Some construction projects in California may be secured by a number of separate labor and material bonds which cover only work performed within the purview of that bond. In such a scenario, is a contractor limited to recovery under the single bond covering the scope of his work, even if the bonding arrangement would prevent the contractor from recovering the entire amount owed? Unfortunately, the answer is “yes.”
This issue was recently addressed by the 4th District Court of Appeal in the case of Nissho of California, Inc. v. Bond Safeguard Ins. Co. (2013) 220 Cal. App. 4th 974. In Nissho, landscape contractor, Nissho of California, Inc. (Nissho) entered into a contract with the project developer for the performance of landscaping work on a private residential development project. However, pursuant to an agreement between The City of Palm Springs (“The City”) and the developer, the scope of Nissho’s work included certain offsite landscape improvements to city owned property that bordered the housing development. With the approval of The City, the developer obtained a number of separate labor and material bonds from Bond Safeguard Insurance Company (“Safeguard”) to secure the project. One of these bonds specifically pertained to the offsite landscaping in the amount of $566,200, which represented 50% of the estimated cost of the improvements. When Nissho was not paid, it filed suit against the developer and Safeguard seeking, among other things, payment under the bonds in the sum of $909,986.96
After a bench trial, the trial court ruled in favor of Nissho in the amount of $1,041,148, permitting it to seek recovery against all of the bonds issued by Safeguard. On appeal, Safeguard argued that Nissho’s recovery was limited to the amount enumerated in the offsite bond. To the contrary, Nissho claimed that pursuant to language in the Subdivision Improvement Agreement (SIA) between the developer and The City, the developer was required to obtain a single bond covering all persons furnishing labor and/or materials on the project and therefore, Nissho was entitled to recover against all the bonds issued by Safeguard. The Appellate Court agreed with Safeguard’s position by ruling that Nissho could only recover under the bond that was designated for the offsite landscaping, thus limiting Nissho’s recovery against Safeguard to the sum of $566,200.
In support of its ruling, the court noted that obtaining separate bonds to furnish security for projects was permitted by Government Code § 66499 (a)(1), which allows for a “[b]ond or bonds by one or more duly authorized corporate sureties.” The court further noted that Government Code § 66499.2, which dictates the form of labor and material bonds issued under the statutes, provides “A bond or bonds by one or more duly authorized corporate sureties for the security of laborers and material suppliers shall be in substantially the following form … .” Based on the statutory language, the court concluded that the issuance of multiple bonds for a development project was clearly envisioned under the statutory scheme. The court also reasoned that The City consented to the issuance of separate bonds specific to the work to be performed, as the SIA was not executed until more than a month after all the bonds were issued. Also, the court observed that the issuance of separate bonds limited to specific work on the project was consistent with the intent of the SIA to provide adequate security for different categories of improvements. Moreover, the court felt that disregarding each bond’s limitations and treating them as a single bond would ignore both the intent of the parties to the bonds and the legal requirement that the surety’s obligations be strictly construed by the limitations imposed by the bonds. Finally, the court pointed out that, given its experience in the construction industry, Nissho either knew or should have known of the bonding scheme before it accepted award of the landscaping contract, especially since it had provided estimates which served as the basis for the amount of the offsite bond.
 Under Government Code § 66499.3 (b), The City was able to require that the developer provide labor and material bonds limiting Nissho’s recovery to only 50 percent of the work it completed or 50 percent of the total work conducted on the project.