Amer. Surety Co. v. Plank & Whitsett

• Decision Date: 22 September 1932
• Citation: 159 Va. 1
• Court: Virginia Supreme Court
• Parties: AMERICAN SURETY COMPANY v. PLANK & WHITSETT, INC., ET ALS.

Page 1

159 Va. 1

AMERICAN SURETY COMPANY v. PLANK & WHITSETT, INC., ET ALS.

Supreme Court of Virginia, Staunton.

September 22, 1932.

Present, Campbell, C.J., and Holt, Hudgins, Gregory and Browning, JJ.

1. SURETYSHIP — Working Contracts — Construction of Surety Contract — Surety Contract in the Nature of an Insurance Contract. — A contract whereby a surety company for a monetary consideration guarantees the faithful performance by a contractor of a working contract contains the essential elements of an insurance contract, and is construed accordingly.

2. SURETYSHIP — Working Contracts — Owners Must Show that They Have Performed Conditions of Contract Before They Are Entitled to Recover from the Surety — Payment of Substantial Sums to Contractor Before They Are Due — Failure of Owners to Retain Required Percentage — Case at Bar. — Before the owners of property are entitled to recover for any loss which they have incurred by reason of the default of the contractor against the contractor's surety, they must show that they have performed the conditions under which the surety has promised to recompense them for loss suffered. These conditions are payments to the contractor in accordance with the terms of the contract. Payments of substantial sums before they are due, or failure to retain the required percentage, are generally held to be such variations in the terms of the contract as will discharge the surety from its obligation to the owners. In the instant case the owners failed to show that they had complied with the terms of the agreement, and hence the surety was released from its obligation to them.

3. WORKING CONTRACTS — Subcontractors, Laborers and Materialmen — Compliance with Condition of Contract. — Subcontractors, laborers and materialmen, before they can recover for a default of the contractor in his obligation to them, must show compliance with the required conditions, i.e., that they have performed work upon the building or furnished materials in accordance with the plans and specifications.

4. Working Contracts — Subcontractors, Laborers and Materialmen — Protection by Surety's Bond — Rights Independent of Each Other — Variation or Modification of Contract. — The rights of owners and laborers or materialmen, where the latter are protected by the provisions of the bond, are independent of each other. No variation or modification of the contract by mutual agreement of the owners and the contractor, even with the consent of the surety, will release the latter from its obligation to pay claims for labor and material, in the event the contractor defaults in such payments.

5. WORKING CONTRACTS — Surety — Failure of Owner to Retain Percentage — Case at Bar. — In the instant case a surety for the faithful performance of a working contract did not appeal from a decree ordering it to pay the claims for labor and materials furnished the contractor, but it contended that the owners should be compelled to reimburse it for all sums so paid. One of the grounds upon which this contention was based was that premature payments and failure to retain the percentage agreed upon stand upon the same footing and constitute a violation of the contract. This contention, however, was unsound. By the express terms of the surety's obligation it voluntarily assumed the risk that the contractor would default in the payment of his obligations to the workmen and materialmen, and in paying these claims the surety has done nothing which it did not obligate itself to do.

6. WORKING CONTRACTS — Failure of Owner to Retain Percentage — Case at Bar. — By the express terms of a bond to guarantee the performance of a working contract the owners were required to retain fifteen per cent of the cost of construction, which should be paid to the contractor only in the event that he submitted satisfactory evidence that all pay rolls, material bills, etc., connected with the work had been paid. The fund created by this retained percentage was required not only as a protection to the owners, to be used in the event that the contractor defaulted in any of his obligations to them, but as a fund out of which the surety might be paid, in the event that it elected to complete the building after the default of the contractor, and out of which it had a right to be reimbursed for the payments it might be compelled to make laborers and materialmen. In other words, by the express terms of the agreement the surety was given an equitable interest in this retained percentage, which could not be diverted without its consent. This is the theory upon which it is generally held that sureties are entitled to reimbursement from the owners out of the retained percentage.

7. WORKING CONTRACTS — Suit by Surety to Recover from Owners Payments to Subcontractors and Materialmen — Amounts Advanced by Owners to Contractors on Projects Foreign to that which the Surety Guaranteed — Case at Bar. — The instant case was a suit by a surety company against the owners of property for payments by the surety company to subcontractors and materialmen. The owners had made two contracts with the same contractor, upon only one of which complainant was surety. The owners made large advances to the contractor reserving the right to collect such advances by deducting them from payments to become due on either contract, and when it was apparent that the contractor would default, the owners charged the advances on the contract guaranteed by complainant.

Held: That this conduct of the owners constituted a breach of faith with the surety.

8. WORKING CONTRACTS — Suretyship — Payment of Debt to Contractor. — When the surety is required to make reimbursements for a loss occasioned by the default of the principal, it has a right to require the owners to show how and in what manner they have performed their part of the contract. The owners, as between them and the surety, would have no right to pay the contractor under the terms of the contract by giving him credit for a debt owing them at the time the bond was executed unless the surety, before assuming the risk, was informed of this intention, or agreement, between the owners and the contractor.

9. WORKING CONTRACTS — Suretyship — Good Faith Required of Obligee in Bond. — The obligee in the bond is not only required to exercise good faith with the surety at the time the obligations are assumed, but this good faith must be kept inviolate in all subsequent transactions affecting their rights and obligations created by the contract and bond.

10. WORKING CONTRACTS — Suretyship — Contractor Indebted to Owners for a Purpose Foreign to the Erection of the Building. — When the contractor, subsequent to the acceptance of the bond, becomes indebted to the owners for a purpose entirely foreign to the erection of the building which the surety has guaranteed shall be completed for a definite sum, the owners have no right to pay the contractor by deducting the amount of such debt from the payments due, or to become due, under the building contract.

11. WORKING CONTRACTS — Agency — Contracts for Erection of Building — Case at Bar. — In the instant case owners of two lots entered into an agreement with a corporation under which the corporation agreed to erect theater buildings upon the lots and lease them after completion with an option to purchase. The corporation made a contract with a contractor for the erection of the building.

Held: That the corporation was acting as agent for the owners of the lots to the extent of their interests and for itself to the extent of its interest, and therefore both the owners and the corporation were liable to the contractor.

Appeal from a decree of the Circuit Court of Roanoke county, in a suit by certain claimants of mechanics' liens, from a judgment in which the surety company appeals.

The opinion states the case.

Caldwell, Chaney & Loyd and W. J. Henson, for the appellant.

R. C. Jackson and J. P. Saul, Jr., for the appellees.

HUDGINS, J., delivered the opinion of the court.

Statement of Facts

Mrs. May B. Cooper and Mrs. Ruth C. Whitsett were the owners of two lots, one in Salem and one in Blacksburg. They made a contract with Plank & Whitsett, Inc., wherein the corporation agreed to bear a part of the cost of the erection of a theater building in Salem and lease it after completion, with an option to purchase. A similar contract was made with Blacksburg Realty Corporation for the erection and leasing of a theater building in Blacksburg. All the stock in the two corporations was owned or controlled by the same parties; R. F. Plank was active manager of both corporations.

On April 23, 1929, R. F. Plank, in the name of Plank & Whitsett, Inc., as owners, made a contract with Morris C. Miller & Son, general contractors, for the erection of the theater building on the Salem lot, the cost of which building, including extras, totalled $58,743.65. On the same day R. F. Plank, in the name of Blacksburg Realty Corporation made a similar contract with Morris C. Miller & Son for the erection of a theater building in Blacksburg. The agreed cost of the construction of this building, including extras, totalled $69,918.

For the erection of the theater building in Salem the contractor was required to give bond for the faithful performance of his contract. No such bond was required of the contractor for the erection of the building in Blacksburg. On May 18, 1929, Morris C. Miller & Son, as principal, and American Surety Company, as surety, executed the required bond in the penal sum of $46,000, payable to Plank & Whitsett, Inc., as obligee. The condition of this bond reads thus:

"* * * if the principal shall faithfully perform the contract on his part, and satisfy all claims and demands, incurred for the same, and shall fully indemnify and save harmless the owner from all cost and damage which he may suffer by reason of failure so to do, and shall fully reimburse and repay the owner all outlay and expense which...