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Payment Bond Surety Entitled to Award of Attorneys' Fees Although Defended by Principal



For contractors involved in California public works projects the scenario is not uncommon: The general contractor awarded the public works project is required to obtain a payment bond for the benefit of subcontractors and suppliers and the payment bond surety issuing the payment bond requires the general contractor to defend and indemnify the surety from and against any claims against the payment bond.


In Cell-Crete Corporation v. Federal Insurance Company, 82 Cal.App.5th 1090 (2022), the 4th District Court of Appeal examined whether a payment bond surety, who prevails in a claim against the payment bond, is entitled to statutory attorneys’ fees when the party actually incurring the attorneys’ fees was the general contractor, pursuant to its defense and indemnity obligations, as opposed to the surety itself.


The Cell-Crete Case

General contractor Granite Construction Company was awarded a public works contract issued by the City of Thermal known as the Airport Boulevard at Grapefruit Boulevard and Union Pacific Railroad Grade Separation Project. We’ll just call it the “Project.” Subcontractor Cell-Crete Corporation entered into a subcontract with Granite for lightweight concrete and related work.


As required under Civil Code section 9554, Granite furnished a payment bond on the Project. The payment bond was issued by Federal Insurance Company. Federal, as a condition of issuing the payment bond, required Granite to defend and indemnify Federal from and against any claims against the payment bond “including court costs and attorneys’ fees, which it shall at any time incur by reason of its execution and/or delivery of said bond or bonds or its payment of any claim or liability thereunder.”


The subcontract between Cell-Crete and Granite included an arbitration clause, and when a dispute arose on the Project, Cell-Crete and Granite arbitrated the dispute over seven days starting October 8, 2018 and ending on January 23, 2019. During the arbitration, Cell-Crete sought $309,557 for work performed and delay costs. Federal was not a party to the arbitration. At the conclusion of the arbitration, the arbitrator awarded damages to both Cell-Crete and Granite with Granite eking out a net positive award of $130.82. The arbitrator declined to award attorneys’ fees or costs to either party.


Prior to arbitrating the dispute, Cell-Crete had filed a lawsuit against Granite in the Riverside Superior Court. In its lawsuit, Cell-Crete, in addition to suing Granite, also sued Federal under the payment bond. The same law firm that represented Granite in the arbitration also represented Federal in the superior court action.


After the arbitration award, Grant petitioned the trial court to confirm the arbitration award. After the arbitration award was confirmed and Cell-Crete’s action was dismissed, Federal filed a motion for attorneys’ fees and costs. The trial court, however, denied Federal’s motion. Although the trial court recognized Federal as the “prevailing party” and that Federal would otherwise wise be entitled to recovery of its attorneys fees under Civil Code section 9564, the trial court found that “Federal incurred no such expenses. Instead all such costs and fees were borne by Granite” and “[h]aving paid nothing in fees and costs, Federal has suffered not loss, and thus may not collect any compensation for the non-existent loss.”


Federal appealed.


The Appeal


On appeal, Federal argued that it was entitled to recover its costs under the plain language of Code of Civil Procedure section 1032(b) which provides that a prevailing party is “entitled as a matter of right to recover costs in any action of proceeding” and under Code of Civil Procedure section 1033.5(c)(1) which provides that “[c]osts are allowable if incurred, whether or not paid.”


Citing to a decision by the 1st District Court of Appeal in Litt v. Eisenhower Medical Center, 237 Cal.App.4th 1217 (2015), in which the 1st District reversed a trial court’s denial of costs and expert fees because those costs were paid by another party pursuant to an indemnity provision, the Court of Appeal held that “Federal incurred the legal liability to pay the litigation costs even though Granite agreed to indemnify them for their expense” and that “[w]e see no reason to depart from the plain meaning of the statute or the construction given it by our sister court.”


As to attorneys’ fees, the Court of Appeal explained that, “[u]nlike in the case of costs, there’s no separate statute specifying [that] it doesn’t matter whether the prevailing party paid the litigation expenses.” Nevertheless, held the Court of Appeal, “we conclude there’s no need to add that belt to the suspenders of section 9564(c).” “The general rule with respect to fee-shifting statutes,” explained the Court of Appeal, “is that the judge must award reasonable attorney fees to the prevailing party regardless of whether the prevailing party ultimately is responsible to pay the fees.”


Finally, responding to Cell-Crete’s argument that Federal would be obligated to pay any

attorneys’ fees awarded to Granite, and therefore should not be awarded attorneys’ fees as at all because it was Granite rather than Federal that incurred those fees, the Court of Appeal held that the “issue is not properly before us, but we would not be dissuaded from our interpretation should it turn out to be true” since “[t]he right of a party to seek an award of statutory attorney fees is not equivalent to a right to retain such fees.”


Conclusion


For payment bond sureties and their principals, the Cell-Crete decision clarifies that prevailing payment bond sureties, even if defended by their principals pursuant to a defense and indemnity agreement, are entitled to recover the attorneys’ fees incurred in defending against claims against the payment bond. For principals, the case also suggests that sureties are likely required to pass along any attorneys’ fees awarded by a court to offset attorneys’ fees actually incurred by the principal in defending the surety.

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