In Cell-Crete Corp. v. Fed. Ins. Co., a California court awarded a surety attorneys’ fees and costs that its principal incurred defending the surety against a claim on a public-works payment bond.[1] This is good news for sureties and their principals, who commonly defend sureties against such claims pursuant to a general indemnity agreements (“GIA”).
The payment bond and related litigation
Granite Construction Company (“Granite”) entered into a contract with the County of Riverside to complete a roadway project (“Project”). Granite subcontracted with Cell-Crete Corporation (“Cell-Crete”) for installation of light weight concrete at the Project. Granite obtained a payment bond (the “Bond”) from Federal Insurance Company (“Federal”) pursuant to the California Little Miller Act,[2] which requires payment bonds for any public project in excess of $25,000. As Granite’s surety, Federal required that Granite sign a GIA obligating it to defend, indemnify, and hold Federal harmless against claims made against the Bond.
Disputes arose between Granite and Cell-Crete during the Project and Cell-Crete eventually filed an arbitration demand seeking $309,557, plus its attorneys’ fees and costs. Granite counter-sued Cell-Crete seeking damages, as well as its attorneys’ fees and costs.
Cell-Crete then filed a separate lawsuit against Granite and Federal seeking to recover its damages and attorney’s fees and costs under the Bond. Granite retained a law firm to represent it in the arbitration and lawsuit. Federal tendered its defense in the lawsuit to Granite. As required by the GIA, Granite paid the law firm representing Granite in the arbitration and lawsuit to also represent Federal in the lawsuit so that Federal would not incur any fees or costs. The arbitrator eventually awarded damages to both parties, but Granite was awarded $130.83 more than Cell-Crete. The arbitrator refused to award either party its fees and costs.
The court granted Granite’s petition to affirm the arbitration award and dismissed the lawsuit. The trial court then granted Federal’s motion for attorney fees and costs because Granite’s slim margin of victory rendered it the “prevailing party.” However, the trial court declined to award Federal any attorney fees or costs because “[h]aving paid nothing in fees and costs, Federal has suffered no loss, and thus may not collect any compensation for the non-existent loss.” Federal appealed the trial court’s ruling.
The surety’s statutory right to attorney fees and costs on a public works project
The appellate court reversed the trial court, stating: “The general rule with respect to fee-shifting statutes is that the trial judge must award reasonable attorney fees to the prevailing party regardless whether the prevailing party ultimately is responsible to pay the fees.”[3]
Cell Crete argued existing case law only mandated attorney fees and costs paid by a third party in public interest litigation. In response, the appellate court pointed out that existing case law permitted recovery in numerous circumstances including, but not limited to, when a government agency or charitable organization represents claimants who otherwise could not afford to pursue their claims, where a corporation is represented by its in-house legal counsel, and where one party agrees to pay another’s legal fees pursuant to an indemnity agreement.[4]
Takeaways
The specter of paying the adverse party’s attorneys’ fees and costs helps deter frivolous lawsuits seeking to enforce performance bonds on public works projects. Any rational party considering whether to make a claim against a performance bond on a public works project lawsuit first assesses whether it makes economic sense to pursue the claim. That analysis includes, in part, an assessment of whether one could be required to pay the surety’s defense costs. As the value of defense costs and possible risk of failure increase, the incentive to forgo the claim also increases. The Cell-Crete ruling also encourages sureties and their principals to continue using GIAs in a manner that should serve to keep bond premiums lower than they might otherwise be. That, in turn, benefits California tax payers because it reduces the cost to construct public works projects.
[1] 82 Cal. App. 5th 1090 (2022).
[2] Cal. Civil Code §§ 9550, et seq.
[3] Id., at 1096; see California Civil Code § 9564(c)[3](“In an action to enforce the liability on the bond, the court shall award the prevailing party a reasonable attorney’s fee.”).
[4] Cell-Crete, 82 Cal. App. 5th at 1097 (citations omitted).
