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Surety Held Liable For Statutory Penalties Based on Contractor's Failure to Pay Sub

A recent California Appellate Decision held that a surety on a public works payment bond was not only responsible for monies due a subcontractor for work performed, but also for statutory penalties imposed by the so called Prompt Payment Laws.

The Prompt Payment Laws impose penalties in certain cases when payments to contractors are delayed. The statute in this case imposed a penalty of 2% per month in the event the prime contractor failed to pay its subs within 10 days of receipt of payment from the public entity.

The prime contractor failed to make timely payments and eventually filed bankruptcy. The sub sued several defendants, including the payment bond surety, seeking to recover the total amount owed, including the penalty. The surety sought to strike that portion of the complaint seeking penalty interest.

The Appellate Court held that, unlike a Mechanic's Lien claim (which is statutorily limited to the reasonable value of the labor, services, equipment or materials furnished) a bond exists to secure payment for amounts due, and the penalty is clearly part of that claim. Therefore, the claim against the surety for penalty interest was proper.

Washington International Ins. Co. v. Superior Court (1998) 98 CDOS 2392.

Mr. Kershner is with the Law Offices of Gary Kershner, a member of the Exchange since 1955. The law firm acts as general counsel in litigation and non-litigation matters for a variety of small and medium-size businesses. Mr. Kershner can be reached at (510) 832-6500. This article provides general information about a current legal issue. If you have a specific legal question or need legal advice, you should contact an attorney.