R. M. Sherman Co. v. W. R. Thomason, Inc.

Plaintiff R. M. Sherman Co., Inc. (Sherman) sued for money due under a building contract between it, as subcontractor, and defendant W. R. Thomason, Inc. (Thomason), as prime contractor. Also named as a defendant was Industrial Indemnity Company, the surety under a stop notice release bond. The trial court allowed Thomason to assert a defense of setoff based on a previous contract between Sherman and Thomason which violated the Subletting and Subcontracting Fair Practices Act (former Gov. Code, § 4100 et seq.; now Pub. Contract Code, § 4100 et seq.). (Hereafter, Fair Practices Act.) We hold that this was error.

I. Facts.

In December 1981, Thomason agreed to subcontract to Sherman the concrete work on a public improvement project in the City of Ukiah. Thomason had already secured the prime contract without identifying a subcontractor. The City was not told of, and did not approve, Sherman’s involvement in the project. As part of the transaction some of Sherman’s employees and suppliers were paid through Thomason’s accounts, apparently to conceal Sherman’s involvement. Due to inclement weather, Thomason incurred cost overruns of some $99,000, which it contended Sherman…