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Construction Industry News

Surety Is Responsible for Penalties for Contractor's Overtime and Prevailing Wage Violations


April 30, 2001


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By John W. Ralls
Thelen 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 415-369-7210 or at jralls@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2001 Thelen LLP

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