Crouse v. . Stanley

BbogdeN, J. Did the failure of the plaintiff to preserve and hold the retained percentage release the defendant surety from any and all obligation upon' its bond ? *188 Tbe legal status of retained percentage in contracts of the kind involved in this controversy has been thus declared in Insurance Co. v. Durham County, 190 N. C., 58, 128 S. E., 469: “The contract provision that 85 per cent of the value of labor and material used during the previous month, as estimated by the architect, shall be paid by the owner to the contractor at the dates specified during the progress of the work creates in the 15 per cent reserve balance an equity in which the surety has a substantial right. While the owner also has an equity in this reserved balance, he has no right, without the consent of the surety to waive it, or to exceed the provisions of the contract in making payments to the contractor. The retained balance is well calculated to induce the contractor to complete the building, and it is valuable security against loss when a breach occurs.” Prairie State Bank v. U. S., 164 U. S., 227, 41 L. Ed., 412; Hamilton v. Republic Casualty Co., 135 S. E., 259; Williston on Contracts, Vol. II, sec. 1243. Williston, supra, summarizing the decisions upon the subject, states: “Such payments in larger amounts, or at earlier times than the contract between the principal and his employer fixed discharges the surety. But the basis of the rule is equitable, and it should not be pushed beyond equitable limits, and especially in recent years the courts have shown a tendency to hold the surety where it sufficiently appears* that the overpayment of the principal has caused no loss.” An examination of the authorities bearing upon the subject discloses that the courts have adopted various attitudes with respect to the application of the principle of releasing the surety from his obligations. First, some courts have held that, 'if the owner overpays the contractor upon forged or mistaken estimates or by reason of fraudulent substitution of inferior materials, the surety is not thereby released. Van Buren County v. American Surety Co., 115 N. W., 24; Wakefield v. American Surety Co., 95 N. E., 350. Second, if the excess payments are made to satisfy the valid claim of laborers and materialmen who are included within the terms of the bond, the surety is not relieved. U. S. Fidelity and Guaranty Co. v. Trustees of Baptist Church, 102 S. W., 325. Third, a surety is not discharged by overpayment unless it is shown that such overpayment resulted in loss. Lloyd Investment Co. v. Illinois Surety Co.., 160 N. W., 58; Maine Central R. R. Co. v. National Surety Co., 94 Atl., 929. Fourth, if the owner fails to retain the specified percentage, the surety is discharged pro tanto upon the theory that such reserve percentage creates a right in the surety to apply the same in exoneration of the loss sustained by the failure to pay laborers and materialmen. Mfg. Co. v. Blaylock, 192 N. C., 407, 135 S. E., 136. This Court has adopted the pro tanto theory; that is to say, that in contracts of the kind involved in this case, the surety in obedience to *189 equitable principles is discharged and relieved to tbe extent of tbe loss actually suffered and no further. Therefore, the final determination of the rights of the parties depends upon whether the surety suffered a loss in the ease at bar. When Stanley & Dazey defaulted it was the duty of the defendant' surety company to complete the work in accordance with the terms of the contract. If the owner had complied with the agreement entered into between the parties he would then have in hand to turn over to the surety the sum of $4,202.80, and thereupon the surety would be entitled to said sum to apply upon the completion of the work. No such amount was available, and thus the surety was deprived of a credit to which it was entitled under the law. No evidence was offered connecting the defendant, Greensboro Paint Company, or the defendant, Comer, with the transaction, and the judgment of nonsuit as to such defendants is' upheld. The judgment of non-suit as to defendant surety company is reversed, and the cause remanded for trial in accordance with the rules of liability declared in this opinion. Reversed. Stacy, C. J., and CqNNOr, J., dissent.