If you’re involved in public works projects you know that direct contractors are required to furnish payment bonds on public works projects exceeding $25,000.
If a subcontractor or supplier is not paid, they can then file suit against the surety company that issued the payment bond, and if they prevail in the lawsuit they are entitled to recover their reasonable attorney’s fees.
But, as one subcontractor discovered, just because a public entity requires that a payment bond be furnished and just because a payment bond is in fact furnished, does not necessarily mean it’s a public works project.
If it Walks Like a Duck and Talks Like a Duck . . .
In Nissho of California, Inc. v. Bond Safeguard Insurance Company, Case No. E052746 (October 22, 2013), landscape subcontractor Nissho of California, Inc. (“Nissho”) performed landscaping work under contract with developer Suncal PSV, LLC (“Suncal”). When Suncal failed to pay Nissho, Nissho filed suit to collect under payment bonds issued by surety Bond Safeguard Insurance Company (“Safeguard”).
The payment bonds were issued in connection with a subdivision improvement agreement (“SIA”) between Suncal and the City of Palm Springs (“City”) for the development of a private residential community called Avalon Palm Springs Village. Among the payment bonds furnished by Suncal was a payment bond for offsite landscaping improvements on property owned by the City.
Prior to entering into the SIA, Suncal had obtained a payment bond for the offsite landscaping improvements in the amount of $566,200, representing 50% of the estimated cost of the offsite improvements, which was accepted by the City.
As it was nearing completion of the offsite landscaping, Nissho gave notice to Suncal and Safeguard that it had not been paid. When Suncal and Safeguard failed to pay Nissho, Nissho then filed suit against Suncal and Safeguard seeking $909,986.96 under the offsite landscaping payment bond.
After a bench trial, the court ruled in favor of Nissho in the amount of $1,041,148.55. Thereafter, as the prevailing party, Nissho filed a motion for attorney’s fees which the court denied.
Both Nissho and Safeguard appealed. Nissho appealed the denial of its motion for attorney’s fees, and Safeguard appealed the amount of the award on the ground that it was in excess of the amount of the offsite landscaping payment bond.
It May Just be a Goose
On appeal, the Court of Appeals for the Fourth Appellate District found that Nissho was not entitled to recover its attorney’s fees and, moreover, that its recovery was limited to the $566,200 amount of the payment bond, because the offsite landscaping work was not a “public works” project under Civil Code sections 9550 et seq.
Although the City required that Suncal furnish a payment bond and a payment bond was furnished by Suncal, explained the Court, the offisite landscaping work was not a public works project because:
- Nissho did not pay prevailing wages which would indicate that its work was pursuant to a public works contract;
- Suncal was not a contractor performing work under a public works construction contract with the City, but rather, furnished the performance bonds under the terms of a subdivision improvement agreement; and
- the SIA did not refer to the offsite landscaping improvements as being “public improvements” or use similar words to indicate that the offisite landscaping work was a public works project under Civil Code section 9550 et seq.
Rather, explained the Court, the payment bond was furnished pursuant to Government Code section 66499 et seq., which permits a public entity to require that a developer provide security for performance of its obligations, including the furnishing of one or more payment bonds, but does not set the type or amount of such security; and further limits the recovery of reasonable attorney’s fees to those “incurred by [the] county (or city) in successfully enforcing [the] obligation” and not a subcontractor or supplier.
Thus, concluded the Court, the City was neither compelled to require that Suncal provide a payment bond equal to the full value of the offsite landscaping work, nor, was Nissho a party which was entitled to recover its reasonable attorney’s fees under the bond even though it was the prevailing party at trial.
Payment bonds are an important statutory remedy for subcontractors and suppliers on public works projects to help ensure that they are paid for the work they perform. But, as Nissho discovered, even though a public entity may require that a payment bond be furnished and a payment bond is in fact furnished on a project, does not necessarily mean that the work performed by a subcontractor or supplier is part of a public works project.
Rather, parties need to look at the transaction as a whole. Did the public entity put the work out to bid? Is there a construction contract with the public entity? Were prevailing wages paid on the project? Is there oversight and control by the public entity?
Because, unfortunately for Nissho, just because it walks like a duck and talks like a duck . . . doesn’t necessarily mean it’s a duck.