AGCC/LAC NEW CASES OF INTEREST
(March 10 through April 4, 2003)

Prepared by Aaron P. Silberman

Meeting Date: April 8, 2003

Principal’s Section 998 Offer Does Not Automatically Exonerate Payment Bond Surety from Liability

Scott Co. of California v. United States Fidelity & Guaranty Ins. Co., 2003 DJDAR 3245 (3/21/03)

The Court of Appeal reversed the trial court’s grant of summary judgment in favor of defendant sureties and against plaintiff subcontractor and remanded the issue of whether subcontractor was entitled to recover its attorneys’ fees in lawsuit against owner, GC and sureties.

Scott Co. was the mechanical subcontractor for Blount, Inc., the general contractor for the construction of the San Jose Convention Center.  After Blount allegedly failed to pay Scott for cost overruns due to delays and change order work, Scott sued Blount, the owner (Redevelopment Agency of the City of San Jose), and three sureties that had issued Blount a payment bond. 

Before trial, Scott settled with the City for approximately $1.4 million.  Scott also received and rejected a CCP § 998 offer from Blount for $900,000.

At trial, the trial court found that (1) Scott and Blount each caused a portion of Scott’s overrun, (2) Scott was entitled to $442,054 in damages from Blount, (3) Scott was entitled to its costs and fees incurred before Blount’s § 998 offer, and (4) Blount was entitled to its post-offer costs and fees.  The net result of the court’s costs and fees awards was that Scott owed Blount $46,726.86.  By stipulation, Scott’s causes of action against the sureties were held in abeyance while Scott and Blount appealed the trial court’s judgment.

While Scott and Blount’s appeals were pending, the sureties moved for summary judgment, contending that they were not liable for Scott’s damages because Scott had a judgment against Blount, Blount was not in default, and the court’s ruling on Blount’s liability was res judicata (i.e., Scott could not relitigate its damages against the sureties).  The sureties also contended they were not liable for Scott’s fees and costs incurred after Blount’s § 998 offer.  Relying on R.P. Richards, Inc. v. Chartered Constr. Corp., 83 Cal. App. 4^th 146 (2000), the trial judge initially assigned to the case, Judge Robert H. Kroninger, denied the sureties’ motion as to fees and costs on the ground that Blount’s § 998 offer did not purport to bind the sureties.  (He declined to rule of the motion regarding Scott’s damages based on a technicality – the sureties had not alternatively moved for summary adjudication.)

After Judge Kroninger withdrew from the case, the sureties moved the new judge assigned to the matter, Judge Conrad L. Rushing, to reconsider the court’s denial of its summary judgment motion.  Judge Rushing reconsidered and granted the sureties’ motion for summary judgment.  Scott appealed.

Scott first contended that Judge Rushing’s order exceeded the court’s jurisdiction because the requirements for reconsideration in CCP § 1008 (“new or different facts, circumstances, or law”) were not present.  While the Court of Appeal agreed that the requirements were not met, it held that § 1008 cannot constitutionally  limit a court’s inherent discretion to reconsider its own prior rulings.

On the issue of damages, the court affirmed the trial court’s grant of summary judgment for the sureties.  The statutory scheme for public works projects (Civil Code §§ 3247-3250) does not contravene the general rule in Civil Code § 2809 that the obligation of a surety is no greater than that of its principal.  Since the principal, Blount, had not defaulted (and, according to the court, had satisfied the judgment at some point), Scott’s damages claim against the sureties must fail.  The court added that Scott could not recover from the sureties any damages attributable to the City because Blount, not the City, was the principal on the payment bond.

The court reached a different result, however, on Scott’s post-998 settlement offer costs and fees.  Civil Code § 3248 provides that, if a general contractor fails to pay a subcontractor, the sureties on the bond will pay amounts owed to the subcontractor and, where suit is brought on the bond, a reasonable attorneys’ fee.  The sureties’ obligation under this section is not subordinate to the general statutes making sureties’ liability commensurate to that of their principals.  In other words, a surety may owe a claimant its fees and costs, even if its principal does not.

The question remained whether Blount’s § 998 offer relieved the sureties of their duty to pay Scott’s post-offer fees and costs.  Although Scott prevailed at trial against Blount, Blount was relieved of its duty to pay Scott’s post-offer fees and costs because its § 998 offer exceeded Scott’s recovery.  The court held that issues of fact precluded summary judgment for the sureties on this issue.  It remanded the case for the trial court to determine whether the sureties were intended to be parties to Blount’s § 998 offer.  If they were, they would not be liable for Scott’s post-offer fees and costs; if they were not, they would be so liable.