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Matched Legal Cases: ['§ 3', '§ 996', '§ 3', '§ 2787', '§ 2807', '§ 2809', '§ 12', '§ 26', '§ 11', '§ 9', '§ 431', 'art 4']

Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) :: :: Supreme Court of California Decisions :: California Case Law :: California Law :: US Law :: Justia
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Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997)
Bryan Cave, Farella, Braun & Martel, Alan E. Harris, Norma G. Formanek, Busch & Berger, Clark H. Cameron, Knecht, Haley, Lawrence & Smith, [15 Cal. 4th 885] John L. Condrey, Bevington, Jackl & Gropman, Bevington, Jackl & Haas and Anne M. Bevington as Amici Curiae on behalf of Defendants and Appellants.
In other jurisdictions, the majority view is that, if reasonably possible, clauses in construction subcontracts stating that the subcontractor will be paid when the general contractor is paid will not be construed as establishing true conditions precedent, but rather as merely fixing 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. (See, e.g., Koch v. Construction Technology, Inc. (Tenn. 1996) 924 S.W.2d 68; Power & Pollution Svcs. v. Suburban Piping (1991) 74 Ohio App.3d 89 [598 N.E.2d 69]; OBS Co., Inc. v. Pace Const. Corp. (Fla. 1990) 558 So. 2d 404; Southern St. Masonry v. J.A. Jones Const. (La. 1987) 507 So. 2d 198; Thos. J. Dyer Co. v. Bishop International Engineering Co. (6th Cir. 1962) 303 F.2d 655.) This approach has been followed in California. (Yamanishi v. Bleily & Collishaw, Inc. (1972) 29 Cal. App. 3d 457, 462463 [105 Cal. Rptr. 580]; see also Rubin v. Fuchs (1969) 1 Cal. 3d 50, 53 [81 Cal. Rptr. 373, 459 P.2d 925] [stating that "provisions of a contract will not be construed as conditions precedent in the absence of language plainly requiring such construction"].) A contract clause that has been construed in this fashion is sometimes referred to as a "pay when paid" rather than a "pay [15 Cal. 4th 886] if paid" provision. (See Kirksey, "Minimum Decencies"-A Proposed Resolution of the "Pay-When-Paid"/"Pay-If-Paid" Dichotomy (Jan. 1992) Construction Law. 1.)
In 1990, the owner of a commercial building in Los Angeles entered into a contract with Keller Construction Co., Ltd. (Keller), as general contractor, for rehabilitation work on the building. Keller in turn entered into subcontracts for this project with, among others, Wm. R. Clarke Corporation, Barsotti's, Inc., Garvin Fire Protection Systems, Inc., and Church and Larsen, Inc. (collectively, the subcontractors). Each subcontract contained a pay if paid provision and three of the four subcontracts also included an [15 Cal. 4th 887] addendum reiterating the pay if paid limitation yet also purporting to preserve the subcontractors' mechanic's lien rights and to make those rights the subcontractors' "sole remedy" in the event the owner failed to pay Keller. fn. 3
At the owner's insistence, and pursuant to the terms of the general contract, Keller obtained a labor and material payment bond from defendant Safeco Insurance Company of America (Safeco) to protect the owner from mechanic's lien claims by subcontractors and material suppliers. The bond recited that it was a payment bond as defined in Civil Code section 3096 fn. 4 and that it had been executed to comply with title 15 (Works of Improvement) of the Civil Code. fn. 5 The bond stated that Keller, as principal, and Safeco, as surety, "are held and firmly bound unto any and all persons who perform labor upon or bestow skill or other necessary services on, or furnish materials or lease equipment to be used or consumed in, or furnish appliances, teams, or power contributing to the work described in [the general contract between the owner and Keller], a copy of which contract is or may be attached hereto, and is hereby referred to, in the sum of" $16.5 million. The bond further stated: "Now, Therefore, the Condition of This Obligation Is Such, That if the Principal shall pay, or cause to be paid in full, the claims of all persons performing labor upon or bestowing skill or other necessary services on, or furnishing materials or leasing equipment to be used or consumed in or furnishing appliances, teams or power contributing to such work, then this obligation shall be void; otherwise to remain in [15 Cal. 4th 888] full force and effect." In the final provision relevant here, the bond stated: "No suit, action or proceeding may be maintained on this bond unless the person claiming hereunder shall previously have either, recorded a mechanic's lien claim pursuant to Title 15, Works of Improvement, of the Civil Code of the State of California or given notice to the Surety on this bond before the expiration of the time prescribed in said statute for recording a lien." The bond was duly executed by the authorized agents of Keller and Safeco, and it was duly recorded.
[2] Our state Constitution provides: "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 [15 Cal. 4th 889] 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.) As this court has said, "The mechanic's lien is the only creditors' remedy stemming from constitutional command and our courts 'have uniformly classified the mechanics' lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen.' [Citation.]" (Hutnick v. United States Fidelity & Guaranty Co. (1988) 47 Cal. 3d 456, 462 [253 Cal. Rptr. 236, 763 P.2d 1326].) "[S]tate policy strongly supports the preservation of laws which give the laborer and materialman security for their claims." (Connolly Development, Inc. v. Superior Court (1976) 17 Cal. 3d 803, 827 [132 Cal. Rptr. 477, 553 P.2d 637].)
[1b] Safeco argues that a pay if paid provision in a construction subcontract does not violate Civil Code section 3262's anti-waiver provisions [15 Cal. 4th 890] because, under Civil Code section 3140 (limiting a subcontractor's recovery on a mechanic's lien claim to "such amount as may be due him according to the terms of his contract"), mechanic's lien remedies are available only to subcontractors whose payment rights have vested under the terms of their contracts. Absent a contractual right to payment, a subcontractor has no mechanic's lien remedy to enforce. In Safeco's view, a mechanic's lien is merely one remedy that is granted to subcontractors to enforce a contractual right to payment. Absent such a contractual right, there can be no remedy. Thus, according to Safeco, the subcontractors have not waived their mechanic's lien remedy. Rather, they never acquired the contractual payment right that is a necessary precondition to the enforcement of any mechanic's lien remedy.
Safeco argues that it is established law in this state that pay if paid provisions in construction subcontracts are valid and enforceable. The authority Safeco cites for this proposition is Michel & Pfeffer v. Oceanside Properties, Inc. (1976) 61 Cal. App. 3d 433 [132 Cal. Rptr. 179], which we find to [15 Cal. 4th 891] be distinguishable. There, under a modification of the subcontractor's agreement with the general contractor, the subcontractor agreed to accept as payment for the final 15 percent of the contract price a pro rata interest in funds the general contractor would receive from either a secured promissory note or the proceeds of an intended sale of the project property. The Court of Appeal concluded that under this agreement the subcontractor had no right to the final payment until the general contractor received funds from one of the two designated sources. (Id. at p. 441.) The Court of Appeal further reasoned that because the general contractor had not received funds from either source, the general contractor was not in default on its agreement, and the subcontractor therefore could not yet recover its final payment either by proceeding against the surety on a payment bond or by foreclosing a mechanic's lien on the project property. (Ibid.)
Although the agreement provision at issue in Michel & Pfeffer v. Oceanside Properties, Inc., supra, 61 Cal. App. 3d 433, raises some of the same concerns as a pay if paid provision, it was not such a provision. Nothing in the Court of Appeal's opinion suggests that the final payment to the subcontractor could be delayed indefinitely, nor did the Court of Appeal consider whether, if so, the provision there at issue violated the public policy underlying the anti-waiver provisions of Civil Code section 3262. Accordingly, we do not find the Court of Appeal's decision in that case relevant or helpful in deciding the issue presented here, and Safeco's reliance upon it is misplaced.
In any event, we find Safeco's "freedom of contract" argument unpersuasive in this context. By closely and carefully circumscribing subcontractors' [15 Cal. 4th 892] freedom to waive mechanic's lien rights, and by forbidding waivers not accompanied by payment, or a promise of payment, the Legislature has already determined that there are policy considerations here that override the value of freedom of contract. We merely recognize and enforce that legislative policy determination.
Safeco's argument fails in another respect as well. Were we to adopt Safeco's proposed construction of Civil Code section 3140, and thereby to [15 Cal. 4th 893] conclude that the pay if paid provision merely bars the subcontractors' contract claims against Keller, while fully preserving their mechanic's lien claims (and thus not violating the public policy underlying the anti-waiver provisions of the mechanic's lien laws), this conclusion would not assist either Safeco or Keller because both are obligated by the payment bond to pay all valid mechanic's lien claims. If the subcontractors have valid mechanic's lien claims, as posited by Safeco's argument, then those claims are necessarily enforceable against the payment bond.
The fallacy of this reasoning (apart from its erroneous assumption that the pay if paid provisions are valid and enforceable and its reliance on a strained construction of Civil Code section 3140) is that it considers only Keller's contractual liability under the subcontracts, while ignoring Keller's separate and independent liability as principal and co-obligor on the payment bond. Keller's contract with the owner required it to obtain a payment bond, the purpose of which is "to create an additional fund or security for the satisfaction of lien claimants [citations], and also to limit the owner's liability to the contract price [citation] ...." (Sudden Lumber Co. v. Singer (1930) 103 Cal. App. 386, 390 [284 P. 477]; accord, Simpson v. Bergmann (1932) 125 Cal. App. 1, 12 [13 P.2d 531].) The payment bond at issue here refers to Keller's contract with the owner, but makes no mention of the subcontracts. The operative language of the bond states that "[Keller], as Principal, and [Safeco], as Surety, are held and firmly bound unto any and all persons who perform labor upon ... the work described in" the general contract.
Keller's obligation under the bond is measured by the terms of the bond and the statutes referenced in the bond. ( Southern Heaters Corp. v. N. Y. Cas. [15 Cal. 4th 894] Co. (1953) 120 Cal. App. 2d 377, 379 [260 P.2d 1048].) Under the bond, Keller assumed an obligation to pay the lien claims of any and all persons, including subcontractors, that performed work on the project identified in the general contract. Liability on the bond thus extends not only to those with whom Keller has entered into subcontracts, but to "everyone who has a right to claim a lien" (Myers v. Alta Construction Co. (1951) 37 Cal. 2d 739, 743 [235 P.2d 1]; see also Hammond Lumber Co. v. Willis (1915) 171 Cal. 565, 568-569 [153 P. 947]; Union Asphalt, Inc. v. Planet Ins. Co. (1994) 21 Cal. App. 4th 1762 [27 Cal.Rptr.2d 371]). And the liability on the bond to pay mechanic's lien claims fell equally on Keller as principal and Safeco as surety. (See, e.g., Code Civ. Proc., § 996.410, subd. (a) [stating that "[t]he beneficiary may enforce the liability on a bond against both the principal and sureties"].) Thus, the default for which Safeco promised to answer was Keller's default under the bond and not Keller's default under the subcontracts.
We find nothing to the contrary in Flickinger v. Swedlow Engineering Co. (1955) 45 Cal. 2d 388 [289 P.2d 214] (Flickinger) or in Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal. 2d 141 [308 P.2d 713] (Lewis).
Flickinger, supra, 45 Cal. 2d 388, concerned a subcontract for work on a state highway project. The subcontractor was a licensed contractor who later assigned the benefits of the contract to a partnership composed of himself and another licensed contractor. After the work was completed, the general contractor sued both the partnership and the individual partners, who responded with a cross-complaint against the general contractor. The trial court entered judgment that neither party take anything on their opposing claims, and this judgment became final. The original subcontractor then sued the general contractor and its payment bond sureties, arguing a legal theory of recovery different from the one he had unsuccessfully urged by cross-complaint in the earlier action. The trial court granted judgment for the subcontractor, and the general contractor appealed. This court reversed, holding that the subcontractor could and should have asserted any claim arising from the subcontract in the earlier action, and that the claim was therefore barred.
Rejecting the subcontractor's argument that this bar was not good against the payment bond surety, who was not a party to the earlier action, this court stated: "[A]ny right which plaintiff might have had to recover upon the bond was necessarily dependent upon plaintiff's right to recover upon his contract with [the general contractor]. While he had the option to file a cross-complaint on the bond and thereby bring in the surety as a party in the prior action [citation], he was clearly compelled to assert by way of counterclaim, [15 Cal. 4th 895] in said prior action, any right which he had against [the general contractor] under the contract which was the basis of [the general contractor]'s prior action. [Citation.] Having omitted to assert directly in that action his alleged rights under the contract, but having elected to assert his alleged rights upon an alleged acount stated with the resulting adverse final judgment on the merits, plaintiff is now barred from relitigating his alleged rights under the contract as the basis for an action against [the general contractor] as the principal on the bond. And as such defense to this action is available to [the general contractor] as the principal, it is likewise available to ... the surety on the bond." (Flickinger, supra, 45 Cal. 2d 388, 394.)
In Lewis, supra, 48 Cal. 2d 141, a state road construction contract prohibited the general contractor from subcontracting more than 50 percent of the work. Attempting to circumvent this requirement, the general contractor purported to enter into separate equipment rental and subcontract agreements with a partnership that did not have a contractor's license. Later, the partnership sued the general contractor and its payment bond sureties for money due under the rental agreements. The trial court denied recovery. On the partnership's appeal, this court affirmed, relying on Business and Professions Code section 7031, which bars unlicensed contractors from bringing any action for compensation for work requiring a license. After concluding that the partnership could not recover from the general contractor because the rental agreement was a sham and the partnership was actually seeking recovery for work requiring a license, this court considered the partnership's claim against the payment bond sureties. This court noted that Business and Professions Code section 7031 bars not only an unlicensed contractor's action for breach of contract, but also its action to foreclose a mechanic's lien. This court then stated: "The obligation of the sureties on defendant's bonds was not to pay for labor merely by virtue of the fact that it had been expended on [the public work]. It was an obligation to pay only if plaintiff established, without reference to the bond, a legal and valid claim for compensation." (Lewis, supra, 48 Cal. 2d 141, 155, citing, inter alia, Flickinger, supra, 45 Cal. 2d 388, 393-394.)
[3] Flickinger, supra, 45 Cal. 2d 388, and Lewis, supra, 48 Cal. 2d 141, both stand for the proposition that a claimant on a labor and material payment bond must "establish[], without reference to the bond, a legal and valid claim for compensation" (id. at p. 155). That proposition is in no way inconsistent with our conclusion here that the payment bond obligates Keller to pay the subcontractors' valid mechanic's lien claims, because a mechanic's lien claim is "a legal and valid claim for compensation." Where the bond is conditioned, as is the Safeco bond at issue here, on the payment of mechanic's lien claims on a particular private work, Flickinger and Lewis [15 Cal. 4th 896] require only that a claimant on the bond establish, without reference to the terms of the bond, a legal and valid mechanic's lien claim for that project. Neither Flickinger nor Lewis, nor any other case that has come to our attention, has addressed Safeco's hypothesized situation, in which a subcontractor is able to establish, without reference to the terms of a payment bond, a legal and valid mechanic's lien claim but not a legal and valid claim for breach of contract.
One more appellate decision requires our attention. In Kalfountzos v. Hartford Fire Ins. Co. (1995) 37 Cal. App. 4th 1655 [44 Cal. Rptr. 2d 714] (Kalfountzos), the Court of Appeal applied the rule of law established in Flickinger, supra, 45 Cal. 2d 388, and Lewis, supra, 48 Cal. 2d 141. In Kalfountzos, the issue presented was whether a surety on a public works payment bond could assert the defenses and setoffs of a principal whose corporate powers had been suspended for nonpayment of franchise fees. Concluding that the surety could assert the defenses of its principal, the Court of Appeal stated: "The surety must pay on the bond only if the claimant establishes, without reference to the bond, a legal obligation on the part of the principal to pay." (Kalfountzos, supra, 37 Cal. App. 4th 1655, 1659, italics added.) The italicized language goes beyond the rule of law declared in Flickinger, supra, 45 Cal. 2d 388, and Lewis, supra, 48 Cal. 2d 141, on which the Court of Appeal purported to rely, because it requires the claimant on the bond to establish, without reference to the bond, a claim for compensation that is not only legal and valid, but also one that the bond principal would otherwise be obligated to pay. To the extent that Kalfountzos implies that the principal on a payment bond incurs no liability on the bond unless it has a separate payment obligation, contractual or otherwise, the statement is incorrect and is hereby disapproved. [4] When a general contractor executes a statutory labor and material payment bond as principal, the obligation on the bond is not limited to the subcontractors and material suppliers with which the general contractor has executed valid contracts, but extends also to lower tier subcontractors and material suppliers with which the general contractor has no privity of contract, and to which the general contractor owes no payment obligation apart from the bond, provided only that they have valid lien claims for that project. (Myers v. Alta Construction Co., supra, 37 Cal. 2d 739, 743; Hammond Lumber Co. v. Willis, supra, 171 Cal. 565, 568-569; Union Asphalt, Inc. v. Planet Ins. Co., supra, 21 Cal. App. 4th 1762.)
Having concluded that a general contractor's liability to a subcontractor for work performed may not be made contingent on the owner's payment to [15 Cal. 4th 897] the general contractor, we conclude that Keller was liable to the subcontractors under their subcontracts for the work they performed and that Safeco, as Keller's surety, was likewise liable on the payment bond.
In 1990, the owner of a commercial building in Los Angeles contracted with Keller Construction Co., Ltd. (Keller or the contractor), for rehabilitation work on the building. Keller in turn entered into subcontracts with Wm. [15 Cal. 4th 898] R. Clarke Corporation, Barsotti's, Inc., Garvin Fire Protection Systems, Inc., Church and Larsen, Inc. (collectively, the subcontractors), and others.
"4. Nothing in this Addendum shall be interpreted as limiting Subcontractor's right 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 [15 Cal. 4th 899] (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." fn. 1
The trial court granted judgment for the subcontractors and against Safeco in each action. Safeco appealed. The Court of Appeal affirmed. It held the subcontractors' express reservation of mechanic's liens rights in the addendum, of which Safeco was aware, amounted to an assumption of greater liability than that which the general contractor owed. The court concluded "that an action to recover on a payment bond is an action to enforce a mechanic's lien right and, therefore, a remedy expressly reserved by the subcontractors who are parties to these appeals." "Stated otherwise," the [15 Cal. 4th 900] court held, "Safeco's acceptance of the contract documents and the reservation of the subcontractors' mechanic's lien remedy rights was a waiver of whatever rights Safeco might otherwise have had under [Civil Code] section 2809." We granted Safeco's petition for review.
The majority misinterprets section 3140 in its effort to invalidate the pay if paid clause. It reads the statute as providing that the contractual language [15 Cal. 4th 901] allocating the risk that the owner will not pay eliminates all mechanic's liens against the property. That interpretation is illogical. Why should the owner's default protect that same owner from mechanic's liens? The answer is, of course, that it should not. But this answer means only that we should interpret the statute reasonably, not that we should use it to invalidate the pay if paid clause.
A " 'statute should be construed with reference to the whole system of law of which it is a part so that all may be harmonized and have effect.' " (Landrum v. Superior Court (1981) 30 Cal. 3d 1, 14 [177 Cal. Rptr. 325, 634 P.2d 352].) Moreover, we should assume the Legislature intended the statute to be constitutional "and construe it to avoid 'serious' doubts as to its constitutionality if that can be done 'without doing violence to the reasonable meaning of the language.' " (San Francisco Taxpayers Assn. v. Board of Supervisors (1992) 2 Cal. 4th 571, 581 [7 Cal. Rptr. 2d 245, 828 P.2d 147].) An interpretation of section 3140 that would cause a private contractual agreement between contractor and subcontractor to limit mechanic's lien rights-other than establishing the "amount" or "value" of the labor or [15 Cal. 4th 902] materials-would be utterly illogical. (Why should an agreement between the contractor and subcontractor limit their mutual rights against the property?) That interpretation would give rise to a very serious doubt as to section 3140's constitutionality.
Given this interpretation, section 3140 does not prevent us from evaluating the pay if paid clause on its own merits without reference to mechanic's lien rights, which are completely separate. I see no basis on which we could categorically invalidate all such clauses. A strong public policy favors lien claimants against the property on which they have bestowed their labor or material, but no policy favors any particular claimants over any others. This record shows the parties entered into their agreements voluntarily with their eyes open. Indeed, the addenda expressly stated the general contractor had been informed that the owner had "not obtained, and may not obtain in the future, a construction loan to fund the costs of construction." The subcontractors expressly acknowledged that the contractor had "made no representation as to the financial responsibility of the Owner, or of its ability to fund the costs of construction." We have stressed the "strong policy considerations favoring the enforcement of freely negotiated" contractual provisions in other contexts. (Nedlloyd Lines B. V. v. Superior Court (1992) 3 Cal. 4th 459, 462 [11 Cal. Rptr. 2d 330, 834 P.2d 1148] [upholding choice-of-laws clause].) We should also enforce this contractual provision.
Decisions from other states do not support the majority's result. The majority relies on West-Fair Elec. v. Aetna Cas. & Sur. Co. (1995) 87 N.Y.2d [15 Cal. 4th 903] 148 [638 N.Y.S.2d 394, 661 N.E.2d 967], which invalidated a similar pay if paid clause under New York's mechanic's lien laws. As New York's lien law is different from California's, however, we can easily distinguish that case. The court explained in that case that New York's "Lien Law also provides that subcontractors may file and enforce their mechanics' liens against the persons liable for the debt giving rise to the lien, in addition to rights in the real property [citations]." (661 N.E.2d at pp. 971-972, italics added.) In California, by contrast, the mechanic's lien is "upon the property." (Cal. Const., art. XIV, § 3.) Enforcing the pay if paid clause would infringe on New York's lien law; it does not infringe on California's. Citing "traditional notions of the freedom to contract," the Virginia Supreme Court recently upheld pay if paid clauses. (Galloway Corp. v. S.B. Ballard Const. Co. (1995) 250 Va. 493 [464 S.E.2d 349, 354].) fn. 3
The subcontracts expressly provide Keller need not pay the subcontractors if the owner did not. Nevertheless, the majority also concludes Keller and the surety were obligated to pay the mechanic's liens under the bond. This conclusion effectively voids the pay if paid clause, although in a roundabout way. Again, I disagree. A bond does not create a contractual obligation to a third party, but rather obligates the principal, and the surety as guarantor, to perform an underlying contractual obligation. If, as here, Keller has breached no contractual obligation to anyone, neither it nor the surety is liable under the bond. "A surety ... is one who promises to answer for the debt, default, or miscarriage of another ...." (Civ. Code, § 2787.) "A surety who has assumed liability for payment ... is liable to the creditor immediately upon the default of the principal ...." (Civ. Code, § 2807, [15 Cal. 4th 904] italics added.) Moreover, because a surety merely answers for the liability of another, it is a bedrock principle that "The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal ...." (Civ. Code, § 2809.)
The cases make clear that the surety's obligation is no greater than that of the principal under the underlying contract. In Bloom v. Bender (1957) 48 Cal. 2d 793, 803 [313 P.2d 568], we explained "that a surety is not liable where the principal does not incur any obligation under the basic contract (Atowich v. Zimmer (1933), 218 Cal. 763, 769 [25 P.2d 6]), or where the principal has fully performed his contract obligations [citation]," although the surety may be liable even if the principal is discharged without fully performing the contract obligation "where the principal incurs an actual obligation." (See also Regents of University of California v. Hartford Acc. & Indem. Co. (1978) 21 Cal. 3d 624, 636, fn. 4 [147 Cal. Rptr. 486, 581 P.2d 197] [finding an exception when the statute of limitations had expired as to the principal but not the surety, even though "the general principle, codified in Civil Code section 2809, is that the liability of principal and surety are commensurate" (original italics)]; U.S. Leasing Corp. v. duPont (1968) 69 Cal. 2d 275, 290 [70 Cal. Rptr. 393, 444 P.2d 65] ["since the liability of a surety is commensurate with that of the principal, where the principal is not liable on the obligation, neither is the guarantor"]; Flickinger v. Swedlow Engineering Co. (1955) 45 Cal. 2d 388, 394 [289 P.2d 214]; Royster Construction Co. v. Urban West Communities (1995) 40 Cal. App. 4th 1158, 1168-1169 [47 Cal. Rptr. 2d 684]; Kalfountzos v. Hartford Fire Ins. Co. (1995) 37 Cal. App. 4th 1655, 1659 [44 Cal. Rptr. 2d 714]; Michel & Pfeffer v. Oceanside Properties, Inc. (1976) 61 Cal. App. 3d 433, 441 [132 Cal. Rptr. 179].)
While exceptions to this general principle exist, such as surety liability even if the statute of limitations had expired as to the principal, a basic prerequisite to liability is that the principal have "incur[red] an actual obligation." (Bloom v. Bender, supra, 48 Cal.2d at p. 803.) Here, the contractor never incurred an actual obligation for which the surety has promised to answer. " '[T]he surety merely lends its credit so as to guarantee payment in the event that the principal defaults. In the absence of default, the surety has no obligation.' (1 Cal. Insurance Law & Practice (Matthew Bender, 1986) Surety Bonds Compared to Insurance, § 12.13 [2], p. 12-35, fn. deleted.)" (Schmitt v. Insurance Co. of North America (1991) 230 Cal. App. 3d 245, 257 [281 Cal. Rptr. 261].) "Upon the default of the principal, the surety is liable to the named obligee and to unpaid subcontractors, laborers, equipment renters, and material suppliers as third-party beneficiaries. [¶] A bond issued by a surety ... represents nothing more than an [15 Cal. 4th 905] undertaking to indemnify a person or the public against losses resulting from acts of the principal." (8 Miller & Starr, Cal. Real Estate (2d ed. 1990) Mechanics' Lien, § 26:77, p. 600, italics added, fns. omitted.) The principal here did not default; the losses resulted from acts of the owner, not the principal.
The 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. "The surety must pay on the bond only if the claimant establishes, without reference to the bond, a legal obligation on the part of the principal to pay. (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal. 2d 141, 155 [308 P.2d 713].) [¶] ... [¶] The 'obligation,' as referred to in Civil Code section 2809 and U.S. Leasing Corp. [v. duPont, supra, 69 Cal.2d at p. 290], is the obligation the principal ... originally undertakes as to the creditor," i.e., "the obligation was defined in the subcontract ...." (Kalfountzos v. Hartford Fire Ins. Co., supra, 37 Cal.App.4th at p. 1659, italics added; see also Royster Construction Co. v. Urban West Communities, supra, 40 Cal.App.4th at pp. 1168-1169 [quoting much of this language].)
The majority's response to Kalfountzos v. Hartford Fire Ins. Co., supra, 37 Cal.App.4th at page 1659 (and, presumably, Royster Construction Co. v. Urban West Communities, supra, 40 Cal.App.4th at pages 1168-1169), is to claim it is "incorrect" and to "disapprove[]" it. (Maj. opn., ante, at p. 896.) That decision is, however, well grounded in California surety law. (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal. 2d 141, 155 [308 P.2d 713] ["The obligation of the sureties on defendant's bonds ... was an obligation to pay only if plaintiff established, without reference to the bond, a legal and valid claim for compensation." (Original italics.)]; Bloom v. Bender, supra, 48 Cal.2d at p. 803 ["it has been held that a surety is not liable where the principal does not incur any obligation under the basic contract"]; Flickinger v. Swedlow Engineering Co., supra, 45 Cal.2d at p. 394 ["any right which plaintiff might have had to recover upon the bond was necessarily dependent upon plaintiff's right to recover upon his contract with [the principal]"].) Despite this explicit language, the majority seeks to distinguish our cases on the basis that here the subcontractors' "mechanic's lien claim is 'a legal and valid claim for compensation.' " (Maj. opn., ante, at p. 895.) The mechanic's lien, however, is against the property, not the contractor. The subcontractors have no right to recover against the principal under either the contracts or the mechanic's liens. The bond did not create an obligation where none existed.
The majority cites several cases that it claims support its position. (Maj. opn., ante, at p. 893.) But in none did the court suggest the surety (or principal) had to pay absent some underlying obligation of the principal. [15 Cal. 4th 906] They certainly do not suggest the bond alone obligated the principal to pay what the underlying contract expressly said it did not have to pay. In Southern Heaters Corp. v. N.Y. Cas. Co. (1953) 120 Cal. App. 2d 377 [260 P.2d 1048], for example, the issue was whether a bond naming as principal the fictitious business name of an individual also covered obligations incurred under another fictitious name of the same individual. In deciding the question, the court said that "When a bond is given for the purpose of complying with the mechanic's lien law [citation] the terms of the statute are to be read into the bond and control its interpretation and effect." (Id. at p. 379.) By no means does this language suggest the surety would be liable absent an underlying obligation of the principal under either name.
The majority also suggests the specific language of the bond itself creates an obligation separate from any underlying contract. It is true that the bond itself does not expressly incorporate all the relevant statutory provisions. But it may not be interpreted without regard to those provisions. The bond expressly states it is a payment bond, as defined in Civil Code section 3096, to comply with the laws of title 15, "Works of Improvement," of the Civil Code. "The rule is that rights and liabilities under a surety bond are to be determined from the language of the bond read in the light of applicable statutes." (Morro Palisades Co. v. Hartford Accident & Indemnity Co. (1959) 52 Cal. 2d 397, 400 [340 P.2d 628]; see also Southern Heaters Corp. v. N.Y. Cas. Co., supra, 120 Cal.App.2d at p. 379 [quoted in the previous paragraph].) This bond is not fundamentally different from other bonds that merely guarantee payment of an underlying obligation.
No relevant statutory provision supports the subcontractors' claim. Under Civil Code section 3096, "Once the principal is in default, there is a direct right of action against the surety on statutory payment bonds ...." (1 Marsh, Cal. Mechanics' Lien Law (6th ed. 1996) § 11.4, p. 11-6, italics added.) However, nothing in that statute abrogates the basic necessity that there be an underlying obligation for which the principal is in default. The subcontractors also cite Civil Code section 3226. fn. 4 The key words in that statute are "released from liability." One cannot be released from liability unless an underlying liability exists. This statute also does not omit the requirement that the principal be liable for some underlying obligation. The majority also cites Code of Civil Procedure section 996.410, subdivision (a), [15 Cal. 4th 907] which allows the beneficiary to "enforce the liability on a bond against both the principal and sureties." (Italics added; see maj. opn., ante, at p. 894.) I agree that, if there is liability, the beneficiary could sue both the principal and the surety. But this statute, too, does not omit the requirement that there be liability.
The surety has no liability independent of the contractor. Because the contractor has no liability, neither does the surety. [15 Cal. 4th 908]
FN 1. In contract law, a "condition precedent" is "either an act of a party that must be performed or an uncertain event that must happen before the contractual right accrues or the contractual duty arises." (Platt Pacific, Inc. v. Andelson (1993) 6 Cal. 4th 307, 313 [24 Cal. Rptr. 2d 597, 862 P.2d 158].)
FN 2. A Maryland statute provides that a pay if paid provision "may not abrogate or waive the right of the subcontractor to: [¶] (1) Claim a mechanics' lien; or [¶] (2) Sue on a contractor's bond." (Md. Code Ann., Real Prop. § 9-113.) Similarly, a Missouri statute provides that a pay if paid provision "is no defense to a claim to enforce a mechanic's lien ...." (Mo. Rev. Stat. § 431.183.)
FN 3. The pay if paid provision reads: "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."
FN 4. Civil Code section 3096 provides: " 'Payment bond' means a bond with good and sufficient sureties that is conditioned for the payment in full of the claims of all claimants and that also by its terms is made to inure to the benefit of all claimants so as to give these persons a right of action to recover upon this bond in any suit brought to foreclose the liens provided for in this title or in a separate suit brought on the bond. An owner, original contractor, or a subcontractor may be the principal upon any payment bond."
FN 5. Title 15 (Works of Improvement) is found in part 4 of division 3 of the Civil Code, commencing with section 3082.
FN 6. We deny the request of subcontractor Wm. R. Clarke Corporation that we take judicial notice of Keller's complaint in a separate action against the surety on a payment bond issued for the benefit of Wm. R. Clarke Corporation's laborers and material suppliers. Taking judicial notice of the complaint would not assist in the resolution of the issues presented here.
FN 1. The Court of Appeal opinion explains further, "When Barsotti's started work on the project, this Addendum was not part of its contract and no one at Barsotti's ever signed Addendum 1. Keller and Barsotti's nevertheless treated their relationship as controlled by Addendum 1 and, on this appeal, Safeco and Keller both assert that Barsotti's is bound by Addendum 1. For these reasons, we treat all four subcontractors the same vis-a-vis their contractual rights and obligations." In this court, Barsotti's, Inc., expressly agrees with this assessment.
FN 2. In some cases, the clause might be unenforceable for specific reasons such as misrepresentation, unconscionability, or the like. For example, the pay if paid clause provides the contractor would not have to pay if the owner did not pay, even if the reason was "attributable to the fault of the ... Contractor ...." This language is not before us, as all agree the nonpayment was the owner's fault, but the question would be different if the nonpayment was the contractor's fault. I express no view on that question. That issue is not before us.
FN 3. The majority also notes that three states have declared pay if paid clauses unenforceable by statute. (Maj. opn., ante, at p. 886.) In 1993, a bill was introduced in the California Legislature to do the same. (Assem. Bill No. 1981 (1993-1994 Reg. Sess.) [to add Civil Code section 3267.5, providing, as relevant, "Any provision of a contract ... between a contractor and a subcontractor ... which conditions payment of the subcontractor ... upon receipt of payment by the contractor from any third person, is contrary to the public policy of this state, void, and unenforceable."].) The bill failed to pass.
FN 4. Civil Code section 3226 provides, "Any bond given pursuant to the provisions of this title will be construed most strongly against the surety and in favor of all persons for whose benefit such bond is given, and under no circumstances shall a surety be released from liability to those for whose benefit such bond has been given, by reason of any breach of contract between the owner and original contractor or on the part of any obligee named in such bond, but the sole conditions of recovery shall be that claimant is a person described in Section 3110, 3111, or 3112, and has not been paid the full amount of his claim." (Italics added.)