Daniel-Morris Co. v. Glens Falls Indemnity Co.

Callahan, J. This appeal presents a question as to the right of a materialman to recover as a third-party beneficiary under a bond given in connection with a building contract. Big-W Construction Corp. was the general contractor for the construction of a garden apartment in the Borough of Queens, City of New York. It hired Horowitz & Bubin, copartners (unserved defendants), as subcontractors to install the plumbing and heating system for a contract price of $390,000. One of the conditions of the subcontract was that Horowitz & Bubin furnish a 20% payment bond and a 20% performance bond. Such bonds were given. The defendant Glens Falls Indemnity Company was the surety, Horowitz & Bubin the principals, and Big-W the obligee on each bond. — 506 — Horowitz & Rubin did not complete the work under their subcontract. A dispute having arisen as to their performance, they filed a mechanics’ lien for over $325,000. Materialmen have filed liens against this job and another in an amount exceeding $105,000. Plaintiff, a materialman, thereupon commenced this action claiming that it delivered plumbing supplies valued at $17,077.36 to Horowitz & Rubin for installation in the project and claiming the right to recover a money judgment in that amount against the surety on the bond or, in the alternative, recovery in favor of the principal on the bond, the general contractor, for the use and benefit of plaintiff. It was stipulated upon the trial that the plaintiff had received no inducements or representations from either the surety or the general contractor, which had led it to deliver the materials. The payment bond in this action, after outlining the provisions of the plumbing subcontract, sets forth the condition of the bond as follows: 11 if the Principal shall promptly make payment to all persons supplying labor and material in the prosecution of the work provided for in said contract, and any and all duly authorized modifications of said contract that may hereafter be made * * * then this obligation to be void, otherwise to remain in full force and virtue.” The performance bond also recited the provisions of the subcontract and contained as its condition a provision that, “ if the Principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements of said contract ”, with the addition of similar provisions as to any modifications of the contract. Payment of all materialmen and laborers was among the covenants in the contract on the part of the subcontractor. The trial court ruled that the plaintiff had no right to sue as third-party beneficiary under the payment bond for the reason that it was given for the sole benefit of the general contractor. We construe the bond differently. Whether a materialman or laborer may sue upon a bond of the present nature is said to depend on whether it was the intent of the parties to the undertaking to benefit such third persons. That intent is ordinarily to be ascertained from the terms of the bond, plus the provisions of the building contract, considered in the light of the surrounding circumstances (Fosmire v. National Sur. Co., 229 N. Y. 44). In the present case there appears to be no objective to be fulfilled by the payment bond — 507 — except to secure reimbursement of materialmen and laborers. The condition expressed is not that the general contractor will be indemnified against any loss by reason of nonpayment of materialmen or laborers, though, perhaps, we may assume that this was the object or motive for securing the undertaking. A separate bond was provided for the protection of the general contractor from damage due to the failure of the subcontractor to complete the work. This, we think, distinguishes the case from those where a single bond has been given for performance or one for both performance and payment combined. In the latter cases protection to the obligee from damage by failure to perform may well be found to be the dominant purpose of the undertaking. The obligee might be deprived of such protection, if recourse is permitted to be had to the bond by way of suits by materialmen and laborers to secure payment of their claims (Fosmire v. National Sur. Co., supra). In the cited case, however, the bond was for performance as well as payment, and the Court of Appeals ruled that, a third party might not sue because of danger of defeating the dominant purpose. However, it said (pp. 47-48): “In so holding, we put our decision upon the single ground that the bond, read in its entirety, is inconsistent with an intention that the plaintiff and others in like position should have the right to sue upon it. If that intention is absent, the right to sue will be denied (Simson v. Brown, 68 N. Y. 355). A different question would be here if the bond had been conditioned for the payment of wages and nothing else We find no condition in the bond presently sued on except the payment of materialmen and laborers. We have no doubt that the bond was obtained by the general contractor primarily for its own protection, but we think that this supplies the motive in securing the undertaking rather than the intent as to who shall be benefited. If there were no payment bond in existence and an unpaid materialman of a subcontractor placed a lien on the job, he would only be able to recover against the general contractor to the extent that the said contractor had moneys in his possession to which the subcontractor might have recourse. In the absence of such a fund any lien filed by any materialman or laborer would be ineffective as against the general contractor. The claimant would be relegated to an action against the subcontractor. It would seem, therefore, that the purpose of the payment bond between the subcontractor and the general con — 508 — tractor would involve more than indemnifying the latter as to the risks of mechanics’ liens and related litigation. It was designed to assure the general contractor that the materialmen and laborers would, in fact, be paid by the principal or the surety. Such payment would be in the direct interest of and enure to the benefit of the general contractor. The condition, therefore, would evidence an intent to benefit the third parties referred to. If this were not the purpose of the bond, then it would seem to be limited merely to securing- the general contractor against any legal expenses, which it might incur in removing invalid liens. It is reasonable to infer that the object of the payment bond was to secure some protection not afforded by the performance bond. Payment of materialmen and laborers was an expressed undertaking by the subcontractor in the contract, and its failure to perform in that respect would be covered by the performance bond insofar as indemnification of the general contractor is concerned. It is also clear that under the performance bond materialmen or laborers would not have any right of action as third-party beneficiaries, because the dominant purpose of the performance bond is to insure a general contractor against losses from failure of the subcontractor to complete his obligations. Therefore, whatever recourse the materialmen had to the payment bond would in nowise interfere with or prejudice the rights of the general contractor to indemnification for nonperformance. Defendants argue, in substance, that because the present bond covered only 20% of the contract price, and in view of the large amounts of the mechanics ’ liens, it might well be that the general contractor will need more protection than the $78,000 which is the penal sum of the bond, and, therefore, any payment to materialmen or laborers under the payment bond would deprive the principal of some of the protection for which it stipulated. It appears to us that this overlooks the fact that any payment to materialmen or laborers under the payment bond would relieve the general contractor pro tanto from the total risk which he might face due to nonpayment of the obligations of the subcontractor. The assertion of possible inadequacy amounts to no more than a claim that an insufficient bond may have been required. It would not disclose an intent that materialmen and laborers might not have the benefit of an undertaking that was given for payment of their claims. — 509 — We are determining solely the question of the right to bring. the action, and not whether defendant may have any legal or equitable defense that might reduce plaintiff’s damage. “ The defendant will then be at liberty to show in reduction of the damages that other claimants, still unpaid, may share in the security. The aggregate liability to all must be within the limit of the penalty.” (Strong v. American Fence Gonstr. Co., 245 N. Y. 48, 54.) In any event, the trial court in this action made no finding that defendants would be prejudiced by claims in excess of the penal sum of the bond, if this action was maintained. The complaint was dismissed solely on the ground that plaintiff had no right to sue. In McClare v. Massachusetts Bonding & Ins. Co. (266 N. Y. 371) a suit by a third-party beneficiary was permitted under a surety bond in a case where a second bond had been given which would have furnished ample protection to the obligee. It is true that the McGlare case may be distinguished in that the obligee was the State of New York, which had no financial interest of its own to protect. Nevertheless, we think that its holding indicates that the intent to benefit third parties may be established not only by the terms of the undertaking, but by the circumstance that another bond had been given, which reduced the risk of rendering nugatory the dominant purpose of the undertaking sued upon. We have recently sustained an order denying a motion to dismiss a complaint in an action brought by a third-party beneficiary under a payment bond where a performance bond was also given (McGrath v. American Sur. Co., 283 App. Div. 693). In that case, like the present, both bonds were given by subcontractors to the general contractor, but in the McGrath case they were for the full amount or 100% of the subcontract price. The difference involved in this respect relates only to the degree of the risk that the dominant purpose of the bond would be defeated. We see no purpose in reviewing at length the many authorities in this and other States in which the present or a like question was involved. It is enough to say that the cases holding against the right of materialmen and laborers to sue are distinguishable in one way or another as to proof of intent to benefit third parties. This question of intent must depend upon the facts in each case. — 510 — The judgment appealed from should be modified so as (1) to reverse the dismissal of the complaint on the merits against defendants Glens Falls Indemnity Company and Big-W Construction Corp. and the granting of costs in favor of said defendants and direct as to said defendants a new trial with costs to abide the event; and (2) to affirm that part of the judgment directing that the action be severed as against defendants, Horowitz and Rubin, and as so modified the judgment should be affirmed.