Federal Union Surety Co. v. Commonwealth ex rel. Vandiver

— 94 — Opinion of the Court by Commissioner Clay Affirming. The first five cases set ont above were originally, instituted in the Franklin circuit court as separate suits. Thereafter they were consolidated and heard together, and one judgment entered. The case of Federal Union Surety Company v. Commonwealth, for Use of Carrollton Brick Company, was not consolidated with the other cases. As the questions involved in the latter case are the,,same as those involved in the other five cases, we have deemed it best to consider all the cases together and discuss all the questions raised in one opinion. On February 6, 1904, the G-eneral Assembly of the commonwealth of Kentucky passed an act entitled “An act for the erection and completion of the capítol, and other necessary buildings at the seat of government. ’ ’ Laws 1904, c. 2. By this act the commissioners of the sinking fund of the state of Kentucky were authorized as a board to carry out the provisions of the act and to erect the capitol buildings. To that end, the board was authorized and empowered to adopt plans and specifications for the construction and completion of the capitol buildings at Frankfort as it might deem best and most suitable for the accommodation of the Gfeneral Assembly and the state officials and the departments thereof, having due regard for the safety and preservation of the state records. The board was given authority to change the plans as the necessity might arise during the progress of the work. After adopting plans and specifications, the board was directed to advertise for sealed proposals for bidders for said work, or any part thereof; and the act provided that the work — 95 — should be awarded to the lowest and best bidder, due regard being had to the resposibility of the bidder. Among the provisions of the act were the following: “Subcontractors shall in no case be'recognized by the board, the responsibility to continue in the principals and their sureties. * * * Every contract- or for work or material to be furnished under this act, shall execute to the board, a bond, conditioned for the faithful performance of his contract, with surety to be approved by said board.” It was further provided in the act that the total expenditure for all purposes under said act' should not exceed $1,000,000. Section 7 of the act is as follows: “All original and supplemental contracts made by the hoard shall be in writing and signed by the party or parties, in duplicate, and one of the originals deposited in the office of the Auditor of Public Accounts, as a public record therein, and properly authenticated'copies thereof shall be evidence in all courts and other places. And the Franklin circuit court is given jurisdiction of all matters and issues which may arise under the provisions of this act.” On August 10, 1905, the board of sinking fund commissioners, in pursuance of the power conferred upon it by the act of 1904, entered into a written contract with the G-eneral Supply & Construction Company, as general contractors, by the terms of which the latter agreed to erect the capitol building in accordance with the plans and specifications prepared by the architect selected by the board-. The provisions of this contract that are material on this appeal are as follows: “Article IY, a. Said contractor agrees to protect and save harmless the owner from any lossf, cost, or damage to it on account of any damage or injury — 96 — to third persons, or to property, occasioned by the act of negligence of said contractor, his servants, agents, employes or any subcontractor; and said contractor further agrees to keep said real estate■free of all mechanic’s liens, and in the event of suits against the owner on account of such act or acts of negligence, or to enforce any lien, the contractor, upon notice by the owner, will appear and defend any suit or suits and hold the owner clear of cost, Joss or expense therein; and before final payment is made the contractor shall furnish satisfactory evidence that he has paid for all materials used in the construction of said work, and satisfy the claims of all laborers and subcontractors doing work thereon.” “Article YI. The contractor shall complete the several portions and the whole of the work embraced and comprehended in this contract and agreement within two years from this date; and, should said contractor fail so to do, it is agreed by and between the owner and said contractor that the measure of liquidated damages forfeited by the contractor to the owner aforesaid shall be two hundred dollars ($200.00) per day for each day in excess of said two years that said contract remains uncompleted, and the time of two years in which this contract is to be completed constitutes a part of the consideration therefor.” “Article IX. It is hereby mutually agreed between the parties hereto that the sum to be paid by the owner to the contractor for said work and materials shall be eight hundred and eighty thousand ($880,000.00) dollars, subject to the additions and deductions as hereinbefore provided, and that such sum shall be paid by the owner to the contractor in current funds, and only upon the certificate of the architect, as follows: — 97 — ‘ ‘ Certificates to be issued upon the first Monday of each month, throughout the progress of the work, for an amount equal to the value of the work, and materials delivered in place in the building during the preceding month, less ten (10) per cent, of said value, which shall be retained until date of final payment. “The final payment shall be made within thirty (30) days after the completion of the work in this contract, and all payments shall be due when cer-. tifieates for the same are issued. “If at any time there shall be evidence of any lien or claim under which, if established, the owner of the said premises might become liable, and which is chargeable to the contractor, the owner shall have the right to retain out of any payment then due, or thereafter to become due, an amount sufficient’ to completely indemnify it against such lien or claim.. Should there prove to be any such claim after all1 payments are made, the contractor shall refund to> the owner all moneys that the latter may be compelled to pay in discharging any lien on said premises made obligatory in consequence of the contract- or’s default.” Upon the same day that the above contract was* entered into the General Supply & Construction Company and the Federal Union Surety Company, as its surety, executed and delivered to the commonwealth of Kentucky the following bond: “Know, all men by these presents, that we, the. General Supply .and Construction Company, a corporation organized and existing under the laws of the state of New York, as principal, and the Federal Union Surety Company, a corporation organized and — 98 — existing under the laws of the state of Indiana, and having its principal office in the city of Indianapolis, Indiana, as surety, are held and firmly hound unto the commonwealth of Kentucky in the sum of two hundred and twenty-five thousand dollars ($225,000.00), lawful money of the United States, for the payment of which well and truly to be made to the commonwealth of Kentucky, we bind ourselves, pur successors and assigns, jointly and severally, firmly by these presents. “Sealed with our seals and dated this fourteenth day of August, A. D. 1905. “The conditions of this obligation is such: That whereas the said the General Supply & Construction Company has entered into a certain written contract, hereto attached, with the board of sinking fund commissioners acting for and in behalf of the commonwealth of Kentucky, bearing date the tenth (10th) day of August, A. D. 1905, for the construction of the capitol building at Frankfort, Kentucky. “Now, if the said the General Supply and Construction Company shall well and truly fulfill all the covenants and conditions of said contract, and shall perform .all the undertakings therein stipulated by it, to be performed, and shall well and truly comply with and fulfill the conditions of, and perform all of the work and furnish all the material and labor required by any and all changes in or additions to, or omissions from said contract which may hereafter be made, and-shall perform all the undertakings stipulated by it to be performed in any and all such changes in or additions thereto, notices thereof to the said surety being hereby waived, and shall promptly make payment to all persons supplying labor or materials in the prosecution of the work, contemplated by said — 99 — contract, then this obligation to be void, otherwise to remain in full force and virtue. “In testimony whereof, the General Supply and Construction Company, as principal, and the Federal Union Surety Company, as surety, have hereunto subscribed their hands and affixed their seals this fourteenth day of August, A. D. 1905. The General Supply and Construction Company, by.R. P. Taylor, president. Federal Union Surety Company, by Robert M. Nugent, Res. Vice President. Attest: May E. McCabe, Res. Asst. Secretary.” About 10 months later the board of sinking fund commissioners deemed it desirable to make certain changes in the eapitol building. It was decided that the interior structural and ornamental work should be changed from stone to marble, and that the dome ef the building should be changed from copper to terra cotta. For the purpose of carrying out these changes, the board petitioned the General Assembly for an increase in the appropriation. On March 21, 1906, the General Assembly passed an act (Laws 1906, c. 89) entitled “An act to appropriate the additional sum of two hundred and fifty thousand dollars for the erection and completion of the eapitol and other state buildings at the seat of government now under contract and course of construction,” and appropriated the sum of $250,000 to pay for the building as altered and changed. On June 18, 1906, the board of sinking fund commissioners entered into a new contract with the General Supply and Construction Company, in which the desired changes and additions were provided for at an increased cost of $219,600. In this new contract the method of payment adopted was as follows: “Certificates shall be issued upon the first Monday of each month through — 100 — out the progress of the work for an amount equal to 90 per cent, of the value of the work and materials delivered and put in place in the building during the preceding month, plus 50 per cent of the value of material delivered at the building site. The 10 per cent, retained shall be paid within 30 days after the completion and acceptance of the work included in this contract, and all payments shall be due when certificates for the same are issued.” Appellee M. C. Yandiver, by contract with the general contractor, furnished the plumbing for the eapitol building. Appellee W. C. Wulff & Co., under contract with the general contractor, furnished the roofing. Appellee Joseph Elias, under contract with the general contractor, furnished the glass. Appellee Grainger. & Co., under contract with the general contractor, supplied the structural steel, cast iron and ornamental iron. • Appellee J. L. Mott Iron Works, under contract with M. C. Yandiver, furnished the plumbing. Appellee Carrollton Brick Company, under contract with the general contractor, furnished the brick. These several actions were filed by the commonwealth of Kentucky for the use and benefit of the foregoing parties against appellant Federal Union Surety Company and the General Supply & Construction Company to recover on the bond which they executed to- the commonwealth of Kentucky. The provisions of the bond whereby appellant agreed that’the General Supply & Construction Company would promptly make payment to all persons supplying labor and materials in the prosecution of the work were set’fditfi'iiythq respective petitions,, and it was charged that it wh§/the intéhtion of the par — 101 — lani’s demurrers to the various petitions were overruled. Thereupon it answered in five paragraphs. Paragraph 1 admits the execution of the bond sued on and the contract covered thereby, but avers that appellant was released from all liability under its bond by the wholesale and radical alterations' and changes made in the terms of the contract by the obligee in the bond, which alterations and changes were made without the knowledge and consent of appellant and before appellees accepted or attempted to accept the benefit of the bond sued on; that these alterations and changes completely changed the character of the building called for by the contract covered by the bond, and were of so radical and costly a nature that it required a special act of the Legislature in order to secure an additional sum of $250,000 to pay for the same. In its second paragraph,' appellant pleaded that it . was released from all liability under its bond by the acts of the obligee in paying during the progress of the rest of the work to the general contractor the greater part of the retention fund which the contract- provided should be held by the obligee until 30 days after the completion of the work, which payments, it is averred, were made without the knowledge and consent of appellant, and before appellees accepted or attempted to accept the benefit of the bond sued on. Paragraph 3 contains the defense ¡•hat the bond in question was executed pursuant to the provisions of the act of February 6, 1904, and that it was neither the intention of the board of sinking fund commissioners to require, nor had they any authority to require, a bond for the benefit of subcontractors, including appellees, and that the bond aid not inure to their benefit. In paragraph 4, appel — 102 — lant avers that it was released from all liability under tbe bond in question by tbe act of tbe obligee in extending tbe time for the completion of tbe work covered by tbe bond without tbe knowledge and consent of appellant, and before appellees accepted or attempted to accept tbe benefit of tbe bond. In paragraph 5, appellant defended on tbe ground that it was released from all liability by- tbe acts of tbe obligee in changing tbe method and time of paying the contract price to tbe contractor, which changes were made without tbe knowledge and consent of appellant, and before appellees accepted or attempted to accept tbe benefit of tbe bond sued on. It appears that at tbe time of tbe institution of these several actions tbe board of sinking fund commissioners bad in its bands a balance of about $78,000. By order of court this sum was distributed among tbe several claimants. Upon final bearing, judgment was rendered in favor of appellee M. C. Vandiver for tbe sum of $1,713.54, with interest. Judgment was rendered in favor of appellee W. C. Wulff & Company for $2,214.30 and interest. Judgment was rendered in favor of appellee Joseph Elias for $2,644.81 and interest. Judgment was rendered in favor of appellee Grainger & Co. for $4,275.53, and interest. No judgment against appellant was rendered in favor of J. L. Mott Iron Works, but tbe judgment provided that out of tbe amount adjudged in favor of M. C. Vandiver, the claim of J. L. Mott Iron Works for $1,380.87 and interest should be paid. A similar judgment was given in favor of tbe Ahrens & Ott Manufacturing Company for $1,189.41 and interest, payable out of tbe judgment in favor of M. C. Vandiver. Judgment was rendered in favor of appellee Carrollton Brick Company for tbe sum of — 103 — $3,772.61, with interest, subject to a credit of $200. Upon this appeal no question of the correctness of the foregoing amounts is made. The only questions raised are questions of law, and these we shall proceed to discuss. The first question we shall consider is: Was the bond in question authorized by the act of .February 6, 1901? It is true the act does not contain any provision specifically directing or authorizing the board of sinking fund commissioners to incorporate either in the'contract or bond a provision to the effect that the general contractor would.pay the laborers and materialmen. The board of sinking fund commissioners, however, was given authority to contract for the erection of the capitol. Having been given authority to make such contract, it necessarily had the right to insert in the same any reasonable covenants which the members of the board might in their wisdom deem necessary or proper in order to secure the erection of the capitol upon the best terms possible. Indeed, it was their duty to do what ordinarily prudent men would do in attending to their own business of a similar nature. If, then, the members of the board, in the exercise of the discretion conferred upon them, concluded that the work would be prosecuted with more satisfaction and would be better done by securing subcontractors, they were certainly authorized to insert in the contract or bond provisions necessary to attain the end desired. Indeed, the provision in regard to the payment of laborers and materialmen was a wise one. That subcontractors, knowing they were secure, would do better work and furnish better material than if they felt uneasy about their pay, cannot be doubted; and the credit which the contractor would thus gain by the security would — 104 — enable, him. to prosecute the work more rapidly and 'with greater hope of profit. The provision in the act to the effect that “subcontractors shall in no case be recognized by the board, the responsibility to. continue in the principals and their sureties,” did not prohibit the board from providing security for subcontractors. The purpose of this provision was to require the board to place upon the principals and their sureties the entire responsibility. In making provision for the benefit of the laborers and material-men, the board simply placed upon the principal and his surety the responsibility which the act required. We therefore conclude that the board was fully authorized by the act of 1904 to insert in the contract made with the general contractor a covenant on Iris part to pay the laborers and materialmen. Baker v. Bryan, 64 Iowa, 561, 21 N. W. 83. The act of 1904 provides that “every contractor for work or material to be furnished under this act, shall execute to the board a bond, conditioned for the faithful performance of his contract, with surety to be approved by the board.” By this provision, explicit authority is given to require of every contractor for work or material to be furnished a bond conditioned for the faithful performance of his contract. Having first given to the board authority to contract, and. necessarily the power to fix the terms and conditions of the contract, .and the board, by virtue of this power, having incorporated a covenant for the benefit of laborers and materialmen, it follows that the board was then authorized to require of the general contractor a bond with surety, approved by the board, for the faithful performance of the contract so made. That being true, we are of opinion that the board was fully authorized to insert in the — 105 — bond the provision therein contained for the benefit ■of laborers and materialmen. The provision contained in the contract is as follows:"* * * And before final payment is made, the contractor shall furnish satisfactory evidence that he has paid for all materials used in the construction of said work, and satisfy the claims of . all laborers and subcontractors doing work thereon.” This language is plain, clear, and unambiguous. The general contractor thereby covenanted not only to satisfy — that is, to pay — the •claims of all laborers and subcontractors doing work thereon, but to furnish satisfactory evidence that he had paid for all materials used in the construction of ■said work. If this is not the meaning of the provision referred to, then we are at a loss to know what language could have been employed for the purpose of expressing the intention of the parties. In preparing the bond which the statute required, the board saw to it that the bond provided, not only that thq general contractor should fulfill all the covenants and conditions of the contract and should perform all of the undertakings therein stipulated, but also required a specific provision in the bond with reference to paying all persons supplying labor or materials in the prosecution of the work. By incorporating this provision in the .bond, the board left nothing for interpretation. All doubt as to appellant’s undertaking was thereby removed. "When appellant executed the bond, it knew the exact liability which it had incurred. When we consider the terms of the contract and bond and the evident care taken by the contracting parties with reference to the provision in favor of the laborers and materialmen, we have no doubt that it was the intention of the contracting parties to insert the provision in question both for the benefit of the common — 106 — wealth and the benefit of the laborers and material-men. By securing the. laborers and materialmen in the payment of their claims, the board also procured protection and advantages for the commonwealth. This latter fact does not affect the rights conferred , by the bond upon the laborers and materialmen. But it is insisted that the board was under no legal1 duty to incorporate in the bond the provision for the benefit of the laborers and materialmen, and that, therefore, the latter have no right of action on the bond. We conclude, however, that the benefit which the board and the commonwealth derived from the provision in question, and the liability of the fund in the hands of the board to be subjected to liens by the subcontractors, were sufficient to authorize the board to make the contract and bond in question for the benefit of the laborers and materialmen. Morrison v. Payton, 104 S. W. 685, 31 Ky. Law Rep. 992. Being of the opinion that the board was authorized to take the bond, and to insert therein a provision for the benefit of appellees, we have no doubt of the right of the latter to bring this action to recover on the bond, in question. The only, other question which we deem it necessary to consider- is whether or not the changes in the building, or in the time or method of payment, or in the failure of the board to retain the balance of the funds in its hands required by the contract, released appellant from its liability on the bond in' question, so far as appellees are concerned. Without determining whether the bond covered the changes referred to, we shall proceed to a discussion of the question whether or not the act of the board in making such changes affected the rights of the appellees. It may bé con — 107 — ceded that there is considerable authority to the effect that radical changes in, or additions to, a building, or material changes in the method or time of payment, not contemplated by the contract, will release the surety from all liability on his bond so far as the owner of the building is concerned. But the question we have here affects only the rights of appellees. It appears from the record that the contract and bond were executed on August 14,1905. The contract and bond were public records. They were required to be deposited in the office of the Auditor of Public Accounts. Within a short time after the execution of the contract and bond, all the appellees in this case, who were given judgment against the appellant, entered into contracts with the general contractor. These contracts were entered into upon the faith of the bond in question. None of the alleged changes or alterations in the building or in the time or method of payment were made until long after these contracts between appellees and the general contractor had been executed. Upon the making of these contracts, appellees became bound to furnish the materials provided for in the same, and could have been forced to comply with their undertaking and to furnish such materials regardless of any changes that might be made, either in the building or in the contract itself. Their rights against the surety company also accrued at the time they made their contracts with the general contractor. By entering into the contracts, appellees indicated their acceptance of the bond which was executed for their benefit and protecdon. Their rights, then, became fixed, and no change thereafter made by the board of sinking fund commissioners, either in the building or in the method — 108 — or time of paying the contract price, could in any way affect the rights of appellees. United States Fidelity & Guaranty Co. v. American Blower Co., 41 Ind. App. 620, 84 N. E. 555; Schwickert v. Lemke, 40 Minn. 27, 41 N. W. 302; Dewey v. State ex rel. McCullom, 91 Ind. 173; Conn v. State ex rel. Stutsman, 125 Ind. 514, 25 N. E. 443; Doll v. Crume, 41 Neb. 655, 59 N. W. 806; City of Duluth v. Heney, 43 Minn. 155, 45 N. W. 7; Kaufmann v. Cooper, 46 Neb. 644, 65 N. W. 796; Pingrey’s Suretyship, section 112. , It is true that in a majority of the above cases there was a statute securing to laborers and material-men protection in the bonds required to be taken. This fact, however, simply furnished an additional reason for holding that the rights of laborers and materialmen could not be affected by any act of the owner of the building in making changes in the terms of the contract or in the building itself. In our opinion there is every reason why the same rule should be adhered to in the case before us. Being authorized to require a bond for the faithful performance of the contract by the contractor, and being authorized to insert in the contract any provision reasonably calculated to secure the best building at the most reasonable price, and having, under this authority, inserted the covenant for the benefit of appellees, we conclude that the rights of the latter were just as firmly fixed by the contract and bond as if the statute had directed that the contract and bond should contain the provision relied upon. After that time, the board was without authority to do any act that would release appellant so far as appellees are concerned. In conclusion, we deem it proper to say that counsel' for appellant have cited many authorities sustain — 109 — ing their several contentions raised upon this appeal. It cannot he doubted that at one time the courts were so inclined to release sureties from all liability that the surety became known as the favorite of the law. This was probably due to the fact that in the early days the surety entered into contracts of surety^ ship merely for the purpose of accommodating an-' other and received no compensation therefor. Such is not the ease today, however. Suretyship has become a business. Both private individuals and corporations furnish bonds for a consideration. Such bonds are contracts — nothing more nor less, though usually attended by more formality in their execution than are other contracts. Where such contracts are entered into, and the language employed is so clear that the surety cannot fail to know and appreciate the scope of his liability, it should be the tendency of the courts to enforce the contracts, rather than to seek for reasons for relieving the surety of liability. Judgment affirmed.