R. M. Sherman Co. v. W. R. Thomason, Inc.

• Citation: 191 Cal.App.3d 559,236 Cal.Rptr. 577
• Court: California Court of Appeals
• Decision Date: 28 April 1987
• Parties: R.M. SHERMAN CO., INC., Plaintiff, Cross-Defendant, and Appellant, v. W.R. THOMASON, INC., Defendant, Cross-complainant, and Respondent; (Two Cases) Industrial Indemnity Company, Defendant and Respondent. R.M. SHERMAN CO., INC., Plaintiff, Cross-defendant and Respondent, v. W.R. THOMASON, INC., Defendant, Cross-complainant and Appellant; Industrial Indemnity Company, Defendant and Appellant. A034219, A035076.

Page 577

236 Cal.Rptr. 577

191 Cal.App.3d 559

R.M. SHERMAN CO., INC., Plaintiff, Cross-Defendant, and Appellant, v. W.R. THOMASON, INC., Defendant, Cross-complainant, and Respondent; (Two Cases)

Industrial Indemnity Company, Defendant and Respondent.

R.M. SHERMAN CO., INC., Plaintiff, Cross-defendant and Respondent, v. W.R. THOMASON, INC., Defendant, Cross-complainant and Appellant;

Industrial Indemnity Company, Defendant and Appellant.

A034219, A035076.

Court of Appeal, First District, Division 4, California.

April 28, 1987.

Certified for Partial Publication ^*

A. Charles Dell'Ario, Oakland, for plaintiff and appellant R.M. Sherman Co., Inc.

Graham & James, Edward K. Allison, San Francisco, for defendant and appellant W.R. Thomason, Inc. et al.

CHANNELL, Associate Justice.

Plaintiff R.M. Sherman Co., Inc. (Sherman) sued for money due under a building contract between it, as subcontractor, and defendant W.R. Thomason, Inc. (Thomason), as prime contractor. Also named as a defendant was Industrial Indemnity Company, the surety under a stop notice release bond. The trial court allowed Thomason to assert a defense of setoff based on a previous contract between Sherman and Thomason which violated the Subletting and Subcontracting Fair Practices Act (former Gov.Code, § 4100 et seq.; now Pub. Contract Code, § 4100 et seq.) ¹ (Hereafter, Fair Practices Act.) We hold that this was error.

I. FACTS.

In December 1981, Thomason agreed to subcontract to Sherman the concrete work on a public improvement project in the City of Ukiah. Thomason had already secured the prime contract without identifying a subcontractor. The City was not told of, and did not approve, Sherman's involvement in the project. As part of the transaction some of Sherman's employees and suppliers were paid through Thomason's accounts, apparently to conceal Sherman's involvement. ² Due to inclement weather, Thomason incurred cost overruns of some $99,000, which it contended Sherman was obligated to pay.

In September 1982 the parties entered into a second, unrelated agreement making Sherman a subcontractor on a public works project in the City of Pleasanton. So far as the record indicates this subcontract was entirely lawful. Thomason withheld part of the proceeds of this contract, claiming a setoff based on its demands under the Ukiah contract.

Sherman filed this action to recover the sums withheld by Thomason. Thomason cross-complained for damages under the Ukiah contract. Sherman answered the cross-complaint, asserting that the Ukiah contract was illegal and unenforceable. Sherman then moved for summary judgment or summary adjudication of the proposition that the relief available on the cross-complaint was limited to the amount due Sherman in the main action. The trial court declared the Ukiah contract illegal and "void," but denied summary judgment and declared that Thomason "may set off its Ukiah claim" against Sherman's claim. ³ Sherman then amended its answer to plead an estoppel to assert the Ukiah demands.

The parties stipulated for purposes of trial that Thomason's setoff exceeded the size of Sherman's own claim. The apparent intent was to obviate all dispute over the setoff except with respect to the effect of the illegality of the contract and the question of estoppel. The right to pursue those issues on appeal was expressly reserved. Since the first question had already been adjudicated, there were three issues left for trial: (1) whether Thomason was estopped to assert the setoff; (2) whether Industrial, as surety, could avail itself of the setoff; and (3) whether Sherman was owed some $5,000 beyond the $22,365.35 conceded by Thomason.

After a nonjury trial on these issues, the court entered judgment declaring that Sherman was entitled to the amount prayed for, that Thomason was entitled to a setoff in a like amount, and that each party should take nothing. On cross-motions under Civil Code section 1717, the court found Sherman to be the prevailing party and awarded him attorney fees. Sherman appealed from the adverse portions of the judgment, and Thomason appealed from the fee award.

II. ANALYSIS.

The Ukiah contract violated sections 4106 and 4107 of the Fair Practices Act by assigning work, without the City's consent, to a subcontractor who was not identified in the bid for the prime contract. ⁴ Civil Code sections 1598 and 1608 make a contract "void" if it has an unlawful object or an unlawful consideration. The Ukiah contract appeared to have both--the unlawful participation by Sherman being both the object of the contract and the consideration for Thomason's counterperformance. It would therefore appear that the contract was "void." Thomason appears to concede as much.

If the contract was truly void it created no right or claim whatsoever: "A void contract is no contract at all; it binds no one and is a mere nullity." (Guthman v. Moss (1984) 150 Cal.App.3d 501, 507, 198 Cal.Rptr. 54.) "No rights are enforceable under a void contract." (A-Mark Coin Co. v. General Mills, Inc. (1983) 148 Cal.App.3d 312, 322, 195 Cal.Rptr. 859; see First Nat. Bk. v. Thompson (1931) 212 Cal. 388, 405-406, 298 P. 808 [contract void due to illegality "has no legal existence for any purpose"]; Tiedje v. Aluminum Taper Milling Co. (1956) 46 Cal.2d 450, 453-454, 296 P.2d 554 [illegal contract "may not serve as the foundation of any action, either at law or in equity"].) If the agreement conferred no rights whatsoever and is a legal nullity, it is difficult to perceive how it could furnish the basis for a setoff. The general rule is that a setoff must rest on a claim enforceable in its own right. (20 Am.Jur.2d, Counterclaim, Recoupment, and Setoff, §§ 34, 55, pp. 256-257, 273-274.)

Unfortunately, the issue before us does not permit such a straightforward analysis. "The illegality of contracts constitutes a vast, confusing and rather mysterious area of the law." (Strong, The Enforceability of Illegal Contracts (1961) 12 Hastings L.J. 347, 348.) "One of the reasons for the apparent confusion is the fact that illegality may appear in many forms and in varying degrees.... Another source of confusion seems to be the tendency of some courts to speak in terms of absolute rules, and others in terms of numerous exceptions. Unfortunately, there appear to be several conflicting and competing 'absolute' rules. On the other hand, a monotonous and patterned recital of exceptions is apt to obscure the actual rule of decision." (Id. at p. 348.)

Civil Code sections 1598 and 1608 are not always applied literally; in many cases they have simply been overlooked or ignored. (E.g. Asdourian v. Araj (1985) 38 Cal.3d 276, 293, 211 Cal.Rptr. 703, 696 P.2d 95 [suggesting contract might be merely "voidable"; allowing recovery despite violation punishable as misdemeanor].) In any event the courts have fashioned exceptions and qualifications to the seemingly unequivocal statutory mandate of unenforceability. (E.g., Asdourian v. Araj, supra, 38 Cal.3d 276, 292-294, 211 Cal.Rptr. 703, 696 P.2d 95 [defendant unjustly enriched, plaintiff unduly penalized]; Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 151, 308 P.2d 713 [policy of violated statute better served by granting relief]; Severance v. Knight-Counihan Co. (1947) 29 Cal.2d 561, 569, 177 P.2d 4 [restitution to party only slightly at fault, or party equally at fault who repudiates before illegal part of bargain executed]; see Rest.2d Contracts, §§ 178, 180, 181, 183, 184, 198, 199.)

Here Thomason has relinquished any claim to affirmative relief based on the illegal contract. This is consistent with the one reported case to consider the issue, which declares that a contractor who enters an agreement in violation of the Fair Practices Act cannot recover for its breach by the subcontractor. (Kiely Corp. v. Gibson (1964) 231 Cal.App.2d 39, 41 Cal.Rptr. 559.)

Thomason, however, contends that Sherman's breach of the Ukiah contract affords the basis for a setoff. This argument rests on a supposed analogy to cases permitting an unlicensed contractor to assert a setoff based on a contract for building services, notwithstanding that the contract is otherwise unenforceable due to the absence of a license. ⁵ (Marshall v. Von Zumwalt (1953) 120 Cal.App.2d 807, 262 P.2d 363; Steinwinter v. Maxwell (1960) 183 Cal.App.2d 34, 6 Cal.Rptr. 496; Dahl-Beck Electric Co. v. Rogge (1969) 275 Cal.App.2d 893, 80 Cal.Rptr. 440; S & Q Construction Co. v. Palma Ceia Development Organization (1960) 179 Cal.App.2d 364, 3 Cal.Rptr. 690; Culbertson v. Cizek (1964) 225 Cal.App.2d 451, 473, 37 Cal.Rptr. 548.)

The analogy is unsound. Generally, where a statute prohibits or penalizes specified conduct, the courts will infer a prohibition on enforcement of contracts based on such conduct. (Reid v. Overland Machined Products (1961) 55 Cal.2d 203, 208, 10 Cal.Rptr. 819, 359 P.2d 251; Smith v. Bach (1920) 183 Cal. 259, 262-263, 191 P. 14; Gruzen v. Henry (1978) 84 Cal.App.3d 515, 518, 148 Cal.Rptr. 573; Severance v. Knight-Counihan Co., supra, 29 Cal.2d 561, 568, 177 P.2d 4.) In the context of licensing statutes, however, a contrary rule has been said to apply, namely, that when penalties are provided by statute, the courts "will not impose additional penalties for noncompliance with the licensing requirement." (Vitek, Inc. v. Alvarado Ice Palace, Inc. (1973) 34 Cal.App.3d 586, 592, 110 Cal.Rptr. 86; contra, Owen v. Off (1951) 36 Cal.2d 751, 753, 227 P.2d 457.) This exception to the general rule appears to rest, at least in part, on an application of the principle expressio unius exclusius alterius est (to express one thing is to exclude another). (See Vitek, Inc. v. Alvarado Ice Palace, Inc., supra, 34 Cal.App.3d 586, 593, 110 Cal.Rptr. 86.) Thus in Marshall v. Von Zumwalt, supra, 120 Cal.App.2d 807, 810, 262 P.2d 363, the court quoted Business and Professions Code section 7031 and observed, "the statute merely prohibits a contractor from...