S&S CUMMINS CORPORATION v. WEST BAY BUILDERS

Filed 1/31/08

CERTIFIED FOR PARTIAL PUBLICATION*

THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION THREE

A project to build a public elementary school in Pleasanton suffered substantial delays. After the school was built, the general contractor, West Bay Builders, Inc. (West Bay), refused to release to the electrical subcontractor, S&S Cummins Corporation (Cummins), its share of retention proceeds that the school district paid to West Bay following the schools completion. West Bay justified its refusal to pay Cummins its share of retention proceeds on the ground that Cummins had contributed to delays that caused West Bay to incur damages. Cummins sued for breach of contract, seeking contract damages as well as statutory charges for West Bays failure to make prompt payment of the retention proceeds. Following a jury trial, the trial court entered judgment in favor of Cummins for $400,971.

Both West Bay and Cummins appeal from the judgment. West Bay contends the judgment is not supported by substantial evidence, and asserts that the proper application of indemnity and damages caused by delay provisions in the subcontract would completely offset Cumminss damages, compelling a reversal of the judgment. Cummins challenges the trial courts calculation of statutory prompt payment charges, claiming the court erred when it concluded the 2 percent per month charge set forth in Public Contract Code section 7107 is applied on an annual basis rather than compounded on a monthly basis. Cummins also contends the court erred by ruling that the 2 percent per month statutory charge ceases accruing upon entry of judgment. In the published portion of the opinion, we hold that statutory prompt payment charges imposed under subdivision (f) of Public Contract Code section 7107 cease to accrue upon entry of judgment and are not compounded on a monthly basis.

We affirm the judgment.

Factual and Procedural Background

The prime contract and the Cummins subcontract

West Bay was the successful low bidder on a public works project in Pleasanton known as the Phoebe Apperson Hearst Elementary School (hereafter the project or school). On October 13, 1999, West Bay entered into a prime contract with the Pleasanton Unified School District (District) to construct the school. The prime contract anticipated a contract price, before modifications or change orders, of slightly over $10.3 million.

West Bay hired Cummins as the electrical subcontractor on the project. The contract price, as expressed in the West Bay-Cummins subcontract agreement (Cummins subcontract), dated October 15, 1999, was $1,279,150. The contract price rose to $1,315,216 after accounting for approved change orders and additional work and materials requested by West Bay during the course of the project.

Construction delays

The District issued the notice to proceed on November 2, 1999. Under the original project schedule, West Bay was to complete its work on August 28, 2000, or 300 calendar days after work began. During the course of the project, the District awarded West Bay 56 days in time extensions, pushing the estimated date for project completion out to October 23, 2000. The project was not completed until September 25, 2001, or 393 days past the original completion date for the project. Subtracting the 56 days of time extensions awarded by the District, the project was delayed a total of 337 days until its completion.

From the beginning, the work fell behind the original schedule. The project was immediately beset by weather delays and problems associated with the Districts design for the project. There were substantial delays in commencing and completing the foundation and framing, for which West Bay was responsible.

At trial, West Bay presented a critical path method to assess and assign blame for delays in the project. The United States Court of Claims offered this definition of critical path analysis in Haney v. United States (Ct.Cl. 1982) 676 F.2d 584, 595: Essentially, the critical path method is an efficient way of organizing and scheduling a complex project which consists of numerous interrelated separate small projects. Each subproject is identified and classified as to the duration and precedence of the work. (E.g., one could not carpet an area until the flooring is down and the flooring cannot be completed until the underlying electrical and telephone conduits are installed.) The data is then analyzed, usually by computer, to determine the most efficient schedule for the entire project. Many subprojects may be performed at any time within a given period without any effect on the completion of the entire project. However, some items of work are given no leeway and must be performed on schedule; otherwise, the entire project will be delayed. These latter items of work are on the critical path. A delay, or acceleration, of work along the critical path will affect the entire project.

Out of the total of 393 days of delay on the project, West Bays expert estimated that 65 of those days were attributable to Cummins as delays to the critical path. The expert estimated that 265 days of delay to the critical path were attributable to West Bay and others, but not to Cummins. The remainder of the delay was attributable to rain or project extensions granted by the District.

West Bays expert divided the 65 days of critical path delay attributable to Cummins into three distinct windows or categories of delay. First, West Bay focused on a notice of non-compliance issued by the Districts inspector on December 6, 1999, for non-complying duct and conduit work performed by Cummins. Cummins corrected the duct and conduit work by December 15, 1999. West Bays expert witness concluded that responding to the notice of non-compliance delayed critical path work 20 days, of which 10 were attributable solely to Cummins. Cummins disagreed that the work to correct the duct and conduit work affected the critical path, pointing out that the early start date for the underground electrical work was originally December 16, 1999, one day after Cummins completed the corrections to its work.

The second category of delay purportedly attributable to Cummins stemmed from a lack of manpower during late 2000. On August 11, 2000, West Bay sent Cummins a fax asking Cummins to provide additional manpower and advising that other trades were being delayed. West Bays expert opined that Cumminss delay in manning up contributed 27 days of delay to the projects critical path.[1] Cummins disagreed with this assessment, arguing that the days of delay attributable to Cummins were not actual days but were instead the result of West Bays decision to resequence the schedule. It was not until after the project was resequenced that the alleged delays materialized.

The third category of delay blamed on Cummins stemmed from one of Cumminss subcontractors, Ceintronics, which was engaged to install low voltage items such as the smoke alarms and speakers. After signing on to perform the low voltage work, Ceintronics had experienced a significant increase in the cost of its labor. Ceintronics refused to man the job until the wage issue was resolved and Cummins agreed to pay the extra cost. On January 2, 2001, West Bay issued a 48-hour notice to Cummins to commence the low voltage electrical work or West Bay would hire another company to complete the work. Although Ceintronics ultimately completed the job, West Bays expert attributed 28 days of delay to Cummins for the period from late 2000 to early 2001. Cummins disputed this assessment, claiming that installation of the fire alarm and other low voltage items was delayed because of excessive dust caused by the grinding of the concrete floors. The low voltage items could not be installed in such a dusty environment, according to Cumminss site foreman.

The District settles with WestBay and releases retention proceeds

West Bay submitted monthly payment requests to the District in order to receive progress payments during the course of construction. Each progress payment request reflected amounts of work completed by West Bay as well as the subcontractors. Pursuant to the prime contract, the District was entitled to withhold 10 percent of each progress payment. The withheld 10 percent is referred to as retention or retention proceeds. Retention proceeds were to be held by the District in an escrow account until the project was completed. In turn, West Bay had the right to withhold 10 percent from each subcontractors progress payments.

After the project was completed, West Bay and the District disputed the amount owed under the prime contract as well as the proper disposition of the retention proceeds withheld by the District during the course of the project. The District identified roughly $190,000 in disputed work items that remained to be installed or repaired. The District also claimed the project was completed 337 days beyond the adjusted contract completion date, entitling the District to $337,000 in liquidated damages under the prime contract, or $1,000 for each day the project was delayed. The Districts facilities director described the liquidated damages assessment as a negotiable situation. West Bay filed a claim for additional compensation, seeking roughly $900,000 more from the District for delay costs incurred as a result of the Districts changes and for extra work that West Bay performed.

In October 2002, West Bay settled its dispute with the District. Pursuant to the settlement, the District agreed to release the remaining retention proceeds ($516,606), thus paying West Bay the full amount of the original contract price. In addition, the District agreed to pay an additional $218,394 to West Bay, composed in part of a final payment to settle the full amount of the adjusted contract price. The sum of $92,933 (out of the $218,394) represented the settlement of claims over and above the adjusted contract price. The settlement was predicated on an assessment of liquidated damages in the amount of $100,000. The settlement amounts were unaffected by this assessment because they had already been reduced to reflect the $100,000 offset for liquidated damages. Therefore, in the end, West Bay received the full, adjusted contract price plus over $92,000 to settle its claims.

The District released one-half of the retention proceeds to West Bay on October 26, 2001. The other one-half of the retention proceeds were released to West Bay on November 20, 2002, following the October 2002 settlement between West Bay and the District.

WestBay refuses to release retention proceeds to Cummins

West Bay withheld $130,994 as retention from Cumminss progress payments. Public Contract Code section 7107, subdivision (d) generally provides that a subcontractor must be paid its share of retention proceeds within seven days from the time the original contractor receives all or any portion of the retention proceeds from a public agency. The original contractor may withhold from a subcontractor its portion of the retention proceeds, but only if a bona fide dispute exists between the subcontractor and the original contractor. (Pub. Contract Code,  7107, subd. (e).) A contractor may not withhold more than 150 percent of the estimated value of the disputed amount. (Ibid.)

Although the District released one-half of the retention to West Bay in October 2001, and the balance in November 2002, West Bay did not pay Cummins its share of the released retention. West Bay claimed to believe that Cummins had delayed the critical path of the project by approximately 90 days. West Bay claimed it incurred liquidated damages imposed by the District as well as general condition costs associated with the delay. General condition costs represent the costs of remaining on the site, including expenses for phones, temporary power, toilets, rent for jobsite trailers, and salaries. West Bay estimated that it incurred $1,337 per day in general condition costs for each day of delay. Notwithstanding its claim that it incurred damages as a consequence of Cumminss delay, West Bay never provided any written accounting, itemized statement, or justification to Cummins as to why West Bay was refusing to release Cumminss share of the retention proceeds other than to tell Cummins it had delayed the project.

Cummins files stop notice

On March 27, 2002, Cummins filed a stop notice for $145,674. A stop notice is a remedy to reach unexpended construction funds that remain in the owners hands. (See Civ. Code,  3181.) Upon receiving the stop notice, the District withheld 125 percent of the amount specified in the notice from further progress payments to West Bay.

Civil Code section 3196 authorizes the issuance of a stop notice release bond. After the bond is posted, the claimants remedies are limited to the bond and the public entity may no longer withhold money due the general contractor on account of the stop notice. (Civ. Code,  3196; Winick Corp. v. County Sanitation Dist. No. 2 (1986) 185 Cal.App.3d 1170, 1177-1178.)

On April 1, 2002, West Bay obtained a stop notice release bond from Travelers Casualty & Surety Company of America, Inc. (Travelers). West Bay paid an annual premium of $1,821 to obtain and maintain the stop notice release bond.

Cummins sues WestBay and Travelers

On February 6, 2003, Cummins sued West Bay for breach of contract and quantum meruit in the Alameda County Superior Court. Cummins alleged West Bay had breached the subcontract by failing to properly manage and supervise the project work. Cummins also alleged that West Bay had failed to pay on time and sought contract damages as well as statutory prompt payment charges. Alternatively, Cummins sought damages under a quantum meruit theory for the unpaid value of goods and services it had provided.

Cummins also sued Travelers to recover against the stop notice release bond. Cummins sought statutory prompt payment charges in addition to the unpaid contractual amounts.

Cummins secures a judgment for $400,971

The matter proceeded to a jury trial. The trial court granted West Bays and Travelers motion in limine to exclude all evidence regarding Cumminss claim arising from its stop notice because the court found the stop notice was not timely filed and was, therefore, void.[2] Following the presentation of Cumminss case, the court dismissed Travelers on Cumminss motion. After the close of evidence, the court on its own motion dismissed the cause of action for quantum meruit, leaving only the breach of contract cause of action against West Bay.

The jury returned a special verdict in favor of Cummins. The jury made the following findings: Cummins did all or substantially all of the significant things that the Cummins subcontract required it to do, including completing the Cummins subcontract in accordance with the contract documents and satisfactorily performing the work on the Cummins subcontract; West Bay failed to do something required by the Cummins subcontract and that Cummins was harmed by that failure in the amount of $145,674; West Bay was not entitled to any offset against the damage award; West Bay failed to remit payment of retention proceeds to Cummins within seven days after it received retention proceeds from the District on October 26, 2001, and November 20, 2002; West Bays withholding of the retention proceeds on both occasions was not based on a bona fide dispute; and, Cumminss share of the retention proceeds received by West Bay on October 26, 2001, and November 20, 2002, was $65,497 on each occasion.

Cummins sought costs, attorney fees, and statutory prompt payment charges pursuant to the verdict, the Cummins subcontracts fee clause, and Public Contract Code section 7107, respectively. West Bay moved to tax costs and opposed the attorney fees and statutory charges motion. West Bay also moved for a new trial, asserting the damages were excessive, there was insufficient evidence to support the verdict, and the verdict was against the law. Among other things, West Bay asserted it was undisputed that it had incurred liquidated damages and general condition costs as a consequence of project delay. West Bay claimed it was entitled to a complete offset under the indemnity and damages for delay provisions of the Cummins subcontract. The court denied West Bays motion for new trial.

The trial court entered judgment on the verdict, ordering West Bay to pay to Cummins unpaid retention of $130,994 and additional damages in the amount of $14,680, in accordance with the jurys verdict, plus $122,766 in attorney fees, $14,139 in costs, $114,139 in statutory prompt payment charges, and $4,253 in prejudgment interest, for a total judgment of $400,971.

Discussion

I. Substantial evidence supports the jurys special verdict.

When we review a jury verdict, we apply the substantial evidence standard of review. (Holmes v. Lerner (1999) 74 Cal.App.4th 442, 445.) In applying this standard, the power of an appellate court begins and ends with a determination as to whether there is any substantial evidence, contradicted or uncontradicted, to support the findings below. [Citation.] We must therefore view the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference and resolving all conflicts in its favor . . . . (Jessup Farms v. Baldwin (1983) 33 Cal.3d 639, 660.)

West Bay contends there is insufficient evidence to support several of the jurys findings in the special verdict. More specifically, West Bay claims that substantial evidence does not support the findings that Cummins satisfactorily completed its work, that West Bay was not entitled to an offset for damages awarded to Cummins, and that West Bays withholding of retention proceeds was not based on a bona fide dispute. We address each of these claims in turn.

A. Substantial evidence supports the finding that Cummins satisfactorily performed its work.

The jury found that Cummins did all, or substantially all, of the significant things that the Contract required it to do, including: [] (a) Complete the Contract in accordance with the Contract documents; [and] [] (b) Satisfactorily perform the subcontract work[.] West Bay contends this finding lacks substantial evidence support, claiming that Cummins failed to complete its work in accordance with the project schedule. Under the Cummins subcontract, failure to comply with the project schedule is a material breach of the contract.[3]

As Cummins points out, there is no allegation that Cummins failed to complete all of the technical aspects of its work or that the quality of its work was poor, incomplete, or otherwise defective. Instead, West Bays allegation that Cummins failed to perform as required by the Cummins subcontract rests solely on the allegation that Cummins failed to complete its work within the time required by the project schedule. Thus, our focus is on the evidence of delay attributable to Cummins.

At trial, West Bays expert testified that Cummins delayed the critical path for the project by 65 days. He identified three time windows during which Cummins purportedly caused delays. First, he asserted that 10 days of delay was attributable to Cummins as a result of work that had to be done in December 1999 to correct non-complying duct and conduit work. Second, he claimed that 27 days of delay were attributable to Cummins as a result of its failure to provide sufficient manpower in late 2000. Third, he opined that 28 days of delay were attributable to Cummins in part as a consequence of a wage dispute with its low voltage subcontractor, Ceintronics, during the period from late 2000 into early 2001.

Substantial evidence exists to refute each of the claimed delays attributed to Cummins. With regard to the 10-day delay associated with the notice of non-compliance, Cummins established that it completed the necessary work to correct the non-complying conduit and duct work by December 15, 1999. The corrected work was actually completed before the early start date for that work as set forth in West Bays own baseline schedule. West Bays expert attempted to explain this discrepancy by claiming the electrical work had started earlier than anticipated. He also conceded that in his initial analysis he did not attribute 10 days of delay to Cummins for the notice of non-compliance, but later put it in his contemporaneous analysis because of a letter from West Bay stating that the 10 days had somehow delayed West Bays critical path. There was substantial evidence in the record permitting the jury to dismiss the experts estimate of a 10-day delay resulting from the notice of non-compliance.

There was also good reason for the jury to question the 27-day delay attributed to Cummins as a result of its purported failure to provide adequate manpower. As reflected in the trial exhibit setting forth West Bays delay analysis, the expert estimated the critical path of the project was delayed a total of 47 days in a four-week period, from roughly August 17, 2000, to September 14, 2000.[4] Because the delay was longer than the period during which it was allegedly caused, the jury could have reasonably concluded that the experts analysis was unreliable or, at a minimum, overstated any delay. Further, West Bays expert admitted that the days of delay attributed to Cummins for manpower issues were not actual days of delay, but instead resulted because West Bay decided to resequence the schedule to provide a better picture of where the project was at the time. It was not until the project was resequenced that the alleged delays suddenly appeared. The evidence thus permitted the jury to discount the claim that Cummins failed to comply with the project schedule as a result of manpower issues.

Finally, with regard to the 28 days of delay attributed to Cummins during the period from late 2000 into early 2001, there was conflicting testimony about whether rooms were in fact ready for electrical work during that time frame. In addition, Cumminss site foreman testified that delays in installing the fire alarm system and other low voltage electrical items resulted from excessive dust caused by grinding down concrete floors. The work could not be performed in such a dusty environment, according to the site foreman. Thus, the jury could have reasonably concluded that the delay purportedly attributed to Cummins in the period from late 2000 into early 2001 resulted from factors beyond Cumminss control.

West Bay claims the record evidence overwhelmingly demonstrated that Cummins failed to conform to the project schedule. Even if this were true, it is not our place on appeal to reweigh the evidence or to discount the jurys findings because we conclude the weight of the evidence favors West Bay. As to each period of claimed delay attributed to Cummins, there was evidence in the record that permitted the jury to dismiss the analysis performed by West Bays expert. Viewing the evidence in the light most favorable to Cummins and giving it the benefit of every reasonable inference, we conclude there is substantial evidence in the record to support a finding that Cummins complied with the project schedules.

B. WestBay did not establish that it was entitled to an offset for amounts paid to obtain the stop notice release bond.

West Bay claims that, at a minimum, it was entitled to an offset for amounts it paid to obtain and keep in place a stop notice release bond. Under the Cummins subcontract, an improper or erroneous stop payment notice filed by Cummins would result in a fee charged to Cumminss account in the amount of 15 percent of the improper or erroneous amount of the stop notice. According to West Bay, because Cumminss stop payment notice was not filed within 30 days of the recording of a notice of completion, as required by Civil Code section 3184, the notice was untimely and ineffective. West Bay contends that the jurys refusal to allow an offset for the improper stop notice was not supported by substantial evidence.

On its face, West Bays claim seems plausible. The problem with the claim is that West Bay has not demonstrated that its untimeliness theory was presented to the jury. It is true that West Bays president testified that it suffered damages as a result of the stop notice. However, he made no claim the stop notice was improper as a consequence of being filed late. Rather, when asked a specific question about whether the notice was timely, he responded, Dont recall the timeliness of it.

It is also true the trial court ruled in connection with a motion in limine that Cumminss stop notice was untimely. As a consequence of the courts ruling, Cummins dismissed Travelers from the case. The holding that the notice was untimely, however, was announced outside the presence of the jury. West Bay has offered no indication the jury was ever informed the court had found the stop notice to be untimely and therefore improper or erroneous.

In closing arguments, West Bays counsel stated, without elaboration, that the stop notice filed by Cummins was late. Counsel did not explain the factual or legal basis for the conclusion the notice was late, nor did he characterize the notice as improper or erroneous solely as a result of its late filing. Instead, in an apparent effort to confirm it was undisputed the notice was late, he directed the jury to consider an instruction it would soon hear about how Travelers had been dismissed from the case. However, when the court instructed the jury with respect to Travelers, it told the jury not to speculate as to why Travelers was no longer a party. Thus, it would have been improper for the jury to conclude the stop notice was untimely based solely on the fact that Travelers had been dismissed from the case.

Although the record on appeal contains the bare facts from which one might conclude the stop notice was untimelyi.e., the recordation date of the notice of completion and the date the stop notice was filedthe jury was apparently never informed or asked to decide that the notice was untimely under Civil Code section 3184. The court offered a general instruction to the jury regarding West Bays claim to set-off, but that instruction did not allude to the stop notice much less ask the jury to decide whether the notice was untimely or that West Bay was entitled to a set-off as a result of the notice being filed late.[5] How was the jury expected to reach the conclusion that West Bay was entitled to an offset for an untimely stop notice when it was not presented with the necessary tools to conclude that the notice was, in fact, untimely? West Bay has not directed us to any evidence, stipulation, argument, or instruction presented to the jury that would have permitted it to conclude the stop notice was improper or erroneous as a consequence of being untimely. Because West Bay has failed to show how the jury could have concluded that Cumminss stop notice was untimely, we reject West Bays substantial evidence challenge to the finding that West Bay was not entitled to an offset against Cumminss damages.

Story continues as Part II .

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* Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this opinion is certified for publication with the exception of parts I and II of the Discussion.

[1] Both West Bay and Cummins state that West Bays expert attributed 33 days of delay to Cumminss alleged failure to man up. They neglect to note that the expert credited Cummins with six days on the schedule for making progress on manning the project. Thus, the net delay attributable to Cumminss manpower problems was 27 days.

[2] To be effective, a stop notice must be filed within 30 days after the recording of a notice of completion. (Civ. Code,  3184, subd. (a).) The notice of completion was recorded on October 15, 2001, but Cummins did not file its stop notice until March 27, 2002.

[3] In pertinent part, the Cummins subcontract provides: Time is of the essence of this Agreement. It shall be SUBCONTRACTORS obligation to conform to CONTRACTORs progress schedule, subject to CONTRACTORS modifications, which are incorporated herein by this reference and made a part hereof. If the SUBCONTRACTOR takes issue with the progress schedule, the SUBCONTRACTOR has five (5) business days to respond in writing after receipt of the CONTRACTORS schedule and its monthly modifications thereafter. Failure to respond in writing constitutes acceptance of the CONTRACTORS schedule with all of its scheduled durations. . . . Failure to comply with the CONTRACTORS schedule as required by the Contract Documents shall be a material breach of contract.

[4] West Bays expert attributed 33 days of the delay to Cummins and 14 days to other parties. He conceded that the 33-day delay attributed to Cummins exceeded the number of days in the time period during which the delay was allegedly caused. He also credited Cummins with 6 days during the period from September 28, 2000, until October 11, 2000, for making progress on providing manpower on the project. Thus, the net delay attributed to Cummins was 27 days over the period from August 17, 2000, until October 11, 2000.

[5] The jury instruction regarding set-off read as follows: West Bay Builders, Inc. contends that it is entitled to set-off all or a portion of S&S Cummins Corp.s claim. Set-off is defined by statute as follows:  [] Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the persons claim would at the time of filing the answer be barred by the statute of limitations.  [] If you find that West Bay Builders, Inc. has proved a set-off, then you must deduct the set-off from any award that you may make to S&S Cummins Corp.