Opinion · Supreme Court of the United States

Equitable Surety Co. v. United States Ex Rel. McMillan

34 S. Ct. 803

Type: Opinion
Court: Supreme Court of the United States
Jurisdiction: Federal
Date: 1914-06-22
Topic: general

departure from building contract did not release surety

Citator

Cited by: 63 opinions

EQUITABLE SURETY CO.v. McMILLAN,234 U.S. 448(1914)

34 S.Ct. 803

EQUITABLE SURETY COMPANYv. UNITED STATES OF AMERICA, TO THE USE OF

McMILLAN.

CERTIFICATE FROM THE COURT OF APPEALS OF THE DISTRICT OF COLUMBIA.

No. 861.

Argued April 15, 1914.

Decided June 8, 1914.

The obligation given by the surety under the District of Columbia Materialmen's Act of 1899 which is modeled after the General Materialmen's Act of 1894, has a dual aspect, being given not only to secure the Government the faithful performance of all the obligations assumed towards it by the contractor, but also to protect third persons from whom the contractor may obtain materials and labor; these two agreements being as distinct as though contained in separate instruments, the surety cannot claim exemption from liability to persons supplying materials merely on account of changes made by the Government and the contractor without its knowledge and which do not alter the general character of the work.UnitedStatesv.National Surety Co., 92 F. 549, approved. Under the rule ofstrictissimi juris, the agreement altering the contract must be participated in by the obligee or creditor as well as the principal in order to discharge the surety; in the case of a bond under the Materialmen's Acts of 1894 or 1899, there is no single obligee or creditor to consent thereto and the rule ofstrictissimi jurisdoes notPage 449apply where the alterations agreed upon do not change the general nature of the work. In this case the alterations of the terms of a contract for building a school house in the District of Columbia altering its location but without affecting its general character, without the knowledge or consent of the surety, did not have the effect of releasing the surety from the obligation of the bond given under the District of Columbia Materialmen's Act of February 28, 1899.Quare, and not involved in this case, what would be the result of a change not contemplated in the original contract as between the District of Columbia and so great as to amount to abandonment of the contract?

THE Court of Appeals of the District of Columbia certifies

that the record in the above entitled cause, now pending in said

court upon appeal from the Supreme Court of the District of

Columbia, discloses the following:

The declaration of the United States to the use of W. McMillan

and Son, filed February 11, 1913, against the Equitable Surety

Co. alleges:

That Allen T. Howison, as principal, and the Equitable Surety

Co., as surety, on July 24, 1911, executed a bond to the United

States in the penal sum of $110,350.00, conditioned for the

faithful performance by Howison of a certain contract made by him

with the Commissioners of the District of Columbia on that date.

A copy of the bond, made an exhibit, shows that the contract was

for the erection of a school building fronting on Eleventh

Street, N.W., between Harvard and Girard Streets, in the City of

Washington. The conditions of the bond are that if Howison shall

perform to the satisfaction of the Commissioners the work to be

done by him in accordance with the stipulations of the contract,

and shall save harmless and indemnify the District of Columbia

from any and all claims, delays, suits, charges, damages,

judgments, etc., on account of any accidents to persons or

property after the commencement of the work and prior to

completion and acceptance, and pay the same; and "will promptly

make payments to all persons supplying him

Page 450

with labor and material in the prosecution of the work provided

for in said contract," etc., the obligation shall be void;

otherwise to remain in force.

That thereafter W. McMillan Son, at the request of the

Butt-Chapple Stone Co., agreed to furnish to said contractor

certain stone materials to be used in the prosecution of the work

provided for in the contract by the contractor, and did furnish

to said contractor materials of the kind and quality specified in

his contract to the value of $4,452.84, of which material the

contractor used in the building a quantity of the value of

$3,952.84 for which he has failed to make payment. And that

defendant, though requested so to do, has refused to pay the

same. The affidavit of the plaintiff in support of the

declaration follows the requirements of Rule 73.

After the general issue, defendant filed a special plea

denying liability on said bond because after the execution and

delivery of the same, and without the knowledge or consent of

defendant, the Commissioners of the District of Columbia and the

said Howison, its principal, altered the contract the performance

of which was guaranteed by said bond. That said alteration

consisted in the entire changing of the building from one

fronting on Eleventh Street to one fronting on Harvard Street,

which alteration involved the contractor in considerable expense

not contemplated in the original contract, and prejudicial to

defendant. That said relocation of the building necessitated a

material change in grading the ground. That prior to the change

of location the contractor had graded the ground as required in

the contract and expended therein the sum of $2,393.90. And that

by reason of the change said sum was a total loss to the

contractor, and the further excavation made necessary by the

change of location was done at a cost of $1,300.90.

The affidavit of defense alleged the said change in the

contract without its knowledge or consent; and that the

Page 451

same necessitated a material change in the grading of the land

which had been previously performed by the contractor, at a

considerable expenditure not contemplated in the original

contract, and prejudicial to the defendant.

On motion under the 73rd Rule of the Supreme Court of the

District of Columbia the court entered judgment for the plaintiff

for the amount of the demand; and defendant has appealed

therefrom.

By stipulation two other cases involving the same question

here presented are to abide the result of this case.

The act of Congress, in compliance with the requirements of

which the aforesaid bond was executed, (c. 218,30 Stat. 906),

reads as follows:

"An Act Relative to the payment of claims for material and

labor furnished for District of Columbia Buildings.

"Be it enacted by the Senate and House of Representatives of

the United States of America in Congress assembled, That

hereafter any person or persons entering into a formal contract

with the District of Columbia for the construction of any public

building, or the prosecution and completion of any public work,

or for repairs upon any public building or public work, shall be

required, before commencing such work, to execute the usual penal

bond, with good and sufficient sureties, with the additional

obligations that such contractor or contractors shall promptly

make payments to all persons supplying him or them labor and

materials in the prosecution of the work provided for in such

contract; and any person or persons making application therefor

and furnishing affidavit to the department under the direction of

which said work is being or has been prosecuted that labor or

materials for the prosecution of such work has been supplied by

him or them, and payment for which has not been made, shall be

furnished with a certified copy of said contract and bond, upon

which said person or persons supplying such labor and materials

shall have a right of action, and shall be authorized to

Page 452

bring suit in the name of the District of Columbia or the United

States for his or their use and benefit against said contractor

and sureties and to prosecute the same to final judgment and

execution: Provided, That such action and its prosecution shall

not involve the District of Columbia or the United States in any

expense: Provided, That in such case the court in which such

action is brought is authorized to require proper security for

costs in case judgment is for the defendant.

"Approved, February 28, 1899."

The Court of Appeals further certifies that the following

question of law arises upon the record; that its decision is

necessary to the proper disposition of the cause; and to the end

that a correct result may be reached desires the instruction of

the Supreme Court of the United States upon that question, to

wit:

Did the alteration of the terms of the contract by the

District of Columbia and the contractor, without the knowledge or

consent of the surety, have the effect to release the surety from

the obligation of the bond?

Mr. J.J. Darlington, with whomMr. Joseph A. BurkartandMr. William E. Ambrosewere on the brief, for the Equitable Surety Company:

The surety obligation is not to be extended because the surety is a corporation, or because a premium was paid.

The change of site created a new contract, not binding on the surety, either as to owner or sub-contractors.

The bond was security for labor and materials for work provided for in the contract guaranteed by the surety.

The argumentab inconvenientiwill not apply.

In support of these contentions, seeAtlantic Trust Co. v.Laurinburg, 163 F. 690;American Bonding Co. v.Pueblo Inv. Co., 150 F. 17;Abbottv.Morissette,46 Minn. 10;Bridge Co. v.Bogenshot,Page 45348 S.W. Rep. 97, 102;Baglinv.Title Guaranty Co., 166 F. 356;Brunthaverv.Talty,31 App.D.C. 134;Buchananv.Macfarland,31 App.D.C. 619,620;Bauschard Co. v.FidelityCo., 21 Pa. Sup.Ct. 375;Baglinv.Southern Surety Co., 42 Washb. Law Rep. 162, 164;Brown Co. v.Ligon, 92 F. 851;Chesterv.Leonard,68 Conn. 495,570;Carrollv.Lessee of Carroll, 16 How. 275, 286;Connv.State,125 Ind. 514;Chaffeev.U.S. Fidelity Co., 128 F. 918;Deweyv.State,91 Ind. 173;Grahamv.UnitedStates, 188 F. 651, 657;Guaranty Co. v.Pressed BrickCo.,191 U.S. 416;Harrimanv.Northern Securities Co.,197 U.S. 244,291;Henricusv.Englert,137 N.Y. 484,494;Millerv.Stewart, 9 Wheat. 680;McConnellv.Poor,113 Iowa 133,139;O'Nealv.Kelley,65 Ark. 550;Paolucciv.United States,30 App.D.C. 217,222;Pollockv.Farmers' L. T. Co.,157 U.S. 429,574;School Districtv.Greene,135 Mo. App. 421,426;Steffesv.Lemke,40 Minn. 29;Thompsonv.Chaffee,89 S.W. 285;UnitedStatesv.American Bonding Co., 89 F. 925;UnitedStatesv.Bagly,39 App.D.C. 105;United Statesv.Boecker, 21 Wall. 652;United Statesv.California BridgeCo., 152 F. 559;United Statesv.Freel,186 U.S. 309,318;Hillv.American Surety Co.,200 U.S. 197;UnitedStatesv.U.S. Fidelity Co., 178 F. 721;UnitedStatesv.Lynch, 192 F. 364, 368;United Statesv.National Surety Co., 92 F. 549;Wetmorev.Karrick,205 U.S. 141,155;Youngv.American Bonding Co.,228 Pa. 273,280;Zimmermanv.Judah,17 Ind. 286.Mr. Wharton E. Lester, with whomMr. Lucas P. LovingandMr. Daniel W. Bakerwere on the brief, for the United States to the use of McMillan Son:

Change of contract does not release the surety from liability to materialmen and laborers. There is a dual nature of bond required by act of 1899.Page 454

The agency of the District of Columbia ends with obtaining the bond.

The materials were furnished under contract for which bond was given.

In support of these contentions, seeMining Co. v.Cullins,104 U.S. 176;United States c. v.American SuretyCo.,200 U.S. 199;Fidelity Deposit Co., v.Smoot,20 App.D.C. 376;United Statesv.National Surety Co., 92 F. 549;Guaranty Co. v.United States,191 U.S. 416;UnitedStatesv.California Bridge Co., 152 F. 559;UnitedStatesv.Lynch, 192 F. 364;United Statesv.Freel,186 U.S. 309.

MR. JUSTICE PITNEY, after making the foregoing statement, delivered the opinion of the court.

The act of February 28, 1899 (c. 218,30 Stat. 906), under which the bond in question was given, was modeled after an act of August 13, 1894, entitled, "An Act for the protection of persons furnishing material and labor for the construction of public works," (c. 280,28 Stat. 278). In an action founded upon a bond given under the latter act, it was held by the Circuit Court of Appeals for the Eighth Circuit, inUnited Statesv.NationalSurety Co., 92 F. 549, 551, that the obligation has a dual aspect, it being given, in the first place, to secure to the Government the faithful performance of all obligations which a contractor may assume towards it; and, in the second place, to protect third persons from whom the contractor may obtain materials or labor; and that these two agreements are as distinct as if contained in separate instruments. It was consequently held that the sureties in such a bond could not claim exemption from liability to persons who had supplied labor or materials to their principal, to enable him to execute his contract with the United States, simply because the Government and thePage 455contractor, without the surety's knowledge, had made changes in the contract subsequent to the execution of the bond, the changes being such as did not alter the general character of the work contemplated by the contract or the general character of the materials necessary for its execution.

In support of this decision several cases from the state courts were cited, among themDeweyv.State,91 Ind. 173,185;Connv.State,125 Ind. 514,518;Steffesv.Lemke,40 Minn. 27,29; andDollv.Crume,41 Neb. 655,660. They fairly sustain the conclusion reached. The cases cited from the Indiana and Minnesota reports antedated the passage of the act of 1894, and may have furnished the suggestion for that enactment.

The decision of the Circuit Court of Appeals inUnitedStatesv.National Surety Co., supra, although never until now brought under the review of this court, has been many times cited and followed in the other Federal courts.Brown Haywood Co. v.Ligon, 92 F. 851, 857;United Statesv.Rundle, 100 F. 400, 402;United States Fid. Guar. Co. v.Omaha Bldg. Constr. Co., 116 F. 145, 147;Chaffeev.United States Fid. Guar. Co., 128 F. 918;UnitedStatesv.Barrett, 135 F. 189, 190;Henningsenv.United States Fid. Guar. Co., 143 F. 810, 813;CityTrust c. Co. v.United States, 147 F. 155, 156:United Statesv.California Bridge Constr. Co., 152 F. 559, 562;Title G. T. Co. v.Puget Sound Engine Works, 163 F. 168, 174.

InGuaranty Co. v.Pressed Brick Co.,191 U.S. 416, andHillv.American Surety Co.,200 U.S. 197,203, this court adopted a reasonably liberal construction of the act of 1894, in view of the fact that it was evidently designed to furnish the obligation of a bond as a substitute for the security which might otherwise be obtained by attaching a lien to the property; such lien not being permissible in the case of a Government work.Page 456

It seems to us that the construction given to that act in the case in 92 Fed. Rep. is correct, and that it applies equally to the Act of 1899, now under consideration; and that this act, like the other, should receive a reasonably liberal interpretation in aid of the public object whose accomplishment is so evidently intended. Its title is, "An Act relative to the payment of claims for material and labor furnished for District of Columbia buildings." The enacting clause, as well as the title, shows that Congress recognized that no legislation was necessary in order to enable the Commissioners of the District to require "the usual penal bond with good and sufficient sureties" from a contractor engaged for the construction of a public building. The object of the legislation was to give legal sanction to the "additional obligation that such contractor or contractors shall promptly make payments to all persons supplying him or them labor and materials in the prosecution of the work provided for in such contract," and to give to such a laborer or materialman the right to bring an action if necessary upon the bond, either in the name of the District of Columbia or of the United States, for his own benefit, against the contractor and sureties. The nominal obligee is, with respect to these third parties, a mere trustee, and the obligors, including the surety as well as the principal contractor, enter into the obligation in full view of this. The public is concerned not merely because laborers and materialmen (being without the benefit of a mechanic's lien in the case of public buildings) would otherwise be subject to great losses at the hands of insolvent or dishonest contractors, but also because the security afforded by the bond has a substantial tendency to lower the prices at which labor and material will be furnished, because of the assurance that the claims will be paid.

Stress is placed by counsel for the Surety Company upon the fact that the building was materially altered, and in aPage 457manner that involved the contractor in considerable expense not contemplated in the original contract. If these alterations were made pursuant to a stipulation for that purpose contained in the contract, they were binding upon the surety, unless they were so extensive and material as to amount to a departure from the original contract rather than a permissible modification of its details.United Statesv.Freel, 92 F. 299; 99 F. 237;186 U.S. 309.

So far as the certificate shows, however, the contract here in question contained no clause permitting changes. In such case it is beside the question to inquire whether the changes were important, or, indeed, whether they prejudiced or benefited the contractor. The rule that obtains in ordinary cases is that any change in the contract made between the principals without the consent of the surety discharges the obligation of the latter, even though the change be beneficial to the principal obligor.

But it lies at the foundation of this rule ofstrictissimijuristhat the agreement altering the undertaking of the principal must be participated in by the obligee or creditor, in order that it may have the effect of discharging the surety. This is expressed or implied in all the cases.Millerv.Stewart, 9 Wheat. 680, 703, 708, 709;Spriggv.Bank of MountPleasant, 14 Pet. 201, 208;Mageev.Manhattan Life Ins.Co.,92 U.S. 93,98;Union Mutual Life Ins. Co. v.Hanford,143 U.S. 187,191;Prairie State Bankv.United States,164 U.S. 227,233;United Statesv.Freel,186 U.S. 309,310,317.

In the case of a bond given under a statute such as the act of February 28, 1899, there is no single obligee or creditor. The surety is charged with notice that he is entering into what is in a very proper sense a public obligation, and one that will be relied upon by persons who can in no manner control the conduct of the nominal obligee, and with respect to whom the latter is a merePage 458trustee, and therefore incapable, upon general principles of equity, of bartering away, for its own benefit or convenience, the rights of the beneficiaries. In the light of the statute, the surety becomes bound for the performance of the work by the principal in accordance with the stipulations of the contract, and for the prompt payment of the sums due to all persons supplying labor and material in the prosecution of the work provided for in the contract.

What would be the result of a change not contemplated in the original contract, as between the District of Columbia, consenting to the change, and the Surety Company, not consenting thereto, is a question not now before us, and respecting which we express no opinion. But with respect to obligations incurred by the contractor to laborers and materialmen, at least so far as their labor and materials are supplied in accordance with the original contract, it is obvious, we think, that a construction which would discharge the surety because of any change to which the laborers and materialmen were not parties would defeat the principal object that Congress had in view in enacting the statute. If the change were so great as to amount to an abandonment of the contract and the substitution of a substantially different one, so that persons supplying labor and materials would necessarily be charged with notice of such abandonment, a different question would be presented. But, in the case of such a change as was here made — a mere change of position and location of the building, without affecting its general character; involving changes in grading, but having nothing to do with the furnishing of the materials upon which the action is based — it seems to us that the responsibility of the surety to the materialman remains unaffected.The question certified will be answered in the negative.Page 459