Case Information
*1 Filed 4/17/20
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE STATE OF CALIFORNIA CROSNO CONSTRUCTION, INC., D075561, D075562 Cross-complainant and Respondent,
v. (Super. Ct. No. CIVDS1511273) TRAVELERS CASUALTY AND SURETY
COMPANY OF AMERICA,
Cross-defendant and Appellant. APPEALS from a judgment and postjudgment order of the Superior Court of San Bernardino County, Gilbert Ochoa, Judge. Affirmed.
SMTD Law, Jonathan J. Dunn, Teresa L. Polk and Ravpreet K. Bhangoo for Defendant and Appellant.
Barnick | Hodges Law Corporation, John F. Hodges and Whitney Northington Barnick for Plaintiff and Respondent.
Rutan & Tucker, Paul Aherne and Alyssa Roy for Construction Employers' Association as Amicus Curiae on behalf of Defendant and Appellant.
Crawford & Bangs and E. Scott Holbrook, Jr. for American Subcontractors Association as Amicus Curiae on behalf of Plaintiff and Respondent.
North Edwards Water District (the District) selected Clark Bros., Inc. (Clark) as its general or direct contractor on a public works project to build an arsenic removal water treatment plant. Clark hired subcontractor Crosno Construction (Crosno) to build and coat two steel reservoir tanks. The subcontract contained a "pay-when-paid" provision that stated Clark would pay Crosno within a reasonable time of receiving payments from the District, but that this reasonable time "in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment . . . ." After Crosno completed most of its work, a dispute arose between the District and Clark halting the project. As Clark sued the District, Crosno sought to recover payments owed under the public works payment bond that Clark had obtained for the project.
This appeal involves Crosno's payment bond claim against the bond surety,
Travelers Casualty and Surety Company of America (Travelers). At issue is whether the
pay-when-paid provision in Crosno's subcontract precludes Crosno from recovering
under the payment bond while Clark's lawsuit against the District remains pending.
Relying on
Wm. R. Clarke Corp. v. Safeco Ins. Co.
(1997)
FACTUAL AND PROCEDURAL BACKGROUND
The District sought lump sum bids for a public water system improvement project funded by the State. The specifications required general contractors submitting bids to secure a payment bond providing coverage if it or any of its subcontractors failed to make payments due. Clark obtained a public works payment bond from Travelers to secure the payment of subcontractors and suppliers. As the surety, Travelers became obliged upon Clark's failure to make payments due. In addition, the payment bond covered reasonable attorney's fees. Clark listed Crosno as a subcontractor in its bid. The District selected Clark as its direct contractor (§ 8108).
Thereafter, Clark executed a subcontract agreement with Crosno. Crosno agreed to fabricate, erect, and coat two 250,000-gallon welded steel water reservoir tanks for the *4 sum of $630,000. Among other terms, the subcontract required Crosno to be paid for labor and material in monthly progress payments, subject to а retention, upon receipt of payments from the District.2 Critical to this case, the subcontract further contained the following pay-when-paid provision in the event the District delayed making payments to Clark:
"If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. 'Reasonable time' shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics' lien remedies."
Crosno began work in March 2014. On November 6, it was ordered to halt work
because a dispute had arisen between Clark and the District. By that point, Crosno had
supplied and fabricated the steel, shop-primed the steel, transported the steel to the site,
2
"Construction contracts often call for payment in installments—known commonly
as progress payments—due when a project reaches various stages of completion.
[Citation.] By arranging for progress payments, participants in a construction-related
transaction build in an incentive for contractors to complete work and provide an owner
some protection against the risk of nonperformance [citation], while permitting
contractors to obtain an essential cash flow. As an additional hedge against
nonperformance and incentive for completion, an owner may withhold a small percentage
of the money due at each stage—typically 5 to 10 percent—until the project is finished.
[Citations.] If the contractor defaults, or subcontractors assert mechanics liens for
nonpayment, the owner can use this retention fund to make payment or seek substitute
performance. [Citations.] Once work is done to the owner's satisfaction and the period
for filing liens has expired, the owner will release the retention." (
United Riggers &
Erectors Inc. v. Coast Iron & Steel Co.
(2018)
erected the two 250,000-gallon tanks, and almost completed field coating work. Most of the submitted invoices remained unpaid, with a total of $562,435 owed to Crosno for the work completed to that point.
The next day (November 7) Crosno filed a stop payment notice with the District. Two weeks later, Clark told Crosno the District had terminated its contract. This meant that Clark could not pay Crosno the $562,435 owed for completed work.
On December 18, 2014, Crosno gave Travelers a written notice of its claim under the payment bond. The following month, Travelers replied by letter rejecting the bond claim as premature. Invoking the pay-when-paid provision in Crosno's subcontract, Travelers asserted that no funds were due until Clark's then-pending lawsuit against the District concluded. Specifically, Travelers was referring to a lawsuit filed just days before in which Clark had sued the District for breach of contract, breach of implied warranty, and declaratory relief.3
Crosno initially filed suit in Kern County to recover the $562,435 due (No. S- 1500-CV-284661). The first two causes of action, alleging breach of contract as to Clark and enforcement of the stop notice as to the District, are not relevant to this appeal. Crosno's third cause of action was against Travelers for recovery on the payment bond. Travelers filed an answer, asserting among its affirmative defenses any defense held by 3 Originally filed in Kern County in January 2015 (No. S-1500-CV-283924 SPC), Clark's action against the District was transferred to San Bernardino County and assigned a new case number (No. CIVDS1511273). In early 2016, Clark amended its complaint to add allegations and causes of action against the State of California, Water Resources Control Board.
bond principal Clark. Crosno's action was later transferred to San Bernardino County and consolidated for all purposes with Clark's pending action against the District.
Roughly a year later Crosno filed a motion for summary judgment or summary adjudication as to its payment bond cause of action against Travelers. It argued that the pay-when-paid provision in the subcontract was void and unenforceable because Crosno had never executed a waiver and release required under section 8122 to validly "waive, affect, or impair" its payment bond rights. It further asserted that Travelers could not rely on the subcontract provision given the independent nature of the payment bond remedy.
Opposing the motion, Travelers did not dispute the essential facts underlying Crosno's right to payment. It instead focused on the fact that litigation in Clark's lawsuit against the District remained pending. Travelers argued (as it does on appeal) that section 8122 was not implicated because the pay-when-paid clause simply set the time for payment and did not waive Crosno's bond rights. It further relied on suretyship principles to argue that the subcontract defined its obligation as surety under the payment bond.
The trial court granted Crosno's motion. In a detailed statement of decision, it explained that although the payment clause in the subcontract was a "pay-when-paid" provision, rather than a "pay-if-paid" provision, the question remained whether applying the provision would impermissibly affect or impair Crosno's statutory payment bond *7 rights under the antiwaiver statute, section 8122.4 Based on and other authorities, the court found the pay-when-paid provision void because it violated the policies underlying section 8122. Accordingly, it awarded judgment in favor of Crosno against Travelers of $562,435, while staying enforcement of its ruling for 60 days to allow settlement.
After the ruling, Crosno filed a motion for prejudgment interest (§ 3287, subd. (a)). Crosno urged the court to assess statutory prejudgment interest from December 18, 2014, the date that it submitted its payment bond claim to Travelers. Accepting Crosno's claim, in August 2017 the court entered judgment in favor of Crosno against Travelers for $562,435 in principal, together with 10 percent prejudgment interest from December 18, 2014. Travelers appealed the judgment.
Meanwhile, Clark, Crosno, and other entities continued settlement negotiations in Clark's still-pending action against the District. The District interpleaded funds to satisfy the outstanding principal judgment in favor of Crosno on its bond claim. Crosno later requested and received an award of $22,500 from Travelers in attorney's fees. Travelers filed a second notice of appeal from that postjudgment attorney's fee award. The two appeals were consolidated. Because the judgment itself has since been satisfied, Travelers's appeal concerns its liability for prejudgment interest and attorney's fees under the payment bond.
4 The remedial scheme for payment in public works projects and the trial court's ruling are detailed in the discussion.
DISCUSSION
The central question in this appeal is whether a surety may defend a public works payment bond action by invoking an expansive "pay-when-paid" provision in the construction subcontract that defers payment for an indefinite period of time. Specifically, may a payment bond surety turn to a "pay-when-paid" provision in a subcontract to delay its bond obligation tо a subcontractor until some unspecified point at which litigation between the direct contractor and project owner concludes? The trial court rejected that argument on summary judgment, applying the reasoning in Wm. R. Clarke to find the specific pay-when-paid provision at issue unenforceable. Applying de novo review to this question of law on undisputed facts, we agree with the trial court's reasoning and affirm both the judgment and the postjudgment order.
1. Legal Framework
a. Statutory Payment Remedies for Construction Projects The right to a mechanics lien derives from California's constitution. "Mechanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens." (Cal. Const., art. XIV, § 3.) Thus, "[a] mechanics lien gives a claimant (e.g., a contractor, supplier, or laborer) a real property security interest in a private work of improvement to secure the right to be paid for work and material." (4 Witkin, Summary of Cal. Law (11th ed. 2017) Security Transactions in Real Property, § 27, p. 820.) A lien claim is enforced by service, recordation, and *9 foreclosure. ( Ibid. ) Because they are constitutionally derived, statutes governing liens and other relief are remedial in nature and liberally construed. ( , , 15 Cal.4th at p. 889.)
Part 6 of division 4 of the Civil Code (§§ 8000−9566) lays out a comprehensive
statutory scheme to resolve payment disputes in construction projects. Different
remedies are available in public versus private construction projects. (Compare § 8160 et
seq. with § 9000 et seq.) Sovereign immunity principles prevent mechanics liens from
being asserted on public works projects. (
N.V. Heathorn
,
Inc. v. County of San Mateo
(2005)
A stop payment notice notifies a project owner (here, the District) to withhold funds due to the direct contractor sufficient to satisfy the amount of the stop notice claim, plus reasonable litigation costs. (§ 9358; see generally, §§ 9350−9510.) A payment bond "guarantees payment to claimants on a construction project to the extent they are not otherwise paid." (4 Witkin, Summary of Cal. Law (11th ed. 2017) Security Transactions *10 in Real Property, § 27, p. 820; see generally, §§ 9550−9566.) This appeal turns on Crosno's payment bond action against Travelers, so we focus on those statutes.
As the entity that has a direct contractual relationship with the project owner,
Clark is a "direct contractor." (§ 8018.) Every direct contractor awarded a public works
contract in excess of $25,000 must, before beginning the work, provide a payment bond
to the public entity. (§ 9550, subd. (a).) "In addition to protection of the public entity
from liability for a defaulting contractor, the purpose of the surety bond is to provide a
distinct remedy to public works subcontractors and suppliers of labor or materials to
public works projects." (
Liton
The statutory scheme carefully protects against the unfair or imprudent waiver of remedial rights. (See Cal. Mechanics' Liens and Related Construction Remedies (Cont.Ed.Bar 4th. ed. 2019) § 4.11, p. 4-13.) Section 8122 provides:
"An owner, direct contractor, or subcontractor may not, by contract or otherwise, waive, affect, or impair any other claimant's rights under this part, whether with or without notice, and any term of a contract that purports to do so is void and unenforceable unless and until the claimant executes and delivers a waiver and release under this article."
A claimant may waive its statutory remedies only by signing a written waiver and
release. (Cal. Mechanics' Liens and Related Construction Remedies,
supra
, § 4.11, p. 4-
13, discussing Civ. Code, § 8124.) The statutes permit four types of waivers: a
conditional waiver and release upon progress payment (§ 8132); an unconditional waiver
*11
and release upon progress payment (§ 8134); a conditional waiver and release upon final
payment (§ 8136), and an unconditional waiver and release upon final payment (§ 8138).
In other words, "waiver and release of [payment bond] rights is permitted only in
conjunction with payment, or a promise of payment, and a conditional release is effective
only if the claimant is actually paid." (
Wm. R. Clarke
,
supra
,
Enforcing these safeguards, section 8126 provides:
"An oral or written statement purporting to waive, release, impair or
otherwise adversely affect a lien or claim is void and unenforceable
and does not create an estoppel or impairment of the lien or claim
unless either of the following conditions is satisfied: [¶] (a) The
statement is pursuant to a waiver and release under this article. [¶]
(b) The claimant has actually recеived payment in full for the claim."
b.
Defining a Surety's Payment Bond Obligation
A surety bond is governed by general rules of contract interpretation—a court
seeks to discover the parties' intent by examining bond language in its ordinary sense.
(
Electrical Electronic Control
,
Inc. v. Los Angeles Unified School Dist.
(2005) 126
Cal.App.4th 601, 612.) As the payment bond surety, Travelers's obligation "is measured
by the terms of the bond and the statutes referenced in the bond." (
most strongly against the surety and in favor of all persons for whose benefit the bond is given." (§ 8154, subd. (a).) The sole conditions of recovery are that the person is an authorized claimant who has not been paid the claim in full. (§ 8154, subd. (c).)
The payment bond at issue here is broadly worded. It obligates Travelers to pay amounts due up to $6,143,863 with respect "to work or labor under the contract" between Clark and the District if Clark or its subcontractors failed to pay any person named in former section 3181, now section 9100. That statute in turn lists among those eligible to file a stop payment notice or payment bond claim "[a] person that provides work for a public works contract, if the work is authorized by a direct contractor, subcontractor, architect, project manager, or other person having charge of all or part of the public works contract." (§ 9100, subd. (a)(1).) In other words, because Clark failed to pay Crosno for subcontracting work it completed on the District's public works project, Crosno is entitled to make a claim under the payment bond.
c. Application of Subcontract Payment Provisions to Bond Recovery Wm. R. Clarke confronted a then-emerging trend of general contractors inserting "pay if paid" provisions in their subcontract agreements. ( 15 Cal.4th at p. 885.) "A pay if paid provision makes payment by thе owner to the general contractor a condition precedent to the general contractor's obligation for work the *13 subcontractor has performed." ( Ibid. )6 The question before the court in Wm. R. Clarke was whether the surety could use such a provision as a defense against a subcontractor's action under the payment bond. Concluding it could not, the court explained that "pay if paid" provisions are unenforceable as contrary to public policy. ( Id. at p. 886.) Such provisions effectively waive the subcontractor's mechanics lien rights, violating the antiwaiver provisions in section 8122. ( Ibid. ; see Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2019) ¶¶ 6:3580 to 6:3581.)
Following
Wm. R. Clarke
, an appellate court applied the same principles to
preclude enforcement of a pay-if-paid provision in a public works project. (
Capitol Steel
,
supra
,
7 The deferred payment language in Capitol Steel had the same effect as the "pay if paid" clause in , "unambiguously defer[ring] payment until there ha[d] been a transfer of moneys from the district to the general contractor." ( Capitol Steel supra 58 Cal.App.4th at pp. 1058, 1060, fn. 5.)
contractor a condition precedent to the contractor's obligation to pay a subcontractor for its work—that is, a 'pay if paid' clause—is void as against public policy and unenforceable as a matter of law." (Cal. Mechanics' Liens and Related Construction Remedies (Cont.Ed.Bar 2019) § 4.149, p. 4-105 [discussing Capitol Steel ].)
This case considers the effect of a "pay-
when
-paid" provision in a construction
subcontract. As distinguished from a pay-if-paid provision, a pay-when-paid provision is
not a true condition precedent and instead "merely [fixes] the usual time for payment to
the subcontractor, with the implied understanding that the subcontractor in any event has
an unconditional right to payment within a
reasonable time
." ( ,
supra
,
The subcontractor in Yamanishi helped construct a public park. A dispute arose between the city redevelopment agency and the direct contractor. ( Yamanishi 29 Cal.App.3d at pp. 459, 461.) When the direct contractor later stopped paying its subcontractor, the subcontractor sued it and the bond surety to recоver the balance due and attorney's fees. ( Id. at p. 460.) The contractor and surety defended the claim by pointing to the subcontract, which stated the direct contractor would pay the subcontractor "upon receipt of each payment received from the Owner." ( Id. at p. 461.) Relying on this subcontract language, the trial court ruled that until the "condition precedent" occurred, no payment obligation accrued. ( Id. at p. 462.)
The appellate court reversed. As reasonably construed, this provision was not a condition precedent and merely provided the time in which the subcontractor would ordinarily be entitled to progress payment for its work. ( Yamanishi 29 Cal.App.3d at pp. 462−463.) If the contractor was denied payment through no fault of the subcontractor, no specific time for payment was provided in the subcontract, and the default rule was that payment was due within a reasonable time upon the subcontractor's performance. ( Ibid. ) As the court explained, a contrary interрretation was unreasonable:
"Defendants' interpretation of paragraph (r) would postpone payments earned by a subcontractor, itself without fault, until a dispute between the contractor and the owner is resolved, perhaps months or even years later. Indeed, it gives no reasonable assurance that such a dispute would ever be resolved. While the question is unsettled the contractor continues unobligated to the subcontractor. On the other hand, if the dispute be lost because of the contractor's fault, then surely the contractor must pay his subcontractor creditor from other funds; if won, he must apply all or a substantial part of the money he receives toward his subcontractual obligations. His interest would seem more likely to benefit from avoidance of any settlement with the owner. It is unlikely that such a result was intended by the contracting parties." ( Id. at p. 463.) In short, these cases lay out the broad framework for evaluating whether subcontract payment provisions unreasonably affect or impair a claimant's payment bond recovery. The subcontract between Crosno and Clark includes a slightly different payment timing provision than that found in , Capitol Steel , and Yamanishi . Nevertheless, as we explain below, the trial court properly extended the principles set forth in those cases to conclude that Travelers could not rely on the subcontract's definition of "reasonable time" to argue that no payment bond obligation accrued until Clark's litigation with the District concluded.
2. The Trial Court Properly Rejected Travelers's Defense.
As the trial court found, and the parties do not dispute, the payment timing provision in Crosno's subcontract is a pay- when -paid provision. Regardless of whether Clark is successful in its litigation with the District, it remains obligated to pay. The provision merely fixes the time upon which Clark's payment becomes due. This distinguishes the facts from those in Wm. R. Clarke and Capitol Steel , where the subcontract provision set a condition precedent for a subcontractor's right to payment to accrue.
Under the subcontract, Clark was required to pay Crosno within 10 days after it received payment frоm the District. If the District delayed paying Clark, Clark would have a reasonable time to pay, which "in no event" would be less than the time required "to pursue to conclusion [its] legal remedies against [the District]." This latter clause distinguishes the facts here from the general contractor's argument in Yamanishi . But the effect is the same: "reasonable time" is defined to include an indefinite timeframe that Yamanishi held was un reasonable. ( Yamanishi 29 Cal.App.3d at pp. 462–463.)
California courts have yet to decide whether an expansive "pay-when-paid" subcontract provision similar to the one here can be invoked as a defense by a surety to a payment bond claim. Extending the reasoning in , the trial court concluded that the provision was void and unenforceable because it impaired or affected Crosno's payment bond rights in violation of section 8122. Even though the subcontract provision was not a pay- if -paid provision, the court reasoned that the same antiwaiver safeguards applied:
"The issue is whether application of the subcontract provision unreasonably affects or impairs right sunder the bond contrary to the policy of [Civil Code,] § 8122. In other words, whether under the circumstances and consideration of the policy underlying the Wm. R. Clarke and Capitol Steel decisions, the provision is void as applied to the surety's obligation under the bond.
"After considering the case law and arguments at [the] hearing, the court finds the provision void as a violation of the underlying public policy of the anti-waiver provision of [Civil Code,] § 8122. Section 8122 prohibits any provision of a contract that 'waive[s], affect[s], or impair[s] claimants rights,' unless such provision is accompanied by a valid release and waiver. To be valid, a release and waiver must be accompanied by payment. ([Civil Code,] § 8124.) "Here, Crosno is being required to wait until the conclusion of litigation to proceed under the bond. There is no dispute that the provision in the subcontract being enforced by the surety is affecting and impairing Crosno's right to receive payment under the bond." As the trial court explained, although a pay-when-paid provision might properly allow payment to be delayed for a reasonable period of time after completion of work, enforcing the provision here "does not provide for payment within a reasonable time."
We agree with the trial court's thoughtful analysis. If Travelers could invoke the
subcontract's pay-when-paid clause to postpone its payment bond obligation until some
unspecified and undefined point in time when Clark's litigation with the district
concluded, that would unquestionably and unreasonably affect or impair Crosno's right to
recover under the payment bond without either an express waiver or full payment
required by sections 8124 and 8126. Accordingly, the specific pay-when-paid provision
before us is "void and unenforceable" (§§ 8122, 8126) against Crosno's payment bond
claim. It attempts to define as "reasonable" an indefinite time period already determined
to be unreasonable in
Yamanishi
As the trial court observed, the purpose behind the public works payment bond is
to provide subcontractors like Crosno " 'a quick, reliable and sufficient means of
payment.' " (
Cooley v. Freeman
(1928)
Travelers responds that statute of limitations concerns could be resolved by filing
and immediately staying the payment bond action pending resolution of Clark's litigation
against the District. Amicus curiae Construction Employers' Association (CEA) suggests
that a payment bond action filed after Clark's litigation concludes could avail of equitable
tolling to overcome a limitations bar. But as the American Subcontractors Association
points out in its amicus curiae brief, either procedure delays the payment bond action for
an indefinite period, thereby unreasonably affecting or impairing Crosno's payment bond
rights in violation of section 8122. Open-ended delay likewise conflicts with the purpose
behind the payment bond of providing subcontractors like Crosno an expedient means of
recovery. (
Cooley
Also supporting thе trial court's view, section 8152, subdivision (d) prevents a surety from avoiding liability on a bond based on "[a] condition precedent or subsequent in the bond purporting to limit the right of recovery of a claimant otherwise entitled to recover pursuant to a contract, agreement, or bond." As the trial court explained,
"If the provision at issue was included in the payment bond, there would be no dispute it would be unenforceable as against the policy underlying payment bonds. However, this is exactly the result of enforcement of the provision; it results in Crosno having to wait until legal remedies are pursued, albeit by Clark, until [it] can recover on the bond. Travelers has effectively imposed an unreasonable limit on the terms of payment on the bond. It is seeking to do indirectly what it cannot do directly ." Pursuant to section 8152, Travelers could not insert a condition in the bond limiting a subcontractor's bond recovery to those claims as to which litigation against the owner had concluded. It follows that Travelers may not indirectly achieve the same result by *20 applying the subcontract's definition of "reasonable time" to avoid its bond obligation while Clark's lawsuit against the District remained pending.
3. Travelers's Counterarguments Are Unpersuasive.
Travelers and amicus curiae CEA raise four broad counterarguments as to why the pay-when-paid provision in Crosno's subcontract should provide a defense to its liability under the payment bond. As we explain, none of the arguments is persuasive.
a . Permissibility of pay-when-paid clauses
Travelers argues that pay-when-paid clauses, in contrast to pay-if-paid clauses, are
enforceable because they merely fix "the usual time for payment to the subcontractor,
with the implied understanding that the subcontractor in any event has an unconditional
right to payment within a reasonable time." (
Wm. R. Clarke
,
supra
,
Striving to recast
Wm. R. Clarke
as
supporting
its view, Travelers claims the case
"held" that pay-when-paid clauses in subcontracts are enforceable as not violative of
public policy.
Wm. R. Clarke
did not so hold. It merely distinguished pay-if-paid clauses
from pay-when-paid clauses as a general matter, explaining that the former operate as a
condition precedent for payment whereas the latter merely set the usual time for payment,
"with the implied understanding that the subcontractor in any event has an unconditional
right to payment
within a reasonable time
." (
Travelers and CEA suggest that the Legislature's enactment of prompt payment
statutes demonstrate approval of contractual arrangements that require direct contractors
to first pursue payment from projеct owners. But we agree with Crosno that this is an
"apples to oranges argument." Enacted in 1990, the prompt payment statutes sought to
*22
address industrywide problems with payment delays to subcontractors. They impose
comprehensive deadlines for progress and retention payments, enforced by statutory
penalties and fee-shifting provisions "intended to discourage owners and direct
contractors from withholding monies owed as a way of granting themselves interest-free
loans." (
United Riggers
,
supra
,
b . Scope of section 8122
Next, Travelers protests that the trial court "twisted the statutory language into something it is not," by extending section 8122 to a contract provision that merely affects or impairs Crosno's remedial rights. In its view, section 8122 reflects "the Legislature's concern that owners and direct contractors may use superior bargaining power to extract claim waivers from subcontractors without paying for them." According to Travelers, "the Trial Court erred because the subcontract's 'pay-when-paid' provision does not in any way waive or release Crosno's right to payment on its claim." As we explain, Travelers reads section 8122 too narrowly.
Although commonly called an "anti-waiver" statute (see 15 Cal.4th at p. 889), the text of section 8122 constrains not only actual waiver of a claimant's remedial rights, but also actions that affect or impair such rights. (§ 8122.) Likewise, section 8126 renders unenforceable not only those contract provisions that *23 purport to waive a claimant's rights but also those that "impair or otherwise adversely affect" such rights. (§ 8126.)
In this respect, California's statutory scheme offers broader protection than its
federal analog, the Miller Act. (40 U.S.C. §§ 3131−3134). (See
Coast Electric Co. v.
Industrial Indemnity Co.
(1983)
And even construing this more limited statutory language, federal courts have
reasoned that allowing a surety to avoid liability on a payment bond based on an
unsatisfied " 'pay when paid' " provision in the subcontract would prevent the
subcontractor from enforcing its Miller Act rights, thereby amounting to an
impermissible implied waiver. (
United States ex rel McKenney's Inc. v. Government
*24
Technical Services
,
LLC
(N.D. Ga. 2008)
Endeavoring to show that the trial court misconstrued section 8122, Travelers claims that under the court's logic, a host of common subcontract provisions would become unenforceable. Insofar as subcontract provisions delay ultimate payment due, Travelers maintains they would affect or impair Crosno's payment bond rights. We need not dwell on this hypothetical parade of horribles. The effect of pass-through provisions, prelitigation dispute resolution clauses, notice requirements, retention provisions, and liquidated damage clauses is not before us. Suffice to say, Travelers misconstrues both the trial court's ruling and our decision today that affirms it. We do not suggest that every pay-when-paid provision is unenforceable as an impairment of payment bond rights under section 8122. Instead, we conclude that this onе is unenforceable because it unreasonably forestalls accrual of Crosno's payment bond rights for an indefinite period of time while the direct contractor pursues litigation against the owner.
9
Travelers's objection that
Walton
is a federal case involving the Miller Act is
misplaced. (See, e.g.,
California Electric Supply Co. v. United Pacific Life Ins. Co.
(1964)
c
.
Preferring Subcontractors Over Direct Contractors
Shifting to policy, Travelers claims "[t]here is no policy reason to prefer a
subcontractor claim as deserving faster enforcement than that of the direct contractor."
To the contrary, as Crosno observes, "a public works subcontractor has rights to a
security that a general contractor doesn't." "The law has created a preferred position for
persons who perform labor or supply materials for the improvement of real property." (9
Miller & Starr, Cal. Real Estate (4th ed. 2019) § 32:3, p. 15.) "The stop notice provisions
[citation] protect materialmen and labor claimants by allowing for intercepting funds due
from the public agency to the contractor." (
Department of Industrial Relations v.
Seaboard Surety Co.
(1996)
Although Travelers complains that affirming the trial court's ruling will effectively
make direct contractors and their sureties "financers of public works projects when the
owner delays making payment," that is precisely the point. A payment bond shifts the
risk of nonpayment from subcontractors to direct contractors
and their sureties
by
affording public works subcоntractors the equivalent of a mechanics lien remedy
available in private works projects. (See
Capitol Steel
By carving out expansive remedial legislation to protect subcontractors like Crosno, the statutory scheme reflects an express legislative preference to provide expedient enforcement procedures to subcontractors over direct contractors, who are required to insure against the risk by means of a payment bond.10 Moreover, Travelers's construction would not, as it suggests, place Clark and Crosno "on equal footing." Rather, it would prioritize Clark's litigation rights over Crosno's payment bond rights, in 10 Our review of the record and available legislative history sheds little light on the Legislature's reasons for codifying this preference. Although Travelеrs suggests a general contractor "may be less able to weather the financial storm occasioned by the owner's delays in making payment than its subcontractor may be," a treatise states the opposite. Unlike the subcontractor, the general contractor controls the entire project and has the direct relationship with the owner, potentially placing it in a better position to resolve payment disputes. (3 Bruner & O'Connor Construction Law (2020) § 8:49.) Moreover, because "subcontractors are smaller and more thinly capitalized than general contractors," they may not be "well equipped to incur the credit risk of an insolvent or unwilling owner." ( Ibid. ) Ultimately, we draw no conclusion as to who between Clark and Crosno is better able to weather credit risk. Travelers is correct that our record permits no reasonable inference on this matter.
conflict with the statutory aim to give subcontractors " 'a quick, reliable and sufficient
means of payment' " under the bond. (
Cooley
,
supra
,
d . Suretyship principles
Finally, Travelers contends that a surety's obligation on the bond is coextensive with the bond principal's obligation, entitling it to assert the same defenses that Clark possesses as to the underlying obligation. CEA makes this same point in its amicus brief. (See §§ 2808 [surety's liability upon a conditional obligation "is commensurate with that of the principal"], 2809 ["The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal"].) Wm. R. Clarke addressed and rejected a surety's similar argument. ( Wm. R. Clarke , supra , 15 Cal.4th at pp. 893−894.) We find its discussion dispositive.
The surety in
Wm. R. Clarke
argued that no liability accrued under the payment
bond until the direct contractor was in default of its payment obligation under the
subcontract. The subcontract's "pay if paid" provision conditioned payment on the direct
contractor receiving payment from the owner. Because no payment had been received,
the surety argued, no bond liability accrued. ( ,
supra
, 15 Cal.4th at
p. 893.) "The fallacy of this reasoning," our Supreme Court explained, was that it
11 Travelers cites limiting language in
Capitol Steel
that
Wm. R. Clarke
"applies to a
public works project
where there is no pending action against the government entity.
"
(
Capitol Steel
considered only the direct contractor's obligation under the subcontracts while ignoring
its independent liability under the payment bond. (
Ibid.
) As an older case explains,
"[t]he action upon the statutory bond is not in any sense based upon the personal liability
of the contractor but is based upon the obligation of the bond, since the bond provides a
separate and distinct statutory remedy. The obligation of the bond, therefore, is
enforceable without reference to any contract between the contractor and the
[subcontractor or] materialman." (
Pneucrete
Los Angeles Stone Co. v. National Surety Co.
(1918)
Here, as in Wm. R. Clarke , the payment bond referred to Clark's prime contract with the District but did not mention the subcontract executed a few months later between Clark and Crosno. ( Wm. R. Clarke , supra , 15 Cal.4th at pp. 893−894.) The bond obligation is broad, imposing liability on Clark and Travelers if Clark failed to pay any claimant (§ 9100) with respect "to work or labor performed under the contract." As in Wm. R. Clarke , Traveler's obligation as the bond surety is independent of the pay-when- paid provision in the subcontract. ( Wm. R. Clarke , at pp. 893−894.)
As Crosno suggests, Travelers advances an argument favored by the three dissenting justices in Wm. R. Clarke . ( Wm. R. Clarke , supra , 15 Cal.4th at pp. 903−907 (dis. opn. of Chin, J.).) They maintained that the surety was not liable under the payment bond unless the direct contractor defaulted under the subcontract. ( Id. at p. 903 (dis. opn. of Chin, J.).) Because the owner had not paid the direct contractor, the dissent reasoned that the direct contractor was not in default. ( Ibid. ) In the dissent's view, "[t]he bond did not create an obligation on the part of the principal (or surety) divorced from any underlying obligation under either the general contract or any of the subcontracts." ( Id. at p. 905 (dis. opn. of Chin, J.).) The dissent also invoked freedom of contract, stating the "рarties validly could and did agree among themselves that each would assume equally the risk of owner default . . . ." ( Id. at p. 908 (dis. opn. of Chin, J.).)
Whatever their merit, the relevant point for our purposes is that the Wm. R. Clarke majority rejected these arguments, concluding the bond obligation was independent of the subcontract. ( 15 Cal.4th at pp. 893−894.) As to Travelers's contention that Wm. R. Clarke "expressly recognized that the lien or bond claimant *30 must—without reference to the lien or bond—establish a right to payment," the majority explained that this simply requires proof of a valid compensation claim, not "a separate payment obligation, contractual or otherwise" for payment by the bond principal. ( Wm. R. Clarke , at p. 896.) The majority likewise rejected a "freedom of contract" argument as overridden by the Legislature's careful efforts to constrain subcontractors' ability to waive remedial rights. ( Id. at pp. 891−892.) The majority's reasoning in Wm. R. Clarke is dispositive of Travelers' suretyship and freedom of contract arguments.
Because a public works payment bond is statutory in nature, specific statutory protections apply. Pursuant to sections 8122 and 8126, the particular pay-when-paid provision in Crosno's subcontract is void and unenforceable in any action to recover under the payment bond, whether as to bond principal Clark or its co-obligor Travelers. As Crosno points out, Travelers could still assert other defenses to the bond claim if, for example, "Crosno failed to timely and properly perform its scope of work." Our interpretation does not, as CEA suggests, "allow subcontractors whose work is disputed to recover from [a] surety before merit is finally determined by the owner and the general contractor." Here, Crosno's right to payment is undisputed. We simply conclude that *31 Travelers cannot convert a broad obligation under the payment bond to an unreasonably narrow one via the pay-when-paid provision in Crosno's subcontract.12
In sum, as the trial court properly found on the facts of this case, the expansive pay-when-paid provision in Crosno's subcontract may not be invoked by Travelers as a defense to a payment bond action given the policies underlying the antiwaiver statute, section 8122. There being no other defense raised, the court did not err in finding no triable issue of material fact, granting Crosno's motion for summary judgment, and entering judgment in Crosno's favor for the undisputed $562,435 owed with prejudgment interest. Because Travelers raises no other basis to challenge the attorney's fees awarded, we also uphold the postjudgment order.
12
Fed. Ins. Co. v. Superior Court
(1998)
DISPOSITION
The judgment and postjudgment order are affirmed. Crosno is entitled to recover its costs on appeal.
DATO, J.
WE CONCUR:
BENKE, Acting P. J.
IRION, J.