Insurance Co. of the West v. Engineered Systems and
Construction
Filed 2/26/13 Insurance Co. of the West v. Engineered
Systems and Construction CA4/1
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 This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115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
INSURANCE COMPANY OF THE WEST,
Plaintiff, Cross-defendant and Respondent,
v.
ENGINEERED SYSTEMS AND
CONSTRUCTION, INC.,
Defendants, Cross-complainants and Appellants.
D059661
(Super. Ct. No. 37-2008-00088812-
CU-BC-CTL)
APPEAL from
a judgment of the Superior Court of San
Diego County, Joel Pressman, Judge.
Reversed.
A public
entity typically requires a successful bidding contractor to obtain a
the work will be fully performed. To
obtain this bond, the contractor must generally enter into an indemnity
surety agrees to issue the bond and guaranty the performance. In exchange, the contractor agrees to
indemnify (repay) the surety for any payments made by the surety to the public
entity on a claim. Under the indemnity
contract, a surety is not the contractor's insurer, but rather acts as a
guarantor with rights against the contractor if the surety pays on a claim
brought by the public entity.
In this
case, a public entity brought claims against a contractor for claimed
against the contractor's surety to enforce a performance bond. The surety settled this claim for $250,000
and then sued the contractor and others who had signed a March 2006 indemnity
agreement. As amended, the complaint
alleged these defendants breached the indemnity
agreement by refusing to indemnify the surety for the $250,000 settlement
payment and for the attorney fees and costs incurred in the underlying
action. The contractor (and the other
defendants) filed a cross-complaint, seeking declaratory relief that no valid
indemnity contract existed and various other forms of relief pertaining to a
deed of trust.
The surety
moved for summary judgment on the complaint and cross-complaint. The court granted the motion, and entered a
judgment in the surety's favor for $250,000.
The court also stated the surety would be entitled to move for its
attorney fees and costs incurred in the underlying action in a postjudgment
motion.
The
contractor and related parties appeal, contending disputed factual issues exist
as to whether there was a valid indemnity agreement governing the performance
bond at issue and whether the $250,000 was a reasonable
summary judgment on the complaint and cross-complaint. Specifically, we determine there are triable
issues of fact regarding the reasonableness of the $250,000 settlement and the
reasonableness of the fees incurred by the surety in the litigation on the
underlying bond. For guidance on remand,
we also discuss appellants' argument that they are not bound to indemnify the
surety because there was no valid applicable indemnity agreement between the
parties.
FACTUAL AND
PROCEDURAL SUMMARY
Plaintiff
Insurance Company of the West (ICW) is a licensed surety that issues payment
and performance bonds to guarantee the performance of construction contracts. Defendant Engineered Systems and
Construction, Inc. (Engineered Systems) is a contractor that installs water
treatment facilities for public entities. At the relevant times, Engineered Systems was
owned by defendants Donald and Mary Howard and another married couple.
president.
In January
1996, ICW and Engineered Systems entered into a general indemnity agreement,
which was also signed by the Howards as individuals. In the agreement, Engineered Systems and the
Howards agreed to indemnify ICW for all liability, including attorney fees and
costs, "by reason of" the surety issuing bonds in favor of Engineered
Systems. The agreement further provided
that ICW was entitled to recover amounts paid in settlement of claims asserted
against Engineered Systems "whether or not such liability actually
existed" if the payments were
made "in the reasonable belief that [Engineered Systems] was liable for
the amount paid or that it was expedient under all the
circumstances to make such
payment or compromise . . . ."
name="_ftnref2" title="">[2]
During the
next eight years, Engineered Systems and ICW developed a close working
relationship in which ICW would provide performance bonds for public works projects
awarded to Engineered Systems, and Engineered Systems recognized its obligation
to repay ICW for any amounts paid on claims related to the bonded
projects.
In 2004,
Engineered Systems entered into a contract with the Rainbow Municipal Water
District (Rainbow) in which Engineered Systems agreed to install a water
disinfection system to be used for outdoor reservoirs. Rainbow agreed to pay Engineered Systems
$1,003,152 for the work. On Engineered
Systems' behalf, ICW issued a $1,003,152 performance bond which guaranteed
Engineered Systems' performance of its contractual obligations. The bond stated that ICW's obligation
"shall continue so long as any obligation of [Engineered Systems]
remains."
Two years
later, Engineered Systems was the successful bidder on a large project known as
the Sierra Madre project. Because of the
project size, ICW conditioned the issuance of a performance bond on the
Howards' agreement to provide additional collateral in the form of a trust deed
on the Howards' home and enter into another indemnity agreement that provided
for such additional collateral. The
Howards agreed to execute the deed of trust and in March 2006, the parties
entered into this new indemnity agreement.
The agreement was signed by ICW, Engineered Systems, and the Howards
(individually, and as trustees of their living trust, and on behalf of the
Howards' related business entity (Donald R. Howard Consulting Engineers,
Inc.)).
The March
2006 indemnity agreement was identical
to the 1996 indemnity agreement in all respects (including the indemnity
provision set forth in footnote 2 above), except the agreement contained one
new paragraph relating to the additional collateral and one paragraph
identifying additional related parties who could be held liable to ICW for
payments made on a bond. As did the
earlier agreement, the March 2006 indemnity agreement also contained an
integration clause: "This Agreement
contains the entire agreement of the parties and supersedes any prior or
contemporaneous written or oral agreements, representations and warranties
between the parties with respect to the subject matter of this Agreement. There are no representations, warranties,
agreements, arrangements, or understandings, written or oral, that are not
fully expressed in the Agreement."
In 2007,
Engineered Systems completed the Sierra Madre project.
On April 3, 2008, Rainbow served ICW with
its complaint against ICW, Engineered Systems, and other parties involved in
the manufacture/installation of Rainbow's water disinfection system. As against Engineered Systems, Rainbow
alleged breach of contract, fraud, negligent misrepresentation, and a statutory
claim. As against ICW, Rainbow alleged
it incurred damages in excess of $2.5 million to repair Engineered Systems'
defective and deficient work, and thus was entitled to recover these damages
under ICW's bond.
The same
day, ICW sent a letter to Engineered Systems requesting that Engineered Systems
answer for and hold harmless ICW from all losses, costs, and expenses to be
incurred in the defense to the action brought by Rainbow. Engineered Systems did not receive the letter
for another six weeks until about May
12, 2008. Two months later,
in July 2008, ICW filed a complaint against Engineered Systems and the other
Howard parties who signed the March 2006 indemnity agreement, seeking defense
and indemnification regarding the Rainbow lawsuit.
The next
month, on August 7, Donald Howard met with ICW representatives during which the
ICW representatives demanded that Engineered Systems post security in the
amount of $1.25 million to protect ICW from the anticipated losses resulting
from Rainbow's lawsuit. This request was
made under a contractual provision (contained in both the 2006 and 1996
indemnity agreements) requiring an indemnitor to provide a security deposit
"[i]f the Undersigned desire a claim against the Surety to be
resisted" (the defense deposit provision).
offered to provide ICW with legal counsel and bear the full costs of counsel
through Engineered Systems' insurer. ICW
rejected this offer, stating that ICW did not believe Engineered Systems'
counsel had sufficient expertise to properly defend the claims and that ICW had
no obligation to accept counsel if Engineered Systems refused to post the
requested $1.25 million in security while the Rainbow action was pending.
During the
next year, ICW undertook the defense of Rainbow's claims. In November or December 2009, ICW settled the
Rainbow lawsuit and paid Rainbow $250,000.
At the time, ICW had allegedly incurred $433,110.64 in costs and
attorney fees relating to the Rainbow litigation.
In ICW's second amended complaint,
ICW alleged claims against each of the parties that had signed the March 2006
indemnity agreement (collectively defendants
seeking to recover amounts incurred in the Rainbow lawsuit. ICW alleged several legal theories, including
breach of contract and statutory reimbursement under Civil Code section 2847.
Defendants
filed a cross-complaint. In the first
cause of action, defendants sought a declaration that: (1) ICW had no contractual rights against
defendants because the March 2006 indemnity agreement related only to the
Sierra Madre project and the 1996 indemnity agreement had been extinguished by
the execution of the March 2006 indemnity agreement; and (2) ICW's claims had
no merit because it rejected Engineered Systems' offer of a defense.
defendants' challenges to the continuing validity of the Sierra Madre deed of
trust encumbering the Howards' residence.
After
unsuccessfully demurring to the amended cross-complaint and withdrawing a
petition for writ of attachment relating to the deed of trust, ICW moved for
summary judgment and/or summary adjudication on the complaint and
cross-complaint. ICW argued the
undisputed facts showed it fulfilled all of its obligations under the March
2006 indemnity agreement, defendants breached the agreement by failing to
reimburse it for the settlement payment and litigation costs/fees, and it
sustained damages of $683,110.64 (the $250,000 settlement amount plus the
$433,110.64 in claimed costs and attorney fees). In response to defendants' claims that there
was no valid indemnity agreement concerning the Rainbow project, ICW argued the
plain language of the March 2006 indemnity agreement shows it applies to all
bonds issued on Engineered Systems' behalf before or after this agreement was
signed, and that in any event, the 1996 agreement applies to the Rainbow
bond.
To support
the damages amount, ICW submitted several declarations, including from its
surety claims vice president, its former claims consultant who met with Mr.
Howard in August 2008, and its counsel who was involved in the underlying
Rainbow action. As detailed below, these
declarations were submitted to support ICW's claims regarding the amount and
reasonableness of the $250,000 settlement and to set forth reasons explaining
why ICW declined the Howards' offer to defend the Rainbow claims.
In
opposition to ICW's motion, defendants argued there were disputed factual
questions on the following issues: (1)
whether the March 2006 indemnity agreement applies to the Rainbow bond; (2)
whether the settlement ($250,000) and claimed attorney fees and costs
($433,110.64) were "grossly excessive," particularly in light of
ICW's rejection of Engineered Systems' offer to provide a full defense; and (3)
whether ICW's $1.25 million collateral request was excessive and unreasonable.
In support,
defendants submitted Mr. Howard's declaration pertaining to the circumstances
leading to the execution of the March 2006 indemnity agreement. Howard said that after Engineered Systems was
awarded the Sierra Madre contract, ICW stated for the first time that because
of the project size, it would not issue a performance bond on the project
unless Engineered Systems (or its principals) provided additional collateral
(in the form of a deed of trust on the Howards' residence) and agreed to enter
into a new indemnity agreement. Howard
said that before he signed the March 2006 indemnity agreement, ICW managers
Donald Roop and Judith Dickinson "assured me . . . that [the March 2006
indemnity agreement] specifically related to the Sierra Madre project. [¶] . . . They also
stated that the deed of trust as well, related only to the Sierra Madre
Project. And that upon satisfactory
completion of the Sierra Madre Project that the deed of trust would be conveyed
back to our Living Trust." Howard also
said that the ICW representatives informed him that upon completing the Sierra
Madre project, the March 2006 indemnity agreement would be "cancelled, and
that the deed of trust would be conveyed back to us." Defendants also submitted a letter from ICW
confirming that the deed of trust was
for the purpose of securing the Sierra Madre final bond.
With
respect to the issue of the reasonableness of the $250,000 settlement, Howard
said Rainbow's lawsuit "consists largely of minor complaints . . . [that]
totaled about $25,000 or less, and virtually all of them were corrected by us,
all at no cost to Rainbow." Howard
also asserted that Rainbow's claim that Engineered Systems was liable for the
defective design of the system was "incorrect" because Engineered
Systems was not involved in the design of the water treatment system.
Defendants
also produced the declaration of Leonard Levy, an attorney with substantial
training and experience in representing surety companies. Levy offered an opinion on the meaning of the
defense deposit provision (see fn. 3, ante),
stating the provision "relates to the circumstance when the bond principal
desires that the surety defend
the claim, not the
circumstance existing in this matter, where the precise opposite circumstance
exists, i.e. the bond principal and indemnitors offering to defend the surety,
at no cost to the surety." Levy
also said that "the standard practice in the industry is for surety
companies to avoid incurring expenses by tendering defense to the principal
and/or indemnitors when claims and/or lawsuits are instituted against
sureties. When a bond principal is being
defended in an action by competent counsel, who are being paid,
ability to satisfy any judgment rendered against the principal and surety,
it is the general practice in the industry to allow the principal to defend the
surety . . . ." (Italics
added.) Levy also opined that the
insurance defense firm retained by Engineered Systems' insurer was competent
and qualified to have represented ICW in the matter.
After
holding a hearing and permitting supplemental briefing on the contract issues,
the court granted summary judgment in ICW's favor on its complaint and on the
cross-complaint. The court found the
plain language of the March 2006 indemnity agreement applied to all bonds
"whether issued prior to or after execution" of the indemnity
agreement. The court also found the
undisputed facts showed the reasonableness of the $250,000 settlement. In the final judgment, the court stated ICW
was "entitled to judgment in the amount of $250,000 from Defendants, the
amount paid by ICW to settle the claims made by [Rainbow] against bonds issued
by ICW at the request of Defendants."
With respect to the costs and attorney fees allegedly incurred by ICW in
the underlying Rainbow action, the court indicated that ICW was entitled to
reimbursement, but the amount of such fees and costs "shall be determined
by way of a regularly-noticed, post-judgment motion to recover attorneys' fees
and costs."
DISCUSSION
I. Review
Standards
A summary judgment or summary
adjudication motion shall be granted when there is no triable issue of material
fact and the moving party is entitled to judgment as a matter of law. A plaintiff
"bears the burden of persuasion that 'each element of' the 'cause of
action' in question has been 'proved,' and hence that 'there is no defense'
thereto." (Aguilar v. Atlantic
Richfield Co. (2001) 25 Cal.4th 826, 850.)
A moving plaintiff need not "disprove any defense asserted by the
defendant"; instead "[a]ll that the plaintiff need do is to 'prove[ ]
each element of the cause of action.' " (Id.
at p. 853.) When a plaintiff has met
this initial burden, the burden shifts to the defendant "to show that a
triable issue of one or more material facts exists as to that cause of action
or a defense thereto." (Code Civ.
Proc., § 437c, subd. (p)(1).)
We review
the trial court's ruling de novo, liberally construing the evidence in favor of
the party opposing the motion and resolving all doubts in the opposing party's
favor. (Miller v. Department of
Corrections (2005) 36 Cal.4th 446, 460.)
We will affirm a summary judgment or summary adjudication if it is
correct on any ground that the parties had an adequate opportunity to address
in the trial court, regardless of the trial court's stated reasons. (California
School of Culinary
Arts v. Lujan (2003) 112 Cal.App.4th
16, 22; see Code Civ. Proc., § 437c, subd. (m)(2).)
Under these
principles, we review the summary judgment on ICW's complaint and defendants'
cross-complaint.
II. ICW's
Complaint
The court
granted summary judgment on ICW's complaint based on its breach of contract
cause of action and awarded ICW $250,000.
Defendants contend the court erred because triable factual issues exist
on whether: (1) the March 2006 indemnity agreement governed the Rainbow bond
and thus entitled ICW to recover the $250,000; and (2) the $250,000 payment was
a reasonable settlement amount in the Rainbow action.
As explained
below, we determine the second argument has merit and this conclusion requires
that we reverse the summary judgment. If
a cause of action is not proved in its entirety, the court cannot grant a
plaintiff's summary judgment or summary adjudication motion. (See McCaskey
v. California
v. Superior Court (2000) 82 Cal.App.4th 91, 95-97.) For guidance on remand, we additionally
address defendants' first argument regarding the applicability of the March
2006 indemnity agreement.
A. Reasonableness
of $250,000 Settlement Payment
In the
March 2006 and the 1996 indemnity agreements, defendants agreed to indemnify
ICW for any amounts paid by reason of issuing the bond. (See fn. 2, ante.) Under the terms of
these agreements, ICW's reimbursement right was not dependent on a showing that
the payment was made under legal compulsion.
The indemnity agreement states that settlement amounts paid by ICW
"in the reasonable belief that it was liable for the amount paid or that
it was expedient under all the circumstances to make such payment or
compromise, shall be binding upon the
Undersigned as a loss or expense covered by this indemnity,
existed." (Italics added.) Additionally, "[a]n itemized statement
of the payment or compromise, sworn to by an officer of the
Surety . . . shall be prima facie evidence of the fact and
the amount of the liability of the [indemnitor] . . . ."
To show a
reimbursement right under these provisions, ICW presented the sworn declaration
of its vice president stating that ICW paid $250,000 to settle the claims
asserted by Rainbow. It also presented
the declaration of its counsel (Jeffrey Robbins) explaining the decision to pay
the $250,000 settlement in the Rainbow litigation. This declaration stated in relevant
part:
"ICW spent more than a year
investigating and litigating the lawsuit brought by Rainbow. The case involved five separate parties,
Rainbow, ICW, [Engineered Systems], the manufacturer of the chlorination system
sold by [Engineered Systems] [Miox Corporation], and Rainbow's in-house
engineer, Dudek & Associates.
Thousands and thousands of documents were produced. Weeks worth of depositions
were taken. Extensive written discovery
was exchanged by all sides. ICW had to
retain experts in the field of water chemistry and water storage systems. ICW brought its experts out to Southern
California in order to inspect the outdoor reservoirs where
Rainbow installed the chlorination system.
. . . In
late December 2009, ICW ultimately made the decision to settle the Rainbow
lawsuit, pay Rainbow the sum of $250,000 and stop incurring litigation costs
and attorneys' fees. It was clear that
[Engineered Systems] was at least partially responsible for some of the damages
alleged by Rainbow. The manufacturer of
the system [Engineered Systems] sold, Miox Corporation, settled its claim with
Rainbow for $125,000. As far as I know,
the only remaining defendants in Rainbow's lawsuit are Dudek & Associates
and [Engineered Systems]. Had ICW not
settled with Rainbow, it would have continued to accrue litigation costs for
the past eight months, an amount which likely would have exceeded the $250,000
that [Engineered Systems] paid to settle Rainbow's claim. Given the exposure [Engineered Systems] has
in the case and the existence of an attorney's fees provision in the
Rainbow/[Engineered Systems] contract, it is conceivable, if not likely, that
ICW would have paid hundreds of thousands of additional attorneys' fees through
trial only to face a judgment, even if for a relatively small amount, that
would obligate ICW to pay Rainbow's attorneys' fees, which would easily run
into the high six figures, if not seven."
ICW also
relied on Rainbow's complaint alleging breach of contract, tort, and statutory
claims against Engineered Systems. In
the breach of contract cause of action, Rainbow alleged that Engineered Systems
failed to properly install the water treatment system and failed to provide a proper
engineered design for the system.
Rainbow alleged that as a result of the breaches, Rainbow sustained
damages including expenses to remedy the deficiencies in the installed systems
and additional expenses to replace and monitor the system. Rainbow also sought its attorney fees under a
contractual provision in the Rainbow-Engineered Systems contract.
This
evidence satisfied ICW's summary judgment burden to show it was liable on the
bond for $250,000 and that it was entitled to reimbursement of that
amount. (Fidelity & Deposit Co. v. Whitson (1960) 187 Cal.App.2d 751,
757 [under similar indemnity provision "where there is no trial and no
judgment establishing liability, but a settlement of the litigation has been
made, the settlement becomes presumptive evidence of the [surety's] liability
and the amount thereof, which presumption is subject to being overcome by
proof"]; see Travelers Casualty
& Surety Co. of America v. Highland Partnership, Inc. (S.D. Cal. 2012)
2012 WL 5928139; General Ins. Co. of
America v. Singleton (1974) 40 Cal.App.3d 439, see also
Court (1992) 10 Cal.App.4th 1484, 1497.)
Thus, the
burden shifted to defendants to submit evidence showing a triable issue of
fact. To satisfy this burden, defendants
relied primarily on the declaration of Engineered Systems' president (Howard),
who indicated he had personal knowledge of the Rainbow contract work. He stated in relevant part:
"I find [the $250,000
settlement] amount entirely unreasonable[.]
[B]ased on my experience, [Engineered Systems] is not liable to Rainbow
for the work we performed. [¶] . . . As
I read Rainbow's main complaint in the action, it relates to its
dissatisfaction with the disinfecting effect of the MIOX System. Rainbow's claim against [Engineered Systems]
consists largely of minor complaints about installation problems that had to be
fixed. These items, however, totaled
about $25,000 or less, and virtually all of them were corrected by us, all at
no cost to Rainbow. [¶] . . . Rainbow's
taking the position that [Engineered Systems] was engaged in designing the
project, rather than merely installing a water system and related specific
equipment in accordance with the contract that was designed by Dudek (Rainbow's
main target), and which was approved by Rainbow itself is incorrect. [¶] . . . The only design responsibility that
we undertook was to design a concrete slab—this item is not in question, or
alleged to be defective in any way. "
Liberally
construing Howard's declaration, we conclude it was sufficient to create a
triable issue of fact on whether ICW had a reasonable belief it was liable for
the $250,000 or whether the settlement was "expedient" under all the
circumstances. As Engineered Systems'
president, Howard was familiar with the overall project, including his
company's services as compared to the work performed by other contracting
parties; Rainbow's complaints concerning Engineered Systems' work and the work
of other contractors; and the repair work his company performed in response to
these complaints. According to Howard,
Rainbow's major complaint concerning the disinfecting effect of the MIOX system
and the manner in which the system was designed resulted from other
contractors' work and the complaints about the installation work for which
Engineered System was responsible were
"largely . . . minor." Howard maintained the $250,000 settlement was
"entirely unreasonable" because the cost to repair these problems was
$25,000 or less and that Engineered Systems fixed these problems at virtually
no cost to Rainbow. Assuming a trier of
fact agreed with this assessment, it could also reasonably conclude a far less
vigorous defense was warranted. This
would minimize the attorney fees Engineered Systems might ultimately owe to
Rainbow—a primary factor relied upon by ICW to justify the $250,000
settlement. Howard's declaration was
sufficient to create a triable issue of fact.
Surety expert Levy's opinion that
ICW acted below the standard of care in refusing to accept Engineered Systems'
insurance defense counsel to represent its interests in the Rainbow litigation is consistent with this
conclusion. Levy indicated that
insurance defense counsel was qualified and experienced in handling
construction disputes with the ability to properly evaluate Engineered Systems'
exposure and to implement a litigation strategy commensurate with that
exposure. Although ICW declarations
explaining the reasons for the expenses associated with its defense of the
underlying case appear reasonable, if a jury were to conclude that Engineered
Systems' exposure was in line with Howard's assessment of the minor role it
played, the jury could conclude that a far less vigorous defense was warranted
and thus minimize any attorney fees Engineered Systems might ultimately owe to
Rainbow. Because ICW considered the
exposure to these fees as an important factor in justifying the settlement,
this too, could impact whether the $250,000 settlement was reasonable.
Additionally, the court erred in granting
summary judgment because ICW sought attorney fees incurred in its Rainbow
litigation defense as part of ICW's breach of contract claim, and the final
judgment stated that ICW was entitled to those fees and would have the
opportunity to prove them in postjudgment proceedings. However, because ICW did not present any
foundational evidence supporting the amount or reasonableness of these attorney
fees, the court erred in granting summary judgment on this claim. The court further erred because it deferred
the determination of the amount of the fees to a postjudgment proceeding. This ruling was erroneous because the amount
of attorney fees incurred in the Rainbow action is a damages issue and not a
matter that could be decided in a postjudgment proceeding. On remand, ICW will be entitled to seek these
fees, but its entitlement to these fees will depend on its proof of its
substantive claims in the trial proceedings and not in postjudgment
proceedings.
B. Does
the March 2006 Indemnity Agreement
Govern ICW's Reimbursement Claim?
In their
appellate briefs, defendants contend the court also erred in granting summary
judgment because the March 2006 indemnity agreement applied
is a factual dispute on this issue.
Based on our conclusion that triable factual issues exist on the
reasonableness of the settlement amount, we need not reach the issue. Summary judgment cannot be granted if any
factual issues exist with regard to a cause of action. However, because the March 2006 indemnity
agreement issue has been extensively briefed on appeal and it is largely a
legal issue, we find it appropriate to provide guidance to the court and
parties on remand. Our discussion is
based on the record before us, and does not limit the parties' right to present
additional relevant and admissible evidence in the proceedings below.
1. Legal
Principles
In
interpreting an indemnity agreement issued in the context of surety bonds,
courts are governed by well-settled rules of contract interpretation. (City
of Chino v. Jackson (2002) 97 Cal.App.4th 377, 382 (City of Chino); Fidelity
& Deposit Co. v. Whitson, supra, 187 Cal.App.2d at p. 756.) The court's fundamental task is to determine
the mutual intention of the parties at the time the contract was formed. " ' "Such intent is to be
inferred, if possible, solely from the written provisions of the contract. [Citation.]
The 'clear and explicit' meaning of these provisions, interpreted in
their 'ordinary and popular sense,' unless 'used by the parties in a technical
sense or a special meaning is given to them by usage' [citation], controls
judicial interpretation.
[Citation.]" ' [Citation.]" (E.M.M.I. Inc. v. Zurich American Ins. Co.
(2004) 32 Cal.4th 465, 470.)
If the
language is unambiguous, the court must enforce the plain meaning. (Clarendon
America Ins. Co. v. North American Capacity Ins. Co. (2010) 186 Cal.App.4th
556, 566.) However, if contract language
is susceptible to two or more reasonable interpretations, the court may admit extrinsic
evidence to aid in interpreting the contract.
(Wolf v. Walt Disney Pictures
& Television (2008) 162 Cal.App.4th 1107, 1126 (Wolf); City of Chino, supra,
97 Cal.App.4th at pp. 383-384.) The
court may also admit extrinsic evidence to assist in determining whether
contract language is susceptible to more than one reasonable inference. (Wolf,
supra, 162 Cal.App.4th at p. 1126.)
When there is no material conflict in the extrinsic evidence, the trial
court interprets the contract as a matter of law. (Ibid.) An issue of fact arises only if the
contractual language is reasonably susceptible to both
parties' competing interpretations and there is a credibility contest in the
construction rules do not clarify the ambiguity, the ambiguity may be construed
against the party who prepared the contract.
(Steller v. Sears, Roebuck &
Co. (2010) 189 Cal.App.4th 175, 183.)
2. Analysis
The March
2006 indemnity agreement broadly provides that the "Undersigned"
(defined to mean Engineered Systems and the Howard parties) "
Surety against any and all liability for losses and expenses of whatsoever kind
or nature, including attorney fees and costs, by reason of having executed or
procured the execution of Bonds, or
by reason of the failure of the Principal or Indemnitors to perform or comply
with the covenants and conditions of this Agreement." (Italics added.) Reasonably read, this substantive provision
applies to all bonds issued by the surety (including those that have been
"executed") and does not
limit the Bonds to only those bonds that will be issued in the future. (Italics added.) Although the indemnity agreement does not
specifically define the word "Bonds," it does state that the
Undersigned shall not only indemnify but shall also "keep [the Surety] indemnified . . . against any and
all liability" by reason of the surety issuing a bond. (Italics added.) Viewed in its entirety, a reasonable common
sense meaning of the indemnity obligation provision in the March 2006 agreement
supports that "Bonds" referred to in the agreement are not limited to
bonds issued in the future or bonds issued with respect to a particular
project.
This interpretation
is supported by several other portions of the agreement.
First,
section 22 states: "The Undersigned
agree that this instrument shall cover any
bonds executed on behalf of any, without limitation, subsidiary,
partnership, limited partnership, joint venture, corporation, or limited
liability company of the principals, whether now existing or formed hereafter,
and whether partially or wholly owned and controlled, as if the names of such
subsidiaries, partnerships, limited partnerships, joint ventures, corporations
or limited liability companies appeared herein as principals." (Italics added.) Although this provision is directed primarily
at identifying the related parties that can be held liable under the indemnity
agreement, the phrase "any bonds" has meaning and does not suggest
any limitation to the timing of when the bonds were issued.
Second,
section 17 contains a paragraph stating:
"The Undersigned shall continue to be bound under this Agreement
even though the Surety, with or without notice to or knowledge of the
Undersigned, has accepted or released or may in the future accept or release,
other agreements of indemnity or collateral, from the Undersigned or others, in
connection with the execution of Bonds."
Under this provision, defendants agreed they would be bound by the
indemnity obligation, even if ICW had entered into other indemnity agreements with the parties.
Third, the
March 2006 indemnity agreement's "consideration" provision states
that the agreement has been reached "in consideration of the Surety
delivering one or more executed Bonds to the Principal, or the renewal or
extension of Bonds, or refraining from
trying to cancel Bonds . . . ."
(Italics added.) Other
preliminary clauses in the agreement likewise describe the purpose of the
agreement as including ICW's agreement to refrain from "canceling"
the Bonds.
consideration and purpose as including an agreement not to cancel bonds, it is
reasonable to infer the parties contemplated that the definition of bonds would
extend to bonds that had been issued in the past. Defendants' argument that the "bonds
that might be cancelled" language refers solely to future bonds is not a
reasonable reading of these clauses. We
also reject defendants' argument that the recital provisions in the agreement
(see fn. 6, ante) contain a
conclusive definition of the word "Bonds." There is no such definition contained in
these provisions. In any event, the
description of Bonds in the Whereas clauses does not exclude existing bonds
from the indemnity agreement.
Additionally,
the extrinsic evidence presented on this issue was essentially undisputed and
supports the interpretation that the March 2006 indemnity agreement was
intended to cover all bonds issued by ICW in favor of Engineered Systems. Where "the extrinsic evidence points
only one way, . . . the meaning of the language in question may be ascertained
as a matter of law and may be reviewed by an appellate court de novo." (Solis
v. Kirkwood Resort Co. (2001) 94 Cal.App.4th 354, 360.)
The
undisputed evidence shows the parties had a long-term business relationship,
and Engineered Systems and the Howards understood that under the 1996 indemnity
agreement they were required to indemnify ICW for any payments made on claims
arising from the bonds, including the Rainbow bond. When the parties signed the March 2006
indemnity agreement, they expressly agreed that this agreement would supersede
all other indemnity agreements on the same subject. The March 2006 indemnity agreement does not
contain any provision stating or suggesting that it does not apply to existing
obligations owed by Engineered Systems to ICW, and there is nothing in the
record showing ICW would have agreed to waive all of its rights under the
Rainbow bond, for which it had more than $1 million in liability at stake. The Rainbow bond specifically provided that
"the obligation of Surety . . . shall continue so long
as any obligation of [Engineered Systems] remains."
Defendants
rely primarily on Howard's declaration to establish a triable issue of fact on
the meaning of the March 2006 indemnity agreement. However, there is nothing in this declaration
showing the parties intended to extinguish defendants' liability for the
Rainbow bond by executing the March 2006 indemnity agreement, or that they
intended that only the Sierra Madre bonds were covered by the agreement. According to Howard, ICW representatives told
him that the March 2006 agreement "specifically related" to the
Sierra Madre project. This statement
does not suggest the March 2006 agreement covers only that project and that it did not cover any other bonds. Indeed, such an interpretation would be
flatly inconsistent with the language of the March 2006 indemnity agreement, which
refers to "Bonds" in the plural without limitation to the Sierra
Madre bond. "[P]arol evidence is
admissible only to prove a meaning to which the language is 'reasonably
susceptible' [citation], not to flatly contradict the express terms of the
agreement." (Winet v. Price (1992) 4 Cal.App.4th 1159, 1167; see Code Civ.
Proc., § 1856,
subd. (a); Wolf, supra, 162
Cal.App.4th at p. 1126.) Further, as
explained below, the "fraud" exception to the parol evidence rule is
inapplicable on the factual record before us.
Howard's
other statement in his declaration that the deed
of trust related "
reconveyed after the completion of the project is also consistent with
indemnity agreement applied to all Bonds, past and future. The record shows ICW sought additional
collateral in the form of a deed of trust on the Howards' property because of
the size and complexity of the Sierra Madre project and that this collateral
was needed to secure Engineered Systems' performance on this project. But the
parties' understanding that the deed of trust would relate only to a particular
bond does not lead to a reasonable inference that the parties intended the
March 2006 indemnity agreement would not cover all bonds. The fact the parties limited certain
collateral to a particular bond does not mean they did not intend the general
indemnity agreement to apply to all existing and future indebtedness.
Additionally,
the undisputed evidence shows that several months after ICW was served with the
Rainbow lawsuit, the Howards offered to provide ICW with a free defense. This response gives rise to the strong
inference that — despite their current assertions — the Howards always understood
and believed that Engineered Systems remained bound to indemnify ICW regarding
payments made on the Rainbow bond. The
parties' subsequent conduct is relevant to show the intended meaning of
ambiguous contract language. (See Southern
Cal. Edison Co. v. Superior Court (1995) 37 Cal.App.4th 839, 851; Morey
v. Vannucci (1998) 64 Cal.App.4th 904, 912; see also Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1356.)
Defendants'
main appellate argument is that the March 2006 indemnity agreement applied only
to the Sierra Madre bond. However, there
is nothing in the language of the March 2006 indemnity agreement that supports
refer to or mention the Sierra Madre bond.
The fact that the indemnity agreement applies to "Bonds"
generally is stated throughout the agreement without any express or implied
limitation to a single bond.
Considering
the language of the March 2006 indemnity agreement and the extrinsic evidence
presented by the parties, the only plausible interpretation of the March 2006
indemnity agreement is that it encompassed defendants' promise to indemnify ICW
for future and existing bonds, including the Rainbow bond.
Defendants
rely on several cases to support their argument that the March 2006 indemnity
agreement did not apply to the Rainbow bond.
(See Fischer v. First Internat.
Bank (2003) 109 Cal.App.4th 1433 (Fischer);
City of
etc. Assn. v. Kelsey (1935) 6 Cal.App.2d 346, 350 (Kelsey).)
In
earlier issued bonds. (
827-828.) After examining the language
of the contract and the circumstances
surrounding the execution of the indemnity contract, the court concluded the
agreement did not cover earlier issued bonds.
(Id. at pp. 836-840.) However, the facts were materially
distinguishable from here. Unlike here,
the Johansen defendant did not have a
preexisting obligation to reimburse the surety for the prior bonds, and the
parties stipulated that the purpose of entering into the indemnity agreement
was to provide indemnity for future bonds. (Id.
at p. 838.) Additionally, the recitals
in the Johansen indemnity agreement
contained language referring only to future bond issuance; whereas in this case
the recitals included the surety's promise to "refrain[ ] from canceling
bonds." Further, in a related
agreement executed several weeks earlier, the Johansen surety included a typewritten provision stating that
" 'It is further understood and agreed that this Agreement of
Indemnity, executed subsequent to the execution of certain bonds is
nevertheless to be retroactive in all respects and applicable
thereto.' " (
such provision in the agreement before it.
(Ibid.) There is no similar evidence that in other
agreements ICW included a specific reference to prior bonds.
that "all guarantees are prospective and not retrospective in operation,
unless the contrary appears by express words or by necessary
implication." (Id. at p. 350.) This
principle is consistent with our conclusion in the case. As explained, the contractual language and
the circumstances surrounding the execution of the agreement show that the parties
necessarily intended the agreement to cover the existing bonds. By contrast, in Kelsey, there was no express or implied promise to pay prior
indebtedness.
position. In Fischer, this court interpreted a dragnet clause in a trust deed
that was "filled with legal jargon that would have been incomprehensible
to the average layperson." (
Emphasizing the specific rules applicable to the interpretation of
dragnet clauses (that often " ' "enwrap the unsuspecting
debtor in the folds of indebtedness" ' "), we found the
dragnet clause was ambiguous and that the evidence presented by the property
owners supported their interpretation of the agreement. (Id. at
pp. 1446, 1443-1450.) The circumstances
here are legally and factually dissimilar.
In
indemnity agreement contained a specific provision stating that it applies to
bonds issued "whether before or after the date of this
Agreement." (City of Chino, supra, 97 Cal.App.4th at p. 384.) The court found this language unambiguously
covered all bonds whether "executed before or after the indemnity
agreement." (Id. at p. 385.) However, the
fact the March 2006 indemnity agreement did not contain this specific
contractual language does not mean it must be interpreted to apply only to
future bonds. Each indemnity agreement
must be viewed based on the particular language used in the instrument and, if
ambiguous, the surrounding circumstances.
Defendants'
reliance on the California Supreme Court's recent decision in
Fresno-Madera Production Credit Assoc. (2013) 55 Cal.4th 1169 (
the statutory exception to the parole evidence rule that allows a party to
present extrinsic evidence to show that a written agreement was procured by
fraud, even if the alleged misrepresentations were inconsistent with the
subsequent language contained in the written agreement. (Id. at pp. 1174-1183; see Code Civ.
Proc., § 1856,
subd. (g).) In so doing, the
misrepresentations to induce a party's assent to the contract are inadmissible
if the alleged misrepresentations are inconsistent with the provisions of the
written contract. The
plain language of Code of Civil Procedure section 1856 and Pendergrass "failed to account for the fundamental principle
that fraud undermines the essential validity of the parties'
agreement." (Riverisland, supra, at p.
1182.) The Riverisland court stated:
"When fraud is proven, it cannot be maintained that the parties
freely entered into an agreement reflecting a meeting of the minds." (Ibid.)
that ICW made any misrepresentations to the Howards with respect to the Rainbow
bond or fraudulently procured the parties' agreement to the March 2006
indemnity agreement based on false promises that the indemnity agreement would
not cover the Rainbow bond. Defendants
did not assert any fraud claim (affirmatively or in defense of ICW's contract
claim), nor did they present any facts showing that ICW made any false
statements to them about the continuing force of their indemnity obligations
with respect to the Rainbow bond.
Specifically, there is no evidence in the appellate record showing that
before the Howards signed the March 2006 agreement that ICW representatives
said that the agreement did not cover the Rainbow bond or that the Howards
would no longer be responsible for claims against ICW on the Rainbow project. As noted, the Howards' offer of a free
defense to ICW in the Rainbow action makes quite clear that there was no such
understanding by the Howards.
Finally, to
the extent that the March 2006 indemnity agreement did not cover the Rainbow
bond, the evidence is undisputed that the scope of the indemnity obligation was
the same under the earlier 1996 agreement, which clearly did cover the Rainbow
bond. In this respect, we find
unavailing the Howards' reliance on the provision in the March 2006 indemnity
agreement stating that: "This
Agreement contains the entire agreement of the parties and supersedes any prior
or contemporaneous written or oral agreements, representations and warranties
between the parties with respect to the
subject matter of this Agreement."
(Italics added.) Defendants argue
that this integration clause means that any liability under the 1996 indemnity
agreement is eliminated because it is a
"prior . . . written . . . agreement . . . between the
parties" under this contract provision.
This is true to the extent that the March 2006 agreement covers the
Rainbow bonds because it would be an indemnity agreement "with respect to
the subject matter of this Agreement."
However, assuming the Howards' argument is correct and the March 2006
agreement was not intended to cover
the Rainbow bond that was previously
covered by the 1996 agreement, then the March 2006 agreement's integration
provision does not apply to eliminate the Howards' prior indemnity obligations
for the Rainbow bond because the 1996 indemnity contract covering the Rainbow
bond would not be an agreement "with respect to the subject matter of this
[March 2006] Agreement." The
Howards cannot have it both ways. On the
record before us, they are either liable under the March 2006 indemnity
agreement for the Rainbow bond or they
are liable under the 1996 indemnity agreement to indemnify ICW under the
Rainbow bond.
III. Defendants'
Cross-Complaint
In the
first cause of action of their cross-complaint, defendants sought declaratory
relief pertaining to their contractual obligations under the March 2006
indemnity agreement. Our conclusion that
the court erred in granting summary judgment on ICW's breach of contract claim
applies equally to this cause of action.
In the
remaining causes of action in their cross-complaint, defendants alleged that
ICW was liable for failing to reconvey the deed of trust on the Howards'
personal residence. Because ICW did not
specifically address these claims in its moving papers or present supporting
evidence, it did not meet its burden to show no triable issues of fact on these
causes of action. To the extent
defendants are not continuing to pursue these claims, this can be clarified in
the proceedings below.
Accordingly,
we reverse the summary judgment in ICW's favor on the cross-complaint.
DISPOSITION
Judgment
reversed. Respondent to bear appellants'
costs on appeal.
HALLER, J.
WE CONCUR:
NARES,
Acting P. J.
McINTYRE, J.
name="_ftn1" title="">[1]
Because this other couple is not
part of the appeal, we omit further mention of them in the opinion.
relevant part: "1. INDEMNITY.
The Undersigned shall indemnify and keep indemnified the Surety against
any and all liability for losses and expenses of whatsoever kind or nature,
including attorney fees and costs, by reason of having executed or procured the
execution of Bonds, or by reason of the failure of the Principal or Indemnitors
to perform or comply with the covenants and conditions of this Agreement. [¶]
The Surety may pay or compromise any claim, demand, suit, judgment, or
expense arising out of the Bonds, and any such payment or compromise made by
the Surety in the reasonable belief that it was liable for the amount paid or
that it was expedient under all the circumstances to make such payment or
compromise, shall be binding upon the Undersigned as a loss or expense covered
by this indemnity, whether or not such liability actually existed. An itemized statement of the payment or
compromise, sworn to by an officer of the Surety, or the voucher or vouchers or
other evidence of the payment or compromise, shall be prima facie evidence of
the fact and the amount of the liability of the Undersigned under this
Agreement."