WestBay Builders v. Kamran

Filed 8/6/09 West Bay Builders v. Kamran CA3

NOT TO BE PUBLISHED

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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

THIRD APPELLATE DISTRICT

(Sacramento)

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This dispute arises out of a public works project in which contractor West Bay Builders, Inc. (West Bay) hired subcontractor Kamran & Company, Inc. (Kamran) to install food service equipment in a facility operated by the State of California (State). In February 2002, the State experienced problems with the equipment that went unresolved and eventually prompted suit against West Bay. West Bay in turn sued Kamran for breach of contract and indemnification due to Kamrans refusal to provide warranty repairs or a defense against the States lawsuit. Kamran cross-complained against West Bay for withheld payment on the project and against equipment manufacturer, Carrier Corporation. The trial court dismissed Carrier Corporation on summary judgment--a ruling that Kamran has not appealed. After the State and West Bay reached a settlement agreement, only the dispute between West Bay and Kamran remained.

Following a bench trial, the trial court ruled that (1) Kamran had a contractual duty to make repairs in February 2002, (2) Kamran also owed West Bay a duty to defend and indemnify it against the States lawsuit, (3) West Bay did not unlawfully retain payment for Kamrans portion of the work, (4) Kamran was not entitled to prejudgment interest, and (5) Although West Bay owed Kamran $3,369 from retained funds, West Bay was entitled to contractual attorney fees as the prevailing party.

On appeal, Kamran contends that (1) its warranty obligations expired before the demand for repairs in February 2002, (2) it had no duty to defend or indemnify West Bay because the State demanded repairs based on a settlement agreement to which Kamran did not agree, (3) West Bay unlawfully retained payment to which Kamran was undisputedly entitled, (4) Kamran should have been awarded prejudgment interest on the wrongfully withheld payment, and (5) Kamran was the prevailing party because it secured the net monetary recovery in the judgment.

We conclude that the trial court reached the correct result. However, we rely on different grounds than the trial court in determining that Kamran had a duty to make repairs in February 2002. Kamrans subcontract with West Bay imposed the greater duty to make warranty repairs whenever guarantees in the prime and subcontract differed in scope or duration. The one-year warranty in the prime contract, upon which Kamran relies, began to run when the equipment was put in use. However, that warranty does not negate the subcontracts guarantee that Kamran would provide warranty repairs for one year after acceptance of the work by the State. The State did not accept the work until June 2001, less than a year before the February 2002 demand for repairs. Kamran therefore breached its warranty in the subcontract.

Because we reach the same result as the trial court on the question of Kamrans duties to repair and indemnify, we agree with the trial courts conclusions regarding entitlement to prejudgment interest, and the prevailing party determination for purposes of attorney fees and costs. We also agree with the trial court that Kamran is not entitled to penalties for West Bays retention of payment while a bona fide dispute was pending. Accordingly, we shall affirm.

FACTUAL AND PROCEDURAL HISTORY

The trial court issued a comprehensive statement of decision following a three-day court trial. The statement of decision, with appropriate deletions and additions, follows:[1]

The Court is called upon to resolve a contractual dispute arising out of an approximate $9 million construction project known as the Yountville Veterans Home Kitchen Remodel (the Project) during the 1997 to 2002 time frame. [[The State]] entered into a construction contract with [[West Bay]], the general contractor. West Bay in turn entered into a series of Subcontracts, including the one here at issue with [[Kamran]]. Kamran was hired to furnish and install certain food service equipment in exchange for $1,569,029.00.

[ ]

The key contract documents (Contract) were admitted as Trial Exhibits.[[[2]]] They include Exhibits 1 (Prime Contract), 2 (Subcontract between West Bay and Kamran), 3 (Project Manual Book One, index only), 4 (General Conditions of Contract from Project Manual), 5 (Section 00800 Supplemental Conditions from Project Manual Book One), 6 (Section 11400 Food Service Equipment from Project Manual Book One), 7 (Main Kitchen Itemized Specifications) and 8 (Holderman Hospital Itemized Specifications).

Things did not go well on the project and there were disputes between the State and West Bay, as well as between West Bay and Kamran, among others.

State and West Bay entered into two settlement agreements relevant to the instant action.

On June 12, 2001, West Bay and State entered into the first written settlement agreement resolving all disputes except those relating to the walk-ins and refrigeration units installed by Kamran under the Subcontract. The State paid West Bay $477,494 for various additional work, minus certain amounts related to another Subcontractors stop notice. This settlement agreement also provided that the State would retain $126,002 of West Bays retention, half of which ($63,001) related to Kamrans Subcontract and would be retained until successful completion of the walk in cooler repairs. The other half would be released when certain specified Operation and Maintenance Manuals regarding kitchen equipment and as-built drawings were submitted. [ ] Over time, there had been a series of problems with the refrigeration units, including but not limited to defective fan coils, sagging ceiling panels, insufficient or poor quality caulking and the intrusion by rodents. A number of issues remained with these units up to and after the first settlement agreement was signed in June 2001. It was undisputed at trial that all the refrigeration units were in place no later than May of 1999 and some were in use as early as the summer of 1999, while others were not in use until the early winter of 2000. (Emphasis added)[3]

Of importance to this action is the language contained in Section 3.E of the June 15, 2001 Settlement Agreement [ ] between West Bay and the State. It states in relevant part:

the State and [West Bay] agree that the warranty for the walk-ins coolers [[sic]] shall run for two (2) years from the date the modifications are complete and accepted by the State. [ ]

This language undisputedly extended the general warranty language found in the original Contract documents, at least as between West Bay and the State. However, Kamran was not a party to the negotiations, terms or 2001 settlement agreement and asserts in this trial that it cannot be bound by this subsequent modification.

West Bay and the State also agreed that the further remedial work for the walk in coolers would be subject to a reasonable punch list from the State. The settlement agreement did not specify which of the walk-in coolers were covered by the new warranty agreement. Lacking such specification, the Settlement Agreement language arguably appeared to cover all walk-in coolers.

It is undisputed that Kamran was not a party to the June 2001 settlement agreement between the State and West Bay, nor did it have knowledge of it. Kamran was not consulted prior to the above referenced language being agreed upon and accepted by the State and West Bay.

At trial, West Bay asserted that as of the date of the Settlement Agreement on June 15, 2001, the State had fully accepted the work under the contract and the contract was complete, save and except for the items referenced in the settlement agreement. Acceptance of the Contract or acceptance of the work, just like the date certain equipment is put in use, sets the outside time limits under which West Bay and Kamran are required to provide warranty and/or repair work under various warranty, guarantee and indemnification provisions in the Contract.

On November 20, 2001, West Bay sent a letter to the State advising the State that West Bay believed all work on the Project, including the identified exceptions in the June 15, 2001 Settlement Agreement, was complete. [ ] West Bay requested final release of all funds held in retention by the State. The State released the retention on or about March 20, 2002. [ ] Therefore, as far as the State and West Bay were concerned, the two year warranties regarding the walk-ins [ ] referenced in [ ] the June 15, 2001 Settlement Agreement began to run no sooner than November 20, 2001 and no later than March 20, 2002. The express warranty period would end, therefore, at the earliest November 19, 2003, and at the latest March 19, 2004, at least as between West Bay and State.

In February 2002, the State reportedly discovered leaks in seven coils in the walk-ins. The Court finds that Kamran and West Bay were made aware of the problem and therefore on notice through various correspondence. On or about May 13, 2002, the State sent a letter informing West Bay of the leaks and demanding repair. A copy of the May 13 letter was forwarded to Kamran on May 15, 2002. It was apparent from the correspondence and subsequent litigation that State was relying on the two-year extended warranty provisions in the 2001 settlement when it demanded repair.

Kamran declined to repair or replace the coils, asserting that its warranty obligation with respect to the coils had expired under the original Contract documents and provisions. Kamran relied on paragraph 1.7 in the Supplementary Conditions (Section 11400-Food; Service Equipment[ ]), which called for only a one-year warranty period commencing upon the earlier of the date the equipment was put into use or the date the equipment was accepted by the State Architect. (Emphasis added.) All parties agreed the original refrigeration equipment was in use no later than March 2000. So, Kamran asserted, by February 2002 it no longer had any responsibility to repair the equipment. It did not recognize the June 2001 Settlement Agreement between West Bay and the State as binding on it.

Neither West Bay nor Kamran replaced the coils.

Ultimately, the State replaced the coils and, in [[sic]] May 15, 2003, the State filed suit against West Bay to recover the funds expended in the remedial work. In its complaint, the State called the defects latent and referred to the June 2001 Settlement Agreement as the relevant contract document. West Bay tendered defense of the States complaint through its attorneys to Kamran on August 27, 2003 [ ]. Kamran refused the tender. When Kamran refused the tender, West Bay cross-complained against Kamran on November 4, 200[[3]], and Kamran cross-complained against West Bay on December 26, 2003.

In October, 2005, State and West Bay settled. In this second settlement agreement, West Bay paid the State $80,000.00. An itemization of the States alleged damages [ ] indicates that the State expended $818.14 for food and/or product loss; $31,669.35 for refrigerant, $27,969.10 for repair labor costs; and another $21,638.65 for parts. The total claimed was $82,094.24, plus attorney fees.[[[4]]] West Bay signed the $80,000 Settlement Agreement on November 29, 2005. The State signed on November 28, 2005.

West Bay offered evidence at trial that in addition to the $80,000, it cost $13,635.28 to defend and settle the suit with the State. West Bay also introduced testimony by its in-house counsel regarding her reasonable attorney fees and costs in overseeing and/or being involved in resolving the litigation with the State. This later amount was stated as $9,500. It therefore claimed a total of $103,135.28 in indemnification costs against Kamran.

On November 22, 2005, West Bay offered Kamran $13,130.48 from its $106,854.48 retention, or $106,854.48, minus the $80,000 paid to the State, minus $13,715.00 paid to outside counsel, minus the additional $9,500 in attorney fees allegedly incurred by West Bays in-house counsel. Kamran rejected the payment as insufficient[ ] and West Bay did not tender the $13,635.28.

To date, West Bay has not released any of the retention withheld from Kamran. The parties stipulated at trial that West Bay is holding $106,848.48 of Kamrans contract in retention.

Thus, the issues before the Court arise out of the various contract documents and settlement agreements that govern the relationship between State, West Bay and Kamran. The Court is called upon to read, consider and interpret the various documents and provisions in light of the facts presented at trial, and to determine who owes what to whom; identify the prevailing party; and award attorney fees, penalties and/or prejudgment interest as appropriate.

The Pleadings

West Bays action against Kamran is premised on the express indemnification language and guarantees in various provisions of the contract with the State that are made binding on Kamran through its Subcontract, as well as other general covenants and indemnification language contained in the Kamran Subcontract. West Bays legal theories are breach of contract and express indemnification. West Bay seeks indemnification for the $80,000 it paid to the State for the States repairs, as well as its attorney fees in defending against the States action. It also seeks prejudgment interest and its attorney fees as the prevailing party under the Subcontract for prosecuting its cross-action against Kamran. West Bay recognizes that any judgment in its favor must be reduced by the amount of funds it currently holds in retention, i.e., $106,854.48.

Kamrans cross action against West Bay is premised upon breach of its Subcontract with West Bay and specifically, the retention payment provisions. In the alternative, Kamran seeks damages under the theory of quantum meruit. Kamran seeks return of the entire retention in the amount of $106,854.48, plus pre-judgment interest and a 2 percent penalty for improper withholding of retention payment pursuant to Business & Professions Code section 7108.5.[5] Kamrans closing brief also makes reference to Public Contract[[ ]] Code section 7107(d), [6] as well as its attorney fees and costs pursuant to the express terms of the contract documents.

Relevant Contract Provisions

With respect to the original agreement dated October 30, 1996 between West Bay and Kamran, there are many relevant contract provisions in different sections of the component documents that require consideration. They are set out here in full and will be referred to as appropriate later.

1. The General Conditions of the Contract [ ];

a. On page 1, the relevant Contract Documents are identified and include the Agreement, Notice to Contractors, Instructions to Bidders, Proposal, Plans, General Conditions, Supplementary Conditions, Specifications, Contracts Bonds, Addenda, Change Orders and Supplementary Agreements.

b. The term work is defined to include the furnishing and installing of all labor, materials, articles, supplies and equipment as specified, designated or required by the contract.

c. Article 17 is entitled Rejection. It reads: Should any portion of the work done or any materials, articles, or equipment delivered fail to comply with requirements of the contract, such work, materials, articles, or equipment shall be rejected, and shall immediately be made satisfactory to the State, by Contractor, at no additional expense to the State. Materials, articles, or equipment which are rejected shall immediately be removed from the premises at Contractors expense.

d. Paragraph 18, entitled interpretation of Contractor Requirements contains the following language:

(a) Correlations: The contract documents shall be interpreted as being complimentary in requiring complete work ready for use and occupancy or, if not to be occupied, operation. Any requirement occurring in any of the documents is binding as though occurring in all.

(b) Conflicts in the Contract Documents: In the event of conflict in the contract documents, priorities stated in subdivisions 1, 2, 3, 4, and 5 below shall govern:

(1) Addenda shall govern over all other contract documents. Subsequent addenda shall govern over prior addenda only to the extent specified.

(2) The General Conditions of the Contract shall govern over all other contract documents except for specific modifications thereto stated in the Supplementary Conditions and except for Addenda.

(3) In case of conflict between plans and specifications, the plans shall govern.

. . .

(5) In the event where provisions of codes, safety orders, contract documents, referenced manufacture specifications or industry standards are in conflict, the more restrictive and higher quality shall govern.

Paragraph 29 is titled Occupancy by the State prior to Acceptance. It reads as follows:

The State reserves the right to occupy all or any part of the project prior to completion of the work, upon written order therefore. In such event, Contractor will be relieved of responsibility to State for injury or damage to such part as results from such occupancy and use by State . . . .

Such Occupancy does not constitute acceptance by State of the work or any portion thereof, nor will it relieve Contractor of responsibility for correcting defective work or materials found at any time before acceptance of the work as set forth in Article 35 or during guarantee period after such acceptance, as set forth in Article 42. However when the project includes several separate buildings and one or more of such buildings is entirely occupied by the State, then on written request of Contractor, the guarantee period will commence to run from date of occupancy of such building or buildings if written consent thereto is obtained by the State architect.

Paragraph 35 deals with final inspection and acceptance of work. It reads:

When the work is completed, Contractor shall so certify and shall request final inspection, on form furnished by State. Within ten (10) days of receipt of such certification, State architect shall make final inspection. If, from final inspection, State architect determines that the contract has been completed, he will recommend that the Director formally accept the work. Upon acceptance of the work in writing by the Director, Contractor will be relieved of the duty of maintaining and protecting the work. If State architect determines that the work is not complete after receipt of certification by Contractor, Contractor shall be notified in writing of the deficiencies and procedure for final inspection as set forth above shall again by initiated by Contractor. Neither determination by State Architect that the work is complete nor acceptance thereof by Director shall operate as a bar to claim against Contractor pursuant to Article 42.

Paragraph 42, referenced in both paragraphs 29 and 35, is entitled Guarantee and reads as follows:

Contractor hereby unconditionally guarantees that the work will be done in accordance with requirements of the contract, and further guarantees work of the Contractor to be and remain of [[sic]] free of defects in workmanship and materials for a period of one year from date of acceptance of contract, unless a longer guarantee period is specifically called for. Contractor hereby agrees to repair or replace any [[and]] all work together with any adjacent work which may have been damaged or displaced in so doing that may prove to be not in accordance with requirements of the contract or that may be defective in its workmanship or material within guarantee periods specified, without any expense whatsoever to State, ordinary wear and tear, and unusual abuse or neglect accepted. Contract bonds are in full force and effect during the guarantee period.

Contractor further agrees that within ten (10) calendar days after being notified in writing by the Department of any work not in accordance with the requirements of the contract or defects in the work he will commence and prosecute with due diligence all work necessary to full [[sic]] the terms of this guarantee and to complete the work within a reasonable period of time and in the event he fails to so comply he does hereby authorize said Department to proceed to have such work done at Contractors expense and he will pay costs of thereof [[sic]] upon demand. The State shall be entitled to all costs including reasonable attorneys fees, necessarily incurred upon Contractors refusal to pay the above costs.

Exhibit 5 entitled Document 00800 Supplementary Conditions supplements the General Conditions of the Contract. In this document, paragraph 1.18 entitled, Guarantee, Guaranty, Warrantee, or Warranty is relevant in that it requires that the following be added to Article 42 of the General Conditions:

References to Guarantee, Guaranty, Warrantee, Warranty in the contract documents shall be deemed to be a reference to the requirements of Article 42 of the General Conditions. Further Guarantee shall typically be understood to mean the Contractors assurance that the project complies with Contract requirements. Warranty shall be understood to mean subcontractor, manufacturer or materials suppliers assurance that products and services provided meet Contract requirements.

With respect to Exhibits [[sic]] 6 (Section ll400-Food Service Equipment), the parties drew the Courts attention to paragraph 1.7 Guarantees and Warrantees. It reads:

a. Self-contained or remote refrigeration systems furnished under this Contract shall be provided with start up and a one year service contract providing free service, 24 hours per day, seven (7) days per week, including parts and labor. Hermetic or semi-hermetic compressors shall be covered by the manufacturers [[sic]] factory warrantee for an additional four years. Other equipment provided shall include a one year warranty covering parts and labor plus any extended warranties as normally provided by individual manufacturers. Equipment including refrigeration systems both self-contained and remote shall be warranted by the Contractor on the project for one year as indicated in the preceding sentence. The first day of the first year of [[sic]] commences upon the earlier of 1) the date equipment is put into production at the facilities or 2) the date the equipment is accepted by the Architect.

Finally, the Subcontract Agreement between West Bay and Kamran, which was entered into on October 30, 1996, has several relevant paragraphs. These include:

1. Section 1, which states:

SUBCONTRACTOR certifies that it is fully familiar with all of the terms, conditions and obligations of the Contract Documents as hereinafter defined . . . and that it enters into this Agreement based upon its investigation of all such matter [[sic]] and is in no way relying upon any opinions or representations of CONTRACTOR. This Agreement represents the entire agreement. The Contract Documents are incorporated in this Agreement by this reference, with the same force and effect as if they were set forth at length herein, and that SUBCONTRACTOR and its Subcontractors will be and are bound by any and all of the Contract Documents insofar as they relate in any part or in any way, directly or indirectly to the work covered by this Agreement. SUBCONTRACTOR agrees to be bound to CONTRACTOR in the same manner and to the same extent as CONTRACTOR is bound to OWNER under the Contract Documents, to the extent of the work provided for in this Agreement, and that where, in the Contract Documents, reference is made to CONTRACTOR and the work or specification therein pertains to SUBCONTRACTORs trade, craft or type of work then such work or specification shall be interpreted to apply to SUBCONTRACTOR instead of CONTRACTOR. In the event of any conflict between the requirements of the prime contract and this Subcontract, the SUBCONTRACTOR shall be governed by the provisions imposing the greater duty on the SUBCONTRACTOR.

2. The General Subcontract Provisions, specifically paragraph B. Indemnity Provision states:

All work covered by this agreement and the site of construction or in preparing or delivering materials or equipment or any or all of them to the site shall be at the risk of Subcontractor exclusively. Subcontractor shall, with respect to all work which is covered by or incidental to this agreement, indemnify and hold Contractor harmless from and against all of the following:

(1) Any claim, liability, loss, damage, cost, expenses, including actual attorneys and consultants fees incurred in good faith, awards, fines, or judgments arising by reason of the death or bodily injury to persons, injury to property, design defects, (if design originated by Subcontractor) Subcontractors work, Subcontractors performance or non-performance of any or all of the obligations of this agreement, or other loss, damage or expense, including any of the same resulting from Contractors [[sic]] alleged or actual negligence act or omission, regardless of whether such act or omission is passive or active, and

(2) Any [[and]] all claims, liability, loss, damage, costs, expenses, including actual attorneys and consultants fees incurred in good faith, awards, fines, or judgments arising by reason of obligation or indemnity which Contractor has to owner.

It is expressly acknowledged and agreed that each of the foregoing indemnities is independent and that both shall be given effect. However, Subcontractor shall not be obligated under this agreement to indemnify Contractor with respect to the sole negligence or willful misconduct of Contractor, his agents or servants. The provisions of this paragraph shall be in addition to any other duties and obligations of Subcontractor as set forth in this Agreement.

Section D of the General Subcontract Provisions reads, in part:

. . . Submission of as-built drawings for work performed during the previous progress or final payment period is an express condition precedent to CONTRACTORs duty to make any payment for that payment period.

Section G of the General Subcontract Provisions reads, in part:

. . .

It is understood and agreed that the full and faithful performance of this Agreement on the part of SUBCONTRACTOR (including the payment of any obligations due from SUBCONTRACTOR to CONTRACTOR and any amounts due to labor or material suppliers furnishing labor or material for work), . . . is a condition precedent to SUBCONTRACTORs right to receive payment for the work performed.

Section H of the General Subcontract Provisions reads, in part:

CONTRACTOR may withhold or, on account of subsequently discovered evidence, nullify the whole or a part of any payment under SECTION 4, to such extent as may be necessary to protect CONTRACTOR from loss, including costs and actual attorneys fees incurred in good faith on account of (1) defective work not remedied; (2) claims filed or reasonable evidence indicating probable filing of claims; . . . (6) failure of SUBCONTRACTOR to complete the contract in accordance with Contract Documents; (7) unsatisfactory performance of the work by the SUBCONTRACTOR.

Section R of the General Subcontract Provisions reads:

GUARANTEE-SUBCONTRACTOR guarantees all materials and workmanship and agrees to replace at its sole cost and expense, and to the satisfaction of CONTRACTOR, any and all materials adjudged defective or improperly installed as well as guarantee the OWNER and CONTRACTOR against liability, loss or damage arising from the installation of the work during a period of one (1) year from completion and acceptance of the work covered by the prime contract. If, however, the period of guarantee in the Contract Documents exceeds one (1) year, SUBCONTRACTOR shall be bound during the longer period stipulated. SUBCONTRACTOR shall further guarantee the materials and workmanship of all repair work done pursuant to this provision for a period of eighteen (18) months after the repairs are performed.

Paragraph W reads as follows:

Attorneys fees - in the event either Contractor or Subcontractor institute legal proceedings whether by court action, arbitration, or otherwise, against the other party, or against the surety of the other party, in connection with any dispute or matter arising under this agreement, the party prevailing in that proceeding shall be entitled to recover from the other its actual attorneys fees incurred in good faith.

3. Addendum C to the Subcontract Agreement makes changes to Section 4, the Payment Schedule of the Subcontract. It specifically refers to the payment of retention agreement between the parties.

Section 4 states:

Contractor agrees to pay the Subcontractor monthly payments of ninety-five (95%) percent of labor and materials which have been placed in position and for which the right payment has been properly documented pursuant to the terms of the Agreement. The obligation of CONTRACTOR to make any payment to SUBCONTRACTOR remains subject to the express condition precedent of payment by OWNER to CONTRACTOR therefore, except as to payments withheld by the culpable acts or omissions of the Contractor. No payment made prior to completion and acceptance of the work shall be construed as evidence of acceptance of any part of Subcontractors work.

Addendum C adds the following language to Section 4-Payment Schedule:

(1) The five [[sic]] (5%) percent retention will be paid to Subcontractor upon the completion of each of the phases of the main kitchen and Holderman Hospital and Subcontractors retention will not be withheld for final completion of the Project; contingent upon owners release of retention for each phase.

*(2) Contractor shall pay Subcontractor within ten (10) days of each progress payment made from the State based on estimates per General Conditions, Article 36 (Condition Upon Receipt of Payment from Owner).

*Contingent upon receipt of payment from owner.

Factual Disputes and Findings

The Court finds the following:

The Project work was performed in the Yountville Veterans Homes (the Home) main kitchen, dining hall and Holderman Hospitals satellite kitchen. There were at least two or more phases to the project.

Kamran began its work on the Project in 1997. Its scope of work required it to furnish and install, among other things, certain copper coils (coils) as part of the refrigeration systems for the walk-in coolers. As many as seven to twelve walk-in refrigeration units were installed. The original Contracts Specifications called for Omni-Temp refrigeration systems; however, Kamran substituted refrigeration systems manufactured by Cold Zone with the agreement of the State and West Bay. Kamran also got permission to substitute the original contract specified panels for the walk-in refrigeration units.

The parties stipulated that the last walk in refrigeration unit was installed in May 1999. Kamran[[s]] position at trial was that the last of the units was put into use in the Summer of 1999. There was evidence at trial that the last of the units was actually put into use in early 2000. Kamrans counsel asserted that whether the last unit was in use in the summer of 1999 or March of 2000 would make no difference to its legal argument, i.e., that the warranty period had expired and it had no further obligation to repair the units or any part of them in the Spring of 2002.

The units had significant problems. Some were not maintaining their proper temperature; others had improper sealing and caulking or doors not closing properly. Other complaints included poor wiring and evidence that rodents could get into one unit.

In June of 1999, the State reported bowing and flexing of the floor panels and upon investigation, it was discovered that the aluminum tread plate was thinner than called for in the contract specifications. On or about June 30, 1999, the States agent Cini-Little rejected in writing four of the walk-ins and reported additional punch list work for the other units. Rejection is triggered under Art. 17 of the General Conditions of the Contract when the equipment fails to conform to the requirements of the Contract. Rejected materials are required to be removed at the contractors expense. The floor panels for these units were not fully replaced until the end of 1999.

As of the end of March 2000, there were still outstanding punch list items with respect to the walk in units and the State informed West Bay and Kamran that it had not accepted (emphasis added) Kamrans work because there remain major portions of the work unusable by the [State] [ ]

In May 2000, a defective fan coil in one of the walk in units was replaced.

In December 2000, the State again reported problems with panels in the walk-ins; this time the ceiling panels were sagging and separating from their insulation. In March 2001, West Bay informed Kamran in writing that State had informed West Bay that it would reject all of the walk-in refrigeration units unless all the wall and ceiling panels in the problem units were replaced. Kamran agreed that it would replace the defective panels by May 23, 2001.

The States Inspector next complained about the poor quality of the caulking done on several of the units in connection with the panel replacement, and this work was redone on or around May 20-21, 2001. The four walk-ins that were replaced in May 2001 were those identified in the Prime Contract Specifications as C.01, C.03, C.17 and C.19. [ ] The seven Coils that failed were in C.03, C.17, D.01, D.22, E.11, E.16 and L.01. [ ]

In the first half of 2001, West Bay and the State began negotiations regarding West Bays claims for additional compensation in connection with the Project and regarding the States claims for delay damages.

On June 12, 2001, the State and West Bay entered into a written settlement agreement (the 2001 Settlement) resolving all disputes, except those relating to the refrigeration walk-in units installed by Kamran [ ]. Section 3.C of the 2001 Settlement provided that the State would retain $126,002 of West Bays retention, half of which would be retained until successful completion of the walk in cooler repairs and the other half until certain enumerated Operation and Maintenance Manuals and as-built drawings were submitted. Section 3.E of the Settlement Agreement states in relevant part, [[that ]]the State and [West Bay] agree that the warranty for the walk-in coolers shall run for two (2) years from the date the modifications are complete and accepted by the State. [Underscore added.]

On November 20, 2001, West Bay sent a letter to State indicating that West Bay believed its work on the Project was complete and requesting final release of the retention held by the State. The State released West Bays final retention on or about March 20, 2002. The parties stipulated that as of that time West Bay was holding $106,854.48 of Kamrans retention. The Court therefore finds that, at the latest, the State had accepted the contract no later than March 20, 2002, and as early as late November 2001.

In February 2002, State discovered leaks in seven coils in the walk-ins and both KAMRAN and West Bay were made aware of the claims. On or about May 13, 2002, State sent a letter informing West Bay of the leaks and demanding that repairs be made. A copy of States May 13, 2002 letter was forwarded to Kamran on May 15, 2002. Kamran refused to repair or replace the coils, asserting that its warranty obligation with respect to the coils had expired. West Bay also refused to make the repairs, because, according to its testimony at trial, it was concerned that hiring another contractor might otherwise void the manufacturer warranties.[7] Ostensibly, because Kamran refused to repair or replace the coils, West Bay refused to release the $106,854.48 held in retention related to Kamrans Subcontract.

When both West Bay and Kamran failed to perform the work, State replaced the coils and related parts and components and, in May 2003, brought suit against West Bay to recover its damages relating to the remedial work. The States complaint asserted various theories against West Bay, including breach of the 2001 Settlement Agreement, and referenced Paragraph 4 B, which reserved any and all claims that may arise out of, or are related to, latent defects in the Project and from its construction. The complaint did not specifically recite anywhere within its allegations paragraph 4E of the 2001 Settlement Agreement, which contained the extended two year warranty for the walk-in coolers. However, the 2001 Settlement Agreement was appended. The States complaint was predicated on the theories of breach of an implied warranty, breach of the covenant of good faith and fair dealing, breach of contract-third party beneficiary, and negligent interference with an economic relationship.

On August 27, 2003, West Bay tendered defense of the States complaint to Kamran. It rejected the tender. In October, 2005, West Bay and State settled. State released all of its claims in exchange for $80,000 from West Bay. As referenced above, West Bay put on evidence that it paid attorney fees to outside counsel for defending against the States lawsuit in the amount of $13,635.28, and for in-house counsel fees of $9,500.

It is undisputed that Kamran took no part in the negotiation or settlement of this second Settlement Agreement.

On November 22, 2005, West Bay offered Kamran $13,130.48 ($106,854.48 - $80,000 - $13,715) to settle the final amount of any retention and dispute the parties had. West Bays letter also lists the $9,500 in attorneys fees incurred by its General Counsel in litigating the States claim as a legitimate deductible expense; however, that amount was not deducted from the $106,845 [[sic]] amount in its offer. Kamran rejected the offer of settlement and maintained that it was owed the entire contract balance without back charge, as it believed that all warranty or other obligations had been discharged with the passage of time.

At trial, West Bay also offered evidence of a total of $32,357.01 in attorneys fees incurred by it in litigating its right to indemnity in this proceeding from Kamran between December 1, 2005 and December 31, 2006.

The following issues require determination:

1. What documents make up the totality of the agreement between the parties?

2. Are any of the key documents or terms ambiguous?

3. Is there an integration clause that affects the analysis of the Court? How, if at all, may the contract terms be modified?

4. Which provisions, if any, of the contract provisions are controlling as between the parties and their respective obligations to make the repairs required by the State?

5. Are the warranty covenants in the contract documents different from the guarantee covenants in the contract documents?

6. If warranties and guarantees are distinct contract terms, what are the various periods of time within which each apply with respect to Kamrans work?

7. How, if at all, does the Settlement Agreement of June, 2001 affect the covenants between the parties entered into at the time the Subcontract was signed?

8. Would it be unconscionable to hold Kamran to the terms of the June 2001 Settlement Agreement?

9. What does the contract provide for when the remaining retention funds, if any, should have been paid to Kamran? Are these provisions against public policy?

10. When should the final payment have been made to Kamran of the retention funds?

11. How, if at all, did the fact that Kamran did not participate in the negotiation and settlement with State in June of 2001 affect the terms and conditions of the contract between West Bay and Kamran?

12. How, if at all, did the Settlement Agreement entered into by the State and West Bay in October 2005 affect the obligations of Kamran?

13. Did Kamran breach any of the terms of its contract with West Bay?

14. Did West Bay breach any of the terms of the contract with Kamran?

15. If there has been a breach by either party, what does each owe to the other?

16. What is the extent of the indemnification that runs between the parties?

17. Assuming recovery, may West Bay obtain its attorneys fees paid in response to the litigation instituted by the State as part of the indemnification provisions of the Subcontract between the parties? The Court must also address the same question with respect to the remaining trial litigation between Kamran and West Bay on the cross-complaints in 2007[[.]]

18. What is the import, if any, between the separate provisions in the Subcontract titled General Subcontract Provisions, paragraph B (Indemnity Provisions) providing for indemnification of attorneys fees, and paragraph W of the Subcontract, which provides for attorneys fees if suit is instituted on any action between the parties?

19. To the extent both parties prevail to some degree in their respective cross-actions, who is the prevailing party for purposes of an award of costs and/or fees?

20. What is the amount of attorney fees and other damages, if any, awarded to each party?

Key Factual Findings

There are, after all is said and done, a few key factual findings that govern the Courts analysis.

First, all refrigeration units were installed no later than May, 1999.

Next, all units were in use no later than March 2000, but the State did not accept the work because of the above referenced various enumerated problems until, at the earliest, June 12, 2001. As of this date, all units were accepted by the State as conforming to contract specifications, with evidence that there were remaining punch list items that needed attention. The State and West Bay agreed as part of this first settlement agreement that West Bay would extend the warranty for the walk-in units from one year to two years, and that the two years would not start to run until the final modifications or punch list were complete and accepted by the State.

Kamran knew nothing about this extension of warranty obligations and did not acquiesce to it.

In November, 2001, West Bay sent a letter to State indicating that it believed all work on the project was complete and requesting final payment of the retention by the State. The Court understands this to mean that West Bay believed that all work provided by Kamran conformed to contract specifications as of that date. The State paid its final withhold to West Bay on March 20, 2002 in the amount of $127,697.21.

In February 2002, problems again arose and the State demanded in writing in May 2002 that West Bay make the necessary repairs under the provisions it agreed to in the June 12, 2001 Settlement Agreement extending the period of warranty. West Bay asked Kamran to step in and do the work and Kamran declined. West Bay did not do the final repair work.

The State did the repairs and sued West Bay, who in turn sued Kamran, who in turn sued West Bay. The State and West Bay settled for $80,000 in October 2005. West Bay wants to be made whole for the $80,000 it paid, plus its attorney fees and costs, and Kamran wants its retention of $106,854.48, plus attorney fees, costs and statutory penalties claiming it had no contractual duty to undertake the final repair work.

Key Legal Findings

The laws with respect to contract interpretation have been restated many times. The basic rule of contract interpretation is to give effect to the parties mutual intent at the time of contracting. To determine the parties mutual intent, the Court looks first to the words used in the agreement. (Civ. Code 1639.)

To begin, the contract is fully integrated.[8] Thus the Court can examine the four corners of the documents to see what the parties agreed to.

The basic rules also require that the words of a contract are to be understood in their ordinary and popular sense, rather than according to any strict legal meaning, unless the parties used the words in a technical sense or gave them a special meaning by usage. (Civ. Code 1644.) In addition, the meaning of the words used must be determined from a reading of the entire contract, so as to give effect to every part, if possible, with each clause helping to interpret the other. (Civ. Code 1641.) Repugnancy in a contract must be reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract. (Civ. Code 1652, 1653.) Similarly, an interpretation that gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation that leaves a part unreasonable, unlawful or of no effect. (Civ. Code 1643.) Where the language of a contract is clear and does not involve an absurdity, it will be followed. (Civ. Code 1638.) Thus, a court may interpret a contract without recourse to extrinsic evidence if the contract terms are unambiguous.

On the other hand, where the meaning of words used in a contract is disputed, resort to extrinsic evidence may be required. (See Morey v. Vannucci (1998) 64 Ca1.App.4th 904, 912; Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1350; Civ. Code 1647; Civ. Proc. Code 1860.) A trial court must provisionally receive any proffered competent extrinsic evidence that is relevant to show whether the contract is reasonably susceptible of a particular meaning. (Wolf, supra, at p. 1350.) It is reversible error for a trial court to refuse to consider competent extrinsic evidence on the basis of the trial courts own conclusion that the language of the contract appears to be clear and unambiguous on its face. (Id. at p. 1351.) Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed which reveals more than one possible meaning to which the language of the contract is reasonably susceptible. (Id.)

Thus, where the meaning of a contract is disputed, the interpretation of the contract involves a two-step process. First, the court must provisionally receive (without actually admitting) all relevant[9] extrinsic evidence concerning the parties intentions to determine whether the language is reasonably susceptible to the interpretation urged by the party. If in light of the extrinsic evidence the court decides the language is reasonably susceptible to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step, which is interpreting the contract. (Id.) Extrinsic evidence is thus admissible to interpret the language of a written instrument, as long as such evidence is not used to give the instrument a meaning to which it is not reasonably susceptible.

The Courts determination of whether an ambiguity exists in a contract is a question of law. Where no extrinsic evidence has been introduced, or where the extrinsic evidence is not in conflict, the Courts interpretation of the contract also is a question of law. However, where the interpretation of contractual language turns on a question of the credibility of conflicting extrinsic evidence, the Courts resolution of that conflict is a question of fact. (Id.)

The contracts here in question provide for a hierarchy, for lack of a better term, as to which provisions apply if there are any discrepancies or inconsistencies in the various contract documents. It is apparent to the Court, from a reading of the various documents, that the terms warranty, guaranty and indemnification are defined, with each specifying the relevant time frames for their operation, and which entity is responsible for making good on the covenants. In the world of construction there are typically four sets of players: the owner, the general contractor, the Subcontractors, and the persons or manufacturers who supply the goods that are installed. A review of the various contract documents indicates that each, too, have been assigned various contractual obligations.

The meaning assigned to warranty and guaranty is provided in [ ] paragraph 1.18 Supplementary Conditions of the Contract. We know from paragraph 18(b)(2) of the General Conditions of the Contract that when in conflict, the language of the Supplementary Conditions prevails over general language in the General Conditions.

Paragraph 1.18 states that any references to guarantee, guaranty, warrantee or warranty in the contract documents are deemed references to the requirements contained in Article 42 of the General Conditions and that guarantee is typically to be understood to mean the Contractors assurance that the project complies with contract requirements.[[]] Warranty is defined and shall be understood to mean Subcontractor, manufacturer or materials suppliers assurance that products and services provided meet Contract requirements. Both guarantee and warranty therefore bind the relevant party to its promise to provide goods and services that meet or comply with contract requirements. (emphasis added by the Court)

The general contractor, here West Bay, agreed in paragraph 42 of the General Conditions of the Contract to unconditionally guarantee that the project work will be done in accordance with the requirements of the contract, and further guaranteed the work of the Contractor to be and remain free of defects in workmanship and materials for a period of one year from date of acceptance of contract, unless a longer guarantee period is specifically called for. Such an unconditional guarantee is consistent with paragraph 1.18s explanation that guarantees[[]] typically are understood to mean the Contractors assurance that the project complied with all Contract requirements. Importantly, under paragraph 29 of the General Conditions of the Contract, any time limits on the Contractors promise or unconditional guarantee do not start to run until the contract work is accepted, as set forth in Article 35 or Article 42. Paragraphs 35 and 42 set up the mechanism by which the Contractor requests and the State accepts the work.

The Court also finds, after provisionally receiving evidence of a possible contract ambiguity as to what the contract means by acceptance of the contract or acceptance of the work, that these terms are sufficiently defined in Paragraph 35 of the General Conditions of the Contract, such that there is no need to resort to extrinsic evidence to determine their meaning. Acceptance of the work or acceptance of the contract means that the State has determined that the work completed on the project conforms to the project specifications and that all other terms and conditions required, i.e., such as the providing of warranties, plans and specs, etc., have been complied with. The Court rejects Kamrans expert testimony on other implied meanings or based on custom and practice, as implausible.

Turning to the Subcontract between West Bay and Kamran, per Section 1, Kamran affirmed it was fully familiar with all the terms, conditions and obligations of the various Contract documents and acknowledged by its signature that all the Contract Documents were incorporated into the Subcontract Agreement.

Importantly, Kamran expressly agreed to be bound to CONTRACTOR [West Bay] in the same manner and to the same extent as CONTRACTOR is bound to OWNER [State] under the Contract Documents, to the extent of the work provided for in the agreement.

Further, Kamran agreed that . . . where, in the Contract Documents, reference is made to CONTRACTOR and the work or specification therein pertains to SUBCONTRACTORs trade, craft or type of work, then such work or specification shall be interpreted to apply to SUBCONTRACTOR instead of CONTRACTOR.

Lastly, Kamran agreed that [I]n the event of any conflict between the requirements of the prime contract and this Subcontract, the SUBCONTRAOR [[sic]] shall be governed by the provisions imposing the greater duty on the SUBCONTRACTOR[[.]]

And again in Section R of the General Subcontract Provisions, Kamran guaranteed all materials and workmanship and agreed to replace at its sole cost and expense, and to the satisfaction of CONTRACTOR, any and all materials adjudged defective or improperly installed. It agreed to be bound by a period of guarantee as specified in the Contract documents, and therefore if that period exceeded one year, it would be bound for the longer period stipulated.

Thus, reading all the above provisions together, it appears Kamran as the Subcontractor agreed to be bound for any liability incurred by West Bay for the period of one (1) year from completion and acceptance of the work covered by the prime contract. (emphasis added)

Kamran points to [ ] Section 11400-Food Service Equipment, and specifically paragraph 1.7 entitled Guarantees and Warrantees, which is a supplement to the General Conditions of the Contract, as contractual evidence that it need only be bound to any warranties or guarantees for the period commencing upon the earlier of 1) the date the self-contained or remote refrigeration systems furnished under the contract are put into production at the facilities or 2) the date the equipment is accepted by the Architect.

Paragraph 1.7 references self-contained or remote refrigeration systems and requires that each be provided with start up and a one year service contract providing free service, 24 hours per day, seven (7) days per week, including parts and labor, as well as additional warrantees for certain hermetic or semi-hermetic compressors and extended warranties as normally provided by individual manufacturers. Kamran argues that since it is undisputed that the all [[sic]] refrigeration units and parts were in use no later than March 2000, any alleged defects or problems discovered and requested to be repaired in May 2002 are beyond the one year after the units were put into use, and thus its contractual duties were discharged at the time of the problems in May.

Applying the general rules of contract interpretation stated above, the Court has examined the words of the contract documents in their entirety, and has sought to give effect to every part, reconciling anything that appeared to be inconsistent. The reasonable interpretation of the language contained in Paragraph 1.7 [[of]] Section 11400 Food Service Equipment-Supplemental Conditions, is that it applies to the manufacturers or suppliers of the products and calls for the contractor, here West Bay, and its relevant Subcontractor, here Kamran, to insure that the equipment purchased and installed meets the minimum service contract and warranty requirements of the owner, here the State. This section does not relieve Kamran or West Bay from their otherwise greater and independent obligation to unconditionally guarantee that the work will be done in accordance with the requirements of the contract, and further guarantee work of the Contractor to be and remain free of defects in workmanship and materials for a period of one year from date of acceptance of contract, unless a longer guarantee period is specifically called for. (See Subcontract Agreement, Section 1; and Paragraphs 29, 35 and 42 of the General Conditions of the Contract.)

It is undisputed that State threatened to deem Kamrans work as not in compliance with the contract in March 2000, and again in December 2000, given the number and type of problems that arose. The Settlement Agreement of the State and West Bay was designed to separate out all other work and leave the disputed work in issue for further remed