Capitol Steel Fabricators, Inc. v. Mega Construction Co.

• Decision Date: 28 October 1997
• Docket Number: No. B095849,B095849
• Citation: 68 Cal.Rptr.2d 672,58 Cal.App.4th 1049
• Court: California Court of Appeals Court of Appeals
• Parties: , 97 Cal. Daily Op. Serv. 8307, 97 Daily Journal D.A.R. 13,399 CAPITOL STEEL FABRICATORS, INC., Plaintiff and Appellant, v. MEGA CONSTRUCTION CO., INC. et al., Defendants and Respondents.

Page 672

68 Cal.Rptr.2d 672

58 Cal.App.4th 1049, 97 Cal. Daily Op. Serv. 8307,

97 Daily Journal D.A.R. 13,399

CAPITOL STEEL FABRICATORS, INC., Plaintiff and Appellant, v. MEGA CONSTRUCTION CO., INC. et al., Defendants and Respondents.

No. B095849.

Court of Appeal, Second District, Division 5, California.

Oct. 28, 1997.

Certified for Partial Publication. ^*

Gill and Baldwin and Kirk S. MacDonald, Glendale, for Plaintiff and Appellant.

Greenberg & Creyaufmiller and Lawrence R. Greenberg, Los Angeles, for Defendants and Respondents.

TURNER, Presiding Justice.

I. INTRODUCTION

Plaintiff, Capitol Steel Fabricators, Inc. ("Capitol"), a subcontractor, appeals from a judgment entered against it in favor of defendants Mega Construction Co., Inc. ("Mega"), the general contractor, and Fidelity and Deposit Company of Maryland ("Fidelity"), the surety, on a complaint arising out of a public works contract. The primary issue presented by this appeal is whether the trial court properly determined a "pay when paid" clause was enforceable against Capitol, the subcontractor. On June 3, 1997, this court filed an unpublished opinion affirming the judgment. On June 30, 1997, on our own motion, we granted a rehearing to allow the parties to brief the effect, if any, of the Supreme Court's June 26, 1997, decision in Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882, 888-897, 64 Cal.Rptr.2d 578, 938 P.2d 372, on this case. On rehearing, contrary to the arguments posited by the general contractor, Mega, we conclude the June 26, 1997, Wm. R. Clarke Corp. decision applies to a public works project where there is no pending action against the governmental entity. ¹ Hence, we reverse.

II. BACKGROUND

The complaint was filed on June 23, 1992, and named as defendants Mega, Fidelity, and the Long Beach Unified School District ("the district"). Plaintiff asserted causes of action for breach of contract, public works stop notice, and statutory payment bond. The district was merely a stakeholder and has since been dismissed from the action. The complaint alleged, prior to November 5, 1990, Mega and the district entered into the prime contract for the construction of the project known as the New Avalon School Gymnasium on Catalina Island. On November 5, 1990, Capitol and Mega entered into a written subcontract which was subsequently modified. Under the terms of the subcontract, Capitol was to supply Mega with structural steel fabrication, erection labor services, and equipment and material for the project. Mega obtained a bond to secure payment for laborers, material suppliers, and other persons from Fidelity. The prime contract was between the district and Mega. Capitol claimed it performed all terms of the subcontract as modified by the parties. However, Capitol argued Mega failed to pay the amount due under the subcontract. Capitol alleged it had been damaged in the amount of $33,716.50 plus interest from January 27, 1992, and attorney's fees. Plaintiff served a stop notice on May 21, 1992. Defendants answered the complaint. Mega asserted among other defenses backcharges and offsets for allegedly defective workmanship.

The dispute proceeded to trial on April 14, 1995. The parties agreed to have the matter tried on certain stipulated facts subject to briefing and oral argument. The parties stipulated to the following facts. The subcontract was entered into on November 5, 1990. Capitol performed work on the project and was in the class of beneficiaries under the payment bond issued pursuant to Civil Code section 3247. ² The amount of retention on the original subcontract and signed change orders earned by Capitol and unpaid by Mega as of the date the complaint was filed, June 23, 1992, was $22,575. As of June 23, 1992, the date the complaint was filed, Capitol performed all work required under the modified subcontract. Mega paid for all work performed by Capitol except: (1) retention; (2) certain extra work claims totaling $11,141; and (3) certain backcharge and offset claims made by Mega. It was stipulated Mega was no longer asserting backcharge and offset claims. Capitol properly served a timely stop notice in the amount of $33,716.50. The district withheld $42,145.63 pursuant to Capitol's stop notice.

On January 18, 1993, Mega filed a claim under Government Code section 900 et seq. with the district for $652,011.39 plus interests and costs. The claim was also for work which Mega, the general contractor, contended it or its subcontractors had performed on the project. On May 28, 1993, Mega filed a complaint against the district which was settled in February 1995. On March 1, 1995, Mega, the general contractor, paid $33,716.50 to Capitol, the subcontractor. This was in exchange for Capitol's execution and delivery to Mega of a release of the stop notice. The payment was made without prejudice to claims by Capitol, the subcontractor, that there were additional monies due to it which Mega, the general contractor, denied and disputed. As of the date of the "Stipulation of Facts" in the present case, April 28, 1995, the district had not paid Mega the amount due under the settlement agreement. The parties further stipulated that the prevailing party would be entitled to recover reasonable attorney's fees and costs.

Capitol argued it was entitled to unpaid interest and attorney's fees totaling $25,343.89. This was because the March 1, 1995, payment of $33,716.50 was allocated to satisfy accrued interest of $9,274.21 and attorney's fees and costs of $16,069.18, leaving an $8,373.11 balance for allocation to principal. The interest was due on the amount which Capitol recovered as liquidated damages, $33,716.50, from the date they became due pursuant to Civil Code section 3287. This was because, when Mega paid Capitol the entire contract retention amount and abandoned the claims for an offset, such constituted an admission of the lack of merit in the backcharges. Capitol also contended its claims were capable of being made certain with reliance only on documents that existed as of January 27, 1992. Capitol further asserted it was entitled to recover on the bond pursuant to section 3226 because the only conditions for recovery on the payment bond are that the claimant is one of the class identified in section 3110 and is unpaid.

Mega contended it was not required to pay the additional amount because there are three "pay when paid" clauses in the contract between the parties. The first two clauses are in section 4 of the payment schedule as modified in paragraph 9 of rider 2 and state: "CONTRACTOR agrees to pay SUBCONTRACTOR in monthly payments of 90% of labor and materials which have been placed in position as condition precedent and for which payment has been made by OWNER to CONTRACTOR.[ ³] The remaining 10% shall be retained by CONTRACTOR until he receives final payment from OWNER, but not less than thirty-five days after the entire work required by the prime contract has been fully completed in conformity with the Contract Documents and has been delivered and accepted by OWNER, ARCHITECT, and CONTRACTOR. Subject to the provisions of the next sentence, the retained percentage shall be paid SUBCONTRACTOR promptly after CONTRACTOR receives his final payment from OWNER. SUBCONTRACTOR agrees to furnish, if and when required by CONTRACTOR, payroll affidavits, receipts, vouchers, releases of claims for labor, material and subcontractors performing work or furnishing materials under this Agreement, all in form satisfactory to CONTRACTOR, and it is agreed that no payment hereunder shall be made, except at CONTRACTOR'S option, until and unless such payroll affidavits, receipts, vouchers or releases, or any or all of them, have been furnished. Any payment made hereunder prior to completion and acceptance of the work, as referred to above, shall not be construed as evidence of acceptance of any part of SUBCONTRACTOR'S work." The third clause is in section E of the general subcontract which provides in part: "Under no conditions shall SUBCONTRACTOR make any changes either as additions or deductions without the written order of the CONTRACTOR and CONTRACTOR shall not pay any extra charges made by the SUBCONTRACTOR that have not been agreed upon in writing by CONTRACTOR, and in no event, shall CONTRACTOR make payment for any such extra charges unless and until the CONTRACTOR itself receives payment from OWNER...." Mega argued the clauses were enforceable because the complaint alleged approximately $11,000 in extra charges which the district disputed among other things. According to Mega, Capitol did not have the right to receive any interest. Rather, it was only required to pay Capitol after Mega received payment from the district. Mega had not received the payment from the district for the alleged extra work or the retention claimed by Capitol. Hence, Mega argued Capitol was paid prior to the condition precedent occurring; i.e., Mega paid before it was compensated by the district.

Capitol countered the "pay when paid" clause was unenforceable because such provisions are null and void under section 3262, subdivision (a) which provides in part: "Neither the owner nor original contractor by any term of their contract, or otherwise, shall waive, affect, or impair the claims and liens of other persons whether with or without notice except by their written consent, and any term of the contract to that effect shall be null and void. Any written consent given by any claimant pursuant to this subdivision shall be null, void, and unenforceable unless and until the claimant executes and delivers a waiver and release." Capitol argued the condition precedent and "pay when paid" language in the subcontract affected and impaired its rights as a subcontractor regarding the stop notice and bond claims. Capitol argued the language in the subcontract does not conform to statutory waiver and release requirements contained in section 3262, subdivision...