Wm. R. Clarke Corp. v. Safeco Ins. Co.

• Decision Date: 10 October 1995
• Docket Number: B081092,B078686,Nos. B077931,s. B077931
• Citation: 38 Cal.App.4th 1655,46 Cal.Rptr.2d 183
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 38 Cal.App.4th 1655, 43 Cal.App.4th 175, 47 Cal.App.4th 1352 38 Cal.App.4th 1655, 43 Cal.App.4th 175, 47 Cal.App.4th 1352, 95 Cal. Daily Op. Serv. 8031, 95 Daily Journal D.A.R. 13,757 WM. R. CLARKE CORPORATION, Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant. CHURCH & LARSEN, INC., Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant. BARSOTTI'S INC., Plaintiff and Appellant, v. KELLER CONSTRUCTION CO., LTD., et al., Defendants and Appellants. GARVIN FIRE PROTECTION SYSTEMS, INC., Plaintiff and Appellant, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant. , and B082264.

Page 183

46 Cal.Rptr.2d 183

Previously published at 38 Cal.App.4th 1655, 43 Cal.App.4th 175, 47 Cal.App.4th 1352

38 Cal.App.4th 1655, 43 Cal.App.4th 175, 47 Cal.App.4th 1352,

95 Cal. Daily Op. Serv. 8031,

95 Daily Journal D.A.R. 13,757

WM. R. CLARKE CORPORATION, Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant.

CHURCH & LARSEN, INC., Plaintiff and Respondent, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant.

BARSOTTI'S INC., Plaintiff and Appellant, v. KELLER CONSTRUCTION CO., LTD., et al., Defendants and Appellants.

GARVIN FIRE PROTECTION SYSTEMS, INC., Plaintiff and Appellant, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant and Appellant.

Nos. B077931, B078686, B081092, and B082264.

Court of Appeal, Second District, Division 1, California.

Oct. 10, 1995.

As Modified Oct. 23, 1995.

Review Granted Jan. 31, 1996.

Haight, Brown & Bonesteel, Roy G. Weatherup, Armando M. Galvan, Santa Monica, Rivers & Bower, David E. Bower, Hornberger & Criswell, David Berry, Los Angeles, for Defendants and Appellants Safeco Insurance Company of America and Keller Construction Co., Ltd.

Tyre Kamins Katz & Granof, Herman S. Palarz and Richard J. Kamins, Los Angeles, for Plaintiff and Respondent Wm. R. Clarke Corporation.

Negele & Gropman, and Ted R. Gropman, Los Angeles, for Plaintiff and Respondent Church and Larsen, Inc.

Crawford, Bacon, Bangs & Briesemeister, William J. Crawford and E. Scott Holbrook Case, Knowlson, Mobley, Burnett & Luber, and Gary S. Mobley, Irvine, for Plaintiff and Appellant Garvin Fire Protection Systems, Inc.

Jr., West Covina, for Plaintiff and Appellant Barsotti's Inc.

Knecht, Haley, Lawrence & Smith, John L. Condrey, San Francisco, Bevington, Jackl & Haas and Anne M. Bevington, Walnut Creek, as Amici Curiae on behalf of Defendants and Appellants.

Abdulaziz & Grossbart, and Sam K. Abdulaziz, N. Hollywood, as Amici Curiae on behalf of Plaintiffs and Respondents and Plaintiffs and Appellants.

MIRIAM A. VOGEL, Associate Justice.

In these four consolidated cases, a surety contends that a "pay when paid" provision in the subcontracts at issue (the subcontractors agreed that the general contractor would have no obligation to pay them unless and until the general contractor was paid by the owner) relieved the surety of its statutory obligation under a payment bond and that, therefore, the trial court's judgments in favor of the four subcontractors must be reversed. Cross-appeals by the general contractor and two of the subcontractors present issues involving prejudgment interest and statutory penalties. We affirm the judgments.

FACTS

In November 1990, 6420 Wilshire Partners Limited Partnership, the owner of the MGM-Pathe Communications Corporation Headquarters building, retained Keller Construction Co., Ltd. as its general contractor for a rehabilitation project. After the general contract was signed, Keller entered into a number of subcontracts, four of which are at issue in this case--the ones involving Barsotti's Inc. (asbestos abatement work), Garvin Fire Protection Systems, Inc. (installation of a fire protection and sprinkler system), Church and Larsen, Inc. (drywall installation), and Wm. R. Clarke Corporation, doing business as Clarkelectric (electrical work).

All of the subcontracts were in the form required by the general contract and included a "pay when paid" provision in the section covering payment schedules: "Receipt of funds by Contractor from Owner is a condition precedent to the Contractor's obligation to pay Subcontractor under this Agreement, regardless of the reason for Owner's nonpayment, whether attributable to the fault of the Owner, Contractor, Subcontractor or due to any other cause." (Emphasis added.) The following addendum was appended to each of the subcontracts:

"Contractor has been informed that the Owner of the MGM-Pathe Headquarters has not obtained, and may not obtain in the future, a construction loan to fund the costs of construction. Subcontractor also acknowledges that Contractor has made no representation as to the financial responsibility of the Owner, or of its ability to fund the costs of construction.

"Notwithstanding anything stated elsewhere in the Subcontract or Contract Documents to the contrary, Subcontractor shall assume the risk that if [sic] the Owner does not, for any reason (including, but not limited to, unavailability of funds, default by Contractor of its obligations under its General Contract, or otherwise) pay Contractor money owing to it for the work, materials, equipment or services ("Work") provided by Subcontractor. Accordingly, Subcontractor agrees that:

"1. Contractor shall have no obligation, legal, equitable or otherwise, to pay Subcontractor for Work performed by Subcontractor unless and until Contractor is paid by the Owner for the Work performed by Subcontractor. Furthermore, in the event Contractor is never paid by Owner for Subcontractor's Work, then Subcontractor shall forever be barred from making, and hereby waives, in perpetuity, any claim against Contractor therefor.

"2. Subcontractor shall not seek payment from Contractor for, and shall forever refrain from instituting any legal or equitable action for collection of, money and/or compensation for Work performed by Subcontractor for which Contractor is not paid [by] Owner.

"3. Nothing contained in the Subcontract, the Contract Documents or in this Addendum shall be interpreted as creating "4. Nothing in this Addendum shall be interpreted as limiting Subcontractor's rights to enforce its statutory mechanic's lien rights or remedies, if any, against Project property and Subcontractor expressly agrees that such mechanics lien rights, if any, shall be its sole remedy and means for payment (regardless of whether the value [of] Project property is sufficient or insufficient, for any reason, to satisfy Subcontractor's claim) on account of Work performed by Subcontractor for which contractor has not been paid by Owner." (Emphasis added.) ¹

any express or implied obligation on the part of Contractor to Subcontractor to initiate or maintain any action (judicial or extrajudicial) against Owner for collection of monies owing by Owner to Contractor, whether or not relating to Work performed by Subcontractor for which Subcontractor has not been paid by Contractor.

In January 1991, Keller obtained a payment bond from Safeco Insurance Company of America after full disclosure of the terms of the general contract, the subcontracts and the addendum. The bond, which names Keller as principal, is a self-described "payment bond as defined in section 3096 of the Civil Code," executed "for the purpose of complying with the laws of the State of California as contained in Title 15, Works of Improvement, of the Civil Code...." ² By the terms of the payment bond, if Keller failed to pay a subcontractor who had recorded a mechanic's lien or otherwise given notice to Safeco as provided in the bond, Safeco would pay that subcontractor's claim.

Work began on the project but in July 1991, the owner stopped making payments to Keller. ³ Keller, in turn, stopped work, sent out notices of the owner's default, and refused to pay the subcontractors. The subcontractors recorded mechanics' liens. Keller then sued the owner (and other entities associated with the owner) for breach of contract and foreclosure of its mechanic's lien, reached a partial settlement in that case, and tendered payment to the subcontractors on a pro rata basis (the settlement fund was insufficient to satisfy the subcontractors' total claims). At about the same time, Barsotti's, Garvin, Church and Clarkelectric filed separate lawsuits to foreclose their mechanics' liens and to enforce the payment bond. Ultimately, the cases were deemed related and assigned to one judge for all purposes. ⁴

Garvin, Church and Clarkelectric moved for summary judgment against Safeco. Safeco opposed the motions on the ground that its obligation under the payment bond could be no greater than Keller's obligation under the subcontracts and that, under the "pay when paid" clauses, Keller's obligation to pay never arose because the owner had not paid Keller. In July 1993, the trial court granted Clarkelectric's and Church's motions, finding that Safeco's bond "is a statutory obligation and the liability of the surety is independent of the contractual liability of the owner or prime contractor. The 'pay when paid' clause in the subcontract ... is NOT ... a In October 1993, the trial court granted Garvin's motion for summary judgment for similar reasons, finding that a " 'pay when paid' provision in a subcontract does not limit the liability of the prime contractor's surety on a statutory payment bond issued pursuant to [the statutory provisions governing payment bonds for private works, section 3235 et seq.]. [p] [Section] 3226 provides that the surety is not released by reason of any breach of contract between the owner and the prime contractor. Hence the breach by the owner of its obligation to pay the prime does not release the prime's surety from liability to laborers and materialmen for whose benefit the bond was issued." ⁵ In November, judgment was entered in favor of Garvin ($327,035.19).

condition precedent to recovery ... on the bond...." Summary judgments were entered in favor of Clarkelectric ($698,631, plus prejudgment interest of $137,785.56) and Church ($172,930) in August and September 1993.

Meanwhile, Barsotti's case against Keller and Safeco was tried to the court during August 1993. As to Keller, the court rendered judgment in favor of Barsotti's for part but not all of its claim ($84,508, plus $20,050 for prejudgment interest, plus $150,000 for attorneys' fees). As to Safeco, the court awarded Barsotti's the full amount of its contract claim ($610,260 plus prejudgment interest of $144,789.84) for the same reasons the other subcontractors' motions for summary...