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Release Bonds: What Are They Good For?

By California statute, those who provide labor, services, equipment, and materials to a construction project are entitled to record a mechanic's lien or serve a stop payment notice.

A mechanic's lien effects the owner by "attaching" to the real property that is the site of the project. A stop payment notice effects the owner or construction lender by "attaching" to the construction fund for the project.

Certain parties who dispute the validity, enforceability, or correctness of a lien or stop payment notice may post a bond "releasing" the real property or the construction fund.

Upon the posting of a lien/stop payment notice release bond, do the rights of the claimant and effected parties (i.e., owner, construction lender, and surety) change or remain the same?

After all, it is said that are lease bond merely is a "substitute" or "replacement" for the real property or the withheld construction fund. Thus, the parties' rights should remain the same - regardless of if there is a release bond.

On the other hand, it is also said that a surety's liability is the same as its bond principal. Depending on the bond principal, this latter theory could significantly change the rights of the parties.

Mechanic's Lien Release Bond

California courts have confirmed that the posting of a lien release bond does not change the rights of the effected parties. The result is that the claimant is limited to whatever it could recover on the underlying mechanic's lien claim. Thus, California courts have not allowed recovery of "non" "labor, services, equipment and materials" such as attorneys' fees and consequential damages (e.g.delay) on an underlying mechanic's lien - even if those amounts may have been ultimately owed by the bond principal.

Stop Payment Notice Release Bond

By statute, where a bonded stop payment notice is procured by the claimant, attorneys' fees may be recovered. Otherwise, the law on stop payment notice release bonds is not as black and white.

In theory, the same rule should apply - a claimant should be limited to whatever it could recover on the underlying stop payment notice. However, a California court held otherwise in 2002. That court held that because a surety's liability is the same as its bond principal, the surety may be liable for whatever the bond principal is liable for. As a result, the surety could be liable for prompt payment penalties on a stop payment notice release bond - although such penalties could not be recovered against the owner or construction lender on the underlying stop payment notice.

The result is that stop payment notice release bonds appear to be good for more than just releasing the withheld construction fund.