Maryland Casualty Co. v. Eagle River Union Free High School District

The following opinion was filed November 17, 1925: Owen, J. The bond of the surety company was furnished pursuant to the provisions of sec. 3327a, Stats. That statute, therefore, entered into and became a part of the bond. Baumann v. West Allis, 187 Wis. 506, 204 N. W. 907. That statute has recently received the frequent consideration of this court and is discussed in Webb v. Freng, 181 Wis. 39, 194 N. W. 155; Southern S. Co. v. Metro — 524 — politan S. Comm. 187 Wis. 206, 201 N. W. 980, 204 N. W. 476; Southern S. Co. v. Hotchkiss, 187 Wis. 227, 201 N. W. 986; Building Contractors’ L. M. L. Ins. Co. v. Southern S. Co. 185 Wis. 83, 200 N. W. 770; and Baumann v. West Allis, supra. The appellant claims, generally, that it was discharged from its obligation by reason of breaches of the contract on the part of the school district in paying out money contrary to the provisions of the contract. It claims that money was paid to the contractor in violation of the contract provision that payment should be made only once -a month, and then only upon architects’ certificates, and only to the extent of ninety per cent, of the material and labor entering into the construction of the building. It also claims that a complete new contract was made between the school district and the contractor in March, 1923, when the school district agreed to advance money in the manner set forth in the statement of facts to enable the contractor to prosecute the work of construction. If this general statement does not include all of the specific reasons assigned by the surety which it claims resulted in its discharge, a consideration thereof will apply to all other reasons assigned, and it is deemed unnecessary to set forth these reasons more in detail. At the outset of our consideration of this case it is well to have in mind the general principles of law touching the liability of paid sureties upon bonds of this nature, at least so far as they can be invoked to work a discharge of the surety. It is thoroughly established by the decisions of this court that contracts of this kind, entered into for a consideration by surety companies engaged in such business, are in effect contracts of insurance, and the contracts are not to be construed according to the rules of law applicable to the ordinary accommodation surety. First Nat. Bank v. U. S. F. & G. Co. 150 Wis. 601, 137 N. W. 742; Builders L. & S. Co. v. Chicago B. & S. Co. 167 — 525 — Wis. 167, 166 N. W. 320; Building Contractors’ L. M. L. Ins. Co. v. Southern S. Co. 185 Wis. 83, 200 N. W. 770; Joint School Dist. v. Bailey-Marsh Co. 181 Wis. 202, 194 N. W. 171; Maryland Cas. Co. v. Hjorth, 187 Wis. 270, 202 N. W. 665. “While it is said in many cases that the rules of interpretation applicable to contracts of a gratuitous surety are not to be applied to a surety for compensation, it is meant that a different rule of law is applicable because the changed situation makes it applicable.” Joint School Dist. v. Bailey-Marsh Co. 181 Wis. 202, 214, 194 N. W. 171. Sureties were favorites of the common law because their liabilities were gratuitously assumed. The rules and principles of the common law declaring the rights and liabilities of sureties were developed in an atmosphere surcharged with sympathy for the surety. Accordingly, it was held that' any conduct prejudicial to the surety resulted in the total discharge of the surety from any liability. It was a consideration not usually enjoyed by other contractors. As stated in the Bailey-Marsh Case, we find numerous statements in court decisions that the principles applicable to gratuitous sureties do not apply to paid sureties. These declarations, however, come far short of declaring any rule by which the liabilities of paid sureties are to be determined. Paid sureties understand that they are not regarded as considerately or sympathetically as were the gratuitous sureties of the common law, but they are left in doubt as to the extent to' which that consideration is withdrawn. The number of cases coming to the courts in which paid sureties are urging their complete discharge by reason of some infraction of the contract on the part of the indemnified, suggests that a more specific rule concerning, their rights and liabilities be stated. It is believed that rule will be easy to discover if such contracts be consistently treated (as they have often been declared to be) as insurance contracts rather than the common-law surety contract. It is — 526 — true that such contracts retain the form of surety contracts. But the principles governing the liability of sureties did not spring from the form of the contract but rather from the relations of the parties to such contracts, and a striking change in that relation exists where the obligation of the surety, once gratuitously assumed, is now assumed as a source of profit. While the contract between the parties should govern their rights and liabilities, such contract should no longer be construed strictly in favor of the surety. This has often been declared. It would seem, too, that not every circumstance prejudicial to the interests of the surety should work a total discharge of the surety without any reference or consideration to the extent to which the interests of the surety were in fact prejudiced by such circumstance. In other words, a paid surety should not suffer damage by breach of any duty or obligation resting upon the indemnified, but neither should the surety be permitted to profit thereby. If the breach on the part of the indemnified results in damage to the surety, the surety should be compensated for such damage, but no further. This principle was applied by this court in Joint School District v. Bailey-Marsh Co. 181 Wis. 202, 194 N. W. 171, where conduct which would undoubtedly discharge the surety under the principles of the common -'law was held to amount to a discharge only pro tanto. There can be no injustice in requiring a paid surety, when in the business for profit, to prove that alleged delinquencies or misconduct on the part of the indemnified resulted not only in damage to the surety, but the extent of such damage. That is nothing more nor less than a rule applied with reference to contracts generally, except perhaps cases where the breach of a contract is so material as to justify the other party in rescinding the contract. We must not be understood as saying that there can be no conduct on the part of the indemnified which will result in the absolute discharge of — 527 — the paid surety, but we say.that, as a general proposition, considerations of justice are fully met when the surety is recouped to the extent of the losses actually sustained by reason of misconduct on the part of the indemnified. The statement of this principle forecasts the conclusion which must be reached in this case. The school district entered into a contract by which it became entitled to a school building under certain plans and specifications upon payment of a specified sum of money. The surety company, for a paid consideration, guaranteed to the school district that by the expenditure of this sum of money it would acquire such a school building. Although payments were made without architects’ certificates, and although payments were made in excess of ninety per cent, of the construction, yet if it appears that every cent expended by the school district actually entered into the construction of the building, how can it be said that the surety has been injured? If mismanagement or inefficiency on the part of the contractor added to the cost of construction, certainly the school district is not responsible for that. That the school building cost considerably in excess of the contract price is admitted. That might have been due to an improvidenf bid on the part of the contractor in the first place, but the surety company saw fit to guarantee that the building would be erected for the contract price. It is apparent that the work of construction proceeded in a dilatory and most unbusiness-like manner. That this contributed to increase 'the cost of the building cannot be doubted. With such increased cost, however, the school district cannot be charged. The lower court found that the school district acted in good faith in making tire payments and in advancing money with which to carry on the work in the manner it did. It is apparent that the contractor would have been obliged to throw up his job long before he did had he not received this financial assistance. A departure from the terms of the — 528 — contract in these various respects kept the contractor on .the job. The surety company complains because it was not notified of the financial embarrassment of the contractor, but there was no duty resting upon the indemnified to notify the surety as a matter of law, and there was no provision in the contract or in the bond requiring the school district to give the surety notice of the situation. The school district and the contractor in good faith sought to work out the situation and to make it possible for the contractor to complete the work. This might or might not have resulted to the benefit of the surety, but it by no means appears in this case that the surety suffered any damage by reason of this conduct, and by failing to show that it was damaged it has failed to prove a cause of action or that it was released from the obligations which it had voluntarily assumed. We arrive at this conclusion without finding it necessary to refer to or construe that provision of sec. 3327a which provides that “No assignment, modification or change of the contract, or change in the work covered thereby, nor any extension of time for completion of the contract, shall release the sureties on said bond.” It is contended by appellant that this provision, is one for the benefit of laborers and materialmen and that it is not for the benefit of the municipality. In view of what we have already said it is not necessary for. us to pass upon that question at this time. The appellant also complains because the school district did not prove the reasonable value of the work done and materials furnished in completing the building after it had been abandoned by the contractor. The evidence offered by the school district in this behalf showed the amount of money actually expended by the district in the completion of the school building. There was no evidence offered on the part of the surety to indicate that the amounts expended either for material or labor were exorbitant. The complaint is that the school district simply failed in its proof by not — 529 — establishing reasonable value. It has been held that the amount paid is some evidence of reasonable value and proper cost. Dewhirst v. Leopold, 194 Cal. 424, 229 Pac. 30; Pickles v. Ansonia, 76 Conn. 278, 56 Atl. 552. We think in a case like this, where an owner is called upon to complete the construction of a building, that proof of the amount expended by the owner in that behalf is sufficient proof of the reasonable value or the reasonable cost of such construction in the absence of any showing to the contrary. It should not be put to the burden of bringing expert witnesses on reasonable values of a hundred and one elements entering into such construction. It is to be presumed that the materials were bought in the open market and that laborers were paid going wages. If that be true, then the amount paid does actually represent the reasonable cost of the work. Should the surety company feel that there was improvidence on the part of the municipality in completing the work, the burden belongs upon it to so prove. No other points are raised by the appellant which we deem worthy of treatment. We find no error in the record, and the judgment should be affirmed. By the Court. — Judgment affirmed. A motion for a rehearing was denied, with $25 costs, on January 12, 1926.