A little used and frequently overlooked weapon in the arsenal of an unpaid contractor or subcontractor on a private work of improvement is the bonded stop notice. For the sophisticated and aggressive contractor, the bonded stop notice can be one of the most effective remedies available under California law.

I he bonded stop notice on a private project must be distinguished from a stop notice on a public project. Perhaps the most important distinction is that a general contractor has no stop notice rights on a public work of improvement. In addition, on public projects a bond is not required to accompany the stop notice.

The bonded stop notice on a private project is directed to the construction lender, who is required to withhold the amount stated in the stop notice from funds that might otherwise be subject to disbursement to the owner/developer. If a payment bond has been recorded, the construction lender has the option to elect not to withhold funds pursuant to a bonded stop notice filed by someone other than the general contractor (i.e. subcontractors and suppliers).

Key Features

The law governing bonded stop notices is set forth in California Civil Code Sections 8500 – 8510 and 8530 – 8560. Important features of the bonded stop notice include:

The importance of this last point must be emphasized. In order to record a mechanic’s lien, a claimant must wait until it has completed its work (Civil Code Section 8414). This leaves the unpaid contractor or subcontractor who is considering recording a mechanic’s lien with the difficult choice between abandoning the project, cutting its losses and recording its mechanic’s lien or completing the project and gambling on being paid. Of course, at the end of the job almost all of the construction loan will have been disbursed and many other parties may also be recording mechanic’s liens.

Aggressive contractors should consider using the bonded stop notice to encourage prompt payment during the project.

Attention Grabber

On the other hand, the bonded stop notice, served in the middle of the project on the construction lender, will immediately grab the serious attention of the construction lender and the owner. It also allows the claimant to inject itself directly into the relationship between the construction lender and the owner.

Even in a case in which a contractor waits until the end of the job, when the construction loan has been largely depleted, it may still be worth the investment of the price of a stop notice bond premium to file a bonded stop notice. This is based on the fact that a contractor is entitled to priority against the construction loan over charges by the bank against the c (instruction loan for interest, loan fees and other costs.

In Familian Corp. v Imperial Bank (1989) 213 Cal. App. 3d 681, several contractors filed stop notices totaling $427,000 at the end of a project. At that time the bank only held $I88,000 in unexpended construction loan funds, which would have resulted in only partial payment to the stop notice claimants. However, the bank had paid itself $528,000 (out of a total loan of $3,800,000) for loan expenses including interest, loan fees and general and administrative expenses.

In ruling in favor of the stop notice claimants, the court in effect added the $528,000 in bank charges to the $188,000 in unexpended construction loan funds, which created a fund large enough to allow the stop notice claimants to be paid in full. See also Brewer Corp. vs. Point Center Financial, Inc. (2014) – Cal. App. 4th –, 2014 WL 346636.

In summary, aggressive contractors should consider using the bonded stop no tice to encourage prompt payment during the project. Even at the end of the project the bonded stop notice may provide an effective tool to reach a portion of the expended construction loan funds.

Gregory R. Shaughnessy, law Offices of Gregory R. Shaughnessy, Tiburon, specializes in construction and real estate and regularly advises owners, general contractors and subcontractors on their legal rights and remedies and in the negotiating and drafting of general contracts, subcontracts and related documents. He can be reached at (415) 435-2409 or visit the website at www. grs-law.com.

Associated General Contractors of California 21

For more information on Mechanic’s Liens, fill in the form below.

Effective January 1, 1996 section 7030 of the business and professions coded was amended to revise the form of notice requiring at least 10 point type on all prime construction contracts as follows

“Contractors are required by law to be licensed and regulated by the contractors’ state license board which has jurisdiction to investigate complaints against contractors if a complaint regarding a patent act or omission is filed within four years of the date of the alleged violation.  A complaint regarding a latent act or omission pertaining to structural defects must be filed within 10 years of the date of the alleged violation.  Any questions concerning a contractor may be referred to the registrar, Contractors’ State License Board, P.O. Box 16000, Sacramento, California 95826.

Failure to include this written statement may constitute a cause for disciplinary action, but will not deprive the contractor of the right to recover for the work performed under the contract.

2. Description of work

Contractor will furnish all labor, equipment, and material to construct and complete in a good workmanlike, and substantial manner a ___________________________________(the “project”), on the following described property: __________________________owner will locate and point out the property lines to contractor, and will provide a survey if in doubt as to the boundaries.

Since the owner usually tells the contractor where to build, it is better to make it clear that the owner, rather than the contractor, is responsible in the event of an encroachment on adjoining land.

3. Forms; plans, specifications, permits

Normally the project will be constructed according to plans and specifications which should have been examined by the contractor and owner and signed by the parties.  The contractor will obtain and pay for all required building permits (although the owner can be required to pay for permits), but the owner will pay assessments and charges required by public agencies and utilities for financing or repaying the cost of sewers, storm drains, water service, and other utilities, including sewer and storm drain reimbursement charges, revolving fund charges, hook-up charges and other similar charges.

The parties should initial each sheet of the plans and specs the contractor has bid, so that future revisions may be identified as such.

3. Form: payment

Owner will pay contractor the sum of $__________ installments as follows:

If payments are to be made from a construction loan, owner represents that the construction loan fund is sufficient to pay the contract price and for all extra work that may be ordered by owner, and owner will do everything possible to expedite the payments.

If corrective or repair work remains to be accomplished after the building is ready for occupancy and has passed final inspection by the building dept.  The owner, pending completion of such work, may withhold payment of a sufficient amount to pay for completion of such work, but shall not withhold any greater amount.

If the contractor expects to be paid from a construction loan, the owner should see to it that the loan fund is sufficient.  The mere fact that the amount of the loans equals the contract price does not necessarily mean that the loan is sufficient, since the loan proceeds may be used to pay points, interest, title company fees, prior encumbrances and other items, in addition to the contract price.

Owners may be tempted to withhold payments, claiming they are not due until every possible minor correction has been accomplished.  This seems unjust if the owner, as often happens, withholds several times the cost of correction after the building has passed final inspection and is ready for occupancy.

Section 8812 of the civil code–requires that the retention withheld by the owner from a direct contractor or by the direct contractor from any sub, shall be released within 45 days after the “completion” of the project.

4. Labor and materials

The contractor shall pay all valid charges for labor and materials incurred by contractor and used in the construction of the project, but is excused from this obligation for bills received in any period during which the owners is in arrears in making progress payments to the contractor.

Should contractor fail to make any payments required under this paragraph, owner may make such payments on behalf of contractor and contractor shall reimburse owner for the amounts actually paid on demand

This clause is dealing with the requirement that the prime contractor must protect the owner against mechanic’s liens.

Suppose an owner fails to make the completion payment and the retention payment on a job, though the contractor has performed.  As a result, the contractor does not have the money to pay its subs and suppliers, who then record mechanic’s liens.  The owner settles the mechanic’s liens for fifty cents on the dollar, and takes assignments of the claimants’ rights against the contractor.  The contractor files suit against the owner for the balance due under the contract, and the owner offsets at one hundred cents on the dollar the claims which it satisfied at fifty cents on the dollar.  This could allow an owner to take advantage of its own wrongdoing because the mechanic’s lien claims might never have been filed had the owner not wrongfully withheld progress payments from the prime contractor

In order to avoid this outcome, the contract should provide:

If owner should wrongfully withhold progress payments from contractor, and if as a result thereof contractor is unable to pay for work or materials supplied to the job, and if owner settles such claims for work or materials by paying less than the full amount of such claims, then owner may not offset against contractor any more than the amount actually paid to satisfy such claims.

5. Contract, plans, specifications

The contract, plans, and specifications are intended to supplement each other.  In case of conflict, the plans shall control over the specifications, and the provisions of the contract shall control over both.

This clause comes into operation only if actual conflict exists.  It does not apply where part of the work is represented on the plans but not mentioned in the specifications, or vice versa.  An actual conflict only arises when the plans call out one material or process, and the specifications call out a different material or process for the same work.

When a contractor figures a job, it usually makes its take from the plans, and therefore, in the event of conflict between plans and specifications, the plans should control.  This paragraph is intended to resolve only conflicts and not ambiguities.  Such a provision favored by owners is:

In case of ambiguities in or between the plans, specifications, and contract documents, they shall be interpreted most strongly in favor of the better or higher quality material, equipment or process.

Another alternative clause would resolve ambiguities by decision of the architect:

Ambiguities in or between the plans, specifications, or contract documents shall be resolved by the architect.

6. Extra work

The owner may change the scope of the work required by the contract documents by adding or deleting work, materials, or equipment, and the contractor shall perform e work required under this contract as thus modified.  In the event of such changes, the contract price shall be equitably adjusted by written change order signed by both parties.  If the parties cannot agree as to the amount of the equitable adjustment, then the contractor shall provide the owner monthly with a detailed summary of the cost of extra work, including the cost of labor, materials, equipment and subcontracts, and the owner shall reimburse this cost, monthly concurrently with progress payments.  The monthly reimbursement shall include a markup of seven percent to cover job site overhead, field overhead, and profit.  The parties will continue to negotiate the final amount of the equitable adjustment to the contract price, and if they do not agree, the final amount will be determined by arbitration if arbitration is provided for in the contract documents otherwise by litigation.

It is imperative, to protect the interests of the owner, that the owner retain the right to add work to the contract.   The owner will also want to be able to require the contractor to perform the additional work even though the parties have not been able to reach agreement as to the price.  Otherwise the contractor would be able to exert tremendous leverage by refusing to perform extras except at unreasonably high prices.  The only alternative the owner would have would be to bring another contractor into the job to perform the changes, which would be costly, inefficient and disruptive.

On the other hand, the contractor should not be required to perform extra work, without compensation while hard bargaining goes on as to the cost of the extras.  Therefore, the clause provides that pending resolution of disputes as to the amount to be paid for extras, the owner will pay the cost plus a markup to account for overhead and profit pending resolution of the dispute.

7. Allowances

If the contract price includes allowances, and the cost of performing the work covered by an allowance is greater or less than the allowance, the contract price shall be increased or decreased accordingly.  Unless otherwise requested by the owner in writing, the contractor shall use its own judgment in accomplishing work covered by an allowance.  If the owner request that work covered by an allowance be accomplished in such a way that the cost will exceed the allowance, the contractor shall comply with the owner’s request, provided that the owner pays the additional cost in advance.

If the contract includes allowances a separate list should be attached and signed by both parties.

8. Delay

The contractor shall be excused for any delay in completion of the contract caused by acts of god, acts of the owner or the owner’s agent, inclement weather, wet or muddy grounds, labor trouble, acts of public utilities, public bodies, or inspectors, extra work, failure of the owner to make progress payments promptly, or other contingencies unforeseen by the contractor and beyond the reasonable control of the contractor.

9. Completion and occupancy

Owner agrees to sign and record a notice of completion within five (5) days after completion of the project.  If the project passes final inspection by the public agency but owner fails to record a notice of completion, owner hereby appoints contractor as owner’s agent to sign and record a notice of completion on behalf of the owner.  This agency is irrevocable and is an agency coupled with an interest.  Contractor may deny occupancy of the project to owner or anyone else until contractor has received all payments, excluding the retention payment, due under this contract, and until notice of completion has been recorded.

A notice of completion may be signed and verified by an agent of the owner to record the notice of completion, and thus get the normal 35 day retention period running.

Owners occasionally misunderstand the function of a notice of completion, and are reluctant to sign and record one because it might be construed to be an approval of the contractor’s work.  However, even if an owner disapproves of the contractor’s work, or part of it, the owner should still record a notice of completion as soon as possible in order to reduce the period of time during which mechanic’s lien claims may be recorded against the property.  By recording a notice of completion, the owner cuts down the mechanic’s lien period of subcontractors and suppliers from 90 days to 30 days, and cuts down the mechanic’s lien period for the prime contractor and subcontractors who deal directly with the owner from 90 days to 60 days.

10. Damage to project insurance

Owner will procure at its own expense, and before commencement of any work hereunder, a broad form all risk policy of insurance, including coverage for flood and earthquake, at least equal to contract price, with such insurance to name the contractor and all subcontractors as additional insured, and to protect owner, contractor, and subcontractors as their interests may appear, with loss payable to owner for the benefit of owner, contractor and subcontractors.  Owner will, as named insured, properly process claims with the carrier for the benefit of the owner, contractor, and subcontractors.   Should owner fail to do so, contractor may procure such insurance as agent for at the expense of the owner, but contractor is not is not required to do so.  Owner, shall upon request, furnish a copy of the policy to contractor.

If the project, or any part of it, is destroyed or damaged by accident, disaster, or calamity, such as fire, storm flood, landslide, subsidence, earthquake, or vandalism, any work done by contractor or subcontractors in rebuilding or restoring the project shall be paid for by extra work, for which contractor shall receive equitable compensation from owner.

Contractor shall carry workers’ compensation insurance for protection of contractor’s employees during the progress of the work.  Owner shall obtain and pay for insurance against injury to its own employees and persons under owner’s direction and persons on the job site at owner’s invitation.

The owner may have the contractor and subcontractors named as additional insured without an extra premium.  The owner should shop for the broadest coverage available under the provision, including flood and earthquake.  Projects under construction are especially vulnerable to damage, which may be covered even though contributed to by the negligence of the contractor or subcontractor.

It is important to provide that if the structure is destroyed before completion, the contractor will be paid for any work done in rebuilding or restoring the project.  Otherwise, the contractor might have to do so without additional compensation.

If the contractor or owner fails to carry workers’ compensation insurance, a building permit should be denied.  A statute provides that every county or city shall require each applicant for a building permit to furnish evidence of workers’ compensation insurance.  If the public agency issuing the permit fails to require a certificate of workers compensation, it can be held liable for injuries to the contractor’s or owner’s employees.

In one case, the county failed to require a certificate of workers’ compensation insurance.  A worker was injured and went without compensation because its employer became bankrupt.  The court held that the California labor code imposes a mandatory duty on cities and counties.  Where the agency is under a mandatory duty imposed to protect against the risk of a particular kind of injury, the agency is liable for injuries caused by failure to discharge the duty.

Sometimes working with an owner on a handshake (which would be illegal with a home improvement contract) or between a subcontractor and a prime or direct contractor could have its advantages.  If there is a dispute, a properly licensed contractor working on a handshake can be almost certain that the law will award it the reasonable value of work actually performed. This would normally result even if the other party stated that there was no contract or that more was done than required.  The reason is that a judge or jury is almost certain to be impressed by the value of the work that is completed than by the supposed oral agreement that the contractor should be paid less than the value of the work done.  Actual work speaks louder than words.

Construction litigation often comes about because the contractor demand more than the other party is willing or able to pay.  When this type of problem arises, the unpaid contractor or sub would be better off without a contract than with a written contract with customary clauses giving the owner or the prime the right to withhold payment.

More often than not taking the interests of the parties into account, it is more advisable to use a written contract.  The parties can anticipate many problems that may arise during the job and by written contract attempt to resolve them in advance.  Preparing and signing a contract will more often than not force the parties to face these issues in advance.

One of the objectives of the law is predictability.  The law wants to make sure that it is clear enough that anyone consulting a lawyer will be able to predict the results of their actions.

A contractor starting a job wants to predict as nearly as possible what its overall situation will be at the end of a job.  Written contracts help the parties predict what consequences will occur or arise from particular events.

There are also a few instances where the rules of law that are applied in the absence of a written contract are simply unreasonable from the contractor’s point of view.  For example, the rule that a contractor on a lump sum contract must rebuilt the structure free of charge if it should happen to be destroyed by fire during the progress of a job.

Most construction contracts are standardized written forms.  Often these forms have evolved over the years.  When a contractor starts in business it usually adopts a form similar to one used by other contractor’s or the owner’s former employer.  After years pass and hard lessons are learned paragraphs and clauses are added and revised.  The final outcome is a mixture of paragraphs, phrases and clauses extracted from various forms.  Often the resulting contract does not fit together in a harmonious manner.

Contracts are often thought of as method of allocating risks.  One party tries to pass the risk to the other party.  An equitable contract is one that divides the risk of construction to the party best able to bear the risk.

Insurer had no duty to defend subcontractor alleged to have installed defective steel framing in an apartment building, where only alleged damage was to sub’s work, not to other property.

A subcontractor was hired to provide reinforcing steel for the columns, walls, and floors of an apartment project. The steel sub used both 90 degree and 135 degree seismic tie hooks in shear walls. However, after the tie hooks had been encased in concrete, a city inspector issued a correction notice requiring the exclusive use of 135 degree tie hooks. The general refused to pay the steel sub’s invoices and withheld $545,000. The steel sub sued the general for nonpayment, and the general filed a cross-complaint against the steel sub and others asserting contract, warranty, and negligence claims. The steel sub tendered defense of the matter to its insurer. The insurer denied the tender, asserting “no damage to property was alleged, and the purely economic losses caused by the need to reopen the poured concrete to correct the tie hook problem did not constitute property damage within the meaning of the Policy.”

The steel sub subsequently sued the insurer for its refusal to accept the tender and provide a defense and indemnity. However, the trial court granted the insurer’s motion for summary judgment, finding that “the Policy excluded coverage for property damage arising out of a defect, deficiency, inadequacy or dangerous condition of the insured’s work, or a delay or failure by an insured to perform a contract in accordance with its terms,” and that “coverage was excluded for impaired property because such property was defined as tangible property, other than the insured’s work known or thought to be defective deficient, inadequate or dangerous.”

The appellate court affirmed. It observed that where defective workmanship is incorporated into construction projects, “California cases consistently hold that coverage does not exist where the only property ‘damage’ is the defective construction, and damage to other property has not occurred.” (Italics original.) Here, the general contractor’s allegations against the steel sub were simply that it failed to install proper tie hooks, and that failure necessitated demolition and repair of the affected areas. Thus, the allegations fell “squarely within the ambit of the rule” set forth in F & H Construction v. ITT Hartford Ins. Co., 118 Cal.App.4th 364 (2004) that this type of repair work is not covered under a CGL policy. Thus, the steel sub’s defective work did not constitute property damage under the insurance policy. Further, under the policy’s “Impaired Property” exclusion, there was “no coverage for property damage to ‘property that has not been physically injured’ arising out of the [the steel sub’s] negligent failure to perform its contractual obligations based on installation of defective tie hooks.”

Licensed general contractor operating a sole proprietorship who incorporated and had contractor’s license reissued to the corporation was not barred by Business and Professions Code section 7031 from pursuing quantum meruit damages.

A licensed general contractor operating a sole proprietorship incorporated during a construction project and had his contractor’s license reissued to the corporation. A dispute arose with the owner regarding additional work performed after incorporation and reissuance of the contractor’s license. The owner claimed that Business and Professions Code section 7031 barred the corporation from pursuing any quantum meruit damages because it was an unlicensed contractor at the time the contract was entered. The trial rejected the owner’s argument.

The appellate court affirmed. “Applying section 7031 to the circumstances here would lead to absurd results. Were we to find section 7031 applied, it would effectively preclude licensed sole proprietor contractors from lawfully incorporating and obtaining a reissue of a general contracting license to the new business entity at any time during the construction period. The purpose of section 7031 is to deter unlicensed contractors from recovering compensation for their work. It is not intended to deter licensed contractors from changing a business entity’s status, and obtaining a reissuance of the license to the new entity, during a contract period.” (Italics in original.) Further, the damages covered only extra work over and above the contract, and only for the period following the reissuance of the general building contractor license from the individual to the corporation, additionally undermining the owner’s proposed application of section 7031 in these circumstances.

It would seem to be self-evident that a person cannot be bound to a contract unless it consents to be bound.  This is really just another way of saying that a contract requires a manifestation of mutual assent.

However, consider this situation.  A prime contractor, under contract with the owner, is creating an industrial building.  The contract price is $200,000.  The prime contractor expects to pay $50,000 for the “mechanical package” on the building including plumbing, heating, air conditioning, and the fire sprinkler system.  The contractor awards a $50,000 subcontract to S-1 for the complete mechanical package.  S-1 in turn subcontracts the heating, ventilating and air conditioning (but not the plumbing or fire sprinkler) to S-2 at a contract price of $25,000.  S-2 is a sub-subcontractor.  There is no contractual relationship between S-2 and the prime.

Now suppose that all the mechanical work has been finished and S-1 has been paid $25,000, all of which it has retained for its own work.  S-2 has been paid nothing.  At this point, S-1 leaves the state on an extended vacation.  S-2 for some reason, fails to enforce its mechanic’s lien and stop notice rights.

S-2 finds it impossible to collect is $25,000 from S-1, because S-1 cannot be found. But suppose the owner has paid the prime the full contract price of $200,000.  Since the prime contractor has paid only $25,000 for the mechanical package, and since S-1 has left the state and is not seeking the balance of the $25,000 due on the mechanical package subcontract, the prime contractor has only paid $25,000 for the mechanical package, though it agree to pay $50,000 for the package.

What is the puzzling legal problem the owner has paid the full contract price of $200,000.  Therefore, the prime has been paid the $50,000 for the mechanical package, $25,000 of which was intended to go to S-2 for the heating, ventilating and air conditioning system.  However, because S-1 has left the jurisdiction, S-2 has been paid nothing.  Therefore, the prime received a gratuitous bonus of a $25,000 gift profit.  Which it never expected to receive and S-2 has performed $25,000 worth of work for which it has not been paid.  Since the prime received the benefit of the work, S-2 should be paid rather than go unpaid while the prime enjoys an unearned bonus.

What legal theory will require the prime to pay the $25,000 to S-2 there is no contract between the prime and S-2 the prime has committed no fraud nor has it been negligent nor failed to discharge a duty to S-2.  However, why should the prime be enriched?

On case held that the sub-sub has no agreement with the general and therefore the general owes nothing, regardless of nonpayment by S-2’s immediate employer, S-1.

The court in effect said that there is no privity of contract between the prime and sub-sub.

However, one case held that a prime was obliged to pay a sub-sub on a theory known as quasi contract or contract implied in law.

The implied contract theory states that when a person accepts and retains the benefits of a transaction under circumstances making it inequitable for the benefits to be retained without payment of their reasonable value, the law will imply that there is a contract obliging the recipient of the benefits to pay their reasonable value to the party who furnished them—this is a contract implied by the law–regardless of whether the parties ever actually entered into a contract.

2 Prompt payment requirements

In recent years the legislatures has enacted a confusing and inconsistent series of statutes requiring prompt payment of progress payments and retentions by owners, contractors and subs and design professionals on public and private projects.  Failure to make prompt payments is penalized in two ways: (1) monthly interest rates and penalties are imposed, and (2) the prevailing party in a prompt payment dispute is entitled to recover reasonable attorney’s fees from the losing party.  However the parties to a construction contract can waive prompt payment rights under business and professions code 7108.5

Here is an outline of the laws:

A. Requirement that prime or sub remit the amount it received in respect of a subcontractor’s work to the subcontractor. The requirement of prompt payment applies only to monies that have actually been received by the prime contractor or sub–not to monies that either should have received.

1. Penalty for failure to may prompt payment is 2% per month in addition to interest (in the case of retentions, the penalty is 2% per month in lieu of interest)

2. In addition, the prevailing party in action for the collection of funds wrongly withheld is entitled to attorney’s fees

3. 150% of an amount in dispute in good faith may be withheld.

Within 10 days of receipt of written notice that disputed work has been completed the contractor shall advise the subcontractor of acceptance or rejection of the disputed work.  Within 10 days after acceptance, the retained portion of retention shall be disbursed.

4. On public utility contracts, prime contractor must pay subcontractor within 15 days from receipt of payment.

B. Progress payments from prime to sub on federal projects–31 usc 3905–prime K is required to insert in their sub-K a provision that sub-Ks will receive their progress payments within 7 days from the time prime K receives payment from the government.  Interest penalty is at the rate specified by the sec of treasury.

C. Payment of retention by owner to direct K on a private project civil code section 8810-et sq

1. Payable within 45 days of completion.  Completion is defined as certificate of occupancy, date indicated on a valid record notice of completion or completion as defined in the mechanic’s lien law.  Civil code section 8100-private project or 9200 public work

2. Penalty is 2% per month in lieu of interest, attorney’s fees and costs to prevailing party–non-waivable.

D.  Payment of retention by public entity to direct contractor–public contract code section 7107

1. 60 days after date of completion.  Completion means occupation, beneficial use, and acceptance by the public agency, or a cessation of labor for a continuous period for 100 days.

2. 2% per month in lieu of interest, attorney’s fees and costs to prevailing party- non-waivable.

E. State agencies are required to pay undisputed amounts due to creditors by the 31^st day after the agency received notice than an undisputed payment is due, after which interest accrues at the rate equal to interest accruing in the pooled money investment account minus 1%, and the court shall award costs and reasonable attorney’s fees to the plaintiff.

F. Progress payments from public agencies to prime contractors.

1. State agency to contractor (public contract code 10261.5)  State agency must make payment within 30 days after payment request for undisputed item or pay 10% annual interest. Any payment request determined not to be proper shall be returned as soon as practicable, not later than 7 days after receipt, specifying the reason the payment request is not proper.

2. Cal state university must make progress payments to prime contractor within 39 days after payment request (public contract code section 10853) late payments accumulate 10% annual interest.  If payment request is determined not be a proper request, it is to be returned to the contractor as provided above.

3. Local agencies are required to pay prime contractors their progress payments 30 days after payment request. (public contract code section 20104.50) otherwise they pay interest at the rate of 10% per annum.  Payment requests that are determined to be improper are handled as above.

G. Payments to architects, engineers and land surveyors civil code sections 3320-3321.

1. Agency progress payments and retentions are to be paid within 30 and 45 days respectively after receiving written demand or the agency must pay 1 1/25 per month in lieu of interest, with attorney’s fees and costs to the prevailing party.  The agency may withhold 150% of disputed amounts.

2. Prime design professionals are required to pay their consultants within 15 days after receipt of payment from the agency or pay 1 ½ % per month in lieu of interest, with attorney’s fees and costs to the prevailing party(public works only) the payor may withhold 150% of disputed amounts.

Sureties on payment bonds are liable for prompt payment penalties.  While a mechanic’s lien claim is limited to the reasonable value of work or materials furnished or the price agreed to by the claimant whichever is less, in contrast, a payment bond secures payment of the claim of the claimant.  Public contract code section 10223.  A subcontractor’s claim for payment includes the 2% per month penalty and the statutory provisions are incorporated into the bond.

Some construction contracts contain a provision that the owner waives all claims against the contractor if it makes final payment with the knowledge of a construction defect.  Such a clause was upheld in a case in which a contract for sought damages, the contractor interposed a defense a paragraph of the construction contract which provided that the making of the final payment constituted a waiver of all claims except those arising from defective work appearing after completion of the contract.  The court held that the owner must have been aware of the defect before making final payment because the owner had employed another contractor as an inspector to monitor the work.

The defect, although it may have been latent to a lay person was patent to a qualified inspector, therefore the damage claim was waived.

2. Anticipatory breach

What rights does a party to a contract have it the other party says it is going to breach the contract?  Such a breach is known as an anticipatory breach.  For example, if a contract called for drywall, but the owner told the contractor it would withhold the next progress payment unless the contractor installed lath and plaster where drywall was specified, the owner would be guilty of anticipatory breach of contract.

An anticipatory breach of contract would give the contractor all of the rights it would have if the owner actually and without justification refused to make a progress payment.  The contractor would have the option to either: (1) affirm the contract and recover all damages sustained because of the breach, including the profit the contractor could have made if permitted to continue with the contract and complete the contract, or (2) rescind the contract and recover the reasonable value of the work and materials already furnished.

Anticipatory repudiation of a contract permits a party to immediately sue for damages for breach of contract, and also relieves that party of any obligation to perform or offer to perform any conditions precedent.

3. Owner’s damages where contractor abandons work

When a contractor breaches its contract with the owner by failing to properly perform, the owner may eject the contractor from the job, hire another contractor to finish the work, and hold the direct contractor liable for damages.  The difference between the contract price and the actual total cost becomes the measure of damages.

Suppose K agrees to build a residence for O for $250,000–halfway through the job O discovers that K’s work is defective.  K refuses to make corrections.  O has paid K $200,000.  O now ejects K from the job and employs another contractor to complete the work according to the plans and specs.  O must pay the new contractor $140,000.  Therefore, the total cost of the job is $340,000.  But if K had performed the contract as agreed, O would have had its house for $250,000.  The damages, therefore are $90,000 which O can collect from K in a lawsuit.

The same measure of damages would apply to a breach between a subcontractor and prime contractor.  The underlying principle is that the promisee should get the job it bargained for at the price it bargained for.

4. Liquidated damages

What happens when a contractor completes a job in accordance with plans and specs but does not finish within the time limit imposed by a contract?  The owner’s measure of damages is the reasonable rental value of the premises during the period of delay.  If a contractor were one month late in completing a 50-unit apartment building with a monthly rental of $20,000 the damages suffered by the owner would be $20,000.

Most construction contracts contain clauses that excuse the contractor for delay caused by inclement weather delays and delays in inspection by government, agencies, war, flood, fire and other occurrences.  Such provisions are important.  Without them, the risk of delay is placed on the contractor.

How do you determine a loss if there is delay with regard to constructing a highway, bridge or school building that is not ordinarily or ever rented?

To address this problem, most public construction contracts (and some private ones) contain liquidated damage clauses which are presumed valid under civil code section 1671.  Exceptions for liquidated damages include consumer contracts, rentals and residential leases.  They are presumed valid and usually state as follows:

The parties agree that the public work would suffer substantial damage as a result of failure of the contractor to finish the work on time, but it would be impracticable or extremely difficult to fix the actual damages, and therefore, the parties, agree that a reasonable approximation of the actual damages to be suffered by the public is the sum of $1,000 per each day during which full performance of the contract is delayed.

The $1000 is known as liquidated damages.  The parties have agreed in advance on a measure of damages which would otherwise be difficult to ascertain.

There is no requirement in California that a liquidated damage clause be balanced by a bonus provision if the contract is completed early.

Penalties v liquidated damages

California courts do not like penalties and forfeitures.  A penalty is a provision in a contract that the contractor will pay a penalty of $4500 for each day during which the contract remains uncompleted after June 1.  An example of a forfeiture is a provision under which the contractor would forfeit all right to be paid money previously earned on other jobs in the event of a default by the contractor in performing a later contract with the same owner.

The policy of the law is that a party to a contract should be able to collect only such damages as will compensate it for the loss actually caused by the breach of the other party. In other words, even an innocent party should gain no more from the breach of contract than it would gain from its performance.

Apportionment for liquidated damages

The law provides that liquidated damages are presumed valid–it does not resolve the issue of whether liquidated damages may be apportioned.

In one case, a contractor was required by contract to perform excavation and other contract work for a dam.  The contract provided that the work would be finished in 120 days, but the job actually took 369 days.  The flood control district attempted to enforce a $50 per day liquidated damages provision, but the court found that the first 40 days of delay was caused by failure of another contractor employed by the flood control district to vacate the job site. An additional 40 days of delay was caused by the fact that the contractor had to excavate 112,000 cubic yards of material, whereas the flood control district had represented that the contractor would only have to excavate about 52,000 cubic yards.  A severe storm also delayed the job for an additional 37 days.

The flood control district contended that even if the court granted extensions of time for those three causes of delay the contractor still did not finish the job within the required time.  The court refused to attempt apportion the amount of delay attributable to each of the causes and fix the damages. The court laid down the rule that where delays are occasioned by mutual fault of the parties (partly by the owner and partly by the contractor) a court will not attempt to apportion the damages and will refuse to enforce the liquidated damages provision entirely.  Since the owner by its acts made it impossible for the contractor to perform within the prescribed time, the owner lost its right to enforce the liquidated damages provision.

5. No damage for delay clauses

What if construction contract provisions allow time extensions for delay, but deny the contractor additional compensation for the delay?  Variations of this type of clause are found in public and private contracts.  Nevertheless, in certain situations, the contractor still is entitled to compensation for delay as well as an extension of time.

The civil code provides that delay in the performance of an obligation is excused when performance is prevented or delayed by the act of the creditor, “even though there may have been a stipulation that this shall not be an excuse…”  The code provides, however, that the parties may expressly require in a contract that the party relying on the provisions of the code section give written notice to the other party, within a reasonable time, of an intention to claim an extension of time, provided the requirement of such notice is reasonable and just.

Generally, the courts strictly construe such clauses against the party asserting that no damages are recoverable for delay.  Nationwide authority recognizes three exceptions to the enforcement of no damage for delay provisions in construction contracts.  First, if the owner abandons the contract, then the no damage for delay clause will not be enforced.  Second, if the owner operates in bad faith, the no damage for delay provision is void.  Third, the no damage for delay provision will not be enforced to prevent recovery of damages not of the type within the contemplation of the parties at the time the parties entered into the contract.

1. Substantial performance questions arise under construction contracts which is complicated.  How do you comply with every requirement of the plans and specifications?  What if there is some minor deviation.

What if the required pipe that is installed is better than what was required?  What if the pipes is not quite as good?  You can’t economically remove all the pipe from a building and replace it.  There is no doubt a breach.  To replace all the pipe would be wasteful and unjust, therefore there is the doctrine of substantial performance.

The doctrine of substantial performance cannot be applied if the contractor has not exercised good faith or if he has willfully and deliberately departed from the specifications.  Nor can it be applied where the deviations are so great as to substantially affect the usefulness of the building for the purpose for which it was intended.

The doctrine of substantial performance may be applied even if the contract provides that there shall be no deviations from the plans and specifications.

The limits of the doctrine are illustrated by the case of shell v schmidt(1958) the contractor deviated from the plans in three respects: (1) the specs called for wood sheeting on the exterior walls, but the contractor used construction paper covered with chicken wire; (2) the specs called for two furnaces of 30,000 btus each but the contractor installed one 25,000 btu furnace; and (3) the specs called for gypsum lath and plaster, but the contractor used sheet rock with tape joints for interior walls.  The court held that the doctrine of substantial performance was inapplicable,   the contractor was responsible for the cost of correcting all of the defects.

While one defective item standing alone may be minor, an accumulation of apparently minor defects can constitute a lack of substantial performance –famous builders inc v bolin(1968)

2 Severability

In lowy v united pacific insurance(1967) the court cited this doctrine and added it to substantia performance.–the court found that a grading contractor was entitled to be paid for its work. Under the contract the grading contractor was required to do excavation and grading for an 89 lot subdivision and also required to install curbs, gutters, pavement and ancillary items.  After finishing 98 percent of the work, the contractor quit and sought payment for the balance of the contract.  The subdivide defended the nonpayment on the ground that the contractor had breached the contract by failing to perform the cub, gutter and paving work.  The court found that the contractor had in fact breached the contract to install the street improvements.  But awarded damages for the performance of the excavation and grading portion of the work, on the ground that part of the job had been substantially performed.  The curb and gutter work was to be performed on a unit price basis per lot–and therefore the work could be apportioned.

3. Impossibility of performance in 1667. An English court, in the case of pardine v jane stated the rule of law, that where a party by its own contract undertakes a duty–it is bound to make good notwithstanding any accident or circumstances, because it might have provided for such in the contract.

This rule of strict liability has been moderated by judicial decisions and the inclusion of force majeure clauses in contracts that excuse the promisor if performance is made impossible for reasons which it cannot control.

4. Destruction of the project

Few construction projects include specific provisions that the owner is obliged to make the job site available to the contractor.  It seems superfluous–the owner has to make the site available.  However, the parties, by contract should designate who is to bear the loss if a project is destroyed, whether destruction be caused by fire, flood, earthquake, collapse or anything else.   The owner should have to maintain insurance against those hazards if they are insurable, and should provide that if the project is destroyed before it is finished that the contractor should be paid the reasonable value for its work finished up to the time of destruction.  The contract should also state what happens if the project is destroyed from uninsurable losses–such as war, rebellion and earthquake.

–The cases are all over the place–a contract should provide for the owner to have “all-risk” insurance with course of construction, vandalism and malicious mischief clauses-naming the prime contractor and subs as additional insured.

–The contract should provide that if the building id destroyed or substantially damaged from any cause before the job is finished–the contractor will be paid the reasonable value of the work performed until the time of destruction and that both parties will thereafter be relieved of performing any further obligations under the contract.

–The contract should excuse the contractor for delays caused by acts of god, acts of the owner or its agents, inclement weather, strikes, inability to obtain skilled workers, delays by public bodies or public utilities and inspections or any other contingencies not the fault of the contractor.

–If the work to be done encounters a special risk, such as the risk of encountering underground rock or water or the risk that a particular source of supply will be shut off–the parties need to agree in advance as to who will bear the risk.

5.  Remedies

The general rule in California is that a contractor injured by an owner’s breach of contract may choose three different remedies: (1) it may keep the contract alive for the benefit of both parties holding itself ready and able to perform its duties under the contract at all times; (2) it may treat the breach as putting an end to the contract for all purposes of performance–leave the job and sue for the profits it would have realized had the contract been performed or (3) it may treat the contract as terminated (rescinded) and recover the reasonable value of the work it has performed.

A. Walking off the job

Contract law holds that a party to a contract cannot insist on timely performance by another party while at the same time refusing to perform its own obligations–if there is an inexcusable breach the other party has the option of walking off the job or terminating performance, there are normally detailed default provisions in contracts—there are required written notice provision or a series of such notices before termination–California courts require the observance of such notice provisions

Civil code section 8830 sets forth procedures for terminating private contracts and stopping work after January 1 1999

B. Terminations Under civil code section 3260.2, a contractor  that is not paid within 35 days from the date when payment is required may serve a 10-day stop work order provided there is no dispute as to the contractor’s satisfactory performance.  If payment is not made within the 10 days, work may be stopped and the contractor may seek an expedited judicial determination of liability for the unpaid amount.  The amount recoverable is limited to what could have been recovered on a mechanic’s lien.  –that is the market value of the work installed.  –the sub is deprived of a cause of action against the prime contractor for profits lost or for other termination expenses.

A contractor who has the right to terminate performance because of a non-payment should consider whether to undertake a common law termination or a civil code section 3260.2 termination–the advantages of the 322 60.2 termination are that the contractor is insulated from subcontractor claims for lost profit and termination expense–the contractor gets expedited judicial determination of the amount due from the owner and the contractor is protected from delay and remobilization claims by the owner.

C. Rescission The amount that the contractor can recover will depend on whether it decides to rescind and sue for the reasonable value of the work performed–sometimes reasonable value exceeds the contract price.  Sometimes it is less.  If you rescind you need to give notice to the other party =–promptly—–the claim for damages for breach of contract is not considered inconsistent with a claim for relief based on rescission–election of the remedy can be made at a later time.

In rescission–the measure of damages becomes the reasonable value –not limited by the contract price.–a case ensured where the reasonable value was greater than the contract price–because the contract price was discounted.

The measure of damages for breach of contract per the civil code in California is the amount that will compensate the party aggrieved for all the detriment proximately caused thereby or that in the ordinary course of things would be likely to result therefrom.

D. Benefit of the bargain

An owner cannot breach its obligations under a contract and at the same time expect the contractor to continue performance.  The contractor is entitled to the benefit of the bargain–in one case a framing contractor filed suit against a general for breach of contract–the sub was to be paid so much per unit in profit–the court awarded the sub the profit it would have made.

E. Recoverable damages An important rule limiting damages is that in breach of contract –damages are recoverable that would have been contemplated by the parties at the time the contract was made.  A contractor was not permitted to recover profits allegedly lost on future jobs because of a loss of bonding capacity caused by breach of contract by a public agency.  The agency had ejected the contractor from the job and made a demand on the contractor’s bonding company to perform the work.  The bonding company then refused to write further bonds for the contractor–the court held that the public agency at the time the contract was entered into could not have anticipated that the if the contractor was removed from the job that it would lose profits on future jobs because of lack of bonding capacity.

F. Total cost damages

Courts require a contractor to introduce evidence to show the exact amount of damages caused by a specified breach by a project owner—-to invoke total cost damages the contractor must produce its estimate, deduct from its claim the amounts of any busts in the estimate, and deduct the costs of any inefficiencies that are the fault of the contractor or subs

G. Breach by contractor.  This depends on whether the contract has been substantially performed–if it has been the damage is the difference between the market value of the building as build and as specified.  The general value for a tortious injury to property is the difference between the value of the property before and after injury which is to say the diminution in value.

1. Damages for construction defects

An owner’s measure of damages for construction defects is the cost to repair or replace the defective installation.  The damages than an owner can recover for construction defects is limited by economic loss.

I.  Following plans and specs

If the plans and specs are followed–even though the result may be unsatisfactory–and good workmanship was implied there is no damage.

1. Termination or ejection What about slow performance–is the breach minor or major–the owner must assess the option to terminate and include a time is of the essence clause in the contract.  –it gives the owner the option to terminate.

THE MCAFFREY GROUP INC (PETITIONER) V THE SUPERIOR COURT OF CALIFORNIA COUNTY OF FRESNO (RESPONDENT–JESUS CITAL ET. AL REAL PARTIES IN INTEREST 2014 DJDAR 3712(2014 )

This case is a petition for a writ of mandate brought by McAffrey Group which is a builder and developer of single family homes in Fresno.  Real parties in interest own 24 homes within the development, 19 of those homes are owned by 32 individual who purchased their homes directly from McCaffrey.  Nine of the 19 homes were sold before 2013 using a 2001 version of McCaffrey’s “Combined Purchase and Sale Agreement and Joint Escrow instructions” and “Homeowner Warranty.”  Five of the 24 homes are owned by eight individuals who purchased their homes from someone other than McCaffrey after January 1, 2014 (the subsequent purchasers).

The distinction in purchase dates is significant because there was a Right to Repair Act passed in 2002 effective January 1 ,2003 which applied to new residential units and established a non-adversarial method for a homeowner to deal with construction defects.  The builder has the alternative to contract for its own alternative method of dealing with homeowner defect complaint issues which is what McCaffrey did in this case.

The homeowners who purchased their homes after January 1, 2003 were notified by McCaffrey that the non-adversarial statutory remedy was replaced by the remedy proposed by McCaffrey which was perfectly legal.  There was a two-step process.  The first step requires the homeowner to notify McCaffrey of the claimed defects in writing and gives McCaffrey an opportunity to inspect and repair them

McCaffrey has up to 60 days to meet and confer with the homeowner and then McCaffrey is to have access to the property to inspect.

The second step involved non-binding mediation of the matter cannot be resolved through JAMS (Judicial Arbitration and Mediation Services) –there is a short briefing schedule to be held in Fresno County and the matter is to conclude within 15 days of the submission of briefs.  If the mediation does not resolve the claim then either party may file a lawsuit.

The Real parties filed a suit against McCaffrey in 2011 to recover damages for the alleged defective construction of their homes.  McCaffrey filed a motion to compel the ADR or suit resolution subject to mediation as set forth in their agreements with the homeowners.

The motions were opposed by Real Parties.  The Real Parties contended that there was procedural and substantively unconscionable due to the lack of jury trial and McCaffrey’s procedure would increase the costs to Real Parties.

The trial Court agreed with the Real Parties and the Petition for Writ of Mandate was filed by McCaffrey to force the compliance with the Purchase Agreement.

The Appellate Court-5th District found that the Legislature enacted the Right to Repair Act to deal with homeowners and construction defects and set applicable s standards for dealing with the situation in a prompt and fair manner.  There is a discussion of the Act and its various provisions and requirements.

The Court also stated that the Act provided that the builder (McCaffrey) has the right to opt out of the procedure in lieu of its own procedure and can attempt repairs provided the procedure is fair and enforceable.

Here, in this case, the Court deals with what constitutes enforceable contractual provisions.  There is nothing in the Act that requires the builder who elects to use contractual procedures to provide a particular procedure or to comply with deadlines contained in the Act.

The Trial Court found both procedural and substantive unconscionability which was reversed by the Appellate Court. The Appellate Court found no contracts of adhesion; there was no oppression or surprise in McCaffrey’s contracts.  Furthermore the Appellate Court found no contracts of adhesion.  Since there was no surprise or misrepresentation by McCaffrey.  The Appellate court found only a low level of procedural unconscionability at best.

As to substantive unconscionability, the Appellate Court didn’t find any.  The substantive item pertains to the fairness of an agreement’s actual terms and to assessments of whether they are overly harsh or one-sided.

Real parties content the contractual provisions and the 60 day time period and JAMS requirements and the time period set forth above are substantively unconscionable.  Whether there are express time lines set forth, the provisions provide for a methodology to repair the defects. The Appellate Court found imputation of a reasonable time to perform the contract repairs and time line.  Furthermore there is a good faith covenant in all contracts.  Therefore McCaffrey was required to act in good faith in conducting the inspection, finding the repairs and completing the repairs.

Real Parties contended that there should be no Court supervision that the cost of the mediation would be too high but did not show that the fees would actually be exorbitant. The fact that the Real Parties had to detail their claims would be required under the statutory or any type of situation where the Seller/Builder is attempting to fix the defect. The mere fact that contractual procedures required by McCaffrey do not have the same terms as the statutory procedure do not render McCaffrey’s procedures unconscionable.

The Court granted the writ stating that the Real Parties had to comply with the McCaffrey contractual procedures in their contracts.  Furthermore the subsequent purchasers also had to comply with the procedures as this was requested by McCaffrey as well.

By Sean Thompson and John Klotsche, Hanson Bridgett LLP

In California, a litigant is only entitled to recover attorneys’ fees if a statute or contract allows such recovery.  As a result, one of the most important provisions in any construction contract is the attorneys’ fees clause.

Most attorneys’ fees clauses provide that the prevailing party in dispute resolution proceedings will be entitled to recover its attorneys’ fees incurred in enforcing the contract.  However, even if the attorneys’ fees provision states that only one party is entitled to fees, California Civil Code § 1717 mandates that the clause be applied reciprocally, providing either party the right to attorneys’ fees if it prevails in a dispute on the contract.

Fees Clause Can Affect Outcome

The presence of an attorneys’ fees clause can significantly affect the course and out-come of disputes arising from a construction project.

Conventional wisdom says that an attorneys’ fees provision is more likely to benefit a downstream party in a construction contract.  For example, a contractor seeking unpaid amounts from an owner is likely to benefit from the existence of an attorneys’ fees provision.  This is because, in the event of a dispute, the owner has the ability to withhold funds from the contractor, which usually forces the contractor to resort to litigation to get paid.

Because attorneys’ fees accrue to the “prevailing party,” the contractor may be more likely to get attorneys’ fees since the contractor generally only needs to achieve a “net monetary recovery” to be considered the prevailing party.  The same logic holds true if the scenario is a subcontractor versus a general contractor.  Since the general contractor has control over the flow of funds to the subcontractor, the sub is more likely to resort to filing suit and also more likely to be the prevailing party.  Because of this dynamic, upstream parties may exclude attorneys’ fees clauses from their construction contracts to diminish the likelihood of litigation.

Most Contracts Incorporate Performance Bond

Even if there is no attorneys’ fees provision in the body of the construction contract, most contracts incorporate, by reference, the contractor’s performance bond, which, under California law, causes the bond to be deemed a part of the construction contract. King v. Larsen Realty, Inc.,

121 Cal.App.3d 349,357 (1981).

Incorporating the bond into the contract is significant if, as is often the case, a bond requires the surety to pay the owner’s attorney’s fees arising from the contractor’s breach of contract.   The practical effect is that the contract (which, by law, includes the terms of the incorporated bond) purports to give only the owner a right to recover attorneys’ fees. However, as discussed above, Civil Code §1717 renders that one-sided attorneys’ fees clause mutual and, as a consequence, gives the contractor a basis to recover its attorneys’ fees from the owner.

Contractors should anticipate that owners may vehemently contest any attempt to recover attorneys’ fees based on the terms of an incorporated bond.  In doing so, an owner may point to the following language that is commonly used in such bonds: the “surety shall pay” the owner’s attorneys’ fees.

In light of this language, the owner may contend that the bond’s fee provision only affects the surety and, therefore, only the owner and surety may benefit from the fee clause.  This contention should fail because it incorrectly presumes that the contractor is not liable for the owner’s attorneys’ fees.  Under well-settled California surety law, the contractor, as the principal on the bond, is liable to the owner for those fees. See Cal. Code Civ. Proc. (“CCP”) §§ 996.410, 996.430 and 996.460; see also CCP § 2847.

Recent California cases have confirmed that a contractor may take reciprocal ad-vantage of such a one-sided attorneys’ fees provision in a bond. G. Voskanian Construction, Inc. v. Alhambra Unified School District, 204 Cal.App.4th 981 (2012); Mepco Services, Inc. v. Saddleback Valley Unified School District, 189 Cal.App.4th 1027 (2010).

Basis for Challenge?

Another problematic phrase that is commonly included in a performance bond and that an owner may use to challenge a contractor’s claim for attorneys’ fees is as follows: the owner can recover its attorneys’ fees “if suit is brought upon the bond.”  Based on this language, an owner may argue that there must be an actual cause of action against the bond for the contractor to benefit from the bond’s attorneys’ fee provision.

This argument should fail so long as the contractor was not represented by counsel when negotiating the contract, which will usually be the case in hard-bid public works contracts. This is because of a 1983 amendment to Civil Code § 1717, which provides that the attorneys’ fees provision applies “to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract and the fact of that representation is specified in the contract.”  Civ. Code § 1717(a)

Put another way, when a contract contains an attorneys’ fees clause, the clause applies to all aspect of the contract.  Thus it allows a prevailing party to recover its attorneys’ fees arising from any action on the contract, despite language that purports to limit the recovery of fees to a specific type of action (e.g., actions “brought upon the bond”). See Harbor View Hills Community Association v. Torley, 5 Cal. App.4th 343 (1992).

Although the Voskanian and Mepco cases involved situations where there was a claim on the performance bond, El Dorado Irrigation District v. Traylor Bros., Inc., 2007 U.S. Dist. LEXIS 14440 (2007) reached the same result when there was no claim on the performance bond.

The take-away from these cases is that the presence of an attorneys’ fees clause in a performance bond may provide a contractor or subcontractor with unexpected leverage in a project dispute.

Though beyond our scope here, there are procedures that upstream parties can employ to minimize the risk that the party seeking money will be the prevailing party, such as issuing statutory offers to compromise (aka “998 offers”).