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Thelen Reid Brown Raysman & Steiner LLP
Denver D. Darling, dba Darco Construction, was a subcontractor
to Controlled Environments Construction Co. on Controlled's
project to construct a 120,000 square foot cold storage
facility. Darco performed the structural concrete construction,
including construction of the suspended concrete slab floor
of a large loading dock. Darco also installed the concrete
floor in the freezer area upon which mobile storage racks
were installed by another contractor.
At
the end of the job, Controlled alleged that the loading
dock floor was uneven and breached Darco's contract specifications,
which required that variations in flatness not exceed 1/8
vertical inch per 12 linear feet. Controlled withheld Darco's
$101,580 retention and demanded that Darco correct the floor.
Darco paid $15,000 to have the floor leveled, but Controlled
still was not satisfied.
Darco
sued Controlled for breach of contract, common counts and
wrongful withholding of retention under California Civil
Code §3260. Darco's complaint also pleaded a claim
against Traveler's Insurance, which issued Controlled's
contractor's state license bond. Controlled filed a cross-complaint
for specific performance, seeking to compel Darco to correct
the dock floor. After a bench trial, the trial court ruled
that Darco was entitled to recover the full amount of its
retention. The trial court, however, refused to award Darco
the interest penalty and attorney fees provided by §3260
for wrongfully withheld retention. The trial court denied
Controlled's post-trial motion for cost-of-proof sanctions
for Darco's failure to admit in discovery that the dock
floor did not meet the 1/8 inch variance requirement. Darco
admitted that at trial. The judgment also provided that
Darco would take nothing from Travelers if Controlled paid
Darco in full. All parties appealed.
Darco Was Properly Licensed
On
appeal, Controlled contended that Darco was not properly
licensed to perform the work. Controlled argued that Darco
was a Class B general contractor and not a specialty trade
contractor. Therefore, Darco could not take a subcontract
that did not involve at least two unrelated specialty trades.
The Court of Appeals rejected this argument. Denver D.
Darling v. Controlled Environments Construction Co.,
2001 DAR 5985 (June 15, 2001). The court found that the
controlling statute was a prior version of Business and
Professions Code §7057. That section had been interpreted
in Home Depot USA, Inc. v. Contractors State License
Board, 41 Cal.App.4th 1592, 1599 (1996). Under that
interpretation of the prior version of §7057, a general
building contractor could accept contracts involving two
or fewer building trades or crafts so long as the contractor's
principal contracting business was in connection with building
structures that required the use of two or more unrelated
building trades or crafts. Here, Darco demonstrated at trial
that it did concrete construction as well as general contracting,
such as building industrial warehouses and concrete tilt-up
structures and typically used about 11 subcontractors on
its projects. Thus, Darco was properly licensed to perform
the work because its principal business was in connection
with structures requiring two or more unrelated building
trades.
Parol Evidence Was Admissible to Interpret Specifications
An
additional (if not central) issue on appeal was whether
the trial court properly interpreted the subcontract specifications
pertaining to flatness of the floor. The specifications
stated: "[F]inished uniform surfaces measured with
a 12 foot straight edge should not vary by more than 1/8
inch." After that sentence at the time of contracting,
Darco hand-wrote: "Floor flatness @ frezzer [sic] will
be dictated by rail elevation." The trial court determined
that the specification was ambiguous and capable of two
different meanings so that parol evidence could be admitted
to explain the meaning. Darco argued that his handwritten
addition was evidence that the parties intended the clause
to apply only to the freezer floor. Further, the court noted
that the owner paid Controlled fully for construction of
the building. There was no indication that the owner was
dissatisfied with the loading dock. Thus, the trial court
held that the specifications should be read to require that
the loading dock floor merely had to meet industry standards
and be suitable for the building owner's use. The trial
court held that the floor met such standards. It also explicitly
held that neither party breached the contract because both
parties' interpretations were reasonable. The appellate
court upheld the trial court's reasoning and agreed that
Darco was entitled to its retention.
No Cost Of Proof Sanctions When Discovery Response Was
Based on Interpretation of an Ambiguous Contract Provision
The
appellate court upheld the trial court's rejection of Controlled's
post-trial motion for cost of proof expenses. In discovery,
Controlled had propounded a request for admission to Darco
stating: "[A]dmit that the dock floor was not completed
by you in accordance with the contractual specifications."
Darco refused to admit this. At trial, Darco agreed that
the dock floor did not meet the 1/8 inch in 12 feet standard
but asserted that the floor met industry standards. Controlled
argued that Darco should be made to pay for Controlled's
costs of proof. The trial court denied the motion because
it found that the contract was ambiguous as to the flatness
of the dock floor so that Darco's denial was not technically
incorrect. The appellate court affirmed.
General Contractor Is Liable for Attorney Fees and Interest
for Withholding Retention in Excess of 150 Percent of the
Amount in Bona Fide Dispute
Civil
Code §3260 provides that a general contractor must
pay each subcontractor retention within 10 days of its payment
by the owner unless a bona fide dispute exists between the
subcontractor and general contractor. If such a dispute
exists, the retention withheld must not exceed 150 percent
of the estimated value of the disputed item. Failure to
comply results in a charge of 2 percent a month in interest
plus attorney fees to the prevailing party. Darco argued
that while a bona fide dispute may have existed, Controlled
withheld more than the 150 percent allowed, entitling Darco
to interest and attorney fees. The appellate court agreed.
License Bond Issuer Is Not Required to Pay When Code
Violation Was Not Willful
The
appellate court agreed with Travelers' contention on appeal:
Travelers was not obligated to pay out on the contractor's
license bond because there was a good faith dispute and
any violation of the license laws was not willful.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2001 Thelen Reid Brown Raysman & Steiner LLP
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