Lawyer James Denison | Top Attorney Litigation

Construction Law

Mechanic's Liens, Stop Notices, and Other Ways to Secure Payment

What Happens If a Progress Payment Received Is for Less Than Promised?

Life is messy. Life is complicated. Although a construction contract may say that a progress payment of a certain amount is supposed to be made at one stage of a project, that’s not how things always go. In real life, an owner or contractor may ask a subcontractor to accept payments over time or ask that a check not be cashed until after a certain date.

In situations like that, is there any real harm in accepting partial payment and signing a partial release of mechanic’s lien rights? Receiving some payment may seem better than being left hanging. And shouldn’t a partial release only affect the part that’s being paid?

Prior to the revisions of the mechanic’s lien laws in 2012, a case illustrating how the partial-payment scenario could play out in the courts — and what rights might be be lost — is Tesco Controls, Inc. v. Monterey Mechanical Co. (2004).

In Tesco, a subcontractor, Stratton Electric, entered into a purchase order for materials from Tesco Controls that called for monthly progress payments. Payments were to be made under a joint check agreement between Stratton and the general contractor, Monterey Mechanical Co.

Stratton sent Tesco a check for $194,000 for the first three months’ invoices but asked Tesco not to cash the check for 30 days. That was $50,000 shy of what was owing at the time, so Tesco sought the remaining $50,000 from Monterey Mechanical. If both checks had gone through, Stratton and Monterey Mechanical would be current through March.

Monterey Mechanical only agreed to pay the $50,000 if Tesco signed a conditional release of its mechanic’s liens. Although Tesco originally worded its release to cover only the $50,000, not the remaining $194,000, Monterey Mechanical rejected that language. It claimed that such an exclusion was not permitted under the mechanic’s lien laws. Tesco therefore agreed to a release that omitted any reference to the separate $194,000 payment from Stratton.

Although the $50,000 cleared the bank, Stratton’s check for $194,000 bounced. At the end of the day, Tesco got paid for all but the bounced check amount of $194,000. Tesco filed a stop notice and sought to enforce its rights in court..

Initially, the trial court ruled that Tesco’s release of its mechanic’s lien rights only applied to the $50,000 Tesco actually received. The Court of Appeal disagreed. The Court of Appeal ruled that the release of Tesco’s mechanic's lien rights as of March applied to all mechanic’s lien rights as of March upon the payment of the $50,000. Accordingly, Tesco gave up its mechanic’s lien rights for the $194,000 owing from Stratton.

Sounds pretty unfair, doesn’t it? Well, two things should be borne in mind. First, when the Court of Appeal ruled that Tesco had given up its mechanic’s lien rights, that did not entirely change the ultimate result — Tesco did not lose its right to the $194,000 by losing mechanic’s lien rights. Tesco lost the ability to use the mechanic’s lien procedure, but not the right to payment.

That’s still pretty harsh. If you are ever in Tesco’s shoes, you will soon realize that losing mechanic’s lien rights is still extremely significant. The mechanic’s lien laws provide special procedures in the courts designed to make sure contractors and suppliers get paid quickly. Even a motion for “summary judgment,” the procedure Tesco ended up using, takes 75 days minimum just to get scheduled for a hearing.

Second thing to bear in mind is that the mechanic’s lien law changed in 2012, which should help avoid outcomes like the one in Tesco

The changes to the mechanic’s lien laws relating to Tesco’s situation can be found in California Civil Code Section 8132. That section states that a lien release will be null and void if it does not substantially follow the form language provided in the statute. The scenario in Tesco, where only part payment has been received, is expressly addressed. Specially, excluded from the release, in items (3) and (4) are the following:

(3)     The following progress payments for which the claimant has previously given a conditional waiver and release but has not received payment:

Date(s) of waiver and release: _________________________

Amount(s) of unpaid progress payment(s): $ _________________________

(4)    Contract rights, including … the right to recover compensation for work not compensated by the payment.

Today, if an owner or general contractor were to demand a release without inclusion of this language, it would not be effective to cut off the subcontractor’s mechanic’s lien rights at all. The statute says the release must substantially follow the form language or it is “null and void.” 

On the other hand, if the language is included, and if a subcontractor signs such a release without identifying the part payments that have yet to be received, the subcontractor would likely be in the same shoes as the plaintiff in Tesco. The subcontractor might still have a right to further payment, but it would be giving up the advantages of the mechanic’s lien law for the payments yet to be received.


James Denison