National Surety Co. v. Lane

Mr. Justice Robb delivered the opinion of the Court: As we view the question involved, it is a comparatively simple one. Orman & Crook defaulted. Had they completed their contract, the $45,000 retained would have belonged to them, hut, by reason of their default, it became liable to be applied in reduction of the damages resulting therefrom. What followed ? The surety company, being called upon, cast about in good faith to secure the completion of the work and conditionally contracted with new parties to carry it on. The validity of this contract was expressly made to depend upon the execution of a similar contract with the surety company by the United States. That contract was duly executed, and in it the United States agreed to pay the surety company the balance to be earned under the original contract and this retained percentage. The trial court has found that even then the surety [182] company would suffer a loss of $14,050; in other words, that to complete the work of the defaulting contractor it was necessary to pay someone not only the amount yet to be earned under the original contract and the retained percentage, but $14,050 in addition. Because the second contractors, however, relying upon the contract between the United States and the surety, agreed to “look to the payments to be made by the United States of America for their compensation for all work done,” beyond the value of the $14,050 which the surety was to contribute, it is insisted that there was no consideration for the agreement to pay the surety this retained percentage. In Prairie State Nat. Bank v. United States, 164 U. S. 227, 41 L. ed. 412, 17 Sup. Ct. Rep. 142, the bank, having loaned a contractor money which it contended had been used in the performance of a contract, claimed as against the surety under the contract a balance in the hands of the government which represented a retained percentage, as in this case. When the contractor defaulted, the surety assumed the completion of the contract at a loss of about $15,000. The court said; “Hitchcock’s [the •surety’s] right of subrogation, when it became capable of enforcement, was a right to resort to the- securities and remedies which the creditor (the United States) was capable of asserting against its debtor Sundberg & Company, [the contractors], had the security not satisfied the obligation of the contractors, and one of such remedies was the right based upon the original contract to appropriate the 10 per cent retained .in its hands. If the United States had been compelled to complete the work, its right to forfeit the 10 per cent and apply the accumulations in reduction of the damage sustained remained. The right of Hitchcock to subrogation, therefore, would clearly entitle him when, as surety, he fulfilled the obligation of Sundberg & Company to the government, to be substituted to the rights which the United States might have asserted against the fund. It would hardly be claimed that, if the sureties had failed to avail themselves of the privilege of completing the work, they would not be entitled to accredit of the 10 per cent reserved in reduction of the [183] excess of cost to the government in completing the work beyond the sum actually paid to the contractor, irrespective of the source from which the contractor had obtained the material and labor which went into the building.” The court further pointed out that a stipulation in a building contract for the retention, until the completion of the work, of a certain portion of the contract, “is as much for the indemnity of him who may be guarantor of the performance of the work, as for him for whom the work is to be performed; that it raises an equity in the surety in the fund to be created; and that a disregard of such stipulation by the voluntary act of the creditor operates to release the sureties. - -is amply sustained by authority.” See also Hardaway v. National Surety Co. 211 U. S. 552, 53 L. ed. 321, 29 Sup. Ct. Rep. 202. Coming hack to the facts of the present case, the original contractor having defaulted, the surety entered into a contract w¡ th the government for the completion of the work. Recognizing the fact that the cost of such completion would be in excess of both the current payments and the amount retained, and recognizing the equitable interest of the surety in such retained sum, the government agreed to pay such amount to the surety upon completion of the work. So long as the surety was acting in good faith, it was entirely immaterial to the government whether, under the contract between the surety and the parties who actually were to complete the work, those parties agreed that the surety should not be liable for the payment of this amount. It formed a material part of the consideration for their contract with the surety. In fact, as we have seen, that contract was to be void unless the government should enter into a contract with the surety, by the terms of which this retained amount was to be paid to the surety. When we come to consider the fact that in order to secure the completion of this work it was necessary for the surety actually to pay $14,050 in addition to current payments, the amount retained, and the amount held as a forfeiture, it becomes still more important that we should look to the substance and effect of these contracts, and not, by over-re [184] Enement, avoid a proper and legitimate contract between the government and tbe surety. Under that contract, which it is conceded was fair and just, the government agreed to pay the surety this $45,000, as unquestionably, under the facts, it had a right to do. The surety company had arranged for the performance of the work, and agreed to assign all warrants, and to pay over all moneys received from the United States, including'this retained sum, and in addition to pay out of its own funds $14,050. This contract not only was devoid of all speculative features, but, on the contrary, under its provisions the surety was to sustain an actual loss of over $14,000. The work has been performed and this $45,000 earned, not by the original contractor, but by the surety who, through its contractor, performed the work. The fact that when paid it will become the duty of the surety, under its contract with Hayes Bros. Company and Peters, to pay it to them, is no concern of the original contractors or their trustee in bankruptcy. The material question is, Was the expenditure of this sum necessary to complete the work? Had the government entered into a contract with Hayes Bros. Company and Peters, it would have been its right and duty to have applied this sum in reduction of the excess of the cost of completing the work beyond the current payments under the original contract. But the government preferred to deal directly with the surety, as it had a right to do, and under the resulting contract the surety became responsible for the completion of the work. Having in mind that this is an equitable proceeding, and looking at the substance of the transactions involved, as in duty we are bound to do, we have no hesitancy in ruling that the $45,000 holdback should have been paid to the surety. The decree must be. reversed, with costs, and the cause remanded for further proceedings not inconsistent with this opinion. Reversed and remanded. ■A petition for a rehearing was denied May 12, 1916.