements that the bonds performed a similar function to mechanic's liens was with reference to getting the contractors paid, not to creating legal charges on the title to real estate.  That is, mechanic's liens assist them getting paid and so do surety bonds.  My citation of the ABA article had nothing to do with this or the wiki article.  It was merely a piece of evidence countering your assertion, in our current dialog, that performance and payment bonds are rarely used in private construction projects.  (Because it notes that these bonds are "the customary protection against a contractor default and liens.")


 * I'm interested in your ideas for adding further bonding information to this article. I'll get back to you after I've given it more thought. Anoneditor 15:39, 7 July 2007 (UTC)

WP:Hornbook -- a new law-related task force for the J.D. curriculum
Andrew Gradman talk/WP:Hornbook 03:42, 31 July 2009 (UTC)