WM CLARKE CORPORATION v. SAFECO INSURANCE COMPANY OF AMERICA (1995)

In these four consolidated cases, a surety contends that a “pay when paid” provision in the subcontracts at issue (the subcontractors agreed that the general contractor would have no obligation to pay them unless and until the general contractor was paid by the owner) relieved the surety of its statutory obligation under a payment bond and that, therefore, the trial court's judgments in favor of the four subcontractors must be reversed.   Cross-appeals by the general contractor and two of the subcontractors present issues involving prejudgment interest and statutory penalties.   We affirm the judgments.

FACTS

In November 1990, 6420 Wilshire Partners Limited Partnership, the owner of the MGM–Pathe Communications Corporation Headquarters building, retained Keller Construction Co., Ltd. as its general contractor for a rehabilitation project.   After the general contract was signed, Keller entered into a number of subcontracts, four of which are at issue in this case—the ones involving Barsotti's Inc. (asbestos abatement work), Garvin Fire Protection Systems, Inc. (installation of a fire protection and sprinkler system), Church and Larsen, Inc. (drywall installation), and Wm. R. Clarke Corporation, doing business as Clarkelectric (electrical work).

All of the subcontracts were in the form required by the general contract and included a “pay when paid” provision in the section covering payment schedules:  “Receipt of funds by Contractor from Owner is a condition precedent to the Contractor's obligation to pay Subcontractor under this Agreement, regardless of the reason for Owner's nonpayment, whether attributable to the fault of the Owner, Contractor, Subcontractor or due to any other cause.”  (Emphasis added.)   The following addendum was appended to each of the subcontracts:

“Contractor has been informed that the Owner of the MGM–Pathe Headquarters has not obtained, and may not obtain in the future, a construction loan to fund the costs of construction.   Subcontractor also acknowledges that Contractor has made no representation as to the financial responsibility of the Owner, or of its ability to fund the costs of construction.

“Notwithstanding anything stated elsewhere in the Subcontract or Contract Documents to the contrary, Subcontractor shall assume the risk that if [sic] the Owner does not, for any reason (including, but not limited to, unavailability of funds, default by Contractor of its obligations under its General Contract, or otherwise) pay Contractor money owing to it for the work, materials, equipment or services (“Work”) provided by Subcontractor.   Accordingly, Subcontractor agrees that:

“1. Contractor shall have no obligation, legal, equitable or otherwise, to pay Subcontractor for Work performed by Subcontractor unless and until Contractor is paid by the Owner for the Work performed by Subcontractor.   Furthermore, in the event Contractor is never paid by Owner for Subcontractor's Work, then Subcontractor shall forever be barred from making, and hereby waives, in perpetuity, any claim against Contractor therefor.

“2. Subcontractor shall not seek payment from Contractor for, and shall forever refrain from instituting any legal or equitable action for collection of, money and/or compensation for Work performed by Subcontractor for which Contractor is not paid [by] Owner.

“3. Nothing contained in the Subcontract, the Contract Documents or in this Addendum shall be interpreted as creating any express or implied obligation on the part of Contractor to Subcontractor to initiate or maintain any action (judicial or extrajudicial) against Owner for collection of monies owing by Owner to Contractor, whether or not relating to Work performed by Subcontractor for which Subcontractor has not been paid by Contractor.

“4. Nothing in this Addendum shall be interpreted as limiting Subcontractor's rights to enforce its statutory mechanic's lien rights or remedies, if any, against Project property and Subcontractor expressly agrees that such mechanics lien rights, if any, shall be its sole remedy and means for payment (regardless of whether the value [of] Project property is sufficient or insufficient, for any reason, to satisfy Subcontractor's claim) on account of Work performed by Subcontractor for which contractor has not been paid by Owner.”  (Emphasis added.) 1

In January 1991, Keller obtained a payment bond from Safeco Insurance Company of America after full disclosure of the terms of the general contract, the subcontracts and the addendum.   The bond, which names Keller as principal, is a self-described “payment bond as defined in section 3096 of the Civil Code,” executed “for the purpose of complying with the laws of the State of California as contained in Title 15, Works of Improvement, of the Civil Code․” ²  By the terms of the payment bond, if Keller failed to pay a subcontractor who had recorded a mechanic's lien or otherwise given notice to Safeco as provided in the bond, Safeco would pay that subcontractor's claim.

Work began on the project but in July 1991, the owner stopped making payments to Keller.³  Keller, in turn, stopped work, sent out notices of the owner's default, and refused to pay the subcontractors.   The subcontractors recorded mechanics' liens.   Keller then sued the owner (and other entities associated with the owner) for breach of contract and foreclosure of its mechanic's lien, reached a partial settlement in that case, and tendered payment to the subcontractors on a pro rata basis (the settlement fund was insufficient to satisfy the subcontractors' total claims).   At about the same time, Barsotti's, Garvin, Church and Clarkelectric filed separate lawsuits to foreclose their mechanics' liens and to enforce the payment bond.   Ultimately, the cases were deemed related and assigned to one judge for all purposes.⁴

Garvin, Church and Clarkelectric moved for summary judgment against Safeco.   Safeco opposed the motions on the ground that its obligation under the payment bond could be no greater than Keller's obligation under the subcontracts and that, under the “pay when paid” clauses, Keller's obligation to pay never arose because the owner had not paid Keller.   In July 1993, the trial court granted Clarkelectric's and Church's motions, finding that Safeco's bond “is a statutory obligation and the liability of the surety is independent of the contractual liability of the owner or prime contractor.   The ‘pay when paid’ clause in the subcontract ․ is NOT ․ a condition precedent to recovery ․ on the bond․”  Summary judgments were entered in favor of Clarkelectric ($698,631, plus prejudgment interest of $137,785.56) and Church ($172,930) in August and September 1993.

In October 1993, the trial court granted Garvin's motion for summary judgment for similar reasons, finding that a “ ‘pay when paid’ provision in a subcontract does not limit the liability of the prime contractor's surety on a statutory payment bond issued pursuant to [the statutory provisions governing payment bonds for private works, section 3235 et seq.].  [¶] [Section] 3226 provides that the surety is not released by reason of any breach of contract between the owner and the prime contractor.   Hence the breach by the owner of its obligation to pay the prime does not release the prime's surety from liability to laborers and materialmen for whose benefit the bond was issued.” ⁵  In November, judgment was entered in favor of Garvin ($327,035.19).

Meanwhile, Barsotti's case against Keller and Safeco was tried to the court during August 1993.   As to Keller, the court rendered judgment in favor of Barsotti's for part but not all of its claim ($84,508, plus $20,050 for prejudgment interest, plus $150,000 for attorneys' fees).   As to Safeco, the court awarded Barsotti's the full amount of its contract claim ($610,260 plus prejudgment interest of $144,789.84) for the same reasons the other subcontractors' motions for summary judgment were granted.

Safeco appeals from all four judgments.   Keller appeals from the award of prejudgment interest in favor of Barsotti's.⁶  Garvin appeals from the order denying its request for prejudgment interest.⁷  Barsotti's appeals from the order denying its request for a “penalty” of two percent on the amount due as provided in section 7108.5 of the Business and Professions Code.   Church ⁸ and Clarkelectric have not appealed (but are before us as respondents in Safeco's appeal).

SAFECO's APPEAL

 Safeco contends the “pay when paid” provision enures to its benefit and that, notwithstanding the plain language of section 3226, it is not obligated on its surety bond because Keller, the named principal under the bond, was not obligated to the subcontractors.   The subcontractors claim the “pay when paid” provision is not enforceable by Keller, and that it is certainly not something upon which Safeco can rely to escape its statutory liability under section 3226.   As we will explain, Safeco's arguments fail because (as Clarkelectric contends) Safeco issued its bond knowing the subcontractors had expressly reserved their mechanic's lien rights and, therefore, their right to proceed against the payment bond.   Accordingly, we need not (and thus do not) decide whether the “pay when paid” provision would be enforceable against Keller,⁹ but simply assume that it would be and conclude that the existence of that clause has nothing to do with the subcontractors' actions on the payment bond.

A.

By the plain language of the contract documents, the subcontractors reserved their right to sue on the bond.   In each subcontract, the parties agreed that “[n]othing in [the] Addendum shall be interpreted as limiting Subcontractor's rights to enforce its statutory mechanic's lien rights or remedies, if any, 10 against Project property and Subcontractor expressly agrees that such mechanic's lien rights, if any, shall be its sole remedy and means for payment ․ on account of Work performed by Subcontractor for which contractor has not been paid by Owner.”  Contract language doesn't get much clearer than this.  (§ 1638 [where the language of a contract is clear and not absurd, it will be followed];  New Haven Unified School Dist. v. Taco Bell Corp. (1994) 24 Cal.App.4th 1473, 1483, 30 Cal.Rptr.2d 469 [where interpretation does not turn on credibility of extrinsic evidence, appellate review is de novo].)   Under the circumstances of these contracts—where the owner's potential inability to pay was probable rather than merely possible and the subcontractors agreed to look only to their mechanic's lien rights for payment for work they performed for which the general contractor was not paid by the owner—it is inconceivable that the subcontractors would relinquish their lien rights.  (§ 1647 [a contract may be explained by reference to the circumstances under which it was made];  see also Code Civ.Proc., § 1860.)

If anyone had any doubt about the contract language, it would be dispelled by the provisions of the bond itself and its non-debatable connection to the subcontractors' lien enforcement rights.  (8 Miller & Starr, Cal. Real Estate (2d ed. 1990) § 26:77, p. 600 [a payment bond guarantees that, upon the contractor's default, all unpaid subcontractors and other claimants will be paid];  § 1642 [several contracts relating to the same matters, and involving the same parties, and made as parts of what is substantially one transaction, are to be taken together].)   As noted at the outset, Safeco's payment bond was issued for the purpose of complying with Title 15 of the Civil Code.   Chapter 2 of Title 15 (§ 3109 et seq.) covers mechanics' liens.   Chapters 5 and 6 of Title 15 (§ 3225 et seq.) cover payment bonds for private works.   Pursuant to statute (§§ 3114, 3242), a mechanic's lien must be recorded or written notice must be given to the surety before an action can be brought to recover on a payment bond.   It follows ineluctably that an action to recover on a payment bond is an action to enforce a mechanic's lien right and, therefore, a remedy expressly reserved by the subcontractors who are parties to these appeals.¹¹

Finally, since it is undisputed that Safeco was aware of the subcontractors' reservation of their mechanic's lien rights at the time the payment bond was issued, Safeco is in no position to contend it believed it was entitled to rely on the “pay when paid” provision.   Assuming the “pay when paid” provision is enforceable vis-a-vis Keller, it thus has no effect on the subcontractors' rights to recover on the payment bond.

B.

 We reject Safeco's suggestion that, regardless of the parties' voluntarily assumed contractual rights and obligations, Safeco's liability to the subcontractors must be and remain coextensive with Keller's liability to the subcontractors.   While it is true, as Safeco contends, that section 2809 provides that “[t]he obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal,” that rule has no application where, as here, the principal (Keller) incurred an obligation coextensive with the surety's obligation.   As our Supreme Court explained when it rejected a similar suggestion in Bloom v. Bender (1957) 48 Cal.2d 793, 802, 313 P.2d 568, adoption of Safeco's approach would render every surety contract unenforceable to the extent it contemplates continuing liability of the surety after termination of the liability of the principal.   (See also Regents of Univ. of Cal. v. Hartford Accident & Indemnity Co. (1978) 21 Cal.3d 624, 633–639, 147 Cal.Rptr. 486, 581 P.2d 197.)

 For this reason, the rule is that a surety is not discharged when the liability of its principal is extinguished by operation of law or, as here, when the surety voluntarily agrees to remain liable notwithstanding that, upon the occurrence of some specified event (here, the owner's failure to pay Keller), the obligation of the principal will be decreased.  (Bloom v. Bender, supra, 48 Cal.2d at pp. 801–803, 313 P.2d 568.)   Stated otherwise, Safeco's acceptance of the contract documents and the reservation of the subcontractors' mechanic's lien remedy rights was a waiver of whatever rights Safeco might otherwise have had under section 2809.   (Bloom v. Bender, supra, 48 Cal.2d at p. 804, 313 P.2d 568.) ¹²

C.

For these reasons, we reject Safeco's attack on the judgments in favor of the four subcontractors and affirm the trial court's findings that the subcontractors were entitled to recover on the payment bond.   In sum, Safeco cannot cry foul where by a consensual agreement it undertook to remain liable after the obligation of its principal was discharged.  (Cf. Bloom v. Bender, supra, 48 Cal.2d at pp. 804–805, 313 P.2d 568.)

KELLER'S APPEAL

 Before Keller invoked the “pay when paid” clause and stopped paying all of the subcontractors, Barsotti's had submitted a request for a progress payment of about $1 million.   Keller submitted Barsotti's claim to the owner.   The owner, in turn, concluded that Barsotti's costs were excessive compared to the percentage of work completed and, for that reason, paid Keller only $84,508 and not the full amount requested by Barsotti's.   Instead of turning over the $84,508 to Barsotti's, Keller refused to pay any part of Barsotti's claim.   As a result, Barsotti's lawsuit included a claim against Keller for the full amount of his requested progress payment.   At the conclusion of Barsotti's trial, the court awarded Barsotti's the $84,508 which Keller had received from the owner but rejected Barsotti's claim for additional amounts (on the ground that Barsotti's had failed to prove it had incurred the additional costs it claimed).   The trial court then added prejudgment interest of $20,050 to the $84,508.

Keller contends the award of prejudgment interest was improper because Barsotti's was awarded only part and not all of its claim.   According to Keller, this means there was never a “sum certain” and thus no right to prejudgment interest.   We disagree.   As relevant, section 3287, subdivision (a), provides that every person who is entitled to recover damages certain, or capable of being made certain by calculation, is entitled also to recover prejudgment interest thereon from the day that sum became due.   Keller's half-hearted one-page argument about why this statute ought not to apply in this case is not persuasive.   Where, as here, a dispute exists with regard to part but not all of a claim, that dispute does not render the amount of the claim uncertain and the debtor can easily avoid liability for interest by tendering the amount actually due.  (Lacy Mfg. Co. v. Gold Crown Mining Co. (1942) 52 Cal.App.2d 568, 579, 126 P.2d 644;  Sukut–Coulson, Inc. v. Allied Canon Co. (1978) 85 Cal.App.3d 648, 656, 149 Cal.Rptr. 711.) ¹³  The award of prejudgment interest was proper.

BARSOTTI'S APPEAL

 Barsotti's contends that, in addition to prejudgment interest and attorneys' fees, it is entitled to recover from Keller a two percent penalty as provided in section 7108.5 of the Business and Professions Code.¹⁴  We disagree.

The plain language of the statute (fn. 14, ante ) makes it clear that the two percent penalty is a sanction to be imposed in a disciplinary action, not in an action for the collection of funds where, instead, attorneys' fees are recoverable.   In a disciplinary action pursued by the Contractors' State License Board (Bus. & Prof.Code, §§ 7011, 7011.4, 7090 et seq.) it is unlikely that attorneys' fees would be incurred by anyone other than the contractor.   Conversely, in an action for the collection of funds such as the one before us, attorneys' fees would be (and were) incurred.   That the legislature recognized this distinction is clear from its use of separate sentences to provide for two different penalties, one in disciplinary actions, the other in civil lawsuits.   Moreover, we find nothing in the language of the statute or its history to suggest a legislative intent to permit the recovery of both a two percent penalty and attorneys' fees in the same case.  (DaFonte v. Up–Right, Inc. (1992) 2 Cal.4th 593, 601, 7 Cal.Rptr.2d 238, 828 P.2d 140 [to determine legislative intent, we consult the words themselves, giving them their usual and ordinary meaning].)   Not surprisingly, Barsotti's has not offered to trade its attorneys' fee award ($150,000) for the two percent penalty (about $1,690.16 per month or about $24,000 for two years).   For these reasons, the trial court properly refused to award a two percent penalty to Barsotti's.

DISPOSITION

Clarkelectric's and Church's judgments against Safeco are affirmed.   Garvin's judgment against Safeco is affirmed, with directions to the trial court to calculate the prejudgment interest to which Garvin is entitled and to enter an order, nunc pro tunc, correcting the judgment accordingly.   Barsotti's judgment against Safeco and Keller is affirmed.   Clarkelectric, Church, Garvin and Barsotti's are awarded their costs of appeal, payable by Safeco.

FOOTNOTES

1.   When Barsotti's started work on the project, this Addendum was not part of its contract and no one at Barsotti's ever signed Addendum 1.   Keller and Barsotti's nevertheless treated their relationship as controlled by Addendum 1 and, on this appeal, Safeco and Keller both assert that Barsotti's is bound by Addendum 1.   For these reasons, we treat all four subcontractors the same vis-a-vis their contractual rights and obligations.  (Franklin v. Appel (1992) 8 Cal.App.4th 875, 893, fn. 11, 10 Cal.Rptr.2d 759.)

2.   Unless otherwise stated, all section references are to the Civil Code.

3.   With the exception of a separate dispute between Barsotti's and Keller which pre-dates the time at which the owner stopped making payments (discussed below in regard to Keller's appeal), there is no suggestion that Keller did anything wrong.   What happened was what everyone knew might happen—the owner was unable to obtain financing for the rehabilitation project.

4.   There were suits by other subcontractors as well but we are concerned only with the four who are parties to these appeals.   Garvin sued the owner and Keller for breach of contract and to foreclose its lien and filed a separate action against Safeco on the payment bond.   Church filed one action against everybody (the owner, Keller, Safeco and others).   Clarke filed one action for damages for negligent misrepresentation and to foreclose its lien, naming the owner and others as defendants, and a separate action against Safeco on the payment bond.   Barsotti's sued the owner, Keller and others for breach of contract damages and to foreclose its lien, and sued Safeco on the payment bond.

5.   Section 3226 provides as follows:  “Any bond given pursuant to the provisions of this title will be construed most strongly against the surety and in favor of all persons for whose benefit such bond is given, and under no circumstances shall a surety be released from liability to those for whose benefit such bond has been given, by reason of any breach of contract between the owner and original contractor or on the part of any obligee named in such bond, but the sole conditions of recovery shall be that claimant is a person described in Section 3110, 3111, or 3112 [these sections identify the persons entitled to mechanics' liens], and has not been paid the full amount of his claim.”

6.   Keller also purports to appeal from the judgments in favor of Garvin, Clarke and Church.   Since Keller was not a party to those actions at the time they were resolved in the trial court, and since Keller is not named in these judgments, those appeals are dismissed.  (Rebney v. Wells Fargo Bank (1990) 220 Cal.App.3d 1117, 1128, 1132, 269 Cal.Rptr. 844 [only a party aggrieved has standing to appeal].)

7.   Garvin's notice of cross-appeal quite clearly states that its appeal is only “from that portion of the Judgment ․ in which the Court declined to award [Garvin] prejudgment interest.”   This crystal clear statement of an intent to appeal from only that part of the judgment mentioned in the notice limits Garvin's appeal to that issue and precludes our consideration of its contention that it is also entitled to attorneys' fees.  (Unilogic, Inc. v. Burroughs Corp. (1992) 10 Cal.App.4th 612, 625, 12 Cal.Rptr.2d 741.)

8.   In its brief filed in response to Safeco's appeal, Church points out that the original judgment entered in its favor (dated August 2, 1993) did include an award of prejudgment interest but that an amended judgment (dated September 30, 1993) did not include prejudgment interest.   Safeco's appeal, filed after entry of the first judgment but before the amended judgment was signed or entered, is from the original judgment in Church's favor.   Based on this timing, Church claims the second judgment was entered at a time the trial court lacked jurisdiction (by reason of the pending appeal).   Church is mistaken.   The filing of a notice of appeal did not deprive the trial court of its power to correct the judgment to conform to its ruling on prejudgment interest, and it is undisputed that this was such a correction.  (Dutton Dredge Co. v. Goss (1926) 77 Cal.App. 727, 732, 247 P. 594;  Jackson v. Dolan (1922) 58 Cal.App. 372, 374, 208 P. 315.)   The point, however, is immaterial—Church did not appeal from either judgment and it therefore has no standing to seek affirmative relief regarding either judgment.  (California State Employees' Assn. v. State Personnel Bd. (1986) 178 Cal.App.3d 372, 382, fn. 7, 223 Cal.Rptr. 826;  Central Manufacturing District, Inc. v. Board of Supervisors (1960) 176 Cal.App.2d 850, 857, 1 Cal.Rptr. 733;  see also Pulver v. Avco Financial Services (1986) 182 Cal.App.3d 622, 630–631, 227 Cal.Rptr. 491;  Cal.Rules of Court, rule 2(c).)   Accordingly, we do not address Church's request for prejudgment interest.

9.   We nevertheless appreciate the amici curiae briefs filed on both sides of this issue by Fireman's Fund Insurance Company, the Surety Association of America, the American Insurance Association, the National Association of Surety Bond Producers, Associated General Contractors of California, Inc., Swinerton & Walberg Co., McCormick Construction Co., the Sheet Metal and Air Conditioning Contractors National Association, the Plumbing–Heating–Cooling Contractors of California, and the Construction Industry Legislative Council.

10.   We summarily reject Safeco's suggestions that the phrase “if any” implicitly acknowledges the application of the “pay when paid” clause and defeats the subcontractors' claim that they reserved their rights to pursue their mechanic's lien remedies.   In context, it is clear that the phrase requires the subcontractors to perfect their mechanic's lien rights before filing suit on the payment bond, no more and no less.   Any other construction would make the entire provision superfluous.  (Rest.2d Contracts, § 203(a) [a reasonable interpretation giving meaning to all terms is preferred over one which renders a contractual term of no effect].)

11.   As explained in 13 California Real Estate Law & Practice (Matthew Bender 1995) section 453.01, “[a]s used in the mechanic's lien law, ‘payment bond’ means a bond ․ that is conditioned for the payment in full of the claims of all claimants and that also by its terms is made to inure to the benefit of all claimants so as to give these persons a right of action to recover upon this bond in any suit brought to foreclose the liens provided for by law or in a separate suit brought on the bond.”  (See also Pneucrete Corp. v. U.S. Fidelity & Guaranty Co. (1935) 7 Cal.App.2d 733, 737, 739, 46 P.2d 1000 [payment bonds provide mechanic's lien claimants with a “quick, reliable and sufficient means of payment”].)

12.   Safeco's brief is replete with variations on this theme, all of which ignore the fact that the four subcontracts at issue in this case expressly reserved the subcontractors' rights to pursue their mechanic's lien remedies.   We have considered each of those arguments and summarily reject them because they do not acknowledge the existence of the contractual reservation of a remedy on the bond and because all of the arguments fail when that reservation is considered.   For the same reasons, the cases relied on by Safeco are inapposite.  (See, e.g., Michel & Pfeffer v. Oceanside Properties, Inc. (1976) 61 Cal.App.3d 433, 132 Cal.Rptr. 179 [where the court reached a different result because the deferred final payment agreed to by the subcontractors precluded enforcement of their lien rights].)

13.   Garvin's appeal presents an a fortiori prejudgment interest issue vis-a-vis Safeco (because, in the trial court, the sum claimed by Garvin was not disputed in whole or in part).   Safeco has not responded to this issue at all, thus conceding the point.  (See Roth v. Keene (1967) 256 Cal.App.2d 725, 727, 64 Cal.Rptr. 399;  Berry v. Ryan, (1950) 97 Cal.App.2d 492, 493, 217 P.2d 1015.)   For the reasons stated in the text, therefore, we conclude that Garvin is entitled to an award of prejudgment interest on the amount due to it under the payment bond.

14.   Section 7108.5 of the Business and Professions Code provides, as relevant, that:  “A prime contractor ․ shall pay to any subcontractor, not later than 10 days of receipt of each progress payment, unless otherwise agreed to in writing, the respective amounts allowed the contractor on account of the work performed by the subcontractors, to the extent of each subcontractor's interest therein.   In the event that there is a good faith dispute over all or any portion of the amount due on a progress payment from the prime contractor ․ to a subcontractor, then the prime contractor ․ may withhold no more than 150 percent of the disputed amount.  [¶] Any violation of this section shall constitute a cause for disciplinary action and shall subject the licensee to a penalty of 2 percent of the amount due per month for every month that payment is not made.   In any action for the collection of funds wrongfully withheld, the prevailing party shall be entitled to his or her attorney's fees and costs.  [¶]  The sanctions authorized under this section shall be separate from, and in addition to, all other remedies either civil, administrative, or criminal․”  (Emphasis added.)

MIRIAM A. VOGEL, Associate Justice.

ORTEGA, Acting P.J., and MASTERSON, J., concur.