Petrovich v. City of Arcadia , 36 Cal. 2d 78 ( 1950 )

SHENK, J.

The plaintiff brought this action against the city of Arcadia for the rescission and cancellation of his bid to construct sanitary improvements in that city, and for the exoneration of the surety on the bid bond. The city cross-complained joining the surety as a defendant, and prayed for a forfeiture of the bond and for judgment in the full amount thereof. Judgment went against each of the parties on their respective pleadings. The city has appealed from the judgment adverse to it.

In the early part of 1946 the city was duly authorized by popular vote to incur a bonded indebtedness of $350,000 to construct sanitary improvements. The bonds were sold and the proceeds provided a fund in the stated amount for the purpose intended.

On August 6,1946, the city invited bids for the construction of sewer lines and works in accordance with specifications on file, each bid to be accompanied by a cashier’s check or a bond in at least 10 per cent of the amount of the bid. On August 20, 1946, the plaintiff filed a bid of $347,129.40 and a surety bond in the sum of $37,500. On that date the bids were opened, and the plaintiff’s bid was found to be the lowest. Five other bids ranged in amounts from $416,188.75 to $556,480.80. On August 22, and before acceptance, the plaintiff delivered to the city council a written request for permission to withdraw his bid because the cost of certain “wyes” in the pipe lines amounting to $55,448.06 had been inadvertently omitted, and the inclusion of that item would have brought the amount of the bid to $402,577.46. Permission to withdraw or amend the bid was refused. The plaintiff’s bid was accepted and he was requested to sign a contract to perform the work. This he failed to do and commenced the action for the cancellation of the bid and the bid bond. The judgment on the issues thus raised was based on the trial court’s finding that there was no inadvertent error in the computation of the plaintiff’s bid. Since the plaintiff has not appealed, any question as to the correctness of that finding is now foreclosed.

The only questions for determination concern the correctness of the court’s findings on the issues tendered by the cross-complaint.

The invitation for bids required that each bid must be accompanied by either a cashier’s check or a bond in at least 10 per cent of the total amount of the bid as a guarantee that on acceptance the bidder would enter into the contract and furnish a faithful performance bond.

The plaintiff’s bid was on a form furnished by the city and contained the following language with ink lines drawn through the portions indicated: “A* cashiers chock properly made payable to the City of Arcadia* a Bid Bond in favor of the City of Arcadia for Thirty Seven Thousand Five Hundred dollars ($37,500.00), which amount is not less than ten percent (10%) of the total amount of this proposal, is attached hereto and is given as a guarantee that the undersigned will execute the Agreement and furnish the required bonds if awarded the contract and in case of failure to do so within the time provided *said chock shall be forfeited te the City* Surety’s liability to the City will be established . . * (Strike out inapplicable phrase).”

The bid bond in the sum of $37,500 was in the usual form with the condition stated that upon the acceptance of an award made to the plaintiff and his entering into a contract and giving the required performance bonds, the bid bond obligation should be null and void, otherwise to remain in full force and effect.

After the plaintiff refused to sign the contract, the city adopted a resolution to the effect that the plaintiff’s bid bond was forfeited. The cross-complaint was based on the assumption that the language of the invitation for bids and of the bid provided for forfeiture of the bid bond in the event the plaintiff refused to execute the contract upon the acceptance of his bid. At the close of the trial the city asked and was granted leave to amend the cross-complaint by adding an allegation that from the nature of the case it was impracticable and extremely difficult to fix the amount of damage or loss to the city by reason of the plaintiff’s failure to perform. No further evidence was introduced. There was no testimony offered indicating that the nature of the case made it difficult to fix the amount of damage; nor was there any evidence of actual damage to the city. The city did not readvertise for bids and the advertised project was abandoned. Subsequently under other plans and specifications another contract was let.

The city relied on the language of the instruments in evidence and the plaintiff’s noncompliance to establish a case either of forfeiture of the bond, or for liquidated damages under the exception to the general invalidity of agreements therefor (Civ. Code, §§ 1670, 1671). The trial court determined that the instruments relied upon did not provide for a forfeiture of the bond; that the language applicable to a bid bond was that of guarantee only; and that there was no intention or agreement that the penal sum should be treated as liquidated damages. The court found that it was not impracticable or extremely difficult to fix the amount of damage or loss to the city by the plaintiff’s failure to enter into the contract, and that the city suffered no actual damage. The city questions the foregoing determination and findings, and the judgment based thereon.

At the time here involved there was no statute applicable to cities of the sixth class, of which the city of Arcadia is one, requiring the deposit of bid security and forfeiture thereof under such a contract. The Legislature enacted the requirement in 1949. Prior to that year provisions relating to public work contracts in fifth and sixth class cities were included in sections 777 and 874 of the Municipal Corporation Bill of 1883. (Stats. 1883, p. 93 as amended; Deering’s Act 5233.) In 1949 these provisions became sections 37900 to 37907 inclusive of the Government Code. (Stats. 1949, pp. 100, 165.) At no time did they contain specific provision for bid security deposit and forfeiture. At the same session of the Legislature sections 37930 to 37935 inclusive, applicable to cities of the sixth class only, were added to the Government Code. (Stats. 1949, p. 1186, § 3 of act.) It was there provided that security, in the form of cash, cashier’s check, certified check, or surety bond, in at least 10 per cent of the amount should accompany the bid, and that if the successful bidder should fail to execute the contract the amount of the bidder’s security should be forfeited to the city (with an exception not necessary to be noticed). Thus in cases such as this the Legislature has now made mandatory a deposit of security and forfeiture when the successful bidder has inexcusably refused to execute the contract. In adopting those provisions it was declared in section 4 that the legislative intention was not to change the existing law, but rather by such adoption to declare that under prior section 874 ‘ ‘ cities of the sixth class always have had power to require a bid bond, cashier’s check or other security, and the power thereunder to declare the forfeiture thereof upon failure, neglect or refusal to enter into a contract awarded thereunder. ’ ’

The foregoing may be said to be a legislative recognition in 1949 of the power of cities of the sixth class theretofore to provide by other means what the Legislature has now enacted, namely to make adequate provision for the forfeiture of required bid security as a penalty or liquidated damages. But that recognition cannot also be deemed an exercise of the power for the city. In exercising the power the greater penalty must be declared in conjunction with the requirement for bid security deposit. Therefore assuming that the city might make the proper provision by the instruments involved, the question is whether it has done so. Where similar provisions, statutory or otherwise, have been brought into question the result has turned on whether the language declared the full sum forfeited either as a penalty or as liquidated damages. Here language to that effect in relation to the bond security is lacking.

Palo and Dodini v. City of Oakland, 79 Cal.App.2d 739 [180 P.2d 764], involved a provision of the Oakland City Charter requiring the deposit of a certified check with a bid and the forfeiture of the check in the event the successful bidder failed to execute the contract. It was held that, restricting the charter language to its most technical limits, as required by the established rule, the explicit and mandatory terms called for a forfeiture and prohibited any relief therefrom.

In Mill Valley v. Massachusetts Bonding & Insurance Co., 68 Cal.App. 372 [229 P. 891], the bond forfeiture declaration of section 10 of the Improvement Act of 1911 (Stats. 1911, p. 730) was brought into question. That section required the deposit of either a certified check or a bond with the bid. The language of forfeiture read: “But if any bidder fails, neglects or refuses to enter into the contract to perform” the work, “then the certified cheek accompanying his bid and the amount therein mentioned shall be declared to be forfeited to said city, and shall be collected by it and paid into the general fund, and any bond forfeited may be prosecuted and the amount due thereon collected and paid into said fund.” It was held that the language did not fall short of prescribing a forfeiture in the case of a bond, but that the terms of the statute created the forfeiture. The court noted the omission of the express declaration as to the bond, but concluded that the result was the same because of the use of the word “forfeited” in direct connection with the word “bond.” No similar language in connection with the bond requirement appears in the present case.

City of Los Angeles v. Shafer, 53 Cal.App. 458 [200 P. 384], involved a faithful performance bond under section 9 of the Street Improvement Act of 1913 (Stats. 1913, p. 954). In the event of the abandonment of the work, that section authorized the city to relet the contract and hold the contractor and his sureties responsible on his bond for the costs and expenses of reletting, and any damage resulting from the abandonment. (Cf., Gov. Code, § 37935; Stats. 1949, p. 1186.) There was no express alternative declaration of forfeiture. The court contrasted the provision applicable to the bond liability with language in the same section requiring certified check security with the bid and forfeiture of the whole sum if the bidder failed to enter into the contract. As to the bond it was said: “If the legislature intended that the obligation be one for liquidated damages or for penalty or a forfeiture, it could have so provided. ’ ’

Numerous other eases have been cited in support of the propriety of the city’s resolution that there was a forfeiture in the present case. Those cases supported the power of the city to enforce full recovery where the statute or contract declared a forfeiture, usually as liquidated damages. (Turner v. City of Fremont, 170 P. 259 [95 C.C.A. 455]—contract, liquidated damages; Davin v. City of Syracuse, 69 Misc. 285 [126 N.Y.S. 1002]—contract, liquidated damages; Village of Morgan Park v. Gahan, 136 Ill. 515 [26 N.E. 1085]—contract, forfeiture, legality assumed; Wheaton Building & Lumber Co. v. City of Boston, 204 Mass. 218 [90 N.E. 598]—statute, liquidated damages; Daddario v. Town of Milford, 296 Mass. 92 [5 N.E.2d 23, 107 A.L.R. 1447]—PWA rules and contract, liquidated damages; Mayor etc. of Baltimore v. Robinson Const. Co., 123 Md. 660 [91 A. 682, Ann.Cas. 1916C 425, L.R.A. 1915A 225]—charter, liquidated damages; Elliott Bldg. Co. v. City of Greensboro, 190 N.C. 501 [130 S.E. 200]—contract, liquidated damages.) City of Weston v. Bank of Greene County (Mo.App.), 192 S.W. 126, involved a suit by the city on a deposit check payment of which had been refused. The terms and source of the provisions, whether statutory or contractual, under which the check was deposited were not disclosed in the opinion, but the action was upheld under the assumed power of the city “to require a deposit with bids, to be forfeited on the conditions stated in the published offer,” as indicated in Village of Morgan Park v. Gahan, supra.

The foregoing cases disclose that forfeiture to the full amount of the deposit as a penalty or as liquidated damages was accomplished by express language. Thus there was notification by the terms of the statute or the contract of the extent of the contractor’s and surety’s liability where liability in excess of actual loss and damage was intended.

In the present ease the plaintiff’s bid on the form furnished by the city, with the inapplicable phrases stricken as instructed therein, reads: “A bid bond ... is attached hereto and is given as a guarantee that the undersigned will execute the agreement and furnish the required bonds if awarded the contract and in case of failure to do so within the time provided . . . surety’s liability to the City will be established.” This language contains no words of forfeiture or of an agreement that the full sum of the bond will be considered as liquidated damages in the event the contract is not entered into. Nor does the city’s invitation for bids contain such language. The declaration is that of guarantee.

Forfeitures in the nature of a penalty are not favored; and language must be so construed as to avoid a forfeiture if that is possible. (O’Morrow v. Board, 27 Cal.2d 794, 800 [167 P.2d 483], and cases cited; Booth v. County of Los Angeles, 124 Cal.App. 259, 261 [12 P.2d 72]; Civ. Code, § 1442.) In the case of agreements for liquidated damages sections 1670-1671 serve to prevent any penalizing effect, and therefore there may be no need for such a rule of construction. In the present ease we are of the opinion that the agreement does not provide for either a penalty or liquidated damages since the language in relation to the bid bond contained in the executed bid form adopts no more than the words of guarantee in the bid invitation. Words indicating that the full sum of the bond would be forfeited or treated as liquidated damages could readily have been used. To construe words actually used otherwise than in accordance with their plain meaning would result in unauthorized changes in or additions to the language of the instruments and would base the conclusion upon uncertain or doubtful inferences contrary to the language expressly employed. The wording of the bid invitation and the executed bid was of the city’s own choosing and should not be held to extend the bidder’s and the surety’s hazards beyond its fair meaning. (Barber Asphalt Paving Co. v. City of St. Paul, 136 Minn. 396 [162 N.W. 470, L.R.A. 1917E 370].)

Municipalities are not exempt from the foregoing rules in dealings with private persons. (Sacramento County v. Southern Pacific Co., 127 Cal. 217 [59 P. 568, 825]; Hoyt v. Board of Civil Service Commissioners, 21 Cal.2d 399, 402 [132 P.2d 804]; Corporation of America v. Durham etc. Co., 50 Cal.App.2d 337, 340 [123 P.2d 81], and cases cited.) There is here no justification for applying a different rule because a municipality is involved. In Groves v. John Wunder Co., 205 Minn. 163 [286 N.W. 235, 123 A.L.R. 502, 506], it was pointed out that if so-called public contracts were in the suggested special category for measuring damages, a municipal corporation would be dealt with more favorably than the ordinary litigant. In the absence of statutory or contract language otherwise providing, the guarantee measured the city’s compensatory right to the extent of the actual damage only and the liability of the surety on the bid bond would thereby be deemed to be “established” for the actual damage resulting from the plaintiff’s breach, but limited by the sum stated in the bond. (11 C.J.S. 508, par. 130; United States v. Alcorn, 145 F. 995, 998; Weinreich E. Co. v. A. J. Johnston Co., 28 Cal.App. 144, 148 [151 P. 667], and authorities cited.)

If it be assumed by any process of reasoning that the language of the instruments might be construed as an agreement to treat the total sum of the bond as liquidated damages, such a construction would bring into operation sections 1670 and 1671 of the Civil Code. Under those sections it must appear from the nature of the case that it would be impracticable or extremely difficult to fix the actual damages. These provisions apply to the city as well as to any other contracting party. (City of Los Angeles v. Shafer, supra, 53 Cal.App. at p. 466.) Whether the case comes within their terms presents a question of fact which must be alleged and proved. (Dyer Bros. etc. I. Wks. v. Central I. Wks., 182 Cal. 588, 593 [189 P. 445]; Rice v. Schmid, 18 Cal.2d 382, 385 [115 P.2d 498, 138 A.L.R. 589].) No specific showing on that issue was attempted by the city and the findings were based on inferences contrary to its position. Different inferences may not here be indulged. It is not indicated that loss or damage was suffered by the city in any proceeding to relet the contract. In fact, no steps to that end were taken, and there was no showing that any special loss to the city resulted in abandoning the project. The absence of specific evidence that the nature of the case made it difficult to ascertain loss or damage, and the reasonable inferences from the facts that such difficulty did not exist, support the finding of the failure of any showing on that issue. Also as no actual damage was shown the trial court was justified in concluding that there was no basis upon which recovery could be awarded on the city’s cross-complaint. The question of the general power of the city in the absence of statute to provide by contract for forfeiture or liquidated damages becomes a matter of academic interest only and unnecessary to be decided in this ease. This is especially true as the Legislature has now spoken on the subject.

The judgment is affirmed.

Gibson, C. J., Edmonds, J., Traynor, J., and Schauer, J., concurred.