47 Cal.App.5th 940
Cal. Ct. App.2020Background:
- North Edwards Water District awarded a public-works contract to Clark Bros.; Clark subcontracted Crosno Construction to fabricate, erect, and coat two large steel water tanks for $630,000.
- The subcontract included a "pay-when-paid" clause requiring Clark to pay subcontractor within a "reasonable time," defined to be at least the time Clark and Crosno need to pursue to conclusion their legal remedies against the owner.
- A dispute between Clark and the District halted the project after Crosno performed most work; Crosno filed a stop payment notice and then a payment-bond claim against the surety, Travelers, for $562,435 unpaid.
- Travelers denied the bond claim as premature, invoking the subcontract's pay-when-paid clause to delay payment until Clark’s litigation with the District concluded.
- Trial court granted summary judgment for Crosno, holding the subcontract clause un enforceable as an unlawful impairment of payment-bond rights under Cal. Civ. Code § 8122 (and related statutes), and awarded principal, prejudgment interest, and fees; Travelers appealed.
Issues:
| Issue | Plaintiff's Argument (Crosno) | Defendant's Argument (Travelers) | Held |
|---|---|---|---|
| May a surety invoke an expansive pay-when-paid subcontract clause to delay payment-bond recovery until contractor’s suit against the owner concludes? | Clause is void as it "affects or impairs" statutory bond rights under § 8122 unless waived by a valid waiver-and-release tied to payment. | Clause only fixes timing (a pay-when-paid), not a waiver; surety may assert principal's defenses—no bond liability until contractor is paid. | No. The specific clause is unenforceable against a bond claimant because it unreasonably postpones bond recovery and impairs statutory rights. |
| Does § 8122 prohibit contractual terms that merely "affect or impair" bond remedies (not only explicit waivers)? | § 8122 covers provisions that affect or impair claims; broad protection prevents indirect circumvention of anti-waiver scheme. | § 8122 aims at actual waivers; ordinary timing provisions should not be swept in. | Court reads § 8122 broadly: provisions that unreasonably affect or impair recovery are void without statutory waiver/payment. |
| Is a surety's obligation coextensive with the principal’s such that the surety can replicate all subcontract defenses? | Bond liability is independent; surety cannot use subcontract terms to narrow bond remedy in ways that would be unlawful if placed in the bond. | Surety may assert defenses coextensive with principal’s obligations; freedom of contract should be respected. | Bond is statutory and remedial; surety cannot avoid liability by enforcing subcontract terms that impair bond rights (Wm. R. Clarke controlling). |
| Did the court properly award prejudgment interest and postjudgment fees? | Claim was filed and denied by surety; plaintiff seeks statutory prejudgment interest from bond claim notice date and fees allowed by bond statute. | Travelers did not raise a separate challenge on fees/interest on appeal. | Award of prejudgment interest and attorney’s fees affirmed. |
Key Cases Cited
- Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal.4th 882 (Cal. 1997) (pay-if-paid clauses that effectively waive lien/bond rights are unenforceable; bond liability is independent of subcontract conditional-payment clauses)
- Yamanishi v. Bleily & Collishaw, Inc., 29 Cal.App.3d 457 (Cal. Ct. App. 1972) (a subcontract clause that indefinitely delays payment until resolution of contractor-owner dispute is unreasonable; subcontractor entitled to payment within a reasonable time)
- Capitol Steel Fabricators, Inc. v. Mega Const. Co., 58 Cal.App.4th 1049 (Cal. Ct. App. 1997) (pay-if-paid clauses on public works that condition subcontractor payment on governmental payment are void as against public policy)
- Cooley v. Freeman, 204 Cal. 59 (Cal. 1928) (public-works payment bonds provide subcontractors a quick and sufficient means of payment)
- Pneucrete Corp. v. U.S. Fid. & Guarantee Co., 7 Cal.App.2d 733 (Cal. Ct. App. 1935) (arbitration or other contractual clauses will not be applied so as to defeat statutory bond remedies)
- Los Angeles Stone Co. v. National Surety Co., 178 Cal. 247 (Cal. 1918) (surety’s obligation on payment bond is independent of contract deadlines or conditions in the prime contract)
- United States ex rel. Walton Technol., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir. 2002) (federal Miller Act cases refuse to allow pay-when-paid clauses to bar prompt bond recovery; such clauses can effect an impermissible waiver)