UNION ASPHALT INC v. PLANET INSURANCE COMPANY

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Court of Appeal, Second District, Division 6, California.

UNION ASPHALT, INC., etc., et al., Plaintiffs and Appellants, v. PLANET INSURANCE COMPANY, Defendant and Respondent.

No. B068332.

Decided: August 31, 1993

Gerald C. Weaver, San Luis Obispo, for plaintiff and appellant Union Asphalt, Inc. Donley & McKenzie and William H. McKenzie, San Luis Obispo, for plaintiff and appellant Southern Pacific Milling Co. Knecht, Haley, Lawrence & Smith and Anne M. Bevington and John L. Condrey, San Francisco, for defendant and respondent Planet Ins. Co.

Here we hold that Civil Code 1 section 3267 does not preclude third tier subcontractors and material suppliers from a right of action on a payment bond.

FACTS

Riverglen Investments, Ltd., sought to develop a subdivision in the City of El Paso de Robles (the City).   The subdivision agreement with the City required the construction of certain offsite public improvements for which Riverglen was required to provide performance and payment bonds.   Planet Insurance Company provided the bonds.   The bonds were substantially in the form set forth in Government Code sections 66499.1 and 66499.2.2

Riverglen entered into a contract with Spiess Construction to construct the improvements.   Spiess subcontracted 100 percent of the work to Swift Tectonics.   Swift subcontracted portions of the work to Union Asphalt and contracted for materials with Southern Pacific Milling and Westburn.   Riverglen stopped paying its contractors in 1990.

Union, Southern Pacific and Westburn filed complaints alleging they were entitled to recover under the bond.   Planet moved for and obtained summary judgment in its favor on the ground that third tier subcontractors were not entitled to recover under Planet's bond.

Union and Southern Pacific appeal.   We reverse.   Southern Pacific and Union raise the same contentions.   We refer to both appellants as Union for convenience.

DISCUSSION

Union contends that the express language of the bond shows it runs in favor of Union.

Union cites a portion of the bond stating Planet agrees to be bound to “․ all contractors, subcontractors, laborers, materialmen and other persons employed in the performance of the aforesaid agreement [to install public improvements]․”

Planet, on the other hand, relies on a different portion of the bond which provides, “[i]t is hereby expressly stipulated and agreed that this bond shall inure to the benefit of any and all persons, companies and corporations entitled to file claims under Title 15 (Commencing with Section 3082) ․ of the Civil Code․”

This leads to an obvious question.   Is there something in title 15 beginning with section 3082 that limits the rights of any subcontractor or supplier to bring an action for recovery on a bond?

Planet says yes there is, section 3267 which is part of title 15.   That section provides:  “Nothing contained in this title shall be construed to give to any person any right of action on any original contractor's private or public work payment bond described in Chapter 6 (commencing with Section 3235) or Chapter 7 (commencing with Section 3247), unless the work forming the basis for his claim was performed by such person for the principal on such payment bond, or one of his subcontractors, pursuant to the contract between the original contractor and the owner.  [¶] Nothing in this section shall affect the stop notice rights of, and relative priorities among, architects, registered engineers, or licensed land surveyors and holders of secured interests on the land.”

Planet argues the section limits claims on its bond to first tier material suppliers and second tier subcontractors.   Because Riverglen was the principal on the bond and the City's prime contractor for the work of public improvement, Union and Southern Pacific would be third tier subcontractors after Spiess and Swift Tectonics.

No case interprets section 3267, but Planet cites California Surety and Fidelity Bond Practice (Cont.Ed.Bar Supp.1992) section 8.11, page 57–58.   There the author states:  “Civil Code § 3267 limits coverage of the payment bond to claimants who perform work for the principal on such payment bond or for one of the principal's subcontractors.   This language excludes coverage for a supplier or subcontractor who performs for a second-tier subcontractor;  the coverage for mechanics' liens, however, has no limitation on the level of the subcontract as long as the claimant supplies to the contractor or subcontractor and not to another materialman.”

We are puzzled by this interpretation.   There appears no good reason why our Legislature would cut off suppliers and subcontractors at the second tier for payment bonds, but give suppliers and subcontractors of any tier the right to a mechanic's lien.   It would be unreasonable to draw such an arbitrary line.

 In interpreting statutes, we must presume our Legislature intended reasonable results.   Where there are two possible constructions, one leading to mischief or absurdity and the other to a result consistent with justice and common sense, the choice is self-evident.  (See Shoemaker v. Myers (1992) 2 Cal.App.4th 1407, 1424, 4 Cal.Rptr.2d 203.)

Further, an interpretation of section 3267 that cuts off bond claimants at the second tier appears to conflict with the provisions of section 3248.   Subdivision (c) of section 3248 provides that a payment bond approved for public works must “[b]y its terms inure to the benefit of any of the persons named in Section 3181 so as to give a right of action to such persons or their assigns in any suit brought upon the bond.”   Section 3181 provides in part, “[e]xcept for an original contractor, any person mentioned in Section 3110 ․ or furnishing provisions, provender, or other supplies, may serve a stop notice upon the public entity․”

Section 3110 lists all those who have mechanic's lien rights, including materialmen and subcontractors.   Section 3110 does not limit those who have lien rights to second tier materialmen and subcontractors.   Thus, the only reasonable construction of section 3248, subdivision (c) is that it requires public works payment bonds to inure to the benefit of materialmen and subcontractors of any tier.

If section 3267 were intended to limit the beneficiaries specified in section 3248, subdivision (c), one would expect to find some reference in one section to the other, or at least some language in section 3248, subdivision (c) parallel to what Planet claims is the limiting language of section 3267.

In fact, the bond itself, which is substantially in the form provided in Government Code section 66499.2, states it inures to the benefit of “all ․ subcontractors ․ [and] materialmen․”   We presume Government Code section 66499.2 was drafted with section 3267 in mind.   If the Legislature did not mean to cover all subcontractors and materialmen, it would have included in the section something more specific than a general reference to title 15, a reference which is not even stated as an exception to coverage.

 In the broadest sense, subcontractors at every level may be considered to be the bond principal's subcontractors.   Thus, the phrase “one of his [the principal's] subcontractors” as used in section 3267, does not preclude claims by material suppliers or subcontractors beyond the second tier.

 What then is the purpose of section 3267?   The introductory clause, “[n]othing contained in this title shall be construed,” usually indicates that the statute is meant to clarify a point rather than to create substantive law.   We believe section 3267 was intended to make certain that persons who do not perform “․ pursuant to the [construction] contract ․” have no right of action on the bond.

 Thus, for example, architects, engineers and land surveyors who perform work prior to or otherwise outside the scope of the construction contract have no claim on the contract's payment bond.   Similarly, holders of secured interests on the land who neither provide material nor perform work in furtherance of the construction contract have no right of action on the bond.

The judgment is reversed.   Appellants are awarded costs on appeal.

FOOTNOTES

FN1. All further statutory references are to the Civil Code unless otherwise specified..  FN1. All further statutory references are to the Civil Code unless otherwise specified.

2.   These sections deal with forms for surety bonds issued pursuant to the Subdivision Map Act.

GILBERT, Acting Presiding Justice.

YEGAN and WILLARD,* JJ., concur.

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