United States Fidelity & Guaranty Co. of Baltimore v. Marathon Lumber Co.

HoldeN, J., delivered the opinion of the court. The Board of Trustees of the South Mississippi Charity Hospital entered into a contract with the Burke Construction Company for the erection of a hospital building at Laurel, authorized by the legislature of the state. By the terms of the contract, the Burke Construction Company obligated itself to furnish all labor and material for the erection of the building in accordance with certain plans and specifications prepared by an architect, for the sum of forty two thousand four hundred and forty seven dollars and eighty six cents. The contract, amongst other things, provided that if the contractor should fail, refuse, or neglect to supply sufficient or properly skilled workmen or material in accordance with the terms of the contract, to prosecute the work, the architect, upon giving ten days’ notice, should have the right to terminate the contract. Said specifications were expressly made a part of the contract. The specifications contained the following stipulation: “11. Bond: The successful bidder -must furnish a satisfactory bond in full amount of the contract price, executed upon the blank form attached, by sureties ac — 818 — ceptable to the board of trustees and their attorneys, insuring the fulfillment of all the provisions of the contract and covering all guaranties herein provided for and the prompt payment of all persons furnishing labor and materials required in the prosecution of the work. (Transcript, vol. 1, p. 88.)” Article 8 of the contract provides that the contract price of forty two thousand four hundred and forty seven dollars and eighty six cents is to be paid by the owner to the contractor when the building is completed according to the plans and specifications, and also provides as follows: “If, however, at any time any laborer or material-man shall establish to the satisfaction of the architect, that said contractor is owing said laborer for labor performed in said building, or owing said materialman for materials furnished on the ground, which material has been accepted by said contractor, and said architect is convinced that said contractor is liable, to the said laborer or materialman, for said sum or sums claimed, then the owner may, at their option, retain out of any payments then due, or thereafter to become due the said contractor, the amount sufficient to completely satisfy said laborer and said materialman, or either of them. Should there prove to be any such claims after all payments are made, the contractor shall refund to the owners all moneys that they later may pay in discharge of any claim any laborer or material-man may have for the labor performed in the building, or material furnished on the ground and accepted by said contractor, and for which said contractor has not paid, and any expense the owners may incur in ascertaining the correctness of said claims, shall be borne by said contractor, and the said contractor and his sureties on his bond shall be liable for all sums so paid by the said owners. The remaining fifteen per cent, due said contractor on said contract, less any deduc — 819 — tions hereinbefore provided for, shall be paid said contractor when said building is accepted by said owners.” The contractor gave bond for the faithful performance of the foregoing contract, in an amount equal to the contract price for the construction of the building; said bond being executed and furnished by the appellant surety company, the United States Fidelity & Guaranty Company. Amongst other provisions, the bond contains the following: “Whereas, the said principal has entered into a certain written contract bearing date of the 27th day of February, 1917, with the said Board of Trustees, South Mississippi Charity Hospital, Laurel, Mississippi, to do and perform all things contemplated by said contract together with an its terms, covenants and conditions, specifications and stipulations incorporated herein, are made to form a part hereof as fully and ample to all intents and purposes as if said contract was recited herein.” The bond further stipulates that: “Provided that if the said principal shall fail to comply with all the conditions of said contract to such an extent that same shall be forfeited, then the said surety shall have the right and privilege to assume said contract and to sublet or complete the same, whichever said surety shall elect to do, provided it is done in accordance with said contract; provided further that in the event of any breach of conditions of this bond, said surety shall be subrogated to all rights and properties of said principal arising out of said contract, and any or all moneys and properties at that time due and payable, or that may hereafter become due and payable to the said principal under and by virtue of said contract, shall be credited upon any claim the Board of Trustees of the South Mississippi Charity Hospital, Laurel, Mississippi, may make upon said surety because of such breach.” — 820 — In order to induce the appellant United States Fidelity & Guaranty Company to become surety on its bond for the erection and completion of said building, the contractor, Burke Construction Company, signed an agreement of indemnity containing the following stipulations : “And for the better protection of the said company, we do, as of the date hereof, hereby assign, transfer and convey to it, the said United States Fidelity & Guaranty Company, all our right, title, and interest in and to all the tools, plant and equipment of every nature and description that we may now or hereafter have upon such work, or in, on or about the site thereof, including as well materials purchased for or chargeable to said contract, which may now be in process of construction, or storage elsewhere, or in transportation to said site, hereby assigning and conveying also all our rights in and to all subcontracts; which have been or may hereafter be entered into, and the materials embraced therein, and authorizing and empowering said company, its agents or attorneys, to enter upon and take possession of said tools, plant and equipment, materials and subcontracts, and enforce, use and enjoy such possession upon the following conditions, viz.: This assignment shall be in full force and effect, as the date hereof, should we fail or be unable to complete the said work in accordance with the terms of the contract covered.by said bond, or in the event of any default upon our part under the said contract. “In further consideration of the execution of said bond, we do hereby agree, as this date, that the said United States Fidelity & Guaranty Company shall, as surety on said bond, be subrogated to all our rights, privileges and properties as principal and otherwise in said contract, and we do hereby assign, transfer and convey to said Company all the deferred payments, and retain percentages, and any and all moneys and properties that may be due and payable to us at the time of such — 821 — breach or default, or that may thereafter become due and payable to us on account of said contract, or on account of extra work or materials supplied in connection therewith, hereby agreeing that all such moneys, and the proceeds of such payments and properties, shall he the sole property of the said United States Fidelity & Guaranty Company, and to he hy it credited upon any loan, cost, damage, charge and expense sustained or incurred by it as above under its bond or suretyship. ’ ’ After these obligations had been entered into between the parties, the contractor, the Burke Construction Company, undertook and proceeded to construct said building in accordance with the contract, but failed to do so and was adjudged a bankrupt while the building was far from being completed, and thereafter made no effort to pay the claims for labor and material used in the building or to complete the building; whereupon the appellant surety company, through its individual indemnitors, whom it is unnecessary to mention in this connection because their rights are measured by those of the surety company, took over the performance of the contract of the Burke Construction Company together with all its rights and contractual obligations, and proceeded to, and did, complete the building according to the terms of the contract and the bond executed for the faithful performance of the contract, at a loss of about six thousand dollars, that is the construction of the building cost this amount more than the contract price of forty two thousand four hundred and forty seven dollars and eighty six cents. The appellees, the Marathon Lumber Company and others, furnished labor and material in the construction of said building at the instance of the contractor, the Burke Construction Company, before it went into bankruptcy. These claims, amounting to several thousand dollars, were presented for payment to the appellant United States Fidelity & Guaranty Company, and pay — 822 — ment was refused. Appellees tlien presented their claims properly itemized and sworn to, to the said architect employed by the Board of Trustees in making the plans and specifications and in the supervision and construction of the hospital building. Appellees established to the satisfaction of the architect that the said contractor, Burke Construction Company, was owing said lahorors for labor performed in said building and was indebeted to said materialmen for material furnished on the grounds to the contractor and used in the construction' of the building, and the said architect, acting for the Board of Trustees as provided in article 8 of the contract, deducted and retained the amount of said sums from the estimate or balance due appellants sufficient to pay and for the purpose of paying said claims in accordance with, the' terms of the contract. This amount, sis thousand four hundred and fifty two dollars and ninety-two cents, deducted and retained by the trustees, was paid into court with their original bill of interpleader herein. After said amount was paid into court by the trustees with its bill of interpleader the- appellant the United States Fidelity & Guaranty Company, and its said in-vidual indemnitors, claimed a considerable loss on account of the completion of the construction of said hospital and insisted that they had a superior right and equity in and to the funds so retained by the trustees, and demanded payment of said sum to them in order to reduce their losses. Appellees who had furnished the material and labor to the contractor, Burke Construction Company, in the construction of the building, also claimed an equitable and legal right to these funds in satisfaction of their several claims. Accordingly, the appellants and appellees, in answer to the bill of inter-pleader filed by the Board of Trustees, propounded their respective claims to said fund. After a full hearing of the cause before the chancellor, the entire fund in the hands of the Board of Trustees — 823 — was awarded to appellees in satisfaction of their respective claims for labor and material furnished the contractor in the construction of the building. This appeal comes from that decree. Several questions are presented in this appeal none of which we think are necessary for us to decide, except one, and that is whether or. not the appellant United States Fidelity & Guaranty Company undertook and obligated itself by its surety bond to pay the claims here in question for labor and material furnished the' contractor in the construction of the building. The owner of the building in this case being the state, no lien for labor and material furnished attached to the building, and therefore the funds in the hands of the state agents, and Board of Trustees, cannot be applied to the payment of the labor and material claims unless authority for doing so is found in the contract executed by the contractor or in the bond furnished by the appellant bonding company. The case of National Surety Co. v. Decorating Co.. 104 Miss. 626, 61 So. 700, 46 L. R. A. (N. S.) 325, is cited as authority by counsel for the appellee. That decision is not important here, except that it holds a valid provision may be made in a surety bond to secure the payment for labor and material furnished in the construction of a state building. That question • does not arise in the case before us, but the sharp inquiry now is whether the appellant bonding company undertook and obligated itself by the bond and contract to pay and satisfy the claims for labor and material furnished to and used by the contractor in the construction of the hospital building. In National Surety Co. v. Decorating Co., supra, the bond there expressly provided that claims for material and labor furnished were to be paid by the surety company should the contractor fail to do so. But the the contract and bond in the instant case do not contain the same express stipulation. However, the contract here, — 824 — the performance of which is secured by the bond, does provide a method of securing and paying claims for labor and material furnished in the construction of the building. If this method provided is sufficiently definite and comes within the obligation of the bond, we see no reason to question its binding force. The main contentions of the appellants are: That under the provisions of the bond, upon failure of the contractor, the appellants were subrogated to all the rights of the contractor and the owners of the building; that in view of the separate assignment of all rights by the contractor to the surety company, and its rights by subrogation, the surety company’s equitable claim to the fund remaining in the hands of the Board of Trustees is superior to that of the claims for labor and material furnished; that the appellants by subrogation and assignment are entitled to these funds as well as all other rights and property belonging to the contractor; that here was no obligation upon the part of the surety company to satisfy the claims for labor or material. In other words, it is the contention of the appellants that the appellee claimants sold and furnished the material and labor to the contractor, and appellees having no lien upon the building, and there being no surety obligation upon the part of the appellants to pay any of these claims, the fufids in the hands of the Board of Trustees legally and equitably belong to the appellants, and that the claimants merely have an action of debt against the contractor who went into bankruptcy. We do not think the position of the appellants is maintainable. The specifications required the successful bidder, who was the Burke Construction Company, to furnish a satisfactory bond to insure the fulfilment of all of the provisions of the contract and the payment of all persons furnishing labor and materials required in the construction of the building. The specifications alone, possibly, would not be sufficient to hold the — 825 — appellants liable here; hut when considered in connection with the express stipulation in article 8 of the contract» as quoted above, for the fulfillment and performance of which the bond was executed, it reasonably appears that the appellant surety company undertook and obligated itself to allow and secure the payment of any claim for labor performed or materials furnished the contractor .in the construction of the building when such claims were established to the satisfaction of the architect, and sufficient funds to pay same were retained out of any amount due the contractor or its substitute, the subrogated surety company. The method of securing and paying the claims for labor and material furnished, as set out above in article 8 of the contract, seems to be plain and simple. These claims were esablished to the satisfaction of the architect, and the aggregate amount of them was retained out of the amount due the contractor, or due the substituted surety, in the hands of the Board of Trustees, and this is the sum that was paid into court with the bill of interpleader. It is true the surety company was subrogated. to the rights of the owner and contractor, but it also assumed the contractor’s burdens imposed by the contract. It agreed, as the subrogated successor of the contractor, to do those things which the contractor would have been bound to do in fulfilling the contract. The bond having been given to secure the performance of each and every covenant of the contract, one of which was that the amounts due for labor and material furnished might be deducted, retained, and paid by the Board of Trustees at any time and but of any funds due the contractor during the period of the contract, upon approval of the architect, it was proper to deduct the amounts due appellees for labor and material furnished to the contractor in the construction of the building, out of any funds due the contractor or its substitute, the subrogated surety company. The appellees — 826 — certainly have a right, at least against any contract funds retained through the architect, in the hands of the trustees, which is, in effect, a right against the surety company under the bond securing the performance of the contract, because the application of the funds to the payment of the appellees’ claims must necessarily result in their loss to the appellant surety company. But the appellants seek to avoid the above unfavorable construction and application of article 8 of the contract upon the ground that the right of the trustees to “retain out of any payments due or thereafter to become due the contractor an amount sufficient to completely satisfy said laborers or materialmen” is optional and discretionary, which option was not exercised by the trustees against the contractor before default, nor against funds due the contractor, or against the surety company. It will be observed that the trustees could exercise the option at any time while the building was in course of construction or afterwards; and we think it could be exercised against the contractor before he surrendered the completion of the contract to the surety company, or against the subrogated surety company after it assumed and took over the completion of the contract, as it then stood in the shoes of the contractor, as a substitute, with its subrogated rights and contractual obligations of surety. When the sums were deduced and set aside for appellees by the architect as he was authorized to do, acting for the trustees under the contract, this constituted an exercise of the option by the trustees to retain the amount due appellee materialmen; and these funds became impressed with a trust; and, this being true, it follows that the sums so retained or set aside became payable to appellees, and it was the plain duty of the trustee to pay over the funds in satisfaction of the claims of appellees under the contract and bond. A court of equity will order — 827 — that done which ought to have been done by either of the parties. The stipulation in article 8 as to claims for material and labor provides that: “The contractor and its sureties on its bond shall be liable for all sums so paid by the said owners.” Now, we think, it is equitable and just that before the appellant surety company can claim the funds in the hands of the Board of Trustees by right of subrogation it must first satisfy its obligations under the contract and bond, and allow the payment of the amounts due the appellees for labor and material furnished the contractor for the building. The appellant surety company can claim nothing by its separate assignment from the contractor which would be inconsistent with its obligations under its bond, and therefore it is left to stand alone here upon its right of subrogation. It simply stands as a substitute in the shoes of the contractor, with no greater rights and must comply with the terms of the contract for the defaulting contractor. And the contractor agreed that any sums of money due him by the owner of the building growing out 'of the contract might be retained and applied to the payment of claims for labor and material furnished whenever such claims should be established with the architect. These claims having been established and approved, and the amounts having been retained out of the payments due the contractor according to the contract, the contractor could not complain, and therefore the surety company, having the same rights only that the contractor had, cannot complain at the allowance and payment of these claims. The decree of the lower court is affirmed. Affirmed.