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Thelen Reid Brown Raysman & Steiner LLP
In
1994, B.P. Richards was a subcontractor to general contractor
Chartered Construction Corporation on a project for the
Delano Joint Union High School District in Fresno County.
A dispute arose over progress payments, and Richards filed
a $498,238.76 stop notice. Travelers Casualty and Surety
Company, as surety, executed a stop notice release bond.
Richards
filed suit against Chartered, the district and Travelers.
The litigation was stayed pending arbitration. Richards
and Chartered arbitrated the matter, and during the arbitration
they entered into a voluntary settlement agreement under
which Chartered agreed to pay $575,000 over several years:
$385,000 for work performed and $180,000 in attorney fees.
The settlement agreement contained a release of all mutual
claims, present and future, arising from the subject matter
of the action. The prevailing party in a suit to enforce
the settlement agreement would receive attorney fees. The
trial court retained jurisdiction over the action until
the agreement was fully performed. Travelers was not a party
to the settlement agreement and never was asked for its
consent.
In
1998, Chartered defaulted on a settlement payment. Richards
successfully lifted the stay pending arbitration and pressed
the litigation against Chartered and Travelers. The court
granted Richards' motion against Chartered for entry of
judgment based on the settlement agreement and awarded attorney
fees in an amount that included Richards' costs of enforcing
the settlement agreement against Travelers. Chartered appealed
the award.
Travelers
moved for summary judgment on grounds that the settlement
agreement's mutual release clause constituted a release
of Chartered's original obligation to Richards, which exonerated
Travelers from its surety obligations as a matter of law.
The court denied the motion, concluding that the release
was conditioned upon full payment. Travelers also unsuccessfully
sought a writ from the Court of Appeal. At trial, Travelers
used the same argument in a motion in limine to exclude
all evidence other than the settlement agreement. The court
granted the motion and entered judgment in favor of Travelers.
Richards appealed, and the appeal was consolidated with
Chartered's.
Regarding
Richards' appeal, the Court of Appeal affirmed Travelers'
exoneration. B.P. Richards, Inc. v. Chartered Construction
Corp. ___ Cal.App.4th ___, 99 Cal.Rptr.2d 425, 2000
Daily Journal DAR 9227 (Cal.App. 2000). Travelers argued
that Civil Code §2819, concerning suretyship generally,
applied to extinguish its obligation. Section 2819 provides
that a surety is exonerated if the promisee alters the principal
obligation in any way or impairs or suspends the promisee's
rights or remedies against the principal unless the surety
consents or is indemnified by the principal. The statute
applies to material alterations of the principal obligation
in a manner not contemplated by the surety. Thus, when Richards
entered a settlement agreement releasing the underlying
claim, it materially altered Chartered's obligation, and
by not obtaining Travelers' consent, it exonerated the surety.
The
court also held that Civil Code §2810 compelled the
same result. It provides that a surety is not liable if
the principal's liability on the original obligation ceases.
Here, the general contractor's liability on the original
obligation ceased as a result of the releases in the settlement
agreement with the subcontractor. "[The subcontractor]
fully released [the general contractor] from its claim for
payment under the bonded obligation and accepted, in lieu
thereof, an unbonded obligation under the settlement agreement."
Richards
argued that Civil Code §§3225 and 3226, which
specifically apply to stop notice release bonds, applied
to prevent such exoneration. Section 3225 states that the
surety's obligation cannot be exonerated or released by
"any change, alteration, or modification in or of any
contract, plans, specifications" or "extension
of the time for any payment." Section 3226 states that
the sole condition for recovery on the bond is that the
claimant be unpaid and qualified to recover under the statutes.
The
Court of Appeal concluded that §3225 is narrower in
scope than §2819. Section 3225 applies to changes in
the contract because of the nature of the work, materials
used and timing. In those instances, repeatedly requiring
the surety's consent would be burdensome. Section 3225 does
not apply to a release of the underlying contractual obligation,
as in the settlement agreement. Regarding §3226's mandate
that there be no additional conditions imposed for recovery
on a bond, the Court of Appeal held that its decision does
not impose an additional condition but merely recognizes
that there can be no recovery on a bond when the beneficiary
has released the underlying obligation.
The
court indicated that the subcontractor may have had an argument
based on Civil Code §2822 (b). It provides that if
the creditor agrees to accept from the principal less than
the full amount due without the surety's consent and without
any other change to the underlying agreement between the
creditor and principal, §2819 does not exonerate the
surety from liability for the lesser agreed amount. However,
the court found that the subcontractor had waived this argument
by failing to raise it in its opening brief.
Regarding
Chartered's appeal, the Court of Appeal upheld the award
of attorney fees. The renewed litigation against Travelers
and the resulting increase in attorney fees was directly
caused by Chartered's breach of its payment promise in the
settlement agreement.
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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.
©2000 Thelen Reid Brown Raysman & Steiner LLP
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