Copeland Sand and Gravel Inc. v. Insurance Co. of North America

• Jurisdiction: Oregon
• Parties: COPELAND SAND AND GRAVEL INC., Appellant, v. INSURANCE COMPANY OF NORTH AMERICA and Tobin, Crawford & Mikolavich, Inc., Respondents. ; CA 11238.
• Citation: 596 P.2d 623,40 Or.App. 831
• Docket Number: No. 75-414-L,75-414-L
• Court: Oregon Court of Appeals
• Decision Date: 25 June 1979

Page 623

596 P.2d 623

40 Or.App. 831

COPELAND SAND AND GRAVEL INC., Appellant, v. INSURANCE COMPANY OF NORTH AMERICA and Tobin, Crawford &amp Mikolavich, Inc., Respondents.

No. 75-414-L; CA 11238.

Court of Appeals of Oregon.

Argued and Submitted February 21, 1979.

Decided June 25, 1979.

Benjamin E. Freudenberg, Grants Pass, argued the cause for appellant. With him on the briefs was Balderree, Killoran & Nelson, Grants Pass.

Hugh B. Collins, Medford, argued the cause for respondent. With him on the brief was Collins, Velure & Heysell, Medford.

Before SCHWAB, C. J., and TANZER, RICHARDSON and ROBERTS, JJ.

ROBERTS, Judge.

In September, 1973, the City of Rogue River contracted with R & W Construction Company (R & W) for the construction of a sewer system. Defendant Insurance Company of North America (INA) was surety on R & W's performance bond. In June, 1974, R & W ceased performance of its contract with the city and assigned its rights under the city contract to INA. Thereafter, the city made all payments under the contract directly to INA, and INA in turn made or authorized payments to suppliers and subcontractors. Upon being notified of R & W's difficulties with the construction project, INA engaged defendant Tobin, Crawford & Mikolavich, Inc. (TCM), a firm of local insurance adjusters, to assess the situation for INA and to perform various services, including transmittal of payments to subcontractors and suppliers.

In June, 1974, INA engaged a subcontractor, Tru-Mix, to "administer" the construction on INA's behalf. The contract between INA and Tru-Mix recites in part that:

"As a result of certain differences between the City of Rogue River and R & W Construction Co., (INA) is undertaking to complete said contract on behalf of R & W Construction Co.

"Tru-Mix is an experienced contractor and (INA) desires to retain the services of Tru-Mix to assist (INA) in the completion of (R & W's) contract."

In August, 1974, the contract between INA and Tru-Mix was terminated by mutual consent, and one of the partners of R & W resumed or was engaged by INA to provide direct management of the project. The city continued to make payments directly to INA. INA continued to make or authorize payments to subcontractors and suppliers. These included payments to the two partners of R & W, although the partners were not formally included on the project payroll and no amounts were withheld from the payments to them.

Plaintiff alleges that it has not been paid by defendants for certain services, material and equipment which were provided by plaintiff during and after September, 1974, although plaintiff did receive payment from defendants for services and supplies provided before that time. Plaintiff contends that, in June, 1974, INA assumed R & W's role as contractor of the project and was responsible for all obligations incurred by the project after that time, notwithstanding the limits of INA's bond as surety. Plaintiff further contends that TCM, as INA's agent, gave plaintiff assurances of payment, which constituted an agreement by the two defendants to pay plaintiff or which estopped the defendants from denying their responsibility for payment.

The defendants argue that INA did not, as a matter of fact, assume the role of the project contractor; that its obligations to pay subcontractors and suppliers is limited by the amount of its bond which was exhausted at the time the goods and services in question were provided; that there was substantial evidence to support the trial court's findings to the foregoing effect; and that TCM either did not give the purported assurances or that to do so would have exceeded the scope of TCM's agency for INA. ¹ The trial court, sitting without a jury, found in favor of defendants. We affirm the judgment in favor of TCM and reverse the judgment in favor of INA.

The general rule is that the liability of a surety is limited to the amount of its bond. However, when the principal defaults or fails to perform, the surety may, where permitted by contract or with the acceptance of the other party to the principal contract, assume the role of its principal for purposes of performing the obligation which it has bonded. When the surety does so, it becomes responsible for performance of the principal contract and for all obligations incurred in connection with performance, notwithstanding the limits of liability in the bond. Ausplund v. Aetna Indemnity Co., 47 Or. 10, 81 P. 577, 82 P. 12 (1905); Suetter v. Cornwall et al., 102 Or. 220, 201 P. 1072 (1921); Caron v. Andrew, 133 Cal.App.2d 402, 284 P.2d 544 (DCA 3rd District, 1955).

In sum, the principal issue in this case is whether INA assumed R & W's role as contractor with the city after R & W failed to perform, and, if so, whether INA was responsible for payment for the goods and services provided by plaintiff and plaintiff's assignor. In support of its position that the answer to these questions is yes, plaintiff points to the evidence in the record that R & W assigned its rights under the construction contract to INA, that the city thereafter made its payments to INA throughout the remainder of the performance period, that INA contracted with Tru-Mix and engaged various other subcontractors and suppliers to complete the city contract, and that INA authorized payments to subcontractors and suppliers.

Defendants argue that whether INA assumed the principal's responsibilities under the construction contract is a question of fact which was decided adversely to plaintiff by the trial court, and that there was substantial evidence to support that finding. The difficulty with defendants' argument is that certain of the facts to which plaintiff adverts are As a matter of law rather than fact, inconsistent with INA's status as a surety and are consistent only with its assumption of the contractor's rule under R & W's contract with the city. The Combination of INA's acceptance of the assignment of rights from R & W, its acceptance of payments from the city under the principal contract, and its engaging and paying a subcontractor for continued performance of the original contractor's duties under that contract all of which the evidence shows and INA does not dispute occurred had the legal effect of making INA the contractor in place of R & W. See Suetter v. Cornwall et al., supra.

The next question is whether INA remained the contractor after the Tru-Mix subcontract was terminated in August, 1974 and the R & W partner resumed participation in the project. The R & W partner's involvement after August 1974 was not shown to be different in substance from Tru-Mix's during the two months preceding, and INA made payments to the R & W partners out of the sums the city paid INA pursuant...