Frontier Land Companies v. Jeld-Wen CA3 ( 2014 )

Filed 5/22/14 Frontier Land Companies v. Jeld-Wen 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NOT TO BE PUBLISHED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 This opinion has not been certified for publication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
(San Joaquin)
----
FRONTIER LAND COMPANIES, C064351
Plaintiff, Cross-defendant and (Super. Ct. No. CV025623)
Respondent,
v.
JELD-WEN, INC.,
Defendant, Cross-complainant and
Appellant.
Following a jury trial of this suit for breach of contract and indemnity, defendant
Jeld-Wen, Inc., appeals from a judgment in favor of plaintiff Frontier Land Companies.1
Plaintiff, a home builder, sought reimbursement for repairs incurred as a consequence of
1 Defendant cross-complained against Frontier Land Companies and others, alleging
nonpayment on other projects, but settled with the others, and the trial court granted
Frontier’s motion for directed verdict on the cross-complaint as barred by the statute of
limitations. The cross-complaint is not at issue in this appeal.
1
defects in windows, glass doors, and frames supplied and installed by defendant in
residential housing developments built by plaintiff. Defendant contends the trial court
(1) made erroneous rulings that reformed the contracts to add a 10-year guarantee,
(2) improperly applied the express indemnity provision, and (3) improperly awarded
unreasonable attorney fees and prejudgment interest.
We reverse and remand regarding prejudgment interest but otherwise affirm.
FACTUAL AND PROCEDURAL BACKGROUND
This case proceeded to trial on four counts: (1) breach of contract, (2) breach of
implied warranty of merchantability, (3) express contractual indemnity, and (4) implied
contractual indemnity.2 Plaintiff initially claimed damages of $39,122.18 but continued
to incur additional damages, and by the time of trial, the damages demand had risen to
$245,066.82.
Trial Evidence
Background
Plaintiff builds and sells homes in the Central Valley. Defendant manufactures,
sells, and installs windows and sliding glass doors. In January 1999 plaintiff and
defendant entered into a written Subcontract Agreement for defendant to provide and
install windows and sliding glass doors for the initial phase of plaintiff’s LeBaron Estates
subdivision in Stockton. In March 1999 plaintiff and defendant signed a second contract
for an additional phase of the LeBaron Estates subdivision. The parties refer to the two
LeBaron contracts as one contract. In January 2000 plaintiff and defendant signed a third
contract for defendant to provide and install windows and screens for the Villa Ticino
subdivision in Manteca. In November 2000 plaintiff and defendant entered a fourth
2 A count alleging breach of implied warranty of fitness was dismissed during trial.
2
contract for defendant to supply and install windows, patio doors, and screens at the Terra
Bella subdivision in Modesto.
Plaintiff also purchased windows and doors from defendant for four other
subdivisions (Harvest Creek, Orchard Park, Tessie Estates, and Westbrook), but without
written contracts.
Express Guaranty
Each of the contracts between plaintiff and defendant contained the following
clause:
“11. EXPRESS GUARANTY: In addition to and without limiting
Subcontractor’s liability or responsibility for the Work, Subcontractor expressly
guarantees its obligation under this Subcontract Agreement, including, but not limited to
any defect in workmanship or materials, which occur [sic] within two (2) years from the
date of the close of the initial escrow on the Work (i.e., as a new home) to Contractor’s
homebuyers, regardless of the cause of such defects, except where such defects are solely
caused by a third party or by Contractor’s homebuyer. In this regard, Subcontractor
agrees to promptly perform all warranty work requested by Contractor and shall keep
appropriate personnel available 7 days per week to service homeowner warranty claims
in a timely fashion. . . .” (Italics added.)
Default Provision–Defective Materials/Substandard Work
Each contract also stated in paragraph 12 that defendant would be in default of the
contract if defendant “furnishes defective material or does substandard work.”
Express Indemnity Provisions
Each contract contained an express indemnity provision in paragraph 10, though
the language differed.
The LeBaron Estates contracts required defendant to “indemnify and hold
Contractor harmless from and against any and all claims, actions, demands, damages,
liabilities, fines, costs and attorney’s fees arising from or related in any way to the Work
3
including, without limitation, any and all claims arising from any condition of the Work
or arising from any breach or default on the part of Subcontractor in the performance of
any requirement of this Subcontract Agreement, or arising from any act or alleged act of
negligence of Subcontractor, or any of its agents, subcontractors, servants, employees, or
licenses [sic], arising from any accident, injury or damage whatsoever caused to any
person, or entity, except such claims as are exclusively caused by the sole negligence of
Contractor.”
The Terra Bella contract required defendant to “defend, indemnify and hold
Contractor and Owner, its parent company, subsidiaries, partners and affiliates harmless
from and against any and all loss, expense, liens, claims, demands, and causes of action
of every kind and character (including those of the parties, their agent and employees) for
death, personal injury, damage to property of subcontractor and third party fines or
penalties, including costs, attorneys’ fees and settlements arising out of or in any way
connected with or alleged to be arising out of or connected with the performance of work
under this agreement, by act of [sic] omission,[3] whether performed by Subcontractor or
any other subcontractor or any independent contractor or any agent, employee, invitee or
licensee of the parties, whether resulting from or contributed to by (a) the negligence in
any form, whether active or passive, except the sole negligence or willful misconduct of
3 Some of the contracts appear to contain typographical errors by stating “act of
omission” rather than “act or omission.” No one makes an issue of this on appeal. To the
contrary, defendant quotes the contracts as stating “act or omission.” In discussing the
special jury instruction on indemnity (fn. 8, post), the trial court asked counsel, “Do you
want me to take out the words ‘act of omission’? I mean, it appears in some of the
contracts, but I think it’s another way of saying negligence.” Both sides agreed to this
particular change, and the trial court accordingly instructed the jury that plaintiff must
prove damage “caused by an act of negligence or breach of contract.” The court also
instructed that, for breach of contract, the jury must find defendant “failed to do
something that the contract required it to do” and that negligence can occur “by acting or
by failing to act.”
4
Contractor or owner, its parent company, subsidiaries, partners, and affiliates, its agents,
employees, and other independent contractors directly responsible to it, or (b) any defect
in, or condition of the premises on which the work is to be performed or any equipment
thereon or any materials furnished by Contractor. Subcontractor shall be solely
responsible for loss to or damage of all materials, equipment and work hereunder until
the Contract is completed to Contractor’s and Owner’s satisfaction. Subcontractor
further agrees to use proper care and caution in the performance of its work hereunder so
as not to cause damage to any adjoining or other property. Subcontractor does expressly
assume, to the extent of the work covered by this Subcontract, all of the indemnification
provisions and guarantees imposed on the Contractor by the construction contract
between Contractor and Owner, if any. [¶] The defense obligation contemplated herein
is contingent only upon the tender by Contractor or Owner to Subcontractor of a claim
which wholly or partially comes within the ambit of the above, and Subcontractor shall
pay promptly when due and as incurred all attorney’s fees and costs generated in the
defense of Contractor or Owner, as to the entire action and including bonds and the costs
of appeal. No obligation of Subcontractor to Contractor or Owner shall be lessened,
reduced, delayed of [sic] affected by the existence of other potential or actual indemnitors
or insurers, or by Subcontractor’s rights against any third party to contribution,
subrogation or proration.”
The Villa Ticino contract, which was signed before the Terra Bella contract,
contained the same indemnity clause as the Terra Bella contract, but with handwritten
and initialed interlineations deleting some of the words, such that the Villa Ticino
contract required defendant to “defend, indemnify and hold Contractor and Owner, its
parent company, subsidiaries, partners and affiliates harmless from and against any and
all loss, expense, liens, claims, demands, and causes of action of every kind and character
(including those of the parties, their agent and employees) for death, personal injury,
damage to property of subcontractor and third party fines or penalties, including costs,
5
attorneys’ fees and settlements arising out of or in any way connected with or alleged to
be arising out of or connected with the performance of work under this agreement, by act
of [sic] omission, whether performed by Subcontractor or any other subcontractor or any
independent contractor or any agent, employee, invitee or licensee of the parties, whether
resulting from or contributed to by (a) the negligence in any form, whether active or
passive, except the sole negligence or willful misconduct of Contractor or owner, its
parent company, subsidiaries, partners, and affiliates, its agents, employees, and other
independent contractors directly responsible to it, or (b) any defect in, or condition of the
premises on which the work is to be performed or any equipment thereon or any
materials furnished by Contractor. Subcontractor shall be solely responsible for loss to or
damage of all materials, equipment and work hereunder until the Contract is completed to
Contractor’s and Owner’s satisfaction.[4] Subcontractor further agrees to use proper care
and caution in the performance of its work hereunder so as not to cause damage to any
adjoining or other property. Subcontractor does expressly assume, to the extent of the
work covered by this Subcontract, all of the indemnification provisions and guarantees
imposed on the Contractor by the construction contract between Contractor and Owner, if
any. [¶] The defense obligation contemplated herein is contingent only upon the tender
by Contractor or Owner to Subcontractor of a claim which wholly or partially comes
within the ambit of the above, and Subcontractor shall pay promptly when due and as
incurred all attorney’s fees and costs generated in the defense of Contractor or Owner, as
to the entire action and including bonds and the costs of appeal. No obligation of
Subcontractor to Contractor or Owner shall be lessened, reduced, delayed of [sic]
4 Some of the handwritten and initialed strikethroughs in the trial exhibit appear to skip
an isolated word here and there, e.g., “any equipment thereon,” in a way that would not
make sense. Our reading of the strikethroughs above is consistent with defendant’s
quotation of the indemnity clause in its opening brief on appeal.
6
affected by the existence of other potential or actual indemnitors or insurers, or by
Subcontractor’s rights against any third party to contribution, subrogation or proration.”
(Strikethroughs in original.)
Attorney Fees
Each contract provided for attorney fees in paragraph 18: “The prevailing party in
any dispute arising out of this Subcontract Agreement shall be entitled to promptly
receive its reasonable attorney’s fees in addition to other relief granted by the court
therein.”
Integration Provision
Each contract provided in paragraph 20 that the contract was fully integrated and
oral modifications were prohibited.
Homeowner Complaints and Defendant’s Response
Between January 1999 and early 2002, defendant supplied and installed windows,
sliding glass patio doors, and frames pursuant to the three contracts. Defendant has also
installed windows and doors for plaintiff at other subdivisions–Westbrook, Harvest
Creek, Tessie Estates, and Orchard Estates–but without formal written contracts.
Defendant’s performance on those jobs is not at issue here.
Beginning in 2002 and continuing to 2009, plaintiff received complaints from
homeowners about windows leaking, dual-pane windows becoming obscured by
condensation, and one sliding glass door that was the wrong size. The condensation
problem is known as “seal failure” of the hermetic seals between the dual pane glazing or
a failed insulated glass unit. Defendant does not deny the seal failures were defects but
views the condensation problem as “aesthetic only.”
Plaintiff notified defendant, which initially responded and made repairs.
However, defendant stopped responding, which forced plaintiff to hire a third party to
perform the repairs as complaints continued to come in. Plaintiff claimed that out of
653 homes, 259 had window problems, 168 of which were ignored by defendant.
7
Plaintiff sent “backcharges” to defendant for reimbursement of these expenses, including
a 15 percent administrative charge authorized by contract.5 Defendant refused to pay,
claiming the work was not within the scope of defendant’s limited warranty to
homeowners.6 Plaintiff said the first time plaintiff ever heard of defendant’s independent
limited warranty to homeowners was in 2005.
Defendant also asked plaintiff to have homeowners contact defendant directly with
any complaints. Although this deviated from plaintiff’s standard practice, plaintiff
acquiesced. However, defendant failed to respond to homeowner complaints or simply
dropped off replacement windows, leaving the homeowners to their own devices for
installation, purportedly pursuant to defendant’s limited warranty with the homeowners.
Because defendant refused to install the replacement windows and doors, plaintiff had to
hire another subcontractor to do the work. Plaintiff hired Glass Doctor, an authorized
dealer for defendant’s products that could obtain replacement glass from defendant free
of charge.
At trial, plaintiff claimed damages of $245,066.82, of which $180,938.39 was for
seal failures. Defendant claimed plaintiff’s damages were, at most, $7,309.99 for defects
5 The contracts stated in paragraph 13: “. . . For purposes of any default by
Subcontractor in this Subcontract . . . , Contractor shall be entitled to backcharge and
receive from Subcontractor not less than Contractor’s actual labor and material costs and
expenses, plus fifteen percent (15%) overhead for such warranty work, and/or
Contractor’s out-of-pocket costs and expenses, as the case may be.”
6 The portion of the limited warranty quoted in defendant’s opening appellate brief stated
in part: “Should a wood or vinyl window, patio door or component part be proven
defective during the warranty period, the buyer’s remedies will be limited to the
following at [defendant’s] option: (1) repair of the defective product or component part;
(2) replacement of the defective product or component part, including the cost of
shipping; or (3) reimbursement of the purchase price. These remedies are the only
remedies available for breach of warranty or any other legal theory. In no event shall
[defendant] be responsible for installation, repainting, refinishing or similar activities
connected with the replacement of windows, patio doors or component parts. . . .”
8
within the two-year period of the express guaranty clause of the contracts between
plaintiff and defendant.
Precluded Evidence of Defendant’s Limited Warranty
Because defendant wanted to introduce evidence of its own limited warranty to
homeowners, which promised only to supply replacement glass, not install it, plaintiff
filed a motion in limine to exclude evidence of this limited warranty. Plaintiff asserted
that defendant never mentioned the limited warranty until after this lawsuit was filed, and
it was irrelevant to the contracts between plaintiff and defendant, which were fully
integrated with no mention of the limited warranty and no oral modifications allowed.
Defendant argued plaintiff had notice because a sticker affixed to each window said “sold
per the terms of Jeld-Wen’s limited warranty.” The trial court denied plaintiff’s motion
without prejudice, stating plaintiff could revisit the issue after the presentation of
evidence so that the court could rule in context.
After testimony about defendant’s limited warranty, including plaintiff’s evidence
that defendant never mentioned the limited warranty until after plaintiff filed the lawsuit,
the trial court revisited the issue sua sponte, struck the evidence of defendant’s limited
warranty, and excluded further evidence of defendant’s limited warranty. Defendant
argued the evidence was relevant to explain to the jury why defendant supplied
replacement glass without installing it despite claiming its liability had already expired
two years after the subcontracts. Defense counsel argued, “How else do I explain -- can I
logically explain to the homeowners why we would pay for glass but not pay for labor
unless I could show them the warranty that we’re relying on in order to do that? [¶] The
jury’s going to say, ‘Well, if you guys paid for glass, you should pay for labor too.’ The
disclaimers are enforceable under the [Uniform Commercial Code]. They’re enforceable
under a hundred differ [sic] cases. We’re only required to do what our warranty says
we’re required to do.” The court asked, “Vis-a-vis the homeowner?” Defense counsel
agreed, “Vis-a-vis the homeowner.” Plaintiff’s lawyer argued the limited warranty would
9
be relevant if the homeowners sued defendant, but this was a suit between plaintiff and
defendant, and there was no limited warranty between plaintiff and defendant.
The court noted, “it seems to me that the way the limited warranty evidence has
been used is that it does misdirect the jury. It’s often unclear in the questioning of the
witnesses -- especially on cross -- which warranty you’re discussing on cross-
examination. There’s been jumping, kind of a picking and choosing of the various
things, and they’re all kind of pushed together. [¶] . . . I think there has been confusion,
and I think you’ve both seen . . . the latest note from the jurors. [¶] It’s not particularly
clear, but at least one juror seems to be confused about the ten-year warranty issue . . .
[i.e.,] the statute of repose issue . . . .” The trial court excluded the evidence, “both on
grounds of relevancy and under Evidence Code [section] 352, for the reasons I’ve
stated.” The trial court told the jurors that the evidence about defendant’s limited
warranty was stricken, and they were to disregard it and not consider it for any purpose.
Defendant’s Motion for Directed Verdict
After the close of plaintiff’s case, defendant moved for a directed verdict, arguing
that all of plaintiff’s damages fell outside the two-year express guaranty clause in the
contracts. The trial court denied the motion. Plaintiff asked the trial court to interpret the
express guaranty, as a matter of law, as not limiting defendant’s liability. Defendant
agreed that the trial court should interpret the express guaranty, but asked the court to
interpret the clause as a two-year limitation on defendant’s liability.
The trial court ruled that the express guaranty did not limit plaintiff’s remedies
against defendant but instead expressly provided plaintiff with an additional remedy
during the first two years after close of escrow on each home. The trial court said:
“. . . I don’t read Paragraph 11 [express guaranty] as limiting the plaintiff’s remedies.
Paragraph 11 of the contract begins by stating, ‘In addition to and without limiting
[defendant’s] liability or responsibility for the work, [defendant] expressly guarantees its
obligation under the subcontract . . . . [¶] This is an enhanced provision. I don’t see it as
10
a limitation in any way. It’s a contractual provision that provides the contractor with a
little bit more than it would normally have, and I don’t think it’s ambiguous in the least.
[¶] Accordingly, I think that it’s appropriate to grant plaintiff’s motion in the extent
they’re asking the Court to make a finding as a matter of law. The Court will find that
the contract is not ambiguous in the manner urged anyway and that that provision is not a
two-year limitation. [¶] Now, a breach of that provision has to come within two years, I
think, but the plaintiff is suing for other things, and so in other words, the two-year
provision in Paragraph 11 is not properly read as a limitation on all of the contractor’s
remedies. . . .”
Defendant argued the only alleged breach of the contract was breach of
paragraph 11, and therefore plaintiff’s contract claim was indeed limited to two years.
Defense counsel made this assertion despite plaintiff’s counsel having just argued,
consistent with its pleading, that it was alleging defendant breached the “default” clause
of the contracts in paragraph 12 by “furnish[ing] defective material or do[ing]
substandard work.” The trial court said it would have to wait “until there’s a context.”
Jury Instructions
Defendant also moved, after presentation of plaintiff’s case-in-chief, for nonsuit or
directed verdict on the express contractual indemnity claims, arguing such claims
required a preliminary finding of negligence in order to trigger indemnity, and negligence
could not be found here because the “economic loss doctrine” precludes a negligence
recovery unless the defective product causes personal injury or damage to property other
than the defective product, and no such injury or damage to other property exists in this
case. The trial court denied the motion without prejudice. Defendant revisited the matter
during discussions about jury instructions. The court deferred the matter to the following
day, at which point plaintiff objected that the trial court had reinserted a reference to
negligence in the jury instruction, telling the jurors that in order for plaintiff to prevail on
express indemnity, plaintiff must prove damage “caused by an act of negligence or
11
breach of contract.”7 (Italics added.) Plaintiff argued it need only prove breach of
contract. The trial court noted some of the contractual indemnity clauses made reference
to “active omission [sic],” which implied negligence. Counsel for both sides said they
were “fine” with the instruction as modified, despite defense counsel’s having argued the
previous day that “or” was not good enough because negligence was a prerequisite for
express indemnity.
The trial court also instructed the jury: “Homebuilders such as [plaintiff] and
subcontractors, such as [defendant] can be sued and, depending on the evidence in a
particular case, found liable for the reasonable costs to repair latent defects in homes they
built for up to ten (10) years after substantial completion of the homes.”
The trial court also instructed the jury: “The two year express guarantee in the
contract between [plaintiff] and [defendant] only limits [defendant’s] liability under the
express guarantee to two years. It does not limit [defendant’s] potential liability under
the other portions of the contract or other legal remedies that might be available to
[plaintiff].”
Jury Verdict
On December 18, 2009, the jury returned a general verdict finding in favor of
plaintiff on plaintiff’s claims for breach of contract, express contractual indemnity, and
7 Special Jury Instruction No. 2 told the jurors: “[Plaintiff] claims that it was required to
repair and/or replace windows sold and furnished by [defendant]. [Plaintiff] seeks to be
indemnified by [defendant] for the costs incurred for the Villa Ticino, Lebaron and Terra
Bella Subdivisions, pursuant to the express terms of the indemnity provision contained in
the written contracts between the parties. In order for [plaintiff] to recover from
[defendant] on this theory, [plaintiff] must prove the following: [¶] (1) [Plaintiff] has
suffered damages; [¶] (2) For damage to property; [¶] (3) Arising out of [defendant’s]
work under the contract, and [¶] (4) caused by an act of negligence or breach of
contract.”
12
implied contractual indemnity, and awarded plaintiff $126,818.62. The jury found in
favor of defendant on plaintiff’s claim for breach of implied warranty of merchantability.
The trial court entered judgment on December 21, 2009, with the question of costs
deferred, and defendant filed a timely notice of appeal.
Motions for Attorney Fees
Each side filed a motion for attorney fees. Defendant claimed entitlement because
the verdict of $126,818.62 was less than the $137,000 defendant had offered to settle the
case before trial under Code of Civil Procedure section 998 (the 998 offer). The trial
court ruled that because defendant’s 998 offer included fees and costs, plaintiff’s preoffer
costs and fees had to be added to the jury verdict to determine which party prevailed.
When plaintiff’s preoffer fees of $166,237.50 and preoffer costs of $10,535.65 were
added to the jury verdict, the total was $303,591.77, which was more than defendant’s
offer of $137,000. The trial court therefore determined plaintiff was the prevailing party
and was entitled to an award of attorney fees. Based on the evidence presented, the trial
court awarded attorney fees in the amount of $327,553.
The trial court also awarded plaintiff prejudgment interest under Civil Code
section 3287, in the amount of $62,054.26.
On May 7, 2010, the trial court entered an amended judgment that incorporated
attorney fees, costs, and prejudgment interest. Defendant filed a timely notice of appeal
from the amended judgment.8
8 Defendant thus appealed from both the judgment and the amended judgment. Where a
judgment is modified merely to add costs, attorney fees, and interest–which are
separately appealable as postjudgment orders (Code Civ. Proc., § 904.1, subd. (a)(2))–a
party wishing to challenge both the final judgment and the postjudgment order normally
must file two separate appeals, one from the judgment and a second from the
postjudgment order (Torres v. City of San Diego (2007) 154 Cal. App. 4th 214, 222,
criticized on other grounds in Sanchez v. Strickland (2011) 200 Cal. App. 4th 758, 766).
13
DISCUSSION
I. Purported Reformation of the Contracts
Defendant argues the trial court improperly reformed the contracts to provide for
10-year guarantees by (a) misinterpreting the two-year express warranty as enhancing
rather than limiting liability, (b) instructing the jury on the statutory 10-year limitations
period for home construction defects (Code Civ. Proc., § 337.15), and (c) excluding
defendant’s limited warranty defense. We are not persuaded.
A. Interpretation Of Express Guaranty Clause
Defendant maintains the trial court misinterpreted the two-year express guaranty
as an “enhanced provision” rather than a limitation of liability. We disagree.
“The language of a contract is to govern its interpretation, if the language is clear
and explicit, and does not involve an absurdity.” (Civ. Code, § 1638.) A trial court’s
interpretation of a contract as a matter of law is subject to de novo review on appeal,
unless its interpretation turns on the credibility of witnesses or resolution of factual
disputes. (City of El Cajon v. El Cajon Police Officers’ Assn. (1996) 49 Cal. App. 4th 64,
70-71.)
Here, the two-year clause expressly stated, “In addition to and without limiting
Subcontractor’s liability or responsibility for the Work . . . .” This express language
defeats defendant’s proposed interpretation that the clause limits defendant’s liability to
two years. When a dispute arises over the meaning of contract language, the court must
decide whether the language is reasonably susceptible to the interpretation urged by a
party; if it is not, the matter is concluded. (Foster-Gardner, Inc. v. National Union Fire
Ins. Co. (1998) 18 Cal. 4th 857, 878-880, criticized on other grounds as stated in Ameron
Internat. Corp. v. Insurance Co. of State of Pennsylvania (2010) 50 Cal. 4th 1370, 1374-
1375; see id. at p. 1388, conc. opn. of Kennard, J.) We conclude, as did the trial court,
the contract is not ambiguous and does not limit defendant’s liability to two years.
14
In addition to asserting its two-year limitation interpretation, defendant says it
anticipates plaintiff will argue, as it did in the trial court, that defendant breached
paragraph 12 of the contracts–the default clause stating defendant shall be in default of
the contract if it “furnishes defective material or does substandard work.” We note this
breach of contract theory is consistent with the complaint, which alleged defendant
breached the contracts by providing defective products and failing to remedy its defective
workmanship and product.
Defendant says paragraph 12 is “clearly inapplicable” because it speaks of breach
during construction of the project, and plaintiff never claimed during construction that
defendant breached paragraph 12. However, the express language of paragraph 12
provides no limitation to breaches that take place during construction, and defendant
offers no legal support for the assertion that the paragraph should be read that way.
To the contrary, Code of Civil Procedure section 337.159 allows 10 years to make
a claim by filing an action for latent defects in construction, and defines “latent
9 Section 337.15 of the Code of Civil Procedure provides in pertinent part that, except for
actions based on willful misconduct or fraudulent concealment: “(a) No action may be
brought to recover damages from any person, or the surety of a person, who develops real
property or performs or furnishes the design, specifications, surveying, planning,
supervision, testing, or observation of construction or construction of an improvement to
real property more than 10 years after the substantial completion of the development or
improvement for any of the following:
“(1) Any latent deficiency in the design, specification, surveying, planning,
supervision, or observation of construction or construction of an improvement to, or
survey of, real property.
“(2) Injury to property, real or personal, arising out of any such latent deficiency.
“(b) As used in this section, ‘latent deficiency’ means a deficiency which is not
apparent by reasonable inspection.
“(c) As used in this section, ‘action’ includes an action for indemnity brought
against a person arising out of that person’s performance or furnishing of services or
materials referred to in this section, except that a cross-complaint for indemnity may be
filed pursuant to subdivision (b) of Section 428.10 in an action which has been brought
within the time period set forth in subdivision (a) of this section.” (Italics added.)
15
deficiency” as “a deficiency which is not apparent by reasonable inspection.” (§ 337.15,
subd. (b).) Defendant does not claim or demonstrate that the defects were patent as
opposed to latent.
We conclude, as did the trial court, that the two-year express guaranty clauses did
not limit defendant’s liability to two years but, rather, imposed enhanced responsibilities
for prompt service for the first two years. Thereafter, the default provisions in
paragraph 12 provided a basis for liability.
B. Jury Instruction Regarding 10-Year Liability
In accordance with Code of Civil Procedure section 337.15 (see fn. 10, ante), the
trial court instructed the jury with “Special Jury Instruction No. 3,” as follows:
“Homebuilders such as [plaintiff] and subcontractors, such as [defendant] can be sued
and, depending on the evidence in a particular case, found liable for the reasonable costs
to repair latent defects in homes they built for up to ten (10) years after substantial
completion of the homes.”
On appeal, defendant argues this jury instruction essentially reformed the contract
to impose a 10-year guaranty instead of the two-year express guaranty. Defendant argues
“this is not, and has never been, a construction defect action for latent defects. There are
no homeowners that were parties to the litigation. Instead, this is a breach of
contract/express indemnity action between a builder and subcontractor.”
It does not appear that defendant is arguing the defects were not latent, since
defendant cites no evidence on this point. Rather, it appears defendant is arguing the 10-
year statute, Code of Civil Procedure section 337.15, applies only when homeowners are
parties to the litigation. Defendant cites no authority supporting this proposition.
Defendant cites only Marijanovic v. Gray, York & Duffy (2006) 137 Cal. App. 4th 1262,
1272, an inapposite case where a subcontractor sued a general contractor for malicious
prosecution for filing a cross-complaint for indemnity in an underlying suit by a
condominium owners association against the general contractor for latent construction
16
defects. The appellate court held the contractor was entitled to dismissal of the malicious
prosecution suit as a strategic lawsuit against public participation. (Ibid.) Marijanovic
has no bearing whatsoever on the case before us. (Ginns v. Savage (1964) 61 Cal. 2d 520,
524, fn. 2 (Ginns) [cases are not authority for propositions not therein considered].)
Defendant cites no authority, nor does our research disclose any authority, for the
proposition that homeowners are indispensable parties to a suit in order to invoke Code of
Civil Procedure section 337.15. To the contrary, section 337.15 on its face says “No
action may be brought” more than 10 years after completion of the project. It does not
say “No homeowner may bring an action” more than 10 years after completion.
Moreover, section 337.15, subdivision (c) expressly defines “action” to include an action
for indemnity. (See fn. 10, ante.)
Defendant’s position–that plaintiff was required to ignore homeowner complaints
and let the homeowners sue–is contrary to the language of Code of Civil Procedure
section 337.15, common sense, and public policy and is unsupported by any citation of
authority. We therefore reject it.
C. Defendant’s Limited Warranty
Under the same heading about alleged contract reformation, defendant argues the
trial court improperly excluded defendant’s limited warranty and defense. Again, we
disagree.
Defendant argues the trial court’s granting of plaintiff’s motion in limine to
exclude evidence of defendant’s limited warranty deprived defendant of a defense and
was tantamount to a grant of nonsuit. Defendant goes on to cite the standard of review
for nonsuits, which requires us to view the evidence most favorably to defendant; resolve
all presumptions, inferences, and doubts in defendant’s favor; and uphold the judgment
only if it was required as a matter of law. (Edwards v. Centex Real Estate Corp. (1997)
53 Cal. App. 4th 15, 28.) Defendant argues its limited warranty was relevant to explain
why it supplied replacement glass after the contracts’ two-year express guaranty expired.
17
Defendant asserts it wanted to show it supplied uninstalled glass to honor its own limited
warranty and was not conceding 10-year liability to install the new glass. Defendant says
plaintiff’s witnesses admitted that homeowners had only a two-year warranty and that
plaintiff made repairs after expiration of the two years as voluntary “customer
accommodations.”
However, defendant distorts the record. The portion of the transcript cited by
defendant shows plaintiff’s customer service employee testified she was told when hired
“that because of the California state law that we were tied to the homeowner for ten
years, so that anything in their home that was defective we would have to take care of for
ten years.” She testified on cross-examination that a “customer accommodation” is
“something that we have done for the homeowner.” It is sometimes, but not always,
something done to help out the homeowner after the warranty has expired. When asked
to agree that all of the charges after expiration of the two-year warranty were customer
accommodations, she said, “I would say that some of them were. I couldn’t say that all
of them were. We had had a situation where we were being bombarded in some of our
communities by attorneys in Southern California that were trying to put lawsuits together.
We were trying to protect ourselves and our subcontractors by accommodating some of
these homeowners trying to, you know, avert a lawsuit basically.” The trial court
sustained plaintiff’s objection to defense counsel’s question asking the witness to agree
that plaintiff went further than required in order to avoid getting sued. Defense counsel
asked, “So is it your testimony that [plaintiff] did things for these homeowners past the
expiration of the warranty that we looked at so as to avoid litigation being filed by the
homeowners?” The witness replied, “Not always. It depended on the situation. If it was
something that was clearly defective and the customer care representative felt that it
should not have failed, then those accommodations would be made.”
Thus, as can be seen, the record does not support defendant’s position that plaintiff
said it had no legal liability to repair the defects beyond two years.
18
Moreover, the exclusion of evidence of the limited warranty was not tantamount to
a nonsuit. The standard of review of the trial court’s ruling on admissibility of evidence
is abuse of discretion. (City of Ripon v. Sweetin (2002) 100 Cal. App. 4th 887, 900.) The
trial court ruled the evidence was irrelevant and presented a danger of confusing and
misleading the jury under Evidence Code section 352, because it was confusing the jury.
Defendant offers no legal analysis or authority related to the court’s section 352 ruling,
and therefore the contention is forfeited. (Badie v. Bank of America (1998)
67 Cal. App. 4th 779, 784-785.)
Defendant claims the evidence was relevant to support its position that its act of
supplying replacement glass was not a concession of liability under the contracts with
plaintiff. However, plaintiff did not contend at trial that defendant’s act of supplying
replacement glass constituted a concession of liability; plaintiff merely argued that
defendant’s act of supplying replacement glass was a concession that the windows were
defective. Plaintiff’s case for liability was based on the contract language. In closing
argument to the jury, plaintiff’s attorney said defendant’s story was that defendant just
did what was required under its warranty to homeowners, but as plaintiff’s attorney
argued to the jury, “that warranty has no application. The Court has made that ruling.
The warranty between the homeowner and [defendant] has nothing to do with this case
and nothing to do with FCB Homes.”
We agree. Defendant’s limited warranty to the homeowners had no bearing on the
rights between plaintiff and defendant.
We conclude defendant fails to show reversible error regarding exclusion of
evidence of its limited warranty. We also conclude defendant fails to show that the trial
court improperly reformed the contracts.
II. Express Contractual Indemnity
“Indemnity is a contract by which one engages to save another from a legal
consequence of the conduct of one of the parties, or of some other person.” (Civ. Code,
19
§ 2772.) Indemnity provisions are to be strictly construed against the indemnitee.
(Heppler v. J.M. Peters Co. (1999) 73 Cal. App. 4th 1265, 1278 (Heppler).) Where the
trial court construes an indemnity provision without the aid of extrinsic evidence, the
interpretation is a question of law subject to de novo review. (Centex Golden
Construction Co. v. Dale Tile Co. (2000) 78 Cal. App. 4th 992, 996.)
A. Negligence
Defendant, mischaracterizing the trial court’s ruling, says the trial court properly
interpreted the express indemnity clauses as requiring a finding of negligence by
defendant in order to make defendant liable to indemnify plaintiff–a ruling which
defendant characterizes as binding on us under the “law of the case” doctrine. Defendant
also contends the court improperly gave a jury instruction (see fn. 8, ante) stating that
either negligence or breach of contract would suffice.10 We reject these contentions.11
First, the “law of the case” doctrine–which makes appellate court rulings binding
on subsequent retrial or appeal of the same case–has no application here. (Provience v.
Valley Clerks Trust Fund (1984) 163 Cal. App. 3d 249, 256.)
Second, the trial court did not conclude that negligence was a prerequisite to
express indemnity in this case. Rather, the trial court concluded the indemnity clause
10 Plaintiff argues defendant has forfeited any challenge to the jury instruction by failing
to challenge the instruction in the trial court. We disagree. Although defense counsel
ultimately said the instruction was fine, the concession was made after the trial court
rejected the defense argument that negligence was a prerequisite. Any further objection
would have been futile. (People v. Johnson (2004) 119 Cal. App. 4th 976, 984.)
11 The same wrongful act may constitute both a breach of contract and an invasion of an
interest protected by the law of torts. (Erlich v. Menezes (1999) 21 Cal. 4th 543, 551.)
However, conduct amounting to a breach of contract becomes tortious only when it also
violates a duty independent of the contract arising from principles of tort law. (Ibid.)
Here, it appears that defendant wants negligence to be a prerequisite in order to make the
argument that a finding of negligence would not be legally permissible here because of
the economic loss doctrine.
20
could be triggered either by defendant’s negligence or by defendant’s breach of contract
in performance of the job it had contracted to do.
Defendant claims the trial court, by stating this case was governed by Heppler,
supra, 73 Cal. App. 4th 1265, must have agreed negligence was a prerequisite for
indemnification liability. However, Heppler did not hold negligence was a prerequisite
in all cases. The Heppler court was not asked, and did not decide, whether breach of
contract could provide an alternate basis for triggering an indemnity clause. Cases are
not authority for propositions not therein considered. (People v. Barragan (2004)
32 Cal. 4th 236, 243; Santisas v. Goodin (1998) 17 Cal. 4th 599, 620.) “ ‘Language used
in any opinion is of course to be understood in the light of the facts and the issue then
before the court, and an opinion is not authority for a proposition not therein
considered.’ ” (People v. Scheid (1997) 16 Cal. 4th 1, 17, quoting Ginns, supra,
61 Cal.2d at p. 524, fn. 2.)
In Heppler, the litigation arose when homeowners sued a developer for
construction defects. The developer filed cross-complaints for contractual indemnity
against subcontractors–three of which are of interest to us in this appeal. (Heppler,
supra, 73 Cal.App.4th at p. 1273.) The indemnity clauses required the subcontractors
(1) to indemnify the developer for amounts it might become liable to pay in damages for
which the subcontractors were at least partially responsible and (2) to defend the
developer against any such damage claims. (Id. at pp. 1272-1273; Civ. Code, § 2778
[indemnitee may recover from indemnitor for amounts paid by the indemnitor upon
becoming liable and costs incurred by the indemnitee in defending itself against the
claim]; Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal. 4th 541, 553 (Crawford)
21
[§ 2778 sets forth general rules for interpreting indemnity contract unless contrary
intention appears in the contract].)12
The developer tendered its defense to the subcontractors, which either refused or
did not respond to the tender of defense. (Heppler, supra, 73 Cal.App.4th at p. 1273.)
The developer then entered a good faith settlement (1) to pay the homeowners damages
for construction defects and (2) to assign its indemnity rights against the nonsettling
subcontractors to the homeowners. (Ibid.)
The homeowners, standing in the developer’s shoes, then sued to recover from the
subcontractors on the indemnity claim. (Heppler, supra, 73 Cal.App.4th at p. 1274.) If
the homeowners had prevailed, they would have recovered what the subcontractors
would have had to pay the developer under the indemnity contract, i.e., some amount of
what the developer paid in damages to the homeowners, as well as the amount the
developer had to pay in litigation costs. In a pretrial ruling, the trial court determined
plaintiffs would have to prove negligence and causation to trigger the indemnity clauses.
(Ibid.) The jury returned verdicts in favor of the three subcontractors. (Ibid.)13
12 Two subcontracts in Heppler said the subcontractors would “ ‘defend [and]
indemnify’ ” the developer for “ ‘damage to property arising out of or in connection with
Subcontractor’s . . . performance of the Work and for any breach or default of the
Subcontractor in the performance of its obligations under this Agreement. However, this
indemnification shall not apply if such claims, demands or liability are ultimately
determined to have arisen through the sole negligence of Contractor.’ ” (Heppler, supra,
73 Cal.App.4th at pp. 1272, 1277.) The other subcontract said the subcontractor
“ ‘agree[s] to indemnify and save [the developer] harmless against all claims for damages
to persons or to property growing out of the execution of the work, and at his own
expense to defend any suit or action brought against [the developer] founded upon the
claim of such damage . . . .’ ” (Id. at p. 1278.) Some or all of the subcontracts also
contained provisions requiring the subcontractors to adhere to a nonnegligent standard of
care in the performance of their work. (Ibid.)
13 A fourth subcontractor was found to be at fault in Heppler. The homeowners, standing
in the developer’s shoes, were awarded (1) $139,652 as contractual damages for the
22
As described by the appellate court, “plaintiffs’ appeal revolves around the trial
court’s ruling that the indemnity provisions at issue did not apply unless plaintiffs proved
the subcontractors were at fault.” (Heppler, supra, 73 Cal.App.4th at p. 1275.)
Although the trial court had required negligence–rather than negligence or breach
of contract–the homeowners on appeal never contended that they should be relieved of
the burden to prove negligence by virtue of having proved, as an alternate trigger for the
indemnity clause, a contractual breach by the subcontractors in the performance of their
construction jobs.
The homeowners did complain on appeal that trial court error “resulted in the jury
hearing a negligence case rather than a breach of contract case” (Heppler, supra,
73 Cal.App.4th at p. 1275) and “prevented them from presenting their contract claims to
the jury . . .” (id. at p. 1285). However, they did not contend the trial court precluded
them from showing the subcontractors breached a contractual obligation related to the
performance of their construction jobs. The only breach of contract claim raised in the
appeal was breach of the indemnity clause (id. at pp. 1286-1287), and the homeowners
complained on appeal that the trial court’s rejection of their proposed jury instructions on
breach of contract precluded the jury from considering that theory (id. at p. 1286). The
appellate court responded there was no need for contract instructions, because the
homeowners and the subcontractors “stipulated that [the developer] tendered and the
subcontractors rejected the indemnity demands. Given these stipulations, once the jury
made its factual determination regarding negligence and causation, the issue of whether
there was a breach of contract would follow as a matter of law.” (Id. at p. 1287.)
We note the court in Heppler said the homeowners presented evidence as to the
nonsettling subcontractors’ “liability for specific defects at the project and the cost of
fourth subcontractor’s failure to defend the developer against the homeowners’ lawsuit
plus (2) $117,000 for damages caused by the subcontractor’s negligence. (Heppler,
supra, 73 Cal.App.4th at p. 1274.)
23
repairing the defects.” (Heppler, supra, 73 Cal.App.4th at p. 1286.) But in context,
“liability” did not necessarily mean liability as wrongdoers causing harm rather than legal
liability as indemnitors. The homeowners made no argument that they presented
substantial evidence that the subcontractors did anything to cause the defects. The
homeowners were claiming they were denied the right to a jury trial on the indemnity
clause and the right to present evidence of the reasonableness of the amount the
developer paid to the homeowners. (Id. at pp. 1284-1285.) The subcontractors’ liability
as indemnitors would embrace defects caused by others, according to the plaintiffs’
theory of the case. Therefore the quoted sentence does not indicate any claim or evidence
that the subcontractors did anything to cause the construction defects.
That the homeowners did not assert a contractual breach of the subcontractors’
jobs as an alternate trigger for indemnity is apparent from the appellate court’s
conclusion that the trial court was right to require subcontractor fault, because otherwise,
the subcontractors would be placed in the position of liability insurers rather than
indemnitors. (Heppler, supra, 73 Cal.App.4th at p. 1282.) The Heppler court said,
“parties to an indemnity contract have great freedom of action in allocating risk, subject
to certain limitations of public policy. (See, e.g., Civ. Code, § 2782 [construction
contracts cannot provide for indemnification for injury caused solely by indemnitee’s
negligent or willful conduct].) The parties may establish a duty in the indemnitor to save
the indemnitee harmless from the results of his or her active negligence–provided the
language is sufficiently specific and clear to evidence this intent. [Citation; fn. omitted.]
Likewise, the parties may require negligence by the indemnitor as a condition to
indemnification [citation], or they may establish a duty in the indemnitor to save the
indemnitee harmless even if the indemnitor is not negligent [citation].” (Heppler, at
p. 1277, italics added.) “ ‘[T]he question whether an indemnity agreement covers a given
case turns primarily on contractual interpretation, and it is the intent of the parties as
expressed in the agreement that should control. When the parties knowingly bargain for
24
the protection at issue, the protection should be afforded. This requires an inquiry into
the circumstances of the damage or injury and the language of the contract; of necessity,
each case will turn on its own facts.’ ” (Id. at p. 1277, quoting Rossmoor Sanitation,
Inc. v. Pylon, Inc. (1975) 13 Cal. 3d 622, 633.)
Thus, Heppler’s focus was on the indemnitor doing something wrong–not whether
that wrong had to be a tort as opposed to a breach of contract.
As indicated, cases are not authority for propositions not therein considered.
(Ginns. supra, 61 Cal.2d at p. 524, fn. 2.) Heppler does not stand for the proposition that
negligence by the indemnitor is required in all cases of express contractual indemnity.
The Heppler court was not required to, and did not, decide whether a contractual breach
in performance of construction work, as opposed to negligence, would trigger indemnity.
On a different issue, the California Supreme Court concluded Heppler did not
stand for a proposition not addressed by the Heppler court as asserted by defendants
therein. (Crawford, supra, 44 Cal.4th at pp. 560-561.) In Crawford, the issue concerned
whether an indemnitor had a duty to assume the indemnitee’s defense against third party
claims regardless of the outcome of that litigation. (Ibid.) The defendant in Crawford
“relie[d] heavily on Heppler” (Crawford, at p. 560), but the Crawford court said, “the
plaintiffs in Heppler did not contend that, even if the indemnity clause in [the]
subcontract was triggered only by [the subcontractor’s] actual negligence, the duty-to-
defend clause applied more broadly. Accordingly, the Heppler court never separately
addressed the defense clause of the subcontract, or considered how the particular
language of that clause might distinguish it from the indemnity clause. In affirming the
general verdict for [the subcontractor], the court simply assumed that the indemnity and
defense provisions of the subcontract were congruent. [Fn. omitted.] [¶] Here, by
contrast, we directly confront the relationship, and the distinction between the two
clauses. . . . [W]hatever Heppler’s merits on the issues actually considered in that case,
25
we [California Supreme Court] do not find the decision helpful or persuasive on the
narrow question before us” (Crawford, at p. 561).
Similarly, Heppler does not help defendant here because the Heppler court did not
address the situation with which we are presented.
Here, defendant did breach the contracts by furnishing defective materials or doing
substandard work, and the express indemnity clauses are broad enough to encompass
such breach. The LeBaron contract required defendant to indemnify plaintiff for claims
“arising from any condition of the Work or arising from any breach or default on the part
of Subcontractor in the performance of any requirement of this Subcontract Agreement,
or arising from . . . negligence . . . .” (Italics added.) The Terra Bella contract spoke of
claims “arising out of or connected with the performance of work under this agreement,
by act of [sic] omission, . . .” The Villa Ticino contract spoke of claims “connected
with . . . the performance of work under this agreement, by act of [sic] omission, . . .
performed by Subcontractor . . . .”
We conclude defendant’s breach of contract in furnishing defective materials
and/or doing substandard work triggered the indemnity clause.
We parenthetically observe that defendant makes no argument whatsoever
regarding the verdict finding implied contractual indemnity (which is now viewed simply
as a form of equitable indemnity as stated in Prince v. Pacific Gas & Electric Co. (2009)
45 Cal. 4th 1151, 1157). Any error regarding express indemnity would not require
reversal of the judgment unless defendant showed the judgment could not be affirmed on
the alternate ground of implied indemnity. (Code Civ. Proc., § 475 [no judgment shall be
reversed for error unless the error was prejudicial, and prejudice will not be presumed].)
We recognize that an express indemnity clause may in some circumstances be accorded a
preemptive effect, displacing any implied rights. (E. L. White, Inc. v. City of Huntington
Beach (1978) 21 Cal. 3d 497, 507-508 [“when parties by express contractual provision
establish a duty in one party to indemnify another, ‘the extent of that duty must be
26
determined from the contract and not from the independent doctrine of equitable
indemnity’ [but when] the duty established by contract is by the terms and conditions of
its creation inapplicable to the particular factual setting before the court, the equitable
principles of implied indemnity may indeed come into play”].) However, defendant
makes no appellate argument on this point. When an appellant fails to raise a point, we
may treat it as waived. (Badie v. Bank of America (1998) 67 Cal. App. 4th 779, 784-785.)
Thus, even if negligence were required for express contractual indemnity, defendant
would still be liable under the implied contractual indemnity cause of action (Leoni v.
Delany (1948) 83 Cal. App. 2d 303, 309 [one count sustained by sufficient evidence and
free from error is all that is required to support a verdict]), and any error concerning
express indemnity would be harmless, because implied indemnity supplies an affirmative
ground to affirm the judgment based on the arguments with which we are presented on
appeal.
We conclude defendant fails to show that negligence was a prerequisite to
indemnification.
B. Economic Loss Rule
Defendant argues the trial court failed to apply the economic loss rule, which
precludes recovery for negligence unless the defective product causes personal injury or
damage to property other than the defective product itself. (Aas v. Superior Court (2000)
24 Cal. 4th 627, superseded by statute on other grounds as stated in Greystone Homes,
Inc. v. Midtec, Inc. (2008) 168 Cal. App. 4th 1194, 1202.) Defendant’s argument fails
with our rejection of defendant’s contention that negligence was a prerequisite for
indemnification and the jury’s verdict showing the jury found breach of contract.
“[T]he line between physical injury to property and economic loss reflects the line
of demarcation between tort theory and contract theory. [Citation.]” (Sacramento
Regional Transit Dist. v. Grumman Flxible (1984) 158 Cal. App. 3d 289, 294 (Sacramento
Regional).) “Economic loss” means “ ‘ “damages for inadequate value, costs of repair
27
and replacement of the defective product or consequent loss of profits–without any claim
of personal injury or damages to other property . . . .” ’ [Citations.]” (Ibid.; accord,
Jimenez v. Superior Court (2002) 29 Cal. 4th 473, 482.) The expense of repair is purely
economic damage. (Sacramento Regional, supra, 158 Cal.App.3d at p. 294.)
A tort remedy may arise from the negligent performance of a contractual
commitment. (North American Chemical Co. v. Superior Court (1997) 59 Cal. App. 4th
764, 776.) The economic loss rule allows a plaintiff to recover in tort when a product
defect causes damage to property other than the product itself, whereas the law of
contractual warranty governs damage to the product itself. (Jimenez, supra, 29 Cal.4th at
p. 483.)
Even assuming for the sake of argument that the jury may have found negligence
as a predicate for express indemnity, the jury also found defendant breached the
contracts, because the jury found in favor of plaintiff on the breach of contract claim.
Therefore, we need not address the economic loss argument.
III. Attorney Fees
Defendant argues the trial court improperly awarded attorney fees to plaintiff and
awarded an excessive amount. We again disagree.
A. Background
On November 18, 2009, before the trial started, defendant made a Code of Civil
Procedure section 998 settlement offer of $137,000, with each party to bear its own
attorney fees and costs. Plaintiff did not accept the offer and proceeded to trial.
After the verdict, both sides moved for attorney fees under Code of Civil
Procedure section 998 (hereafter section 998),14 which authorizes a fee award to a
14Section 998 provides, in pertinent part: “(c)(1) If an offer made by a defendant is not
accepted and the plaintiff fails to obtain a more favorable judgment or award, the plaintiff
shall not recover his or her postoffer costs and shall pay the defendant’s costs from the
28
prevailing party who obtains a better verdict than a pretrial settlement offer, and Civil
Code 1717,15 which authorizes a fee award to the prevailing party in a contract action
where the contract provides for attorney fees.
In April 2010 the trial court issued orders denying defendant’s motion for attorney
fees and granting plaintiff’s motion for attorney fees. The order awarding attorney fees
to plaintiff stated: (1) plaintiff’s action was primarily an “action on a contract” within the
meaning of Civil Code section 1717; (2) the contractual attorney fee clauses were drafted
in broad terms that supported an award on either a contract or a tort theory; (3) the
$327,553 claimed by plaintiff was a reasonable amount for attorney fees; (4) defendant’s
section 998 settlement offer of “$137,000; inclusive of fees and costs” was clearly and
substantially less favorable than the sum of plaintiff’s verdict ($126,818.62) plus preoffer
costs ($10,535.65) plus preoffer attorney fees ($166,237.50), totaling $303,591.77,
exclusive of interest; (5) the attorney fees incurred by plaintiff in prosecuting its
contractual and noncontractual claims were inextricably intertwined or inseparable such
that it would be both impractical and pointless to parse or allocate; and (6) plaintiff was
the prevailing party on both its complaint and defendant’s cross-complaint. This order
was reflected in the amended judgment.
time of the offer. . . . [¶] (2)(A) In determining whether the plaintiff obtains a more
favorable judgment, the court or arbitrator shall exclude the postoffer costs. [¶] (B) It is
the intent of the Legislature in enacting subparagraph (A) to supersede the holding in
Encinitas Plaza Real v. Knight, 209 Cal. App. 3d 996, that attorney’s fees awarded to the
prevailing party were not costs for purposes of this section but were part of the
judgment.”
15 Civil Code section 1717 provides in part: “(a) In any action on a contract, where the
contract specifically provides that attorney’s fees and costs, which are incurred to enforce
that contract, shall be awarded either to one of the parties or to the prevailing party, then
the party who is determined to be the party prevailing on the contract, whether he or she
is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees
in addition to other costs. [¶] . . . [¶] Reasonable attorney’s fees shall be fixed by the
court, and shall be an element of the costs of suit.”
29
B. Analysis
1. Code of Civil Procedure Section 998
Defendant argues the trial court improperly added preoffer attorney fees (and
costs)16 to the $126,000 jury verdict in order to conclude that plaintiff obtained a better
result than the $137,000 section 998 offer, entitling plaintiff to all attorney fees under
section 998. We disagree.
Section 998 is a cost-shifting statute that encourages the settlement of actions by
penalizing parties who fail to accept reasonable pretrial settlement offers. (Scott Co. v.
Blount, Inc. (1999) 20 Cal. 4th 1103, 1116.)
An award of attorney fees is normally reviewed for abuse of discretion, but the
application of section 998 to an undisputed set of facts is a question of law subject to
independent review. (Barella v. Exchange Bank (2000) 84 Cal. App. 4th 793, 797;
Wilson v. Wal-Mart Stores, Inc. (1999) 72 Cal. App. 4th 382, 389.)
“When the defendant’s offer includes costs, it is to be compared with the
plaintiff’s judgment plus preoffer costs including attorney’s fees.” (Heritage
Engineering Construction, Inc. v. City of Industry (1998) 65 Cal. App. 4th 1435, 1441.)
Though not raised by defendant, we observe that defendant’s 998 offer in this case
did not expressly “include” fees and costs but instead specified “each party to bear their
own attorneys’ fees and costs.” However, the economic effect is the same.
In Fundamental Investment etc. Realty Fund v. Gradow (1994) 28 Cal. App. 4th
966, the defendant’s 998 offer required each party to bear its own costs and attorney fees.
(Fundamental Investment, at p. 970.) The appellate court said, “By the express terms of
16 As part of defendant’s argument that plaintiff did not obtain a more favorable
judgment, defendant argues some of the preoffer costs were not recoverable. We need
not address the matter because, even if we disregard the costs, the addition of preoffer
attorney fees suffices to push plaintiff’s recovery over the $137,000 settlement offer.
30
the offer plaintiff would receive $80,000 and would not be entitled to recover any
prejudgment costs or attorney fees. Thus, the ‘terms and conditions’ of the offer required
an analysis of plaintiff’s pre-offer costs to determine whether it in fact achieved an
overall better result.” (Id. at pp. 971-972.)
Similarly, in Stallman v. Bell (1991) 235 Cal. App. 3d 740, the court held a trial
court erred in refusing to consider preoffer costs in determining whether a party had
obtained a more favorable judgment than the 998 offer, which provided “ ‘each side to
bear its own costs.’ ” (Stallman, at p. 749; see id. at pp. 747-749.) With no focal point,
defendant broadly attacks Stallman as having been decided before a 1997 amendment of
section 998 provided that postoffer costs are to be excluded in determining whether the
plaintiff obtained a more favorable judgment than the settlement offer. Defendant fails to
show why the 1997 amendment should undercut Stallman’s discussion of preoffer costs.
Stallman said, “[T]he chief purpose of section 998 is to encourage settlement of litigation
without trial by penalizing a party who rejects a reasonable offer and forces the action to
proceed to trial. Where . . . a plaintiff’s offer includes waiver of costs and the defendant
rejects the offer, thereby forcing the matter to a trial, allowing the plaintiff to add costs to
the award of damages to determine whether the judgment exceeds the offer is consistent
with the statutory purpose. By contrast, precluding plaintiff from doing so, and limiting
plaintiff to the damages award for purposes of comparison with the offer, might . . .
reward the nonsettling defendants. Such a result is not consistent with the intent of the
statute.” (Stallman, supra, 235 Cal.App.3d at p. 750.)
The same applies here to defendant’s 998 offer, and we reject defendant’s view
that our result allows plaintiff to “game” the judicial system.
Accordingly, the trial court properly added preoffer attorney fees to the jury
verdict and concluded the judgment exceeded the settlement offer.
31
2. Civil Code Section 1717
Defendant argues plaintiff was not entitled to any contractual attorney fees under
Civil Code section 1717 because it sued for four subdivisions for which it had no
contract. However, defendant fails to confront the real issue, i.e., the trial court found
“[t]he attorneys’ fees incurred by Plaintiff in prosecuting its contractual and non-
contractual claims were inextricably intertwined or inseparable such that it would be both
impractical and pointless to parse or allocate.”
“Where a cause of action based on the contract providing for attorney’s fees is
joined with other causes of action beyond the contract, the prevailing party may recover
attorney’s fees under [Civil Code] section 1717 only as they relate to the contract action.”
(Reynolds Metals Co. v. Alperson (1979) 25 Cal. 3d 124, 129.) However, “[a]ttorney’s
fees need not be apportioned when incurred for representation on an issue common to
both a cause of action in which fees are proper and one in which they are not allowed.”
(Id. at pp. 129-130.) Where attorney fees are incurred for both contract and noncontract
claims that involve common issues, the fee award for both is proper where the claims are
“ ‘ “ ‘inextricably intertwined’ ” [citation], making it “impracticable, if not impossible, to
separate the multitude of conjoined activities into compensable or noncompensable time
units.” ’ ” (Erickson v. R.E.M. Concepts, Inc. (2005) 126 Cal. App. 4th 1073, 1085.)
Defendant offers no argument whatsoever on the matter of “inextricably
intertwined” claims.
We conclude defendant fails to show that plaintiff was not entitled to an award of
attorney fees.
3. Amount of Attorney Fees
Defendant argues the award of $327,553 in attorney fees was excessive. We
disagree.
The amount of an attorney fee award is reviewed for abuse of discretion. (PLCM
Group, Inc. v. Drexler (2000) 22 Cal. 4th 1084, 1095.) An abuse of discretion is shown if
32
the award “shocks the conscience or is not supported by the evidence.” (Jones v. Union
Bank of California (2005) 127 Cal. App. 4th 542, 549-550.)
Defendant argues the amount was excessive because it was almost three times
greater than the $137,000 verdict. Actually, it was closer to two-and-a-half times the
verdict. This does not shock the conscience.
Defendant says $165,237.50 was incurred from January 2005 through
November 18, 2009. Defendant fails to explain its point.
Defendant says the fees correspond to 380 hours spent by plaintiff’s lawyers
during the years leading up to trial, with an additional 940.3 hours spent during the two-
week jury trial and thereafter. Defendant says the fees are “patently unreasonable.”
However, defendant offers no reason other than to say the fees were unreasonable for
“what was a fairly simple contract dispute.”
We reject defendant’s reasoning that this was a simple contract dispute, because
defendant requested and obtained, from this court, numerous extensions of time to file its
opening and reply briefs on the ground, among others, that the issues in this appeal are
“very complex and involve the interpretation and application of contracts and warranty
principles,” as defendant’s appellate counsel attested under penalty of perjury.
We conclude defendant fails to show grounds for reversal regarding the amount of
the attorney fee award.
IV. Prejudgment Interest
Defendant argues the trial court improperly awarded prejudgment interest under
Civil Code section 328717 from the inception of the action, because a majority of the
17 Civil Code section 3287 provides: “(a) Every person who is entitled to recover
damages certain, or capable of being made certain by calculation, and the right to recover
which is vested in him upon a particular day, is entitled also to recover interest thereon
from that day, except during such time as the debtor is prevented by law, or by the act of
the creditor from paying the debt. This section is applicable to recovery of damages and
33
damages were incurred after plaintiff filed the lawsuit, some of them long after the filing
of the lawsuit.18 Defendant cites a trial exhibit listing the hundreds of charges incurred
between 2002 and 2009 for which plaintiff sought reimbursement. Defendant asks us to
vacate or reverse the award in its entirety. We agree the trial court erred by awarding
prejudgment interest before damages were incurred, but the remedy is remand to the trial
court to exercise its discretion applying the proper standard.
Civil Code section 3287, subdivision (a) (see fn. 18, ante) authorizes a plaintiff to
recover prejudgment interest on damages, from the day the right to such damages vests,
in any case where damages are liquidated, i.e., certain or capable of being made certain.
Civil Code section 3287, subdivision (b) (see fn. 18, ante) gives the trial court the
discretion to award prejudgment interest on damages, from a date after the filing of the
complaint but before entry of judgment, in contract cases on “unliquidated” claims, i.e., “
‘where damages can be ascertained only by a judicial determination upon conflicting
evidence as to the amount due, . . .’ [Citations.]” (George v. Double-D Foods, Inc.
(1984) 155 Cal. App. 3d 36, 46 [quantum meruit is unliquidated claim in that the amount
due must be determined from a presentation of evidence as to the extent, character and
value of the plaintiff’s services].)
“The addition of subdivision (b) [to Civil Code section 3287] created a limited
exception to the prevailing general rule that prejudgment interest is not allowed on
unliquidated obligations. [Citation.] The usual prohibition against such interest is based
interest from any such debtor, including [public entities]. [¶] (b) Every person who is
entitled under any judgment to receive damages based upon a cause of action in contract
where the claim was unliquidated, may also recover interest thereon from a date prior to
the entry of judgment as the court may, in its discretion, fix, but in no event earlier than
the date the action was filed.” (Italics added.)
18 The fact that some damages occurred after the filing of the lawsuit is not problematic
because “[d]amages may be awarded, in a judicial proceeding, for detriment resulting
after the commencement thereof, or certain to result in the future.” (Civ. Code, § 3283.)
34
upon the rationale that it is unreasonable to expect a defendant to pay a debt before he or
she becomes aware of it or is able to compute its amount. [Citations.] By allowing an
award of prejudgment interest, but only for a limited time period and only if the trial
court finds it reasonable in light of the factual circumstances of a particular case, Civil
Code section 3287, subdivision (b), seeks to balance the concern for fairness to the debtor
against the concern for full compensation to the wronged party. [Citations.] An award of
prejudgment interest is not automatic. [Citation.]” (Lewis C. Nelson & Sons, Inc. v.
Clovis Unified School Dist. (2001) 90 Cal. App. 4th 64, 69.)
We review the award of prejudgment interest for abuse of discretion. (Gebert v.
Yank (1985) 172 Cal. App. 3d 544, 555-556.)
Here, plaintiff’s original complaint, filed January 27, 2005, claimed damages of
$39,122.18. But plaintiff continued to incur more damages as time passed. Plaintiff’s
amended complaint, deemed filed on July 18, 2007, claimed damages “in an amount to
be determined at trial.” At trial in December 2009 plaintiff claimed damages of
$245,066.82, of which $180,938.39 was for seal failures. The evidence showed the
expenses were broken down into hundreds of individual charges incurred between 2002
and 2009. The jury verdict of December 18, 2009, awarded damages of $126,818.62.
Plaintiff moved for prejudgment interest under Civil Code section 3287,
subdivision (a), arguing damages were liquidated, but alternatively arguing that if the
court viewed the damages as unliquidated due to the fact the jury awarded less than
plaintiff demanded, then plaintiff should receive prejudgment interest under subdivision
(b) of section 3287. Defendant opposed prejudgment interest on grounds not reiterated
on appeal, which we therefore need not address. Defendant’s memorandum of points and
authorities opposing prejudgment interest did not raise the point it asserts on appeal, i.e.,
that it is unfair to impose prejudgment interest on damages before they were incurred.
However, defendant did raise the point at the hearing on the motion for prejudgment
interest after the trial court had issued a tentative decision. Regarding this new argument,
35
the trial court said, “That’s a fair point. I hadn’t remembered that when I wrote the
tentative. I was thinking in terms of the damages having occurred prior to the filing of
the complaint, so it’s a good point.” Plaintiff’s counsel claimed plaintiff had $100,000 of
damages when the lawsuit was filed in 2005, and some of those damages dated back to
2003. Defendant did not point out that the original complaint alleged only $39,000 in
damages. In discussing whether damages were liquidated, the court noted the amount
plaintiff was required to spend to fix the window problems at each home was reflected in
the checks plaintiff wrote to the company that installed the new windows, but since the
jury awarded less than the total amount requested by plaintiff, it could not be determined
which checks were being reimbursed. The trial court “recollect[ed]” on an unspecified
basis that the jury awarded 100 percent of the damages claimed for a specific period of
time and 50 percent of everything after that, which “works out to the penny,” but “that’s
not something that’s necessarily on the record . . . .” Defense counsel said he spoke with
the jurors, and “[t]hat isn’t how they got to the numbers.”19 The discussion then moved
to other topics.
The trial court ultimately issued a written ruling concluding the damages were
unliquidated and awarding prejudgment interest under Civil Code section 3287,
subdivision (b) on all damages “from the date the action was filed,” without mention of
the fact that some damages were incurred long after the filing of the lawsuit.20
It is improper to award prejudgment interest on damages before plaintiff incurs the
damage.
19 Of course, evidence of jurors’ mental processes is inadmissible. (Evid. Code, § 1150.)
20 Even assuming for the sake of argument that the trial court should have concluded
damages were liquidated, plaintiff would not be entitled to prejudgment interest on all
damages from the date the lawsuit was filed because Civil Code section 3287,
subdivision (a) allows interest only from the date the right to damages vests, and
plaintiff’s right to damages could not vest before plaintiff incurred the damages.
36
Here, we have as a trial exhibit a list showing the date on which each item of
damages was incurred. However, the problem is that these damages add up to $245,000,
yet the jury awarded only $126,000, and the record does not reveal which items the jury
awarded and which it rejected.
Plaintiff argues it incurred some of the damages in 2002, three years before filing
suit and almost eight years before the jury verdict. Plaintiff says it is impossible to
determine how the jury calculated the damages and which backcharges it awarded, and
that is why the trial court determined the damages were not liquidated. Plaintiff argues it
was impossible to parse out the jury’s award, and therefore it was appropriate for the trial
court to “pick a point,” i.e., the day the complaint was filed, that was years after some of
the damages were incurred but before other damages were incurred.
However, plaintiff’s argument fails because Civil Code section 3287,
subdivision (b) prohibits prejudgment interest for the time period before the complaint
was filed. Therefore, the court cannot award premature prejudgment interest as a tradeoff
for not awarding prefiling interest, because in no case could plaintiff recover prefiling
interest.
On appeal, plaintiff does not challenge the trial court’s choice of Civil Code
section 3287, subdivision (b), rather than subdivision (a), as the basis for the award.
Plaintiff cites Amador Valley Investors v. City of Livermore (1974) 43 Cal. App. 3d
483 as holding that where damages were continuous through the trial, the trial court did
not abuse its discretion in picking a midpoint and awarding interest from that date. That
case does not help plaintiff here. There, a landowner sued a city for damages resulting
from the city’s discharge of sewage water into a creek that flowed through the
landowner’s property. (Id. at p. 488.) The sewage discharge, which continued over time,
caused the landowner to incur additional expenses to carry out planned construction.
(Ibid.) In what was apparently a bench trial, the trial court awarded the landowner all of
the additional expenses of $93,182, with prejudgment interest from a date midway
37
through trial. (Id. at pp. 488, 495.) On appeal, the city argued the court incorrectly
calculated the date upon which interest accrued. (Id. at p. 494.) The basis for the city’s
challenge is unclear from the published opinion. The appellate court said that in a case of
property damage, interest should run from the date the damage is inflicted or at least from
the commencement of suit. (Id. at pp. 494-495, quoting Heimann v. City of Los Angeles
(1947) 30 Cal. 2d 746 (Heimann), overruled on other grounds in County of Los Angeles v.
Faus (1957) 48 Cal. 2d 672, 679.)21 The Amador Valley Investors court said, “Because
the damages were continuous through the time of trial in July 1971, no one date would
accurately reflect compensation from the date of damages. It is noted, however, that the
date chosen by the trial court was well after suit was filed and approximately midpoint
during the period in which damages occurred. Since damages were fairly evenly and
regularly incurred throughout the period, the method chosen by the trial court appears to
have been fair to all parties.” (Amador Valley Investors, supra, 43 Cal.App.3d at p. 495.)
We cannot say the same in this case. Since we do not know which items of
damages the jury awarded, we cannot say they were evenly incurred throughout the
period. Moreover, the trial court here did not pick a midway point, but instead picked the
day the lawsuit was filed–a choice that tipped the scale in plaintiff’s favor.
We conclude the trial court erred in ordering defendant to pay prejudgment
interest on all damages from the date the complaint was filed. As to remedy, we remand
the matter to the trial court to determine an appropriate award of prejudgment interest.
21 Heimann involved a landowner who sued a city for damage to real property. Citing
cases from other states, the Supreme Court observed the “ ‘old rule’ ” was that interest
was not allowed upon unliquidated damages, but the judicial trend was to set the rule
aside in cases of injury to property in order to make the plaintiff whole and comport with
condemnation cases in which statutes authorized interest when the government took
private property. (Heimann, supra, 30 Cal.2d at p. 759.)
38
DISPOSITION
The judgment is affirmed. The postjudgment order (labeled “Amended
Judgment”) for attorney fees and prejudgment interest is affirmed as to the attorney fee
award but reversed as to prejudgment interest and remanded to the trial court for a new
determination of prejudgment interest in light of our opinion. Plaintiff shall recover its
costs on appeal. (Cal. Rules of Court, rule 8.278(a)(3).)
MURRAY , J.
We concur:
NICHOLSON , Acting P. J.
MAURO , J.
39