Cates Construction, Inc. v. Talbot Partners

• Citation: 980 P.2d 407,86 Cal.Rptr.2d 855,21 Cal.4th 28
• Decision Date: 29 July 1999
• Docket Number: No. S061215,S061215
• Court: United States State Supreme Court (California)
• Parties: , 980 P.2d 407, 99 Cal. Daily Op. Serv. 6021, 1999 Daily Journal D.A.R. 7725 CATES CONSTRUCTION, INC. et al., Plaintiffs, Cross-defendants and Appellants, v. TALBOT PARTNERS et al., Defendants, Cross-complainants and Respondents. Tig Insurance Company, Plaintiff, Cross-defendant and Appellant, v. Talbot Partners et al., Defendants, Cross-complainants and Respondents

Page 855

86 Cal.Rptr.2d 855

21 Cal.4th 28, 980 P.2d 407, 99 Cal. Daily Op. Serv. 6021,

1999 Daily Journal D.A.R. 7725

CATES CONSTRUCTION, INC. et al., Plaintiffs, Cross-defendants and Appellants, v. TALBOT PARTNERS et al., Defendants, Cross-complainants and Respondents.

Tig Insurance Company, Plaintiff, Cross-defendant and Appellant, v. Talbot Partners et al., Defendants, Cross-complainants and Respondents.

No. S061215.

Supreme Court of California

July 29, 1999.

Law Offices of William J. Allard and William J. Allard, West Los Angeles, for Plaintiff, Cross-defendant and Appellant Cates Construction, Inc.

Bryan Cave; William I. Chertok, Santa Monica; Bottum & Feliton, Steve Johnson Jerry Garcia; Horvitz & Levy, Barry R. Levy, Daniel J. Gonzalez, Ari R. Kleiman and Andrea M. Gauthier, Encino, for Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Michael A. Mathews for Crum & Forster Insurance as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Long & Levit, Doan A. Lesser and John H. Quinn, San Francisco, for the Association of California Surety Companies as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Busch & Berger, Richard S. Busch and William R. Moore, Calabasas, for Amwest Surety Insurance Company as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Anderson, McPharlin & Conners, G. Wayne Murphy, David T. DiBiase and Mark E. Aronson, Los Angeles, for National Bond Claim Association as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Hugh F. Young, Jr.; Mayer, Brown & Platt, Evan M. Tager and Donald M. Falk, Wash., D.C., for Product Liability Advisory Council, Inc., as Amicus Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Sonnenschein Nath & Rosenthal, Paul E.B. Glad and Cheryl Dyer Berg, San Francisco, for Alliance of American Insurers, Fireman's Fund Insurance Company and National Association of Independent Insurers as Amici Curiae on behalf of Plaintiff, Cross-defendant and Appellant TIG Insurance Company.

Wright, Robinson, Osthimer & Tatum and Peter C. Haley for American Insurance Association and the Surety Association of America as Amici Curiae on behalf of Plaintiffs, Cross-defendants and Appellants.

John S. Alevra, Santa Barbara; Marcus M. Kaufman; Armand Arabian; Shoop & Leanse, Paul Shoop, Malibu; Buchalter, Nemer, Fields & Younger and Bernard E. LeSage, Los Angeles, for Defendants, Cross-complainants and Respondents Talbot Partners and PAA Interpro.

Price, Postel & Parma, J. Terry Schwartz, Christopher E. Haskell, Santa Barbara; Esner, Higa & Chang, Andrew N. Chang, San Francisco, and Stuart B. Esner, Los Angeles, for Defendants, Cross-complainants and Respondents Bank of Montecito and Mountain Financial Corporation.

BAXTER, J.

This case presents issues relating to the contract and tort liability of a commercial surety to a real estate developer under a bond guaranteeing the contract performance of a general contractor on a multimillion dollar condominium construction project. For the reasons set forth below, we conclude that the bond at issue contractually obligates the surety to pay damages attributable to the general contractor's failure to promptly and faithfully perform its contract obligations by the agreed date. We further conclude that, as a matter of law, the developer may not recover in tort for the surety's breach of the covenant of good faith and fair dealing implied in the performance bond. In light of these conclusions, we reverse the judgment of the Court of Appeal insofar as it affirmed the underlying award of tort damages for breach of the implied covenant and permitted an award of punitive damages.

FACTUAL AND PROCEDURAL BACKGROUND

The following background is taken in large part from the Court of Appeal opinion.

In 1989, Talbot Partners (Talbot) hired Cates Construction, Inc. (Cates) to build a condominium project in Malibu on property purchased by Talbot for $1 million. The construction contract called for Cates to complete the project and have it ready for occupancy in eight months. Talbot received financing for the construction through the Bank of Montecito (the bank). The financing was secured by a deed of trust on the property and was conditioned on the issuance of a performance bond in favor of the bank.

At the time the construction contract was signed, Talbot required Cates to furnish a performance bond and a labor and materials payment bond. Transamerica Insurance Company (Transamerica), ¹ a commercial surety company, issued the bonds in favor of Talbot as obligee and the bank as co-obligee. Talbot paid the $27,000 premium on the bonds. Transamerica and Cates also executed an indemnity agreement which allowed Transamerica to recover from Cates all good faith disbursements made under the bonds.

Construction on the project began on May 1, 1989. Cates and Talbot agreed to various extensions on the completion date. At trial, Talbot waived any claim for damages through June 1, 1990.

A fund control agreement required Cates to submit monthly applications to Talbot for reimbursement of costs incurred. Funds were to be disbursed only after review of the requests by Talbot and the bank and after confirmation of the progress of the work. During the course of construction, Cates submitted 22 payment requests which were paid as submitted. The 23rd request, submitted in early November of 1990, was not paid because both Talbot's and Cates's records showed that Talbot had already paid several hundred thousand dollars more than the cost of work. After attempts to resolve disagreements failed, Cates threatened to abandon the project as of December 4, 1990, unless additional amounts were paid.

On November 29, 1990, six months after the contract should have been completed, Talbot advised Transamerica that Cates intended to default and that Talbot already had paid everything it owed under the contract. Talbot demanded that Transamerica perform under the bond. In December, Cates abandoned the project and recorded a mechanic's lien in the amount of $645,367.

After many discussions among the parties, on January 9, 1991, Transamerica informed Talbot of its position that Talbot had breached the contract by failing to make payments. Transamerica refused to intercede or arrange for performance of the contract, claiming a legitimate dispute existed between Cates and Talbot. Correspondence and communications continued.

On February 14, 1991, Cates, at Transamerica's request, gave Talbot notice of its voluntary default. Also in February, Cates assigned its rights against Talbot to Transamerica. On March 1, 1991, Talbot and the bank informed Transamerica that as a result of the delayed completion of the construction contract, Talbot was in default on its loans and the bank was proceeding to foreclose. At that time there was over $935,000 in mechanics' liens against the project, including Cates's lien.

On March 14, 1991, by which time Cates was out of business, Transamerica filed this action on Cates's behalf to foreclose on its mechanic's lien. On March 19, 1991, Transamerica began the process of completing the job pursuant to the performance bond.

On May 10, 1991, Transamerica joined as plaintiff in Cates's lawsuit against Talbot, alleging causes of action for breach of the construction contract, foreclosure on the mechanic's lien, and declaratory relief. They later named the bank as a defendant. Talbot cross-complained against Cates for breach of the construction contract and against Transamerica for recovery under the performance bond, breach of that bond and the labor and materials payment bond and breach of the implied covenant of good faith and fair dealing in the performance bond. In December of 1991, the bank cross-complained against Transamerica for breach of the bonds.

On June 18, 1991, the bank foreclosed on the project. At that time, Talbot owed the bank $7,753,282. Construction was not complete and some of the work was defective and required repair. The project also lacked permit sign-offs for certificates of occupancy.

By stipulation of the parties, the contract claims were tried before retired California Supreme Court Justice David Eagleson, sitting without a jury. Justice Eagleson ruled against Transamerica and Cates on all of their causes of action. Those rulings have not been appealed.

On Talbot's cause of action against Cates, Justice Eagleson found that Cates breached the contract by, inter alia, failing to construct the project in good quality and free of defects; charging rates substantially higher than standard local rates; and failing to use the construction funds to pay subcontractors, resulting in mechanics' liens on the project. He determined that all delays beyond June 1, 1990, were caused by Cates, and that if Cates had not breached the contract, the project would have been available for Talbot to sell on or before June 1, 1990.

On Talbot's causes of action against Transamerica, Justice Eagleson made the following findings. Transamerica breached the performance bond by failing to adequately investigate Talbot's declaration that Cates was in default and by joining in the mechanic's lien suit without such an investigation. Had such an investigation occurred, it would have disclosed that Cates was in default, that Cates's abandonment was unjustified, and that at the time of the abandonment, Cates had been paid the full cost of work, plus an additional sum of $267,730, and was owed no further amounts. Transamerica also breached by failing to promptly complete Cates's contract when Cates's default would have been readily apparent after an investigation. Transamerica arbitrarily determined what work it would perform under the performance bond and failed to fully complete Cates's contract. In addition, Transamerica breached the...