Granite Construction Company v. Bond Safeguard Ins. Co.

gavel-2Unpublished Third Appellate District (Sacramento County)

Labor and material bond not exonerated by contractor’s and principal’s conditional settlement agreement and release.

The principal to a labor and material bond failed to pay a contractor for installation of public improvements for a subdivision.  The contractor sued the principal, and they subsequently entered into a conditional settlement agreement and release, and stayed the lawsuit.  The release and dismissal were contingent upon full payment by the principal within 6 months. The settlement agreement also required the principal’s signed stipulation for entry of judgement against it in the event  of its non-performance within the settlement agreement.  The surety that provided the relevant labor and material bond was not involved in the negotiation of the settlement agreement and did not consent to the settlement agreement.

When the principal failed to perform under the settlement agreement, the contractor then filed an amended complaint naming the surety as a defendant.  The contractor and surety filed cross-motions for summary/ judgement/adjudication.  The trial court granted the contractor’s motion and denied the surety’s.  The trial court rejected the surety’s contention that the labor and material bond were exonerated when the contractor entered into the settlement agreement with the principal.  As to the surety, judgement was entered in favor of the contractor for the full amount of the bond $467k, plus costs, prejudgement interest (from the date the contractor filed its complaint against the surety), and 225k in attorney’s fees.

The appellate court affirmed on the issue of exoneration.  It found inapposite R.P. Richards, Inc. v. Chartered Construction Corp., 83 Cal. App. 4th 146 (2000) (“R.P.Richards”), a case relied upon by the surety. In R.P. Richards, a subcontractor on a public works project settled a lawsuit against the general contractor and its surety for unpaid work. The settlement was for a lesser sum than what was allegedly owed the subcontractor, and the settlement agreement included a releases of all mutual claims.  The surety was not a party to the settlement agreement and did not consent to it.  The general failed to perform under the settlement agreement and the subcontractor resumed prosecution of the lawsuit against the general and surety, but “later moved for entry of judgement against the general contractor under the settlement agreement (instead of prosecuting the underlying claims to judgement).”   The surety successfully argued in the trial court that the settlement agreement extinguished its obligation under the bond.  The appellate court agreed.  “It said the release extinguished the principal bonded obligation, replaced the same with unbonded obligation under the settlement agreement, and thereby impaired the subcontractor’s rights and remedies against the general contractor within the meaning of [Civil Code] section 2819.”

In the present case however, the “word of the settlement agreement clearly show the parties’ intent that the release by [the contractor] was was conditioned on [the principal’s] full payment to [the contractor] of the sums set forth in section 1 of the settlement agreement and the filing of a joint dismissal with prejudice of [the contractor’s} complaint against [the principal].”  Thus, unlike in R.P. Richards, the contingent nature of the release distinguished this case from R.P. Richards.  Accordingly, because the contractor did not release any of its claims against the principal, the contractor did not impair its rights or remedies against the principal or extinguish the bonded claim against the principal.

On the issue of attorney’s fees, however, the appellate court reversed.  While the bond insures to the benefit of contractors, and while the surety would be obligated to pay the contractor’s reasonable attorney’s fees up to the face sum of the bond, the bond did not obligate the surety to pay for the contractor’s legal fees that exceeded the penal sum of the bond.


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© 2013 Robert L. Bachman