PACIFIC EMPLOYERS INSURANCE COMPANY v. STATE (1970)

Plaintiff, Pacific Employers Insurance Company, a California corporation, appeals from a judgment of dismissal entered upon an order sustaining a general demurrer to its complaint with leave to amend, following its declination to amend. The sole issue is whether a cause of action can be found in the complaint.

Only the averments of the complaint material to this appeal will be summarized:¹ Defendant, State of California, acting through its Division of Forestry of the Department of Conservation, entered into a written agreement on or about March 25, 1966, with a D. L. Rocky Stone, an individual, whereby Stone as contractor undertook to erect and complete a fire control station, at Miller, San Diego County.² Stone's undertaking included furnishing all of the necessary labor and materials and equipment required for the work. As part of the agreement between defendant and the contractor, plaintiff executed and delivered a ‘Performance Bond’ and a ‘Labor and Material Bond to Accompany Contract’ (hereafter ‘Labor and Material Bond’). The contractor, on or before November 29, 1966, defaulted and abandoned his contract, leaving numerous laborers and materialmen unpaid. Plaintiff, as surety, paid off laborers and materialmen who had provided work or furnished materials prior to the contractor's abandonment, the amounts totaling $12,801.61. Prior to the date contractor abandoned his contract, defendant at various times and places and in amounts unknown to plaintiff paid contractor progress payments amounting to $11,647.03, ‘without the knowledge or consent of plaintiff.’

Plaintiff's theory of recovery is that the agreement called for a lump-sum payment of the entire contract price upon completion of the work and that progress payments were unauthorized and constituted an alteration of agreement which released it from its obligation as a surety; that it had made payments to the laborers and materialmen under its ‘Labor and Material Bond’ on behalf of defendant; and that it was entitled to be reimbursed from defendant.

Defendant contends that the contract permitted monthly progress payments, and that even if it be wrong in this interpretation of the agreement, plaintiff consented in advance to any change in the mode or manner of payments under the main agreement by virtue of a clause to that effect in the ‘Labor and Material Bond.’

Plaintiff bottoms its contention upon the following sentence of the agreement:

‘Upon completion of the work in a manner satisfactory to the State and upon submission of an invoice in triplicate to the Division of Forestry * * *, the State agrees to pay the contractor the sum of Twenty-seven Thousand Four Hundred Ninety-five and 00/100 Dollars ($27,495.00), said sums includes all State, County or other applicable taxes, fees, cost of bonds related to this agreement.’ (Italics addded.)

However, the specifications, which were also a part of the agreement, provided as follows under a section entitled, ‘ACCEPTANCE AND PAYMENTS':

‘1–40 PARTIAL PAYMENTS

‘Before a partial payment is made the Department of Conservation shall cause an estimate in writing to be made once each month or other date agreed upon during the progress of the work of the total amount of work done and the acceptable materials furnished and delivered by the Contractor on the ground, and not used, to the time of such estimate, and the value thereof. The State of California shall retain ten per cent (10%) of such estimated value of the work done and a percentage within the limits established by law of the value of the materials so estimated to have been furnished and delivered and unused as aforesaid as part security for the fulfillment of the contract by the Contractor, and shall pay monthly or as agreed upon to the Contractor while carrying on the work, the balance not retained, as aforesaid, after deducting therefrom all previous payments and all sums to be kept or retained under the provisions of the contract.

‘1–41 FINAL PAYMENTS

‘After completion of the contract, the Department of Conservation will cause to be made a final estimate of the amount of work done thereunder, and the value of such work, and the State of California shall pay the entire sum so found to be due under the contract after deducting therefrom all previous payments and all amounts to be kept and all amounts to be retained under the provisions of the contract. All prior partial estimates and payments shall be subject to correction in the final estimate and payment. Payment on the final estimate will be made within thirty (30) days from the date of acceptance of the contract by the Director of Conservation provided all pertinent matters have been satisfactorily resolved.

‘1–42 DEDUCTIONS FROM PAYMENTS

‘The State of California by and through the Department of Conservation or other appropriate State officer or officers, may at its option and at any time retain out of any amounts due the Contractor, sums sufficient to cover any unpaid claims, provided that sworn statements of said claims shall have been filed in the office of the Department of Conservation, or in any other appropriate State office.’

The first question is whether, construing the foregoing portions of the agreement together, the contract allows or prohibits progress payments. If the agreement provides only one method of payment as a matter of law, namely, one lump-sum payment upon completion of the entire project undertaken, then no doubt progress payments would have constituted premature payments releasing the plaintiff surety from its obligation on its bond. (Pacific Coast Eng. Co. v. Detroit F. & S. Co. (1931) 214 Cal. 384, 395–396, 5 P.2d 888.) However, if we apply the familiar rule of construction that the whole contract is to be construed together so as to give effect to every part (1 Witkin, Summary of Cal. Law (7th ed. 1960), Contracts, § 219, p. 248, and authorities cited), then effect also must be given to the specifications which are open to a construction that the parties intended progress payments, otherwise these clauses would have been deleted. Thus the agreement is not free from ambiguity in its payment provisions.

‘A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.’ (Civ.Code, § 1636.) Where the language of the contract is such that the mutual intention of the parties is not clear as a matter of law from the language employed by the parties, the meaning should be determined as a question of fact rather than as a matter of law. (Cal. Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474, 486, 289 P.2d 785, 49 A.L.R.2d 496.) Particularly is this true in view of the California parol evidence rule enunciated by our Supreme Court in Pacific Gas & E. Co. v. G. W. Thomas Drayage, etc., Co. (1968) 69 Cal.2d 33, 69 Cal.Rptr. 561, 442 P.2d 641. Plaintiff should be given its opportunity to establish, if it can, by parol evidence the meaning of the contract for which it contends, and should not be foreclosed as a matter of law by demurrer. (Diamond v. Insurance Co. of N. A. (1968) 267 Cal.App.2d 415, 72 Cal.Rptr. 862.)

It is familiar law of pleading that it is improper to sustain a general demurrer against a complaint if it states a cause of action upon any kind of theory. (Johnson v. Clark (1936) 7 Cal.2d 529, 536, 61 P.2d 767.) The allegations of the complaint are to be liberally construed (Cameron v. Wernick (1967) 251 Cal.App.2d 890, 892, 60 Cal.Rptr. 102) and cognizance taken of matters reasonably inferable from the averments (Watson v. Aced (1957) 156 Cal.App.2d 87, 91, 319 P.2d 83; Bracker v. American Nat. Food, Inc. (1955) 133 Cal.App.2d 338, 340, 284 P.2d 163). Where a general demurrer is sustained with leave to amend, the plaintiff may decline to amend and test the sufficiency of his pleading by appealing from the judgment of dismissal sustaining the demurrer upon plaintiff's declining to amend. (2 Witkin, Cal.Procedure (1954) p. 1495.)

Defendant claims that plaintiff cannot recover under a theory of common-law subrogation since plaintiff did not allege that the progress payments were made after the laborers and materialmen served stop notices (Code Civ.Proc. § 1190.1 subd. (a)) or filed verified statements with the public agency (Code Civ.Proc. § 1192.1 subd. (a)). Without such procedures by the laborers or materialmen, the public agency, contends the defendant, is under no duty to withhold payments. Plaintiff's allegation that it paid off laborers and materialmen pursuant to its obligation under the ‘Labor and Material Bond’ carries an inference that the payees had complied with section 1192.1 of the Code of Civil Procedure of that the payments were made prior to the expiration of the time for filing claims and while the claimants still had an inchoate lien of equitable garnishment on the funds to which plaintiff seeks to be subrogated (See United States Fid. & Guar. Co. v. Oak Grove Union School Dist. (1962) 205 Cal.App.2d 226, 230, 232, 22 Cal.Rptr. 907; General Elec. Co. v. Central Surety & Ins. Corp. (1965) 232 Cal.App.2d 590, 594, 43 Cal.Rptr. 48), at least for the purposes of testing the validity of a general demurrer.

Defendant further contends that the provision in the ‘Labor and Material Bond’ that ‘no change, extension of time, alteration or addition to the terms of the contract or to the work to be performed thereunder or the specifications * * * shall in any wise affect its obligations on this bond [etc.]’ constituted an advance consent (Bloom v. Bender (1957) 48 Cal.2d 793, 801, 313 P.2d 568) to progress payments even if the basic agreement was one for a single lump-sum payment upon completion of the project. We disagree.

Such an advance consent provision is not to be found in the ‘Performance Bond’ as distinguished from the ‘Labor and Material Bond.’ The latter bond ‘is strictly a statutory bond³ inuring to the benefit of subcontractors, materialmen and laborers, not the general contractor or the public agency owning the land.’ (Italics added.) (Powers Regulator Co. v. Seaboard Surety Co. (1962) 204 Cal.App.2d 338, 348, 22 Cal.Rptr. 373, 379.) The public agency on this bond is merely a trustee for many obligees or creditors, to wit: the laborers and materialmen who are the beneficiaries of this statutory bond. (Cal. Elec. Supply Co. v. United Pac. Life Ins. Co. (1964) 227 Cal.App.2d 138, 151, 38 Cal.Rptr. 479; cf. Equitable Surety Co. v. United States to use of W. McMillan & Son (1914) 234 U.S. 448, 457–458, 34 S.Ct. 803, 806, 58 L.Ed. 1394, 1398.) The paragraph of the ‘Labor and Material Bond’ in question is merely a statement of what is otherwise the law, which holds that changes and alterations between the contractor and the landowner cannot affect the right of recovery of laborers and materialmen falling within the category of those described in the bond. (Code Civ. Proc. § 1200.1 subd. (a); Powers Regulator Co. v. Seaboard Surety Co., supra, 204 Cal.App.2d at p. 345, 22 Cal.Rptr. 373; Cal. Elec. Supply Co. v. United Pac. Life Ins. Co., supra, 227 Cal.App.2d at p. 149, 38 Cal.Rptr. 479.) This cannot be deemed to be an advance consent by the surety to the public agency's changes or alterations in the basic construction contract between it and the general contractor.

The judgment of dismissal is reversed with directions to reconsider the demurrer in conformity with the views set forth above.

FOOTNOTES

1.  Some of the allegations were averred upon information and belief.

2.  The entire contract, including the bonds and the ‘bid,’ specifications, and plans which by terms of the agreement were made an integral part thereof, was before the court. Parts thereof had been attached as exhibits to plaintiff's complaint; the balance was judicially noticed at defendant's request. (Evid.Code, § 453.) Matters subject to judicial notice may be properly considered in passing upon a demurrer. (2 Witkin, Cal.Procedure (1954) pp. 1185–1187.)

3.  Gov.Code, §§ 4200–4210.

AISO, Associate Justice.

KAUS, P. J., and REPPY, J., concur.