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By John W. Ralls
Howrey LLP
A
contractor agreed to build a sewer project for a sanitation
district. During the job, the contractor defaulted. The
contractor's surety engaged another contractor and funded
the completion of the job.
After
the job was complete, the Division of Labor Standards Enforcement
notified the sanitation district to withhold payments from
the contractor for prevailing wage and overtime violations.
The surety remitted the underpaid wages but not the penalties.
The
sanitation district then filed a complaint in interpleader,
naming the surety and the division as parties contesting
entitlement to funds the district was holding.
The
trial court granted summary judgment in favor of the surety
on the theory that after the default and assumption of the
contract by the surety there was no money due the contractor
under the contract from which the penalties could be withheld.
The
Court of Appeal reversed. East Quincy Services District
v. General Accident Ins. Co. of America, 2001 Cal.App.
LEXIS 259 (Cal.App. 2001). The court reasoned that "once
a surety assumes the contract of its principal, it stands
in the same position to the contract as the principal, including
all liabilities… accruing before it assumed the contract…."
The court found that the contractor forfeited underpaid
wages and penalties at the moment of violation, even though
the Division's notice to withhold was sent after the job
was completed.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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