Liton General Engineering Contractor, Inc. v. United Pacific Insurance , 93 Daily Journal DAR 7422 ( 1993 )

PETERSON, J.^*

I respectfully dissent.

This case presents important issues of first impression in this state which affect all public (and ultimately private) works of improvement. It concerns the liability of a surety, issuing a public works payment bond, for a subcontractor’s attorney fees and costs incurred in recovering an award from the surety’s principal in a private and voluntary contractual arbitration, in which each party agreed, and was ordered, to pay its own such expenses, and to which the surety was not a party. It raises the issue of whether such private arbitration is an action “on the payment bond” triggering the surety’s liability for such fees and costs in excess of the actual confirmed arbitration award.

The majority opinion upholds an award of attorney fees and costs against the surety on these facts. This result, without precedent, is erroneously reached because the majority:

1. Construes a statute, allowing recovery of attorney fees and costs from a surety only in an action “on the payment bond” (Civ. Code,¹ § 3250), as justifying an award of such fees and costs incurred in an arbitration proceeding which was not an action “on the payment bond”;

2. Misinterprets the contractual language of contractor and subcontractor, providing each party shall bear its own attorney fees and costs incurred in arbitration, and by doing so effectively compels payment thereof to the winner;

3. Bases its result on a purported “public policy” rationale void of support from or analysis of the case law and statutes apposite here—and which “public policy” ignores the actual public policy formulated and enacted by the California Legislature favoring the finality of arbitration awards;

4. Interprets statutory language, providing an arbitration award against a principal alone shall not be construed as an award against its surety, to mean the opposite.

In order to fully understand the erroneous reasoning of the lower court, and the majority’s new and different reasoning which reaches the same erroneous result, further exposition of the facts is required. I will refer to Liton as “subcontractor,” Bay Cities as “contractor,” and UPI as “surety.”

A. The Contract, the Lawsuit, and the Arbitration

The subcontract of August 31,1983, between contractor and subcontractor contained the arbitration clause in question, and was signed after surety had issued its payment bond on August 25, 1983, on behalf of contractor, the successful bidder on the California Department of Transporation (Caltrans) job. Section 25 of that subcontract provided that all disputes regarding interpretation or performance of the subcontract be arbitrated by one of two methods;² that such arbitration decision by either method “shall be binding and conclusive, . . . and shall be a condition precedent to any right of legal action” against the contractor; and that “Each party shall bear the expense of its own arbitrator, witnesses and legal fees . . . .” (Italics added.)

The dispute between contractor and subcontractor arose when Caltrans imposed a liquidated damages clause of the prime public works contract on contractor for a delay in performance, and contractor passed a portion of such liquidated damages through to subcontractor by withholding payments to the latter, contending the delay was caused by subcontractor’s untimely performance of its subcontract.

By May of 1986, contractor was in administrative negotiations with Caltrans concerning the latter’s liquidated damages claim, which on October 6, 1987, became the subject of arbitration between contractor and Caltrans before the California Office of Administrative Hearings (OAH arbitration). (See Pub. Contract Code, §§ 10240-10240.13.)

Subcontractor had, on August 7, 1986, filed its complaint (subsequently amended) in the case at bench; naming contractor and surety as defendants. Those pleadings asserted three causes of action on which subcontractor sought judgment from contractor only, for breach of contract and two common counts. The fourth cause of action sought judgment from surety only by reason of the issuance of its performance bond, alleging, inter alia, subcontractor was entitled to attorney fees and costs from surety expended in prosecuting that cause of action, which it alleged was one “against the payment bond.”

Subcontractor made no further appearance in the lower court after August 1986, when its complaint was filed and amended, until it opposed contractor’s motion to stay the action for arbitration almost two years later. The complaint³ insulated subcontractor’s fourth cause of action against surety from the defense of the six-month limitations period of section 3249⁴ 5in the event the contractor defaulted in payment ordered by the arbitrator and confirmed in this action.

On contractor’s motion, the lower court, on August 23, 1988, stayed the action and ordered subcontractor to “join the currently pending arbitration proceeding between [contractor] and [Caltrans], and administered by the State of California Office of Administrative Hearings [the OAH arbitration],[⁵] if a joinder is granted by the Arbitrator therein. If such joinder is not granted, the parties are to select another arbitrator under the terms of their subcontract.” (Italics added.)

Subcontractor never elected or offered to separately pursue its fourth cause of action on the payment bond, either by moving for its severance and exclusion from the stay order or by protesting or objecting to the stay of the fourth cause of action. Contractor’s motion for stay, and its memorandum of points and authorities supporting the motion, made no reference to the fourth cause of action or to surety, characterizing the stay as sought in a “classic subcontractor, contractor, owner [Caltrans] dispute.” Subcontractor described the “dispute” for which arbitration was sought as one between only subcontractor and contractor: “a straightforward breach of contract action.” The issue of surety’s liability to subcontractor under the latter’s fourth cause of action was not arbitrated or ruled upon by the arbitrator.

After subcontractor thus joined the pending OAH arbitration before arbitrator Robert E. Leslie, contractor and subcontractor jointly concluded their arbitration against Caltrans. OAH jurisdiction over those parties terminated when that government entity thus ceased to be a party to the arbitration dispute. (See Pub. Contract Code, §§ 10240, 10240.5, 10240.6; Cal. Code Regs., tit. 1, §§ 301, subds. (c)-(Z), 306, 331, 332.) Subcontractor and contractor, however, then stipulated that Leslie would continue to hear their dispute as their single joint arbitrator,⁶ consistent with section 25 of their subcontract; and the parties agree on this appeal that the arbitration award was made under that private arbitration provision, not under Public Contract Code section 10240 et seq.

On April 23, 1990, the arbitrator ruled in favor of subcontractor, awarding it $51,480. He also ruled, inter alia, that “Each party shall bear its own attorney’s fees and costs . . . .” (Italics added.)

This final award was thereafter confirmed, in the superior court action which subcontractor had previously filed against contractor and surety. The award thereby obtained the status of a civil judgment (Code Civ. Proc., § 1287.4), requiring subcontractor to bear such arbitration expenses.

Contractor paid subcontractor the full amount of the arbitration award thus reduced to judgment in this action, and subcontractor filed a full satisfaction of that judgment.

Then, strangely enough, subcontractor’s subsequent summary judgment motion, seeking payment by surety of attorney fees and costs subcontractor had incurred in the arbitration, was granted. A judgment therefor, generating this appeal, was then awarded against surety for subcontractor’s “attorney’s fees upon the statutory bond . . . $89,789.23, $3,239.69 as and for other costs.”

B. The Arbitration Proceeding Between Contractor and Subcontractor Was Not an Action on the Payment Bond Against Contractor’s Surety

1. The Lower Court’s Decision Violates Section 2855

The lower court found that when the arbitrator’s decision in favor of subcontractor established contractor’s liability, “[A]t that point . . . , it is my view that pursuant to [section] 2827[⁷] [surety] became immediately liable to [subcontractor] under the payment bond. [ft] . . . [A]t that very point, [surety] also became immediately liable to [subcontractor] ... for any attorneys fees incurred [in the arbitration proceedings] ... in enforcing the payment bond, . . . [and] at that point of time [contractor] breached its . . . payment obligations to [subcontractor], [ft] [Surety]. . . became immediately liable to [subcontractor] under the bonds [sic], and then pursuant to Section 3258 became immediately liable, at that point statutorily ... for any attorneys fees. . . incurred in enforcing the bond.” (Italics added.)

The lower court further found surety’s “liability] . . . under the payment bond” for subcontractor’s arbitration attorney fees and costs became fixed immediately on the terms of the final award in the arbitration proceeding without regard to whether a lawsuit against surety was then pending.⁸ This conclusion is irreconcilable with the provisions of section 2855, added in 1979: “An arbitration award rendered against a principal alone shall not be, be deemed to be, or be utilized as, an award against [its] surety. [SI] The intent of this legislation is to apply existing law to arbitration awards.”8 ⁹

The trial court compounded its error by expanding the arbitration award to require payment by surety of fees and costs incurred in the arbitration which the arbitrator did not order.

If such liability became fixed immediately on the terms of an arbitration award when entered, surety would clearly have no liability here for fees and costs the arbitrator ordered the subcontractor to bear. Under the trial court’s reasoning, however, a surety is automatically obligated to pay the attorney fees and costs incurred in an arbitration by the winning party against the surety’s principal, a proceeding in which the surety did not participate and was not required to participate, and in which the arbitrating parties had clearly agreed to pay their own such fees and costs.

2. The Majority’s Holding Reaches the Trial Court’s Result by a Different and Equally Erroneous Route

The majority reaches the trial court’s result by finding that subcontractor’s lawsuit (which was irrelevant to the lower court’s analysis) was filed as an action “on the payment bond” before arbitration proceedings commenced, and was stayed for arbitration so that “successful resolution of the arbitration action was a necessary precursor to and an integral component of a successful outcome in [subcontractor’s] action against [surety]. The court correctly determined, that the arbitration fees [attorney fees and costs] were incurred by [subcontractor] as part of its action on the bond." (Maj. opn., ante, p. 585, italics added.)

In sum, the lower court found that a surety’s liability “on the payment bond” for fees and costs of a subcontractor, incurred in an arbitration against surety’s principal, is “immediate[]” on entry of the award, regardless of when or if litigation against the surety is initiated. The majority rejects this position implicitly by adopting one equally untenable, i.e., that where a subcontractor’s cause of action pending against the surety is stayed, pending decision in an arbitration confined solely to the causes of action subcontractor asserts against contractor, such arbitration automatically becomes “an integral component” of subcontractor’s stayed separate cause of action against the surety “on the payment bond.”

The flaw in this reasoning is obvious: When the principal is released from the obligation to its claimant, no cause of action against surety on the bond securing performance of that satisfied obligation may be thereafter maintained. The applicable statutes clearly provide that the surety was not liable on the bond until the contractor became liable, and was not liable thereon after the principal paid the arbitration award as confirmed. (§ 3226 [“[T]he sole conditions of recovery shall be that claimant . . . has not been paid . . . .”].) The liability of the surety cannot be more extensive than the liability of the principal. (§ 2839 [“Performance of the principal obligation . . . exonerates a surety.”].)

The majority, however, proceeds to a strange and unprecedented fastening of liability on the surety to pay the subcontractor’s fees and costs from which contractor was exonerated by judgment confirming the arbitration award.

No authority supports either position.

3. The Subcontractor’s Three Causes of Action Which Were Arbitrated Were Not Actions on the Bond

The pleadings clearly demonstrate that the only action “on the payment bond” filed in this case was the fourth cause of action asserted by subcontractor against surety. The timely filing of such action by subcontractor, ensuring its right to recover on the surety bond if the obligation of the principal to subcontractor, becoming a judgment on its confirmation, remains unpaid, is commonly undertaken in all such commercial litigation. Such suits are filed as a precautionary procedure to preclude a surety from invoking section 3249 (see fn. 4, ante)-, they are filed when, as here, separate administrative proceedings, formal or informal arbitration, or even negotiations between subcontractor and contractor are in progress, or are anticipated to be in progress, six months after the time when a stop notice must be filed on public works construction.

The fourth cause of action was never considered or ruled upon by the arbitrator. The surety never joined the arbitration, and neither contractor nor subcontractor sought its joinder therein; both treated the arbitration as involving only themselves.

The root of the majority’s confusion lies in its equating the contractual arbitration between subcontractor and contractor, where attorney fees and costs are not recoverable, with a legal action “on the payment bond” against the contractor’s surety. A principal’s failure to pay an arbitration award confirmed by judgment will generally trigger the surety’s liability in a pending cause of action on its bond for the amount of that judgment. The majority, however, has brokered a new rule—the surety is always liable for the subcontractor’s arbitration fees and costs as an additur, in effect, to the arbitration judgment which literally excludes them, even though that judgment has been wholly satisfied.

The critical fact the majority ignores is this: Although subcontractor chose in the lawsuit filed in the superior court to join both the contractor and its surety as defendants, asserting separate and distinct causes of action against them, under long-standing precedent, joinder of both, while permitted, was not required. Subcontractor had the option, which it chose to waive, of severing or trying its cause of action against the surety, rather than tacitly, by nonopposition, consenting to its stay pending the arbitration with contractor. Suit against, or concluding arbitration with, the contractor was in no way a precedent condition to subcontractor’s separate pursuit of its fourth cause of action on the payment bond against the surety, had subcontractor chosen to do so. (See Pneucrete Corp. v. U. S. Fid. & G. Co. (1935) 7 Cal.App.2d 733, 738 [46 P.2d 1000].) “The action upon the statutory bond is not in any sense based upon the personal liability of the contractor but is based upon the obligation of the bond, since the bond provides a separate and distinct and statutory remedy. The obligation of the bond, therefore, is enforceable without reference to any contract between the contractor and the material-man. [Citations.]” (Ibid.)

Here, the subcontractor permissibly elected its remedies. It could try its cause of action against the surety alone and, in that suit, recover its attorney fees and costs incurred therein, as well as damages. Alternatively, it could take the faster, speedier, and generally less expensive route of arbitration against the contractor, without a right to recover fees and costs as it had contractually agreed to do. The subcontractor chose the latter course. It did not seek to sue only the surety; nor did it seek to sever and proceed to try separately its claim in the fourth cause of action of its complaint against the surety, which it clearly had the right to do.¹⁰ Confirmation of the arbitration award, in the action in which the stayed cause of action against surety was filed, did not convert the resulting judgment from a contract arbitration into an action “on the payment bond.” The majority’s focus on the arbitration proceedings, generating the fees and costs it has affirmed to subcontractor, as a “precursor” to subcontractor’s recovery on a pending cause of action is misplaced. (Maj. opn., ante, p. 585.)

On this analysis, every time a subcontractor made a disputed claim to a bonded contractor, and the parties wholly settled that claim after either negotiations or informal or formal arbitration, the surety would never be relieved of liability to the subcontractor. The contractor’s agreement to pay any portion of subcontractor’s original claim thus negotiated or determined and settled would, the majority reasons, arise from proceedings denominated a “precursor” to subcontractor’s potential right of recovery on surety’s bond, if contractor should default in payment; and although contractor fully satisfies subcontractor’s claims, regardless of their initial propriety, at the conclusion of such proceedings, subcontractor would always recover from surety its fees and costs incurred therein.

The naiveté of such reasoning is startling, plainly ignoring the common practices and experiences of the real commercial world. Subcontractors’ claims, like many damage claims, are often initially inflated and legitimately disputed, wholly justifying a contractor’s refusal to pay them on demand until negotiations or arbitration produces a recovery the parties agree on or are required to accept. The majority would require contractor’s surety to fund subcontractor’s attorney fees and costs incurred in any such proceedings regardless of such circumstances, because such proceedings, necessary to determine the obligation of contractor that surety bonds, are a “precursor” to subcontractor’s potential recovery against surety on its bond only if contractor fails to pay the subcontractor’s claim as thus determined.

Finally, the majority’s “precursor” focus is obviously irrelevant. The focus required by the Legislature is clear. The “sole condition[]” of a subcontractor/claimant’s recovery on the surety’s bond is that “the full amount of [its] claim” has not been paid. (§ 3226.) The amount of that claim—the bonded obligation of the contractor/principal—was established by arbitration, a method freely chosen by contract and confirmed by judgment. That judgment of confirmation required both contractor and subcontractor to pay their own arbitration fees and costs. Subcontractor filed a satisfaction of that judgment, eliminating any statutory liability to it of surety.

One will search the case and statutory law in vain to find any support for the majority’s “precursor” analysis.

In sum, the majority has simply permitted the subcontractor to utilize the provisions of its contract, with all the advantages of arbitration it provided, and awarded it attorney fees and costs which the contract proscribed and the arbitrator denied. Subcontractor could only recover such expenses if incurred in a trial on its fourth cause of action against surety—a trial it chose to forgo, for arbitration against contractor, on a cause of action which became moot when the judgment on arbitration was wholly satisfied by contractor.

4. The Majority Has Misanalyzed Sections 3248 and 3250 and the Applicable Case Law

The subcontractor is not aided, as the majority believes, by sections 3248 and 3250. Those sections provide that a subcontractor, such as respondent, could recover from the surety only the attorney fees and costs incurred in an action against the surety on its payment bond, not fees and costs incurred in an arbitration against the contractor, based upon breach of contract, in which the surety was neither party nor participant.

Section 3248 sets forth the requirements of a payment bond on a public works project, and provides in pertinent part that the bond must include a provision stating the surety is liable “in case suit is brought upon the bond” for “a reasonable attorney’s fee, to be fixed by the court.” (Subd. (b), italics added.) Section 3250 includes a parallel provision stating, “An action on the payment bond may be maintained separately .... In any action, the court shall award to the prevailing party a reasonable attorney’s fee, to be taxed as costs.” (Italics added.)

The causes of action which subcontractor arbitrated against contractor simply put in issue three contract claims against contractor, and did not involve any issue concerning the payment bond. The arbitration award, excluding fees and costs per the subcontract, was promptly paid by contractor; and subcontractor acknowledged full satisfaction of the judgment resulting from confirmation of the arbitration award.

The majority refuses to follow a long line of precedent, which it has ineffectively attempted to distinguish. As this court (Division Two) and others have ruled, the provisions of sections 3248 and 3250 are intended to allow only an award of fees and costs incurred in an action against the surety on the payment bond, not fees and costs incurred in some other, albeit factually related, action. (See, e.g., Western Concrete Structures Co. v. James I. Barnes Constr. Co. (1962) 206 Cal.App.2d 1, 10-11 [23 Cal.Rptr. 506] [This court (Division Two) held that the attorney fees provision in issue here, then contained in section 4207 of the Government Code, only allowed an award for fees incurred in an action on the payment bond brought by a claimant against the surety, not for a contract action brought against the contractor.]; accord, Acoustics, Inc. v. Trepte Constr. Co. (1971) 14 Cal.App.3d 887, 918 [92 Cal.Rptr. 723] [“We find no authority, and none has been cited, which authorizes an award of attorneys’ fees ... in defense of the contract action. Therefore, the award of any attorneys’ fees [in such an action] cannot be sustained . . . .” Italics added.]; cf. also Boliver v. Surety Co. (1977) 72 Cal.App.3d Supp. 22, 31 [140 Cal.Rptr. 259] [Since the surety’s obligation is coterminous with that of the principal, the surety’s liability for attorney fees turns on the question of whether the claimant’s contract with the principal authorizes an award of such fees.].)

Examination of the legislative history of section 3250, of which we have previously taken judicial notice at surety’s unopposed request, confirms the view that this section only authorizes an award for attorney fees and costs incurred in an action on the payment bond against the surety, not for fees and costs incurred in an arbitration of an underlying contract or other action against the contractor.¹¹

Sections 3248 and 3250 do not, therefore, authorize the arbitration attorney fees and costs which the lower court awarded subcontractor against the surety.¹²

Neither subcontractor nor the majority has cited any authority for the specific holding in this case. The majority’s authorities consist simply of statements of general principles of law which, while abstractly correct, are irrelevant to the legal question in issue here, and of unpersuasive attempts to distinguish contrary authorities which are specifically relevant.

As a policy matter, the Legislature may someday provide, as the majority has here, that attorney fees and costs expended by a subcontractor in its contractual arbitration with its contractor should be recoverable from the latter’s surety, whether or not included in the confirmed arbitration award. It clearly has not done so, and no reported case implies or so holds. “We cannot, however, create a right to fees in that context where the Legislature has not seen fit to enact one.” (Abbett Electric Corp. v. California Fed. Savings & Loan Assn. (1991) 230 Cal.App.3d 355, 360-361 [281 Cal.Rptr. 362] [Division Four of this district rejected an analogous argument that attorney fees should be recoverable where a mechanic’s lien is foreclosed, in light of the general public policy favoring the claims of materialmen who contribute to a project.].)

5. California’s Public Policy Respecting Sureties Requires Reversal

For 120 years, the legislative policy of California regarding the liability of sureties has mandated that: “The obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal . . . .” (§ 2809.) The majority ignores this policy, by enlarging a surety’s liability to pay fees and costs its principal was exempt from paying by contract, where an arbitration award absolved that principal from paying such fees and costs, and where the award so providing became the equivalent of a civil judgment, in the very same action in which a contrary judgment was later filed compelling the surety to pay the same. The surety’s potential liability on its performance bond ceased to exist when the obligation of its principal, established by judgment confirming an award in an arbitration to which subcontractor agreed, was acknowledged to be wholly satisfied.

The majority’s only rationale, its unsupported rhetorical claim that public “policy . . . favoring mechanics, laborers and materialmen” supports its result, unfortunately casts a wider net than intended. (Maj. opn., ante, p. 582.) It is equally as applicable to private as to public works, and poses the same implications for both. This misplaced rationale has never previously been asserted as a ground for allowing one voluntarily participating in an arbitration it contracted for to recover attorney fees and costs which it agreed to bear itself.

The majority also seems to imply, contrary to the trial court, that a surety’s liability for fees and costs may depend on whether a lawsuit against the surety is pending when the arbitration is completed. Such sophistry does not withstand the most cursory analysis. If no such action was then pending, the majority opinion would nonetheless require sureties to pay those fees and costs to a subcontractor in litigation filed after the arbitration order issued as an “integral component” of the action against surety; i.e., the characterization of the arbitration as an “integral component” of the “action” against surety would logically apply to such actions filed before, after, or during arbitration. Either way, the subcontractor’s arbitration fees and costs would ultimately always, on the majority’s view, constitute a claim against surety “on the payment bond.”

The implications for a surety’s premium adjustments, adding to the expense ultimately passed to consumers and taxpayers in this state in all bonded works of improvement, public and private, will be potentially onerous. Here, the principal amount awarded subcontractor in the arbitration was $51,480; the amount awarded against surety by the lower court, which the majority upholds, for subcontractor’s attorney fees and costs it claimed as incurred in the arbitration was $93,028.92.

It takes little imagination to project premium increases for surety bonds if, contrary to the provisions of section 2809, the surety for a multimillion dollar public works construction contract is compelled to pay amounts it cannot ever reasonably forecast for attorney fees and costs incurred by a subcontractor in an arbitration with its principal. The surety was not joined, was not required to join, and did not undertake the additional expense of joining that arbitration as the majority suggests it should have. We are not told why a surety should participate in an arbitration of contractual disputes between its principal and another. No precedent requires the surety to do so. A surety’s role is generally passive. That joinder, even if allowed, would subject the surety to additional and unnecessary litigation expenses, to be recovered by higher premiums passed through to the builders of the bonded project and, ultimately here, to the taxpayers of this state.

The purpose of the bond for the project in the case at bench—which the majority loses sight of—was to guarantee performance of a public works project including highway bridging, not to bankroll costly multiparty litigation. Contractor and subcontractor agreed to provide a speedy method for the resolution of any disputes, through arbitration, with each party to bear its own fees and costs. Such an agreement does not fall afoul of any “public policy”—rather, this is what the public policy in favor of arbitration, and the finality of arbitration awards, was meant to encourage.

6. California’s Public Policy Regarding Arbitration Also Requires Reversal

Thus, another inherent contradiction exists in the majority’s position. Even if, as the majority suggests, subcontractor’s fees and costs in arbitration should be recoverable from the surety because in some sense it was a part of the action “on the payment bond,” still the majority faces the obstacle of the arbitration award having been confirmed as a judgment in this very action on the payment bond.¹³ That judgment requires the subcontractor to pay its own arbitration fees and costs, and is then followed by a judgment in the same lawsuit contrarily directing surety to pay the same. The majority opinion’s suggestion, that the judgment confirming the arbitration award is an “integral component” of the action on the bond, but is somehow ineffective in that action to require subcontractor to follow the judgment’s terms in paying its own fees and costs, is self-contradictory.

Arbitration agreements on bonded works of improvement will be discouraged by the majority’s opinion, which reaches such unintended and capricious results. The uncertainty as to potential liability for fees and costs, despite an agreement negating such liability, will only cause parties to abandon arbitration. The majority opinion will simply encourage full-fledged litigation at greater expense and greater length in our overcrowded courts, contrary to the expressed intention of the California Legislature.

More critically, the majority’s focus on what subcontractor “understood” the parties’ agreement to mean—rather than a proper focus on what that agreement actually says—will cause much mischief in failing to satisfactorily explain why a provision, that each party shall bear its own attorney fees and costs, should not be “understood” to mean just that. (Maj. opn., ante, p. 593.)

In common commercial disputes such as this one, the parties should be taken at their word when they agree to bear their own legal costs incurred in an arbitration. The majority wanders far afield when it relies instead upon the “strong policy of this state favoring mechanics, laborers and material-men” to overrule legislative enactments and the equally strong policy in favor of the settlement of disputes quickly and cheaply through agreements to arbitrate. (Maj. opn., ante, p. 582.) Our state’s policy in favor of “mechanics” does not mean that “mechanics” should always prevail in litigation, regardless of the merits.

The majority, in summary, ignores the only applicable public policy—the strong policy in favor of the enforceability of arbitration agreements. “Title 9 of the Code of Civil Procedure, as enacted and periodically amended by the Legislature, represents a comprehensive statutory scheme regulating private arbitration in this state. [Citation.] Through this detailed statutory scheme, the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution.’ [Citations.]” (Moncharsh v. Hetty & Blase (1992) 3 Cal.4th 1, 9 [10 Cal.Rptr.2d 183, 832 P.2d 899].) The parties, having agreed to bear their own legal costs in the arbitration, cannot reasonably be deemed to have contemplated a further costly tussle over the contractor’s indirect liability for those fees and costs. They contracted for arbitration in the expectation that the arbitrator’s award would be final. “This expectation of finality strongly informs the parties’ choice of an arbitral forum over a judicial one. The arbitrator’s decision should be the end, not the beginning, of the dispute.” (Id. at p. 10.)

7. The Majority Precludes a Bonded Principal From Ever Effectively Contracting Against Payment of a Subcontractor’s Fees and Costs Incurred in Arbitration

While subcontractor and the majority theorize arbitration might be discouraged if fees and costs are not awarded for arbitration proceedings, a greater disincentive to arbitration is erected by the majority.

If the majority opinion stands, no surety whose principal participates in and loses an arbitration arising from a contract the surety bonds, wherein each participant agrees to pay its own arbitration fees and costs, will ever be exempt from paying such fees and costs of the winning side. A surety will simply become a passive cash cow, satisfying, in the first instance, claims for fees and costs which have been waived by the participants in an arbitration in which the surety did not participate, and as to which it has only secondhand knowledge. This will be followed by additional litigation when the surety sues to enforce its statutory subrogation rights against its principal under section 2848¹⁴ upon satisfying the latter’s obligation for such fees and costs.

A contractor’s contract to arbitrate disputes with its subcontractor by an agreement negating the former’s liability for the latter’s arbitration fees and costs becomes meaningless. That liability will simply always be passed through to and paid by the contractor because the surety’s obligation to pay those expenses will trigger the contractor’s obligation to repay the surety therefor. Section 2847¹⁵ binds the principal of the surety to reimburse the latter for all disbursements made on the principal obligation, including necessary costs and expenses in connection therewith. (Post Bros. Constr. Co. v. Yoder (1977) 20 Cal.3d 1, 8 [141 Cal.Rptr. 28, 569 P.2d 133]; cf. Maurice Merc. Co. v. American Emp. Ins. Co. (1934) 140 Cal.App. 354, 360 [35 P.2d 1047] [Lease guarantors under bond are entitled to attorney fees under section 2847.].)

In sum, the contractor, clearly agreeing with the subcontractor to pay no attorney fees or costs incurred in arbitration, is compelled by the majority to pay them indirectly to the subcontractor by reimbursing the surety therefor. I find no legislative intent or public policy vitiating a contractor’s contractual immunity from paying a subcontractor’s arbitration fees and costs, by requiring contractor to pay them to a third party, contractor’s surety. The financial result the contractor sought legitimately to avoid for a good consideration is nonetheless imposed by the majority’s decision.

C. Conclusion

The arbitration of the parties was not an action on the bond. It was an action on the contract of the parties. The surety’s liability on the bond for subcontractor’s arbitration fees and costs was not established by the arbitration award or its court confirmation.

Subcontractor’s attempt to collect its attorney fees and costs incurred in arbitration in this action violates the rule that a surety cannot be liable for more than its principal, and constitutes a forbidden attempt to vary or vacate the arbitration award without any sufficiently compelling reason. (See Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 10.) The surety was immune from payment of subcontractor’s arbitration fees under the present statutory scheme.

The applicable law wholly precludes the majority’s result. I would reverse the judgment.

A petition for a rehearing was denied July 9, 1993, and appellant’s petition for review by the Supreme Court was denied September 30, 1993. Panelli, J., and Baxter, J., were of the opinion that the petition should be granted.

* Presiding Justice of the Court of Appeal, First District, Division Five, sitting under assignment by the Chairperson of the Judicial Council.

1 Unless otherwise indicated, all subsequent statutory references are to the Civil Code.

2 By one arbitrator mutually chosen; or by three arbitrators, the neutral arbitrator chosen by the two respectively designated by each party.

3 Filing the complaint ignored the provision of section 25 of the subcontract specifying an arbitration decision “shall be a condition precedent to any right of legal action.”

4 Section 3249 provides, in pertinent part: “Suit against the surety or sureties on the payment bond . . . must be commenced before the expiration of six months after the period in which stop notices may be filed . . . .”

5 Although subcontractor objected to this order on the grounds, inter alia, that Public Contract Code section 10240.9 required its consent as a condition to being joined in the OAH arbitration, which it had not given, this objection was not pursued below or on this appeal.

6 Contrary to the majority’s implication, subcontractor was not compelled to arbitrate with contractor through the OAH arbitration upon completion of that arbitration with Caltrans (maj. opn., ante, p. 585); subcontractor stipulated to do so. Subcontractor, in resisting the initial OAH arbitration and thereafter in stipulating to private arbitration, made no effort to exercise its right under section 3250 to proceed separately against surety, as discussed post.

7 The reporter’s transcript of the proceedings below of February 20, 1991, (not filed herein until Nov. 3, 1992) mistakenly identifies section 2807 as section 2827, a section which does not exist. The lower court described the statute on which it relied as one providing “security [surety] is liable immediately upon default of the principal,” which paraphrases section 2807.

8 In stating his findings on the record, the trial court actually assumed, erroneously, that no litigation between the parties was pending when the arbitration between contractor and subcontractor was concluded: “We know that money that was arbitrated and resolved by the arbitrator in favor of [subcontractor], at that point when that occurred, which occurred prior to the filing of any litigation, . . . [surety] became immediately liable to [subcontractor] under the payment bond.” (Italics added.)

9 That “existing law” related to case law regarding judgments against a principal and was summarized for the Senate Judiciary Committee as follows: “[A] judgment entered against a principal alone is not conclusive against [its] surety. A surety may be bound by the judgment only if the suretyship agreement specifically provides. [H This bill would provide that an arbitration award rendered against a principal alone shall not be, be deemed to be or be utilized as an award against [its] surety.” (Assem. Com. on Judiciary, Dig. of Sen. Bill No. 1194 (1979-1980 Reg. Sess.) as amended May 25, 1979.)

10 Code of Civil Procedure section 1281.4 provides at paragraph three: “If the issue which is the controversy subject to arbitration is severable, the stay may be with respect to that issue only.” The majority, thus, mistakenly casts the burden of moving to sever the fourth cause of action or to participate in the arbitration on surety, ignoring subcontractor’s failure to ask for the severance remedy and separate pursuit of surety it was entitled to as a matter of law; the majority ignores the fact that the option to separate, sever, and pursue the fourth cause of action, or to leave it pending during arbitration of the three causes of action against contractor, was that of subcontractor—not surety.

11 The 1970 amendment of section 3250, concerning action on the payment bond, clearly indicates that addition of the language “In any action, the court shall award to the prevailing party a reasonable attorney’s fee, to be taxed as costs” was only intended to expand payment of such fees on appeal, not for those incurred in arbitration. (Stats. 1970, ch. 479, § 1, p. 950, italics added.) It “permit[s] the prevailing party to recover such fees on appeal.” (Id. at § 4.)

12 I do not, accordingly, reach the surety’s additional contentions that such an award violated its due process rights, because it was not a party to the arbitration; but I note generally that troubling questions of fairness and due process are raised by the circumstances of this case.

13 “If an [arbitration] award is confirmed, judgment shall be entered in conformity therewith. The judgment so entered has the same force and effect as, and is subject to all the provisions of law relating to, a judgment in a civil action; and it may be enforced like any other judgment of the court in which it is entered.” (Code Civ. Proc., § 1287.4.)

14 “A surety, upon satisfying the obligation of the principal, is entitled to enforce every remedy which the creditor then has against the principal to the extent of reimbursing what [it] has expended . . . .” (§ 2848.)

15 Section 2847 provides, in pertinent part: “If a surety satisfies the principal obligation, or any part thereof, whether with or without legal proceedings, the principal is bound to reimburse what [the surety] has disbursed, including necessary costs and expenses . . . .”