Den Mar Const. Co. v. American Ins. Co.

• Decision Date: 17 August 1979
• Docket Number: No. 48990,49022 and 49299.,48990
• Citation: 290 NW 2d 737
• Parties: DEN MAR CONSTRUCTION COMPANY, et al., Appellants (48990, 49299), v. The AMERICAN INSURANCE COMPANY, Appellant (49022). COUNTY OF MARSHALL, Minnesota, Respondent, v. AMERICAN INSURANCE COMPANY, Appellant (49022).
• Court: Minnesota Supreme Court

290 N.W.2d 737 (1979)

DEN MAR CONSTRUCTION COMPANY, et al., Appellants (48990, 49299), v. The AMERICAN INSURANCE COMPANY, Appellant (49022).

COUNTY OF MARSHALL, Minnesota, Respondent, v. AMERICAN INSURANCE COMPANY, Appellant (49022).

Nos. 48990, 49022 and 49299.

Supreme Court of Minnesota.

August 17, 1979.

Rufer, Hefte, Pemberton, Schulze, Sorlie & Sefkow and Gerald S. Rufer, Fergus Falls, for Den Mar Const. Co., et al.

Briggs & Morgan and John L. Devney, St. Paul, Dickel, Johannson, Wall & Taylor and Lee E. Wall, Crookston, for The American Ins. Co.

Harold G. Myhre, County Atty., Warren, for respondent.

Heard before TODD, SCOTT, and MAXWELL, JJ., and considered and decided by the court en banc.

TODD, Justice.

Den Mar Construction Company (Den Mar) was the low bidder on a drainage ditch project in Marshall County, Minnesota. Den Mar's bid was accompanied by a bid bond furnished by American Insurance Company (American). American refused to issue final performance and payment bonds to Den Mar. Because Den Mar had no final bonding, Marshall County awarded the contract to the second lowest bidder who furnished a performance bond which varied from the bidding requirements. Den Mar sued American, alleging damages for negligence and breach of an implied agreement to furnish the final bonds. Marshall County sued Den Mar and American based on the bid bond, and American sought indemnity from Den Mar. The jury found that American had an implied contract to furnish final bonding to Den Mar, but that the breach by American was justified. The trial court granted summary judgment for Marshall County against American and Den Mar on the bid bond, and granted judgment for American against Den Mar on the indemnification claim. We affirm in part, reverse in part, and remand.

In January 1976, the County of Marshall received bids for the construction of County Ditch No. 45 in Marshall County, Minnesota. Den Mar, a partnership, submitted the lowest bid of $423,302.90. A bid bond listing Den Mar as principal and American as surety accompanied the bid.

Den Mar's bid was accepted on February 19, 1976. The contract papers and other documents were signed shortly thereafter. Den Mar did not furnish a 100-percent payment bond and 100-percent performance bond within 10 days as required by the bid specifications. The Board of Commissioners of Marshall County discussed the default at a regular meeting on April 6, 1976. The Board extended the time for furnishing bonds until April 15, 1976. Den Mar was aware of the extension and promised bonding.

Den Mar had difficulty in securing the bonding. Its bid bond surety, American, declined to furnish the bonding because it believed Den Mar had an insecure financial status and had submitted an underpriced bid. American had in the past furnished Den Mar various bonds. It had furnished bid bonds on 38 occasions. On each of 8 awarded contracts, American had also furnished performance and payment bonds.

On April 15, 1976, the Board again extended the time for bonding, on this occasion until April 20, 1976. However, the Board also resolved that if bonding was not received by that time, the contract would be awarded to the second lowest bidder, Roy Benson & Son, Inc. (Benson). Benson had submitted a bid for $482,005.23. Den Mar knew of this extension and resolution.

On April 20, 1976, Den Mar did not file bonding, but it did deliver a letter of intent by a bonding company to issue a payment bond of $168,000 and a performance bond of $260,000. This would be approximately a 40-percent payment bond and a 60-percent performance bond.

Apparently because no actual bonding was furnished and the promised bonding was less than the 100-percent bonding requirement, the county awarded the contract to Benson. Benson furnished a 100-percent performance bond but only a 50-percent payment bond.

Suit was subsequently commenced by the county on the bid bond against Den Mar and American for the difference in Den Mar's bid amount and Benson's bid amount. Den Mar also commenced suit against American for negligent failure to furnish final bonding, and for breach of an implied agreement to furnish final bonding. Den Mar also brought action against the county for wrongfully awarding the contract to Benson. Judgment was entered for the county on the bid bond, and judgment was entered in favor of American on Den Mar's claim of wrongful failure to furnish final bonding. Den Mar appeals from the judgments against it, and American appeals from the judgment on the bid bond.

The issues presented are:

(1) When the second lowest bidder on an awarded municipal contract furnishes only a 50-percent payment bond rather than a 100-percent payment bond, is the contract invalid for the purpose of assessing damages owed by the defaulting lowest bidder?

(2) Did the trial court properly refuse to submit jury instructions on the issue of American's alleged duty in tort to furnish final bonding to Den Mar?

(3) Did the trial court properly instruct the jury concerning American's justifiable breach of an implied contract to furnish final bonding to Den Mar?

1. Both Den Mar and American argue that they are not liable to Marshall County for the difference in amount between Den Mar's bid and the second lowest bid because the county allegedly awarded the contract to the second lowest bidder in an unlawful manner. This argument is based on the fact that the second lowest bidder, Benson, furnished only a 50-percent payment bond rather than a 100-percent payment bond as required by the bid specifications. Benson did, however, furnish a 100-percent performance bond as required by the bid invitation. The county argues that Den Mar and American have no standing to challenge the deficiency in Benson's payment bond.

This challenge to Benson's contract surfaces the interrelationship of bonding statutes applicable to ditch construction and bonding statutes applicable to general contractors. Minn.St. 106.221, subd. 1, pertains to county ditches and provides in part:

"* * * The contractor shall make and file with the auditor or clerk a bond, with good and sufficient surety, to be approved by the auditor or clerk, in a sum not less than 75 percent of the contract price of the work. Every such contract and bond shall embrace all the provisions required by this chapter and provided by law for bonds given by contractors for public works, and shall be conditioned as provided by statute in case of public contractors for the better security of the contracting county or counties and of parties performing labor and furnishing material in and about the performance of the contract. * * * Such contractor shall be considered a public officer, and such bond an official bond within the meaning of the statutory provisions construing the official bonds of public officers as security to all persons, and providing for actions on such bonds by any injured party." (Italics supplied.)

American and Den Mar then argue that the highlighted portion of the statute incorporates the provisions of Minn.St. 574.26, which deals with contractor's bonds in general. Section 574.26 provides in part:

"No contract with the state, or with any municipal corporation or other public board or body thereof, for the doing of any public work, shall be valid for any purpose, unless the contractor shall give bond to the state or other body contracted with, for the use of the obligee, the state and of all persons doing work or furnishing skill, tools, machinery, or materials * * * conditioned for the payment, as they become due, of all just claims for such work, tools, machinery, skill, materials, * * *. The penalty of such bond shall be not less than the contract price. * * *" (Italics supplied.)

Because Benson furnished only a 50-percent payment bond, American and Den Mar argue the contract with Benson is void, even for the purpose of assessing damages arising out of Den Mar's default.

We reject this contention. Even if the provisions of Minn.St. 574.26 apply to Minn.St. 106.221,¹ neither Den Mar nor American have standing to challenge the performance bond furnished by the second lowest bidder. The beneficiaries of bonding are the public corporation, laborers, and materialmen. Minn.St. 574.26. See, A. J. Chromy Const. Co. v. Com'l Mechanical, 260 N.W.2d 579 (Minn.1977); Ceco Steel Products Corp. v. Tapager, 208 Minn. 367, 294 N.W. 210 (1940). Thus, we have indicated that the effect of defective bonding will differ, depending on who is challenging the defect. In Lundin v. Township of Butternut Valley, 172 Minn. 259, 214 N.W. 888 (1927), this court held that a contractor could not recover against a township for construction of a bridge. Although the main reason for denial of compensation was due to the faulty nature of the bridge, the court stated another reason was that no bond had been given by the contractor as required by statute, and therefore "the contract on which plaintiff relies must be held void." 172 Minn. 261, 214 N.W. 889.

On the other hand, this court in Waterous Engine Works Co. v. Village of Clinton, 110 Minn. 267, 125 N.W. 269 (1910), held that a bond issued at approximately 50 percent of the required statutory amount was valid against the sureties for the purpose of requiring the unpaid materialman to pursue his claim against the surety before pursuing a claim against the municipality. This court said (110 Minn. 274, 125 N.W. 271):

"Where it is claimed that an instrument is void because of a variance between its terms and those required by a statute, the character of the variance must always be taken into consideration. For the purpose of determining the effect of a variance it is always pertinent to inquire who may take advantage of it. If an action were brought against the sureties upon the bond we are considering, they could not successfully defend against it because it was for an amount less than that required by the statute, for it would be impossible to see how

...