Electrical Electronic Control v. Lausd

Decision Date04 February 2005
Docket NumberNo. B172858.,B172858.
Citation126 Cal.App.4th 601,24 Cal.Rptr.3d 316
CourtCalifornia Court of Appeals Court of Appeals
PartiesELECTRICAL ELECTRONIC CONTROL, INC., Plaintiff and Respondent, v. LOS ANGELES UNIFIED SCHOOL DISTRICT, Defendant and Appellant.

Law office of Bergman & Dacey, Gregory M. Bergman, John P. Dacey, Mark W. Waterman, Los Angeles, Beth D. Orellana for Plaintiff and Respondent.

Law office of Kinley and Styskal, Thomas G. Styskal, Tustin, Anne K. Styskal for Defendant and Respondent.

CROSKEY, J.

A public entity awarded a public works contract to a contractor. Although the contract documents required the contractor to provide a payment bond for the protection of its subcontractors, as required by law, the contractor did not provide a bond. The contractor began work on the project and failed to pay its subcontractors. The public entity subsequently terminated the contractor from the project, and the public works contract was assigned, with the consent of the public entity, to a replacement contractor. A subcontractor who had not been paid by the initial contractor brought suit against the public entity, alleging the public entity was liable for its negligence in allowing the initial contractor to commence work without having furnished a payment bond. The public entity acknowledged the initial contractor did not furnish a bond. However, the public entity sought judgment in its favor on the basis of a payment bond furnished by the replacement contractor when it, several months after the first contractor's default, took over work on the public works contract. The trial court concluded the public entity had failed to establish the replacement contractor's bond applied to claims of subcontractors whom the initial contractor had failed to pay. Based on this ruling, the parties entered into a settlement for a stipulated judgment, providing for appellate court review of the trial court's ruling. We agree with the trial court. The public entity also challenges the trial court's ruling that the attorney's fees incurred by the subcontractor in attempting to recover from other entities the amounts it was owed can be recovered as damages from the public entity under the "tort of another" theory. Here, we agree with the public entity and conclude the trial court erred. We therefore modify the judgment to delete the award of attorney's fees and otherwise affirm.

FACTUAL AND PROCEDURAL BACKGROUND1

Los Angeles Unified School District (LAUSD) solicited proposals for "local area network (LAN) integration projects" at various schools. For purposes of this project, LAUSD grouped clusters of schools into separate "Packages." In 2000, LAUSD contracted with four different contractors, each of whom was given the contract for one or more Packages. Two of those contractors were Wareforce, Inc. (Wareforce), and Pacific Bell Telephone Company, d.b.a. SBC DataComm (SBC).

Pursuant to their contracts with LAUSD, and pursuant to statute (Civ. Code, § 3247), the contractors were required to obtain payment bonds for the benefit of their subcontractors. Wareforce failed to obtain a bond for its contract and LAUSD not only took no steps to force Wareforce to do so, it allowed the work to commence on the project and even made payments to the contractor, all without it having complied with the bonding requirement.

After work commenced on the LAN integration projects, Wareforce failed to pay its subcontractors. Ultimately, those subcontractors claimed Wareforce owed them a total amount in excess of $8,000,000. Included in that amount is approximately $350,000 owed to Electrical Electronic Control, Inc. (EEC), the eventual plaintiff in this action.

By May 21, 2001, EEC had completed its work on the Wareforce contract. In order to protect its right to payment, EEC had served stop notices on LAUSD, requiring LAUSD to withhold from payments due Wareforce sufficient funds to answer EEC's claims. Numerous other subcontractors had also served stop notices on LAUSD with respect to Wareforce's failure to pay them. The record is not clear as to whether LAUSD withheld sufficient funds to pay the claims of all of Wareforce's subcontractors.

By July 2001, it became clear that Wareforce could not complete the Packages it had contracted to complete. On July 9, 2001, an assignment agreement was executed by Wareforce, SBC and LAUSD pursuant to which the parties agreed that Wareforce would assign its contracts to SBC. However, SBC did not simply take over the terms of Wareforce's contracts. Instead, the parties agreed that the terms of SBC's previous contracts would apply. In other words, SBC would be assigned the contracts for Wareforce's Packages, but the contracts would be amended to incorporate the terms and conditions governing the Packages SBC had originally contracted to complete. The assignment included the right to any receivables Wareforce had outstanding. The assignment agreement acknowledged that LAUSD was limited in its ability to make payments while stop notices remained in effect. Therefore, SBC and Wareforce agreed to "use their best efforts to obtain appropriate releases and/or bonds for those stop notices prior to seeking any additional payments."

While the record is not entirely clear, it appears that there were additional agreements between SBC and Wareforce. SBC may have agreed to use Wareforce as a subcontractor on some of the assigned Packages. The record does not include the subcontract agreement; but LAUSD did submit a partially executed rider to that agreement. The rider states that SBC had agreed to assume over $8,000,000 of Wareforce's payables, which were enumerated in an attached appendix, and included the debt owed EEC.2

In October 2001, SBC obtained two payment bonds from Travelers Casualty and Surety Company of America ("Travelers"). The bonds were intended to guarantee SBC's payment of its subcontractors on the two LAN installation projects SBC had undertaken. The first bond was intended to guarantee the work SBC had originally contracted to perform in July 2000. The second bond, which is the bond at issue in this case, was clearly intended to guarantee the work SBC undertook to perform when it accepted the assignment of the Wareforce contract. As we explain below, however, we are unable to conclude that the bond was intended to guarantee the performance of any other obligations SBC undertook via the assignment agreement, or any other contracts SBC simultaneously executed. Rather, it appears that the bond was only intended to guarantee SBC's payment of its subcontractors for the work it was to perform on the public improvement for LAUSD.

Time passed, and EEC remained unpaid. On November 8, 2001, EEC contacted LAUSD and requested a certified copy of Wareforce's payment bond. On November 14, 2001, EEC brought suit against Wareforce, SBC, LAUSD and Doe defendants. Most of EEC's causes of action were against Wareforce. As against SBC, EEC alleged SBC agreed to assume EEC's payables and that it was a third party beneficiary of that agreement. As against LAUSD, EEC sought to enforce its stop notices. On the chance that Wareforce had obtained a payment bond, EEC brought a cause of action on the bond against a Doe defendant, indicating it would amend the complaint when LAUSD identified the surety.

In December 2001, LAUSD informed EEC that no payment bond was in existence, although in fact SBC had obtained and filed the bond, on which LAUSD would subsequently rely, in October, 2001. In August 2002, EEC brought the instant action against LAUSD, for breaching its mandatory duty to require Wareforce to obtain a payment bond. The two cases were consolidated, although we will refer to the first action filed on November 14, 2001, as the "underlying action."

SBC obtained a stop notice release bond. As a result, the stop notices were released and EEC dismissed LAUSD from the underlying action. SBC then settled the underlying action with EEC for an amount which was less than the amount owed EEC by Wareforce. As Wareforce had filed bankruptcy proceedings, the underlying action was stayed against it. The underlying action was effectively terminated by SBC's settlement. The only remaining litigation was EEC's current suit against LAUSD for negligently failing to require Wareforce to obtain a payment bond.

EEC also sought to recover its attorney's fees in the underlying action as consequential damages in the instant action. LAUSD filed a pre-trial motion to preclude EEC's recovery of attorney's fees. EEC argued that, had LAUSD not failed to require Wareforce to post a payment bond, EEC would have been able to recover against the bond and would not have had to pursue the underlying action. The trial court agreed, concluding that attorney's fees may be recoverable as damages under the "tort of another" doctrine, and indicated this would be a matter for the jury.

The case proceeded toward trial. On August 18, 2003, one week before trial, a pre-trial hearing was held. At the hearing, LAUSD indicated, for the first time, that it had recently discovered that there was, in fact, an applicable payment bond. The parties agreed the issue would have to be briefed.

On August 22, 2003, LAUSD filed its motion "for judgment on the pleadings or to dismiss or, alternatively, ... to try legal issue of coverage under payment bond." LAUSD took the position that a bond had been obtained on the public works project in question, and that, therefore, LAUSD did not breach its duty to require a bond. However, the bond on which LAUSD relied had not been obtained by Wareforce. Instead, LAUSD relied on the bond which had been obtained by SBC from Travelers in October 2001, a few months after Wareforce's default and the assignment of its contract to SBC. The bond was intended to guarantee payment "for all labor and material used or reasonably required for use in the performance of the Contract." The "Contract" was defined as a "written agreement dated ...

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