Trinity Universal Insurance Company v. Gould

• Decision Date: 15 September 1958
• Docket Number: No. 5782,5783.,5782
• Citation: 258 F.2d 883
• Parties: The TRINITY UNIVERSAL INSURANCE COMPANY, a corporation, Appellant, v. James G. GOULD, Appellee. James G. GOULD, Cross-Appellant, v. The TRINITY UNIVERSAL INSURANCE COMPANY, a corporation, Cross-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

258 F.2d 883 (1958)

The TRINITY UNIVERSAL INSURANCE COMPANY, a corporation, Appellant, v. James G. GOULD, Appellee.

James G. GOULD, Cross-Appellant, v. The TRINITY UNIVERSAL INSURANCE COMPANY, a corporation, Cross-Appellee.

Nos. 5782, 5783.

United States Court of Appeals Tenth Circuit.

August 7, 1958.

Rehearing Denied September 15, 1958.

Gerrit H. Wormhoudt, Wichita, Kan. (Homer V. Gooing, Wayne Coulson, Paul R. Kitch, Dale M. Stucky and Donald R. Newkirk, Wichita, Kan., were with him on the brief), for appellant and cross-appellee.

Arthur N. Turner, Newton, Kan., and William P. Thompson, Wichita, Kan. (C. Fred Ice, Newton, Kan., A. W. Hershberger, Richard Jones and H. E. Jones, Wichita, Kan., were with them on the brief), for appellee and cross-appellant.

Before MURRAH, PICKETT and LEWIS, Circuit Judges.

Rehearing Denied (No. 5782) September 15, 1958.

MURRAH, Circuit Judge.

Appellee Gould brought this diversity suit against appellant, Trinity Universal Insurance Company, to enforce the penalty on its surety bond for the performance of a contract between Gould and Abney for the construction of Gould's dwelling. Trinity asserted a material alteration of the construction contract which worked a breach and discharge of the bonded obligation. This appeal is from a judgment in favor of Gould on the surety bond in the approximate sum of $12,000. The cross-appeal challenges only the amount of the award.

The construction contract obligated Abney to construct the dwelling for Gould according to specifications for the sum of $25,000 and to complete the same on or before May 1, 1951. The contract contained the conventional ten percent retainage, and also provided for changes and alterations without change in the contract price, unless the contractor, before making such changes and alterations, notified the owner in writing of the added cost, in which event Gould had the election whether to proceed with such changes. In conventional language, the bond guaranteed the performance of the construction contract in the principal amount thereof, provided among other things that the obligee should retain ten percent of the contract price until complete performance; and that "no change shall be made in such plans and specifications which shall increase the amount to be paid the principal more than ten percent of the penalty of this instrument without the written consent of the surety."

During the course of the construction of the dwelling, numerous changes were made in the plans and specifications, but only two items in the aggregate of $1,425 were submitted in writing by the contractor for additional cost. Early in May, the contractor orally agreed with Gould's father-in-law to construct a porch and certain other alterations in the kitchen and family room, in accordance with separate plans and specifications on a cost plus ten percent basis, estimated to be $5,000. On April 25, 1951, $12,888.23 had been paid on the $25,000 contract price. The house was not completed on May 1, 1951, and Abney and Gould agreed that Abney would continue performance of his contract. Abney failed to pay material and labor bills as they became due, and on or about May 10, 1951, Gould began to pay one hundred percent of the cost of work on the residence on certification of the labor and material bills. The bills were paid either through Abney's controlled bank account, or directly through Gould's account in the same bank. In August Abney had been paid the sum of $26,464 and the dwelling was not complete. When Abney expressed a disposition to leave the job, the father-in-law offered to pay him not less than a $2,000 bonus in lieu of his prior separate cost plus agreement with him if Abney would "stay on the job and complete the house". Abney finally left the job unfinished on October 8, 1951, at which time a total of approximately $40,000 had been paid to him or for his account. Thereafter Gould completed the house at a total cost of $63,021.38. Gould first notified the surety in writing of the default on October 11, 1951.

The surety takes the position that the cost of the changes and alterations made by agreement between Gould and Abney and paid for by Gould, without the surety's consent, exceeded ten percent of the penalty of the bond, and it is agreed that the changes authorized by the father-in-law exceeded this amount. Gould argues, however, that the changes authorized by the father-in-law were paid by him under a separate independent contract, which in no wise prejudiced the bonded obligation; that with respect to the other changes and modifications, only $1,425 was submitted in writing for additional cost; that it must therefore be presumed that all other changes were within the contract price; that Abney simply undertook to build the house too cheaply; and that the bonding company should have known it.

The record does not show the cost of some sixty-seven changes or alterations; no attempt was made to segregate them; indeed, no attempt was made to segregate the cost of the father-in-law's additions and alterations. All were paid from a common account. From the nature of the alterations, it seems fairly inferable, however, that the cost of those made without written notification greatly exceeded the allowable ten percent of the contract price. At the same time, it is arguable that inasmuch as the contract contemplated changes and alterations without change in the contract price unless submitted in writing and approved by the owner, all changes and alterations except those so approved carried no additional cost in excess of the contract price.

It is of course almost axiomatic that any change or modification of the construction contract which materially increases a compensated surety's risk discharges the obligation. See Restatement Security § 128. On the other hand, contracts of this kind conventionally contemplate changes and alterations in the specifications; and any change or modification which does not materially affect the risk is inoperative. See Williston Contracts, Vol. 4, §§ 1239, 1240, 1241. The trial court made no specific finding on whether the changes and alterations agreed to between the parties without the consent of the surety exceeded the allowable tolerance under the bond, hence effected a discharge. Its judgment, however, presupposes a material alteration of the construction contract and a resultant breach of the surety bond, for it rests squarely upon the alternative grounds of equitable waiver. In that regard, the court specifically found that during the course of the construction, Gould informed Trinity's local policy-writing Manager of all the developments in connection with the building contract, including the failure of Abney to complete the building on May 1; the agreement of Gould and Abney that Abney would continue the work; the change in the method of payment; the written statements of additional cost by reason of changes; and the cost plus agreement between the father-in-law and Abney. The court found that...