J. Alvarez Construction v. Western National Group

Filed 7/23/07 J. Alvarez Construction v. Western National Group CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment and order of the Superior Court of San Diego County, Charles R. Hayes, Judge. Affirmed in part; reversed in part; remanded with directions.

I.

INTRODUCTION

J. Alvarez Construction, Inc. (Alvarez), a framing contractor, entered into an agreement with Western National Group, L.P. (Western National), a general contractor, to assist in the construction of an apartment complex. After the parties had various disputes regarding Alvarez's and Western National's respective obligations under the agreement, Alvarez recorded a mechanics' lien on the property on which the apartment complex was being built. Shortly thereafter, Western National terminated Alvarez and ordered Alvarez off the job site. Western National subsequently recorded a "release bond" pursuant to Civil Code section 3143 for the purpose of releasing the property from the lien. Alvarez later recorded an additional mechanics' lien on the property.

Alvarez brought claims against Western National that included breach of contract, quantum meruit, and foreclosure on the mechanics' liens. After a bench trial, the trial court found in favor of Alvarez on all of its claims and entered a judgment awarding Alvarez damages in the amount of $637,344.99, and interest in the amount of $257,731.79. The judgment also states that Alvarez "has a mechanics' lien" on the property in the amount of $539,337.99. The trial court entered a postjudgment order awarding Alvarez costs in the amount of $30,843.64.

On appeal, Western National raises a number of claims of error concerning liability, damages, prejudgment interest, and costs. We affirm the trial court's finding of liability with respect to Alvarez's breach of contract claim. We conclude that we need not consider Western National's contention that the court erred in finding Western National liable on Alvarez's quantum meruit claim in light of our disposition of the other claims Western National raises in this appeal. We reverse the judgment on Alvarez's mechanics' lien claim and remand with directions that the trial court conduct further proceedings regarding the release bond that Western National executed.

With respect to damages, we conclude that the trial court improperly awarded damages for delayed performance ($93,672), unsubstantiated lost profits ($42,737), and unsigned change orders ($8,199.15), and that the damage award must therefore be reduced by $144,608.15, to $492,736.84. Similarly, if the court determines on remand that Alvarez is entitled to recover on the release bond, any subsequent judgment on the bond must also be reduced by $101,871.15, to $437,466.84, for amounts improperly awarded for delayed performance ($93,672), and unsigned change orders ($8,199.15).^[1]

The trial court must recalculate the award of prejudgment interest on remand, to correspond with our reduction of the damages. In recalculating prejudgment interest, the trial court must toll the accrual of prejudgment interest for the period during which the case was stayed pursuant to Alvarez's motion for a stay. Finally, because the trial court erred in awarding nonstatutory costs in a postjudgment proceeding, the cost award must be reduced by $18,073.64.

II.

FACTUAL AND PROCEDURAL BACKGROUND

A. Factual background

In February 2001, Western National entered into a contract with Ameriton Properties, Inc. (Ameriton) to construct six apartment buildings and several ancillary buildings on property (Property) located on Navajo Road in San Diego. In March, Western National and Alvarez executed a letter of intent awarding Alvarez the framing

subcontract on the project. On June 20, Alvarez signed a subcontract (Agreement) for the framing on the project.

Alvarez began to perform under the Agreement in June 2001. Over the course of several months, the parties had a number of disputes regarding the progress of the framing work. Western National attributed to Alvarez delays in completing the framing, and Alvarez attributed the delays to Western National. On October 17, 2001, Western National delivered a notice to Alvarez that stated in part, "[T]o insure that all materials that have been invoiced are on the job and that we have sufficient funds to cover all labor costs, all funds are on hold until we are satisfied." The next day, Alvarez recorded a mechanics' lien on the Property to secure unpaid framing labor and materials it had provided to the project.

On October 24, 2001, Western National delivered another notice to Alvarez. This notice informed Alvarez that Alvarez had failed to fully comply with the insurance requirements under the Agreement, and had also failed to increase its production on the project. The letter further stated that unless Alvarez fully complied with the terms of the Agreement within 24 hours, Western National would terminate the Agreement pursuant to the Agreement's termination provision.

Within 24 hours of receiving the notice, Alvarez obtained additional insurance in an attempt to correct the deficiencies Western National had noted, and provided Western National with documentation of the additional coverage. On October 25, 2001, Western National delivered a notice to Alvarez that stated that Alvarez, "remains in breach of the insurance requirements and production requirements for the project." Western National stated in the notice that it was terminating Alvarez pursuant to the Agreement's termination provision. Western National ordered Alvarez off the job site that same day.

B. Procedural history

In April 2002, Alvarez filed a first amended complaint against Western National and other parties. Alvarez's claims against Western National included breach of contract, quantum meruit, and foreclosure on its mechanics' liens.

In the Spring of 2005, the trial court held a bench trial. In November 2005, the trial court entered a final statement of decision in which it found in favor of Alvarez on its breach of contract, quantum meruit, and mechanics' lien claims. The trial court found that Alvarez was entitled to the following damages and prejudgment interest on its breach of contract claim:

"With regard to the issue of whether [Western National's] breach caused any damages to Alvarez, the court's decision is that [Western National's] breach of the contract was the proximate cause of damages to Alvarez in the total amount of $637,344.99, plus interest at the legal rate from the date of breach October 25, 2001. Alvarez'[s] damages consist of the unpaid amounts invoiced under the contract through the date of termination ($414,266.84), the amounts invoiced for labor and materials on change orders ($8,199.15), the unpaid amounts invoiced for roof trusses made by Madera supplied to and used in the project ($23,200.00), the amounts invoiced for roof trusses from Madera that were not used in the project ($55,270.00), an additional amount Alvarez was entitled to invoice under the contract for delays at the project caused by [Western National] that resulted in additional labor expenses ($93,672.00), and an amount for the lost profit that Alvarez would have earned on the remaining contract work if [Western National] had not terminated the contract ($42,737.00)."

With respect to Alvarez's quantum meruit^[2] and mechanics' lien claims, the trial court awarded the same damages as it had awarded on the breach of contract claim, except that the court did not award the $55,270 in damages for unused trusses or the $42,737 in lost profit damages. As with the breach of contract claim, the trial court awarded prejudgment interest on all damages, accruing from October 25, 2001.

In December 2005, the court entered a judgment in favor of Alvarez. The judgment awarded Alvarez damages in the amount of $637,344.99 and interest in the amount of $257,731.79.^[3] The judgment also states that Alvarez "has a mechanics' lien" on the property in the amount of $539,337.99. The trial court subsequently entered a postjudgment order awarding Alvarez costs in the amount of $30,843.64.

Western National timely appeals from the court's judgment and the postjudgment order awarding costs.

III.

DISCUSSION

A. Liability issues

1. The trial court did not err in determining that Western National

breached the Agreement

Western National claims the trial court erred in determining that it breached the Agreement. Alvarez maintains that this court must affirm the trial court's determination that Western National breached the Agreement because Western National has not challenged the trial court's finding that Western National terminated Alvarez in retaliation for recording a mechanics' lien, and not because of a lack of production or insufficient insurance coverage. Alvarez contends that Western National's action constituted a breach of the Agreement's implied covenant of good faith and fair dealing. In reply, Western National argues that the covenant of good faith and fair dealing did not prohibit it from exercising its termination right under the Agreement, even if it had an "ulterior motive" for doing so.

Accordingly, we must consider Western National's contention that Western National's action does not, as a matter of law, constitute a breach of the duty of good faith and fair dealing. This is a question of law, which we review de novo. (See Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799 ["[w]hen the decisive facts are undisputed, we are confronted with a question of law," for which de novo standard of review applies].)

a. Governing law

"[I]t is well established that a covenant of good faith and fair dealing is implicit in every contract. [Citations.] The essence of the implied covenant is that neither party to a contract will do anything to injure the right of the other to receive the benefits of the contract. [Fn. omitted.] [Citations.]" (Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 43.)

In Carma Developers, Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342 (Carma), the court^[4] discussed the purposes, scope, and limitations of the implied covenant of good faith and fair dealing. The Carma court began its analysis by noting that "in situations where one party is invested with a discretionary power affecting the rights of another," the covenant of good faith and fair dealing requires that "[s]uch power . . . be exercised in good faith." (Id. at p. 372; see also Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354, 367 (Locke) ["The implied covenant of good faith and fair dealing obligated Warner to exercise . . . [its contractual] discretion honestly and in good faith"]; Call v. Alcan Pac. Co. (1967) 251 Cal.App.2d 442, 447 [contractor's "option to terminate [subcontractor] must be exercised in good faith"].)

After acknowledging the difficulty of defining precisely what is required by the covenant, the Carma court noted that the covenant has both a subjective and an objective component:

"[I]t has been suggested the covenant has both a subjective and objective aspect ─ subjective good faith and objective fair dealing. A party violates the covenant if it subjectively lacks belief in the validity of its act or if its conduct is objectively unreasonable. [Citations.] In the case of a discretionary power, it has been suggested the covenant requires the party holding such power to exercise it 'for any purpose within the reasonable contemplation of the parties at the time of formation ─ to capture opportunities that were preserved upon entering the contract, interpreted objectively.' [Citation.]" (Carma, supra, 2 Cal.4th at p. 372.)

The Carma court also clarified that certain actions are not prerequisites to establishing a claim that a party has breached the covenant of good faith and fair dealing:

"Notwithstanding the difficulty in devising a rule of all-encompassing generality, a few principles have emerged in the decisions. To begin with, breach of a specific provision of the contract is not a necessary prerequisite. [Citation.] Were it otherwise, the covenant would have no practical meaning, for any breach thereof would necessarily involve breach of some other term of the contract.[Fn. omitted.] Nor is it necessary that the party's conduct be dishonest. Dishonesty presupposes subjective immorality; the covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor's motive. [Citation.]" (Carma, supra, 2 Cal.4th at p. 373.)

The duty of good faith and fair dealing is also limited by the purposes for which it is implied:

"It is universally recognized the scope of conduct prohibited by the covenant of good faith is circumscribed by the purposes and express terms of the contract. [Citation.] As explained in Foley [v. Interactive Data Corp. (1988) 47 Cal.3d 654, 668, under traditional contract principles, the implied covenant of good faith is read into contracts 'in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose.' [Citation.]" (Carma, supra, 2 Cal.4th at p. 373.)

Thus, a party may breach the covenant by engaging in conduct, "[that,] though not prohibited [by the parties' contract], is nevertheless contrary to the contract's purposes and the parties' legitimate expectations." (Carma, supra, 2 Cal.4th at p. 373.)

In applying this law, the Carma court considered whether a lessor had breached the covenant of good faith and fair dealing by terminating a lease upon the lessee's issuance of a notice of intent to sublet or assign, so that the lessor could obtain for itself the appreciated rental value of the premises. (Carma, supra, 2 Cal.4th at p. 374.) In concluding that the lessor had not breached the covenant of good faith and fair dealing, the Carma court emphasized that the lease specifically gave the lessor the right to terminate the leasehold in order to allow the lessor to capture the appreciation:

"That paragraph does not merely permit termination upon notice of intent to sublease or assign. It also allows the lessor to pursue a new lease directly with the proposed transferee or another without sharing any profit with the lessee. Since, in pursuing this option, the lessor would be giving up an assumed stream of income from the current lessee, the only incentive for doing so would be the hope of receiving higher rent from a new lessee. Consequently, it was certainly within the reasonable expectations of the parties that [lessor] might terminate the lease upon a proposed transfer in order to claim for itself appreciated rental value of the premises." (Ibid.)

The Carma court reasoned that the lessor had not breached the covenant of good faith because its "termination of the lease in order to claim for itself appreciated rental value of the premises was expressly permitted by the lease and was clearly within the parties' reasonable expectation." (Carma, supra, 2 Cal.4th at p. 376.)

b. Western National was required to exercise its right to terminate

in good faith

The Agreement contains a termination provision that provides in relevant part:

"Upon notification from Contractor by telegram or by written notice that Subcontractor's performance under this Agreement is unsatisfactory, or upon notification that Subcontractor has failed to comply fully with the terms of this Agreement, or that Subcontractor's work needs correction or has been damaged, Subcontractor shall promptly take all actions necessary to fully comply with the terms of the Contract Documents and the requirements of Contractor. Should Subcontractor fail to do so within twenty-four (24) hours after such notification Contractor may terminate this Agreement."

Pursuant to Carma, Western National was required to exercise its discretionary right to terminate in good faith. (Carma, supra, 2 Cal.4th at p. 372.)

c. Western National breached the Agreement by failing to exercise its

right to terminate in good faith

In its statement of decision, the trial court made the following factual finding:

"The decision to terminate the contact was made by Millard Thacker, Western National's project manager. The court does not believe Mr. Thacker's testimony that he terminated the contract because of Alvarez'[s] lack of production or because of deficiencies in the insurance coverages. Mr. Thacker terminated the contract in retaliation for Alvarez recording a mechanics lien on October 18, 2001."

Western National does not challenge the trial court's finding that it terminated the contract in retaliation for Alvarez's recording of a mechanics' lien. Thus, the issue before this court is whether the trial court erred in determining that Western National breached the agreement because, as Western National maintains, its termination of Alvarez does not, as a matter of law, constitute a breach of the duty of good faith and fair dealing.

As the Carma court noted, the duty of good faith has both a subjective and an objective component. In this case, Western National's action violated both prongs of the covenant. The trial court's unchallenged finding establishes that Western National knew it was not terminating Alvarez for either of the two reasons for which it was authorized to exercise its termination right under the Agreement, namely Alvarez's unsatisfactory performance, or Alvarez's failure to comply fully with the Agreement. Western National thus could not have had a subjective belief in the validity of its action.

Further, one cannot conclude that in terminating Alvarez in retaliation for Alvarez's filing a mechanics' lien, Western National acted pursuant to "'any purpose within the reasonable contemplation of the parties at the time of formation.' [Citation.]" (Carma, supra, 2 Cal.4th at p 372.) Unlike the situation in Carma, in which the lessor was acting for a purpose "expressly permitted by the lease and . . . clearly within the parties' reasonable expectation" (Carma, supra, 2 Cal.4th at p 376), there is nothing in the Agreement that suggests that the parties contemplated that Western National would have the right to terminate Alvarez if Alvarez were to record a mechanics' lien. Nor has Western National identified any evidence that suggests that the parties reasonably contemplated that Western National would act pursuant to such a purpose. A finding that Western National's action constituted a breach of the implied covenant of good faith and fair dealing thus does not conflict with any of the provisions of the Agreement. (Compare with Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002)100 Cal.App.4th 44, 61 ["No obligation to act in good faith can be implied to contradict or limit . . . [contract's] express condition precedent"]; Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 808 ["courts are not at liberty to imply a covenant directly at odds with a contract's express grant of discretionary power"].)

While it is true that the Agreement did not expressly prohibit Western National from terminating Alvarez for recording a mechanics' lien, the very purpose of the implied covenant of good faith is to prohibit actions, "[that,] though not prohibited [by the parties' contract], [are] nevertheless contrary to the contract's purposes and the parties' legitimate expectations." (Carma, supra, 2 Cal.4th at p. 373.) In this case, there can be little doubt that the parties did not believe Western National would have the right to terminate Alvarez if Alvarez were to record a mechanics' lien. In fact, if the parties had expressly granted Western National such a right, the agreement would have been null and void as contrary to public policy. (Civ. Code,  3262, subd. (a).)

Western National's action in terminating Alvarez for asserting its constitutionally (Cal. Const., art. XIV,  3) and statutorily (Civ. Code,  3110) protected right to record a mechanics' lien constitutes a breach of the covenant of good faith and fair dealing. A breach of this covenant constitutes a breach of the Agreement. (See Locke, supra, 57 Cal.App.4th at p. 363, fn. 3 [party adequately pled breach of implied covenant of good faith and fair dealing claim by alleging breach of contract claim because breach of covenant constituted breach of contract].) Accordingly, the trial court did not err in concluding that Western National breached the Agreement.^[5]

2. Quantum meruit

Western National claims that the trial court erred in finding it liable on Alvarez's quantum meruit claim because the termination clause of the Agreement expressly authorized Western National's termination of Alvarez. We need not consider this claim because the trial court did not award any damages on this claim that it did not also award as damages for breach of contract. To the extent we reduce Alvarez's damages for breach of contract, the corresponding damages awarded under a quantum meruit theory of liability are similarly reduced. (See part III.B., post.)

3. The judgment as to Alvarez's mechanics' lien claim must be reversed

and the case remanded for further proceedings

Western National claims in its opening brief that this court must reverse the judgment as to Alvarez's mechanics' lien claim because Western National is not an owner of the property to which the lien attached. In its respondent's brief, Alvarez argues that the trial court did not err in entering a judgment against Western National on Alvarez's mechanics' lien claim because Western National executed a release bond in which Western National agreed to be bound up to the amount of $1,647,704.01 if the court were to determine that Alvarez's mechanics' lien was valid. In its reply brief, Western National claims that this court may not affirm the judgment on the mechanics' lien claim on the ground that Western National posted a release bond and stipulated that the release bond attached to Alvarez's mechanics' lien, because Alvarez failed to assert a claim for recovery on the release bond in its first amended complaint, and failed to present substantial evidence of the release bond or the stipulation at trial.

The parties have responded to our request for supplemental briefing on the question whether this court may direct the trial court to enter a new judgment on Alvarez's mechanics' lien claim that states that Alvarez may recover on the release bond that Western National executed. Western National argues that this court may not direct the entry of such a judgment because the record indicates that Alvarez did not seek recovery on the release bond in the trial court. Alvarez argues that this court may direct the trial court to enter a new judgment that specifies that it is entitled to recover on the release bond. Alternatively, Alvarez argues that this court may remand the matter to the trial court for the purpose of making factual findings in conjunction with a postjudgment motion for enforcement of the release bond, which Alvarez intends to file on remand.

a. Factual and procedural background

On October 18, 2001, Alvarez recorded a mechanics' lien on the Property. On October 19, 2001, Western National, as principal, and Insurance Company of the West, as surety, executed a release bond in the amount of $1,647,704.01 in order to release Alvarez's mechanics' lien on the Property. On December 4, 2001, Western National recorded the bond. In January 2002, Alvarez filed its original complaint in this action. In its complaint, Alvarez alleged that it was entitled to foreclose on its October 18, 2001 mechanics' lien. On March 22, 2002, Alvarez recorded a second mechanics' lien on the Property.

In April 2002, Alvarez filed a first amended complaint against Western National, Insurance Company of the West, and various other parties, including Ameriton and Archstone Communities Trust (Archstone). In the complaint, Alvarez alleged that Ameriton was the owner of the Property and that Archstone was Ameriton's agent. The first cause of action was entitled "Recovery on Release Bond Against Defendant Insurance Company of the West." In this claim, Alvarez alleged:

"Plaintiff is informed and believes and thereon alleges that defendant Western National, as principal, and defendant INSURANCE COMPANY OF THE WEST, as surety, . . . executed a release bond in connection with the above-described work of improvement. Said bond was provided to Contractor as number 1840969, effective October 19, 2001, in the sum of $1,647,704.01. The bond provides for payment in full of the claims of [Alvarez,] and is by its terms made to inure to the benefit of [Alvarez] to give them a right of action to recover on the bond in this action."

The second cause of action was entitled, "Foreclosure on Mechanics Lien as Against All Defendants." This claim referred to the October 18, 2001 and March 22, 2002 mechanics' liens, and incorporated all of the allegations of the previous paragraphs in the first amended complaint, including the paragraph quoted above pertaining to the release bond.

On June 27, 2002, Alvarez dismissed without prejudice its claims against Insurance Company of the West, Ameriton, and Archstone. On July 1, 2002, the parties entered into a stipulation that provided, "[T]he Release Bond (Bond No. 184 09 69) filed in this action will extend to both of the mechanics' liens (Nos. 2001-0754445 and 2002-0243157) filed by [Alvarez]." The stipulation further provided, "[Alvarez] agrees that with this signed stipulation, it will dismiss without prejudice all defendants other than [Western National]."

On October 7, 2002, the parties entered into a stipulation for the purpose of staying the action pending resolution of a related criminal matter. As part of that stipulation, the parties stipulated in relevant part:

"2. The parties agree that the plaintiff may amend the Complaint to include Insurance Company of the West ("ICW"), the bondholder for defendant as an additional defendant.

"3. The parties agree that the bond provided by [Insurance Company of the West] as the surety of [Western National] will apply to plaintiff's first lien filed on October 18, 2001, which has been reduced in an amount proportionate to the amount of money already paid by defendant, and the second lien filed on March 22, 2002, both of which will be released."

This stipulation was filed with the trial court and signed by the trial judge on October 18, 2002.

In May 2005, during Western National's direct examination of Thacker at trial, Thacker referred to the release bond, stating, "Also, Archstone has a risk management group, and as soon as that lien hits, they stop ─ we don't get a dime until we bonded a hundred and fifty percent of the lien." Thereafter, the following colloquy occurred:

"[Western National's counsel]: Just to complete this whole dialogue, you referenced the mechanics' lien. Exhibit 202 is ─ I believe that's the mechanic's lien. Let me put that in front of you. That's binder 2. [] That's not it. Here it is. It's Exhibit 201. Is Exhibit 201 the mechanic's lien you were referring to? [] (Ex. 202 marked for identification.)"

"[Thacker]: Yes, it is."

Exhibit 202 is the release bond. Near the end of the trial, the court asked the parties whether they agreed to the following procedure for admitting evidence: "[T]o the extent an exhibit was referenced in testimony and used by a witness, my clerk ordinarily will cause that to be received into evidence if your exhibit list so indicates. It's just in." Both parties agreed to this procedure.^[6]

During the trial of the case, Western National filed a motion for judgment in which it asserted the following:

"In this matter, [Western National] obtained and recorded a release bond, and thereby cleared titled to the Project. As such, [Alvarez] cannot foreclose on the mechanics' lien which it filed, and instead must look to recover only on the bond."

During his closing argument, Alvarez's counsel stated, "[W]e're only proceeding on three causes of action: Breach of contract, foreclosure on mechanics' lien, and quantum meruit." The following colloquy occurred while Alvarez's counsel was arguing regarding the merits of the mechanics' lien claim:

"The court: Is foreclosure of the mechanic's lien an issue in view of the fact that they bonded around it?"

[Alvarez's counsel]: Yes, it is. The parties had stipulated to dismiss with prejudice the insurance companies and what not and with the agreement that in the event the Court renders judgment on the mechanics' lien count, then my understanding is the release bond will step in at that point and pay for it, but we do need a judgment on that count in order to implicate the release bond. In other words, we don't intend to actually foreclose on the property but we do need a judgment with respect to the claim to foreclose."

Western National's counsel stated during his closing argument, "I'm not entirely certain how the mechanics' lien claim can be pursued here because of the fact that there's been a bonding around these mechanics' liens." Western National's counsel specifically mentioned that the release bonds^[7] were in evidence.

Alvarez submitted a proposed statement of decision that stated that Alvarez was entitled to "foreclosure of its mechanics' lien." The proposed statement of decision did not refer to the release bond or to the stipulations pertaining to the bond. Western National filed an objection to the proposed to statement of decision in which it argued that foreclosure on the mechanics' lien was improper because Archstone was not a party to the litigation and "mechanics' lien release bonds were obtained to release Archstone's property from the litigation, and they were admitted into evidence." In November 2005, the trial court issued a statement of decision in which it concluded, with respect to Alvarez's mechanics' lien, that "Alvarez is entitled to foreclosure on its mechanics lien in the amount of $539,337.99, plus interest at the legal rate from the date of the breach, October 25, 2001."

In December 2005, the trial court entered judgment in favor of Alvarez. The judgment states in part, "Plaintiff, [Alvarez] has a mechanics' lien on the real property described as Mission Trails Apartments located at 7133 Navajo Road, San Diego, California 92119, in a sum comprised of damages in the amount of $539,337.99, interest on said damages in the amount of $218,099.38, and costs of suit in the amount of $30,843.64."

Western National filed a motion to set aside and vacate the judgment. In its motion, Western National claimed that "the mechanics' lien forecloseure claim . . . must be denied in all respects" because the owners of the Property were not named as parties to the litigation. Alvarez filed an opposition to Western National's motion in which it argued that the failure to include a property owner in a judgment for foreclosure of a mechanics' lien does not render the judgment void. Rather, Alvarez's argued, the judgment is merely unenforceable against the nonparty. After Western National filed a reply, the trial court held a hearing on Western National's motion.

At the outset of the hearing, Alvarez requested permission to file a declaration of its counsel. Alvarez attached the October 19, 2001 release bond and the July 1, 2002 stipulation as exhibits to the declaration of counsel. Over Western National's objection, the trial court permitted Alvarez to file the declaration and accompanying exhibits. Thereafter, the trial court denied the motion to set aside and vacate the judgment.

b. The law governing mechanics' liens and release bonds

Generally speaking, a mechanics' lien is a lien on real property given to persons who have performed labor or furnished materials or equipment contributing to the improvement on the property. (See Civil Code,  3110.) In Hutnick v. U.S. Fidelity & Guaranty Co. (1988) 47 Cal.3d 456, 462 (Hutnick), the Supreme Court described the constitutional underpinnings of mechanics' lien law in California:

"Mechanic's lien law derives from our state Constitution, which provides: 'Mechanics, persons furnishing materials, artisans, and laborers of every class, shall have a lien upon the property upon which they have bestowed labor or furnished material for the value of such labor done and material furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens.' (Cal. Const., art. XIV, 3.) The mechanic's lien is the only creditors' remedy stemming from constitutional command and our courts 'have uniformly classified the mechanics' lien laws as remedial legislation, to be liberally construed for the protection of laborers and materialmen.' [Citation.] '[S]tate policy strongly supports the preservation of laws which give the laborer and materialman security for their claims.' [Citation.]"

The Hutnick court noted that Civil Code section 3143 provides a statutory procedure by which a party may execute and record a bond, known as a "release bond," in place of real property subject to a mechanics' lien. (Hutnick, supra, 47 Cal.3d at pp. 462-463.)^[8] The effect of executing and recording a release bond is that the principal and surety on the release bond assume liability for the mechanics' lien claim:

"The purpose of the release bond procedure is to provide a means by which, before a final determination of the lien claimant's rights and without prejudice to those rights, the property may be freed of the lien, so that it may be sold, developed, or used as security for a loan. [Fn. omitted.] [Civil Code] [s]ection 3143 provides that a mechanic's lien release bond 'shall be conditioned for the payment of any sum which the claimant may recover on the claim together with his costs of suit in the action, if he recovers therein.' The 'claim' for which the principal and surety assume liability in the bond is the 'claim of lien.' [Citation.] The release bond procedure thus protects the lien claimant by providing an alternate source of recovery on the claim of lien. The release bond procedure 'does not deprive the [lien claimant] of its constitutional right to a lien' but '[o]n the contrary, it provides for the speedy and efficient enforcement of such lien . . . .' [Citation.] The recording of the release bond does not extinguish the lien; rather, the bond is substituted for the land as the object to which the lien attaches. (See Marsh, Cal. Mechanics' Lien Law (3d rev. ed. 1988) 8.28 ['The recordation of the bond in effect transfers the claim of lien from the owner's land to the bond.'].)" (Hutnick, supra, 47 Cal.3d at pp. 462-463.)

The Hutnick court noted that, "Because recovery on the bond is a part of the process for enforcing the mechanics' lien, authorities from other jurisdictions have concluded that a cause of action to foreclose a mechanics' lien is substantially the same whether relief is sought against the liened property or against a bond which has been substituted for the property." (Hutnick, supra, 47 Cal.3d at p. 463.) The Hutnick court agreed with these authorities and concluded that in seeking to enforce a "mechanic's lien first against the liened property and subsequently against the release bond," a plaintiff "pursue[s] a single cause of action." (Ibid.)

In Grade-Way Construction Co. v. Golden Eagle Ins. Co. (1993) 13 Cal.App.4th 826, 832, the court concluded that the Bond and Undertaking Law (Code Civ. Proc.  995.010 et seq.) applies to release bonds executed pursuant to Civil Code section 3143.

The Bond and Undertaking Law specifies the manner by which a beneficiary may seek to recover on a bond. Code of Civil Procedure section 996.410, subdivision (a) provides, "The beneficiary may enforce the liability on a bond against both the principal and sureties." The Bond and Undertaking Law specifies two methods by which a beneficiary may enforce the principal's and surety's liability on the bond.

Code of Civil Procedure section 996.430 provides in relevant part:

"(a) The liability on a bond may be enforced by civil action. Both the principal and the sureties shall be joined as parties to the action.

"(b) If the bond was given in an action or proceeding, the action shall be commenced in the court in which the action or proceeding was pending. If the bond was given other than in an action or proceeding, the action shall be commenced in any court of competent jurisdiction, and the amount of damage claimed in the action, not the amount of the bond, determines the jurisdictional classification of the case."

Alternatively, Code of Civil Procedure section 996.440 subdivision (a) specifies that bonds that are given "in an action or proceeding" may be enforced pursuant to a summary postjudgment motion procedure. (National Technical Systems v. Commercial Contractors, Inc. (2001) 89 Cal.App.4th 1000, 1007.) Code of Civil Procedure section 996.440 provides in relevant part:

"(a) If a bond is given in an action or proceeding, the liability on the bond may be enforced on motion made in the court without the necessity of an independent action.

"(b) The motion shall not be made until after entry of the final judgment in the action or proceeding in which the bond is given and the time for appeal has expired or, if an appeal is taken, until the appeal is finally determined. The motion shall not be made or notice of motion served more than one year after the later of the preceding dates."

"[A] judgment of liability on a bond shall be in favor of the beneficiary and against the principal and sureties and shall obligate each of them jointly and severally." (Code Civ. Proc.  994.460.) However, a surety is not bound by a judgment obtained by a beneficiary against the principal in a case in which the surety was not a party. (National Technical Systems v. Superior Court (2002) 97 Cal.App.4th 415, 421 (National Technical Systems).)

c. Alvarez is not entitled to a judgment of foreclosure on its mechanics'

liens on the Property

The judgment in this case provides that Alvarez "has a mechanics' lien" on the Property.^[9] There is no reference in the judgment to either the release bond or to the parties' stipulations pertaining thereto. The judgment must be reversed because the parties stipulated that both of Alvarez's mechanics' liens would attach to the release bond, and not to the Property. Thus, Alvarez is clearly not entitled to a judgment of foreclosure of its mechanics' liens on the Property. (See Frank Curran Lumber Co. v. Eleven Co. (1969) 271 Cal.App.2d 175, 185 ["Since the effect of the recording of the bond was to free the real property from the effect of the claim and lien and any action brought to foreclose such lien, and since no personal judgment could be rendered against the landowners, it was proper, upon granting summary judgment, to dismiss the action as to them"].)

d. The case must be remanded for further proceedings with respect to

whether Alvarez is entitled to recover against Western National and/or

Insurance Company of the West on the release bond

In this case, Alvarez did not make clear in the trial court the manner by which it intended to seek to recover on the release bond. As noted above, the Bond and Undertaking Law specifies two ways in which a beneficiary may seek to recover on a release bond. We discuss the potential applicability of both sections to this case and remand the matter to the trial court for further proceedings.

i. Code of Civil Procedure section 996.430

It is clear that Alvarez cannot prevail against Insurance Company of the West on the release bond pursuant to Code of Civil Procedure section 996.430 since Insurance Company of the West did not participate in the trial and was not a defendant in the action at the time of judgment. Thus, Alvarez is not entitled to a judgment against Insurance Company of the West pursuant to Code of Civil Procedure section 996.430.

However, the record is unclear as to whether Alvarez sought recovery on the release bond against Western National pursuant to Code of Civil Procedure section 996.430, and if so, whether Alvarez adequately established its entitlement to such relief. On remand, the trial court is directed to consider whether Alvarez is entitled to recover against Western National on the release bond pursuant to Code of Civil Procedure section 996.430. To the extent the trial court determines that Alvarez may recover against Western National on the release bond pursuant to Code of Civil Procedure section 996.430, the trial court is directed to enter a judgment that provides that Alvarez is entitled to recover on the release bond against Western National in an amount that shall include damages of $437,466.84; interest to be determined by the trial court in light of our conclusions in part III.D, post; and costs in the amount of $12,769.95.^[10]

To the extent the trial court determines that Alvarez may not recover against Western National on the release bond pursuant to Code of Civil Procedure section 996.430, the trial court shall enter a new judgment that specifies that Alvarez has a claim on a release bond executed by Western National in an amount that shall include damages of $437,466.84, in light of our conclusions in part III.B, post; interest to be determined by the trial court in light of our conclusions in part III.D, post; and costs in the amount of $12,769.95, in light of our conclusions in part III.E, post. The judgment shall further specify that the trial court will entertain a postjudgment motion pursuant to Code of Civil Procedure section 996.440 to enforce the liability of Western National and Insurance Company of the West on the release bond.

ii. Code of Civil Procedure section 996.440

Alvarez indicated in its supplemental brief in this court that, if this case is remanded to the trial court for further proceedings as to the enforceability of the release bond, Alvarez intends to file a postjudgment motion pursuant to Code of Civil Procedure section 996.440. We express no opinion on the merits of any such motion, since that

issue is not before this court in this appeal. However, nothing in this opinion shall be construed to preclude the trial court's consideration of Alvarez's anticipated postjudgment motion pursuant to Code of Civil Procedure section 996.440 to enforce the liability of Western National and Insurance Company of the West on the release bond, if the trial court determines that such a motion is proper in this case. Further, we express no opinion as to whether Alvarez may bring a separate action against one or both of these parties to recover on the bond. (See National Technical Systems, supra, 97 Cal.App.4th at p. 420 [noting in case where surety was not party in original action and claimant could not enforce surety's liability on bond pursuant to Code of Civil Procedure section 996.440 that claimant would "have to litigate the liability on the bond as against [surety]" in separate action].)

However, we acknowledge the anomaly created by the application of the Bond and Undertaking Law in a case where a beneficiary of a release bond intends to proceed by way of the postjudgment proceeding provided by Code of Civil Procedure section 996.440. In such a case, because the release bond has been recorded, a judgment of foreclosure on the mechanics' lien on the property is improper. However, because the beneficiary intends to seek to enforce the liability of the principal and surety on the bond in a postjudgment proceeding, the judgment cannot provide for the beneficiary's recovery on the release bond.^[11]

B. Damages issues

Western National raises a number of claims of error with respect to the trial court's award of damages.

1. Delay damages

Western National claims that the trial court erred in awarding Alvarez $93,672 on each of its three claims in consequential "delay damages," for costs associated with delays in completing the project caused by Western National.^[12] Western National claims the Agreement precludes such an award. We agree.

a. Factual and procedural background

The Agreement provides:

"CLAIMS FOR DELAY OR DAMAGE: Subcontractor expressly waives any and all rights to make claims or to be entitled to receive any compensation or damages for failure of Contractor or other trade contractors to have related portions of the project completed in time for Work of Contractor to proceed. Should the Subcontractor default in the proper performance of this Work including, without limitation, performance of punch-list or pick-up work, thereby causing delay to the project, Subcontractor shall be liable for any and all loss and damages to Contractor, including, without limitation, liquidated damages, increased financing and construction costs, lost sales opportunities, and lost revenues sustained by the Contractor. The Subcontractor shall be liable under this Paragraph even though such default is caused by strikes, lockouts, acts of God, or other reasons beyond the control of Subcontractor, unless the Subcontractor gives written notice of the delay to Contractor within four (4) days following the start of the alleged occurrence. Contractor shall not be liable to Subcontractor for loss or damages resulting from the aforementioned causes, or for Contractor's delay, or for modification or extension of the Construction Sequence or Order of Work of modification of the pace of work, or modification or extension of any progress schedule established by Contractor, or for losses or damages resulting from Change Orders, or for delays caused by other trade contractors." (Italics added.)

At trial, Alvarez offered in evidence a letter Alvarez sent to Western National on November 15, 2001 in which Alvarez stated that it "had 3 1/2 weeks (18 work days) delay to our scope of work." The November 15 letter outlined the "costs for delay" Alvarez had purportedly suffered, as follows:

"Based on one week, we ran an average of hourly payroll (Supervision, hourly carpenters, hourly laborers & equipment drivers) totaling $24,220.00. Taking one week's totals and converting it to a daily rate, our payroll was $4,844.00 gross wages per day. Our equipment charges are $900 per week for two machines. Total costs for delay is $93,672.00 ($87,192 for payroll - $6,480 for equipment)."

Joe Alvarez, Alvarez's president, testified at trial that the November 15 letter represented the amount, "I felt in my mind justifiable to backcharge Western National for the delays that were created and costed [sic] us directly on a daily basis." Joe Alvarez clarified the nature of these costs at trial as follows:

"[Alvarez's counsel]: If you're delayed such that piece workers do not have work or end up going home because they don't have work, does that actually cost you money out of pocket?"

"[Joe Alvarez]: No, it does not cost us any money out of pocket if the piece worker doesn't perform a task for that day. What does take place, [is] that [it] adds to the duration of the project in the overall."

In an exhibit Alvarez offered in evidence entitled "Schedule of Damages," Alvarez listed "$93,672.00" in "Labor Delays."

The trial court's statement of decision provides, "[A]s of October 24, 2004 Alvarez was entitled to invoice under the contract for delays at the project caused by [Western National] that resulted in additional labor expenses in the amount of $93,672.00." The trial court also awarded delay damages in the amount of $93,672 on Alvarez's quantum meruit and mechanics' lien claims.

b. Analysis

Alvarez offered evidence at trial associated with the "costs for delay" it had suffered that it attributed to Western National, and the trial court awarded damages "for delays at the project caused by Western National." However, the Agreement clearly and unambiguously provides that Alvarez waives its right to recover delay damages, and that Western National is not liable to Alvarez for such delays. Thus, Alvarez was not entitled to recover delay damages.

We reject Alvarez's argument that it may recover delay damages pursuant to the italicized portion of the following provision in the Agreement:

"Additional work or deviation from the plans and specifications performed without a Change Order will not be subject to reimbursement. Disputed Work indicated or necessary to complete the project shall be promptly performed as ordered by the Contractor and the proper cost or credit breakdowns therefor shall be submitted immediately thereafter by Subcontractor to the Contractor for consideration. Should the plans vary from the specifications, then the specifications shall govern." (Italics added.)

The "Disputed Work" clause of this provision specifies the procedure to be utilized when the parties have a dispute as to whether a particular item of work is within the statement of work set forth in the Agreement. The clause does not authorize an award of damages to Alvarez for costs associated with delay attributable to Western National. We therefore reject Alvarez's claim that the trial court's award "for delays at the project caused by Western National," is recoverable pursuant to this provision. In any event, Alvarez identifies no evidence from which the trial court could have determined whether the work for which Alvarez was seeking delay damages was work performed outside the Agreement's Statement of Work.

Since the Agreement provides that delay damages are not recoverable, Alvarez is not entitled to recover such damages on its quantum meruit claim. (See Hedging Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1420 (Hedging Concepts, Inc.) [holding party may not recover in quantum meruit where contractual term governed subject].)

Nor is Alvarez entitled to foreclose on a mechanics' lien for damages to which it is not contractually entitled. (See Civ. Code, 3123, subd. (a) ["The liens provided for in this chapter shall be direct liens, and shall be for the reasonable value of the labor, services, equipment, or materials furnished or for the price agreed upon by the claimant and the person with whom he or she contracted, whichever is less].) Even assuming the Agreement did not bar an award for delay damages, Alvarez may not recover delay damages pursuant to its mechanics' lien claim because, "[t]he function of the mechanics' lien is to secure reimbursement for services and materials actually contributed to a construction site, not to facilitate recovery of consequential damages . . . ." (Lambert v. Superior Court (1991) 228 Cal.App.3d 383, 389 [concluding "Civil Code section 3123 [California mechanics' lien statute] does not permit a lien for delay damages"].)

On remand, the trial court is directed to reduce its damage award by $93,672 on each of Alvarez's three claims.

2. Lost profits

Western National claims that the trial court erred in awarding $42,737 in damages for lost profits because Alvarez failed to present substantial evidence of such profits.

"'Substantial evidence' is evidence of ponderable legal significance, evidence that is reasonable, credible and of solid value. [Citation] . . . Inferences may constitute substantial evidence, but they must be the product of logic and reason. Speculation or conjecture alone is not substantial evidence. [Citations.] [] . . . [] The ultimate test is whether it is reasonable for a trier of fact to make the ruling in question in light of the whole record. [Citation.]" (Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 651-652.)

"[E]vidence of lost profits must be unspeculative and in order to support a lost profits award the evidence must show 'with reasonable certainty both their occurrence and the extent thereof.' [Citation.]" (Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 907.) "The Court of Appeal has defined lost profits as follows: '"Net profits are the gains made from sales 'after deducting the value of the labor, materials, rents, and all expenses, together with the interest of the capital employed.' [Citation.]"' [Citations.] A plaintiff must show loss of net pecuniary gain, not just loss of gross revenue. [Citations.]" (Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, 884.)

The only relevant evidence Alvarez cites to support the trial court's award of $42,737 in lost profit damages is Joe Alvarez's testimony that at the time of the breach, Alvarez had yet to bill Western National for $427,370 in labor charges that were contemplated in the Agreement, and that he had used a 10 percent profit margin figure in calculating Alvarez's bid. As Western National notes in its brief, it is undisputed that Alvarez presented no evidence that it had accurately assessed the costs of labor when it bid the contract. Nor did Alvarez present any evidence as to the amount of money it had expended on labor through the date of termination, or the amount of money it would have cost to complete the project. Under these circum