To Be or Not to Be – Subdivision Bonds Does Not a Public Works Project, Make it Be

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“To be, or not to be, that is the question— whether ’tis Nobler in the mind to suffer the Slings and Arrows of outrageous Fortune, or to take Arms against a Sea of troubles . . .” – Hamlet, William Shakespeare

ShakespeareI’ve never been much of a Shakespeare fan.  I only moderately tolerated even the MTV-inspired Romeo + Juliet set in fair Verona Beach with rapiers metaphorically replaced with guns manufactured by Dagger and Sword.

But you’ve gotta give Shakespeare props for his quotability, which have transcended his plays written 400 years ago to modern day, as in the next case R&R Pipeline, Inc. v. Bond Safeguard Insurance Company, Case No. B246974 (January 27, 2014).

To Be or Not to Be

In 2008, R&R Pipeline, Inc. (“R&R”) entered into a construction contract with developer Los Valles Company, LP (“Los Valles”) to install a storm drain, sanitary sewer line and other related improvements on property being developed into a golf course and residential community.  In connection with the project, Bond Safeguard Insurance Company (“Bond Safeguard”) issued a labor and material bond.

Los Valles later failed to pay R&R for the work it performed to the tune of over $1 million.  And, R&R, in turn, filed suit against Los Valles for breach of contract and against Bond Safeguard under the labor and material bond.

However, Bond Safeguard, seeking to taketh what it had earlier giveth, successfully argued to the trial court that nay, its bond was not subject to R&R’s claim, because R&R’s claim was fatally flawed!  Because the work performed by R&R was work required by the County of Los Angeles (“County”) as a condition of receiving a final map, argued Bond Safeguard, R&R’s work was part of a public work of improvement and R&R failed to either serve: (1) a preliminary notice on the County under former Civil Code section 3098; or (2) a special bond notice on Bond Safeguard under former Civil Code section 3252.

The trial court, noting that Bond Safeguard’s bond was labeled a “Los Angeles County Public Works Department Labor and Material Bond,” found that R&R’s work was part of a public work of improvement and that R&R failed to serve either of the notices required on public works projects under Civil Code sections 3098 or 3252.

Subdivision Bonds Does Not a Public Works Project, Make it Be

On appeal, the Court of Appeals for the Second District, noted that the “primary issue in [the] case is whether the work of improvements contracted for between Los Valles and R&R is properly characterized as public work or private work.”  If a public work, R&R was required to serve either of the notices under Civil Code sections 3098 or 3252.  If a private work, R&R was not required to do so.

Looking at the agreement between Los Valles and the County and the payment bond itself, the Court of Appeals held that R&R’s work was not part of a public works project, and that R&R was not required to serve either of the notices under Civil Code section 3098 or 3252.

As to the agreement between Los Valles and the County, the Court held that the agreement between Los Valles and the County was not a public works contract, because the definition of “contract” under former Civil Code section 3088 is a contract between an “owner” and an “original contractor” and the County did not own any portion of the property being developed.

As to the payment bond, the Court held that there is a difference between payment bonds under former Civil Code section 3248 – which requires a surety bond in the sum of not less than 100 percent of the total amount payable on the contract for works of improvement contracted for by a public entity – and subdivision bonds under Government Code section 66410 – which requires a bond of not less than 50 percent nor more than 100 percent of the total estimated cost of the improvement.  The bond issued by Bond Safeguard were not for 100% of the total amount payable to R&R, but rather, approximated only 50% of the estimated cost of the improvements.

Conclusion

We’ve reported on a couple of cases recently in which lines were blurred as to whether a project was a public or a private works project. – California Paving and Nissho – both of which, coincidentally, were also discussed in the R&R case. The common thread running between these cases is that when seeking to enforce your statutory construction payment remedies, it’s important to know what kind of project you are working on, because the construction payment laws have different requirements depending on whether a project is a private or public works projects.  And, as discussed in those cases, when making that assessment, you need to look at the project as a whole, including:

  1. Who owns the underlying property, a public entity, or a private entity?
  2. Were prevailing wages paid which would indicate it is a public works project?
  3. Is the bond in which you are making claim for 100% of the cost of the improvements, indicating a public works project, or something less than 100% of the cost of improvements?

Be careful out there.

Topics:  Municipal Bonds, Public Works, Subdivision

Published In: Construction Updates, Government Contracting Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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