Second District, Division 5 Confirms That Surety Is Usually Liable For Fees If Obligor-Obligee Contracts Calls For Fees.
This next case should be of interest for you practitioners who practice construction law involving payment/performance bonds issued by a surety. Usually, the bonds confirm a tripartite arrangement between the obligor (in the next case, the subcontractor), the obligee (the contractor), and the surety (usually an insurance company). However, there is a twist when the contractor has also obtained a similar bond from the same surety running in favor of the property owner. What happens when there is a liability determination and subsequent fees award? Answer: Depends on the factual situation and web of relationships, as the next decision makes clear.
In First National Ins. Co. v. Cam Painting, Inc., Case No. B200830 (2d Dist., Div. 5 May 15, 2009) (certified for publication), surety on subcontractor’s bond paid out on a claim, but allocated the loss 50/50 between both the subcontractor and contractor bonds (given that the same surety was on the hook for the same project). After a trial, the lower court awarded damages and assessed attorney’s fees in favor of surety and against contractor based on the contractor bond. (These rulings broke down as a 50/50 divide on damages and $25,203 in attorney’s fees awarded jointly and severally against the contractor and subcontractor bonds.) These determinations were reversed because the lower court should have fixed the entire loss on the subcontractor bond running in favor of contractor, because the claim centered around subcontractor’s failure to pay a supplier. “The coincidental fact that [surety] also bonded [contractor] did not dilute its obligation to [contractor] as obligee on the [subcontractor] bond.” (Slip Opn., p. 11.)
In a secondary aspect of the case, the trial court independently found that subcontractor breached its contract with contractor by drilling in areas where there was asbestos, awarding $12,922 in damages jointly and severally against subcontractor and surety. The lower court found that contractor prevailed on this claim, awarding $20,000 in attorney’s fees against subcontractor but refusing to award fees against surety. Again, this failure to include surety in the fees award resulted in a reversal. This result followed from the nature of a surety’s liability—which is commensurate with that of the principal (here, subcontractor). Although many surety bonds incorporate the principal-claimant contract containing fees clause (so that the surety is indeed liable), the appellate panel found that incorporation by reference was not a necessary predicate for surety fee exposure. “We cannot see that the cases, or the statute [Civil Code section 2808], are so limited. Instead, a performance bond and the underlying contract must be read together, as ‘parts of … substantially one transaction.’” (Slip Opn., at pp. 12-13.) Thus, surety was ordered to be jointly and severally liable to contractor for the $20,000 fee award.
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