Garco Indus. Equipment Co., Inc. v. Mallory

• Decision Date: 26 November 1985
• Docket Number: No. 1-285A34,1-285A34
• Citation: 485 N.E.2d 652
• Parties: GARCO INDUSTRIAL EQUIPMENT COMPANY, INC., Plaintiff-Appellant, v. Sherman MALLORY d/b/a Mallory Cement Construction and Sherman Mallory Construction Company, and Indiana Insurance Company, Defendant-Appellee.
• Court: Indiana Appellate Court

Page 652

485 N.E.2d 652

GARCO INDUSTRIAL EQUIPMENT COMPANY, INC., Plaintiff-Appellant, v. Sherman MALLORY d/b/a Mallory Cement Construction and Sherman Mallory Construction Company, and Indiana

Insurance Company, Defendant-Appellee.

No. 1-285A34.

Court of Appeals of Indiana,

First District.

Nov. 26, 1985.

A. David Meyer, Charles N. Doberneck, Buschmann, Carr & Meyer, Indianapolis, Robert M. Gholston, Young, Gholston & Young, Franklin, for plaintiff-appellant.

Robert F. Zoccola, Julia M. Blackwell, Locke Reynolds Boyd & Weisell, Indianapolis, for defendant-appellee.

RATLIFF, Presiding Judge.

STATEMENT OF THE CASE

Garco Industrial Equipment, Inc. appeals the trial court's denial of its motion for summary judgment and the granting of summary judgment in favor of Sherman Mallory and Indiana Insurance Company in Garco's attempt to recover on a performance bond. We affirm.

FACTS

On April 22, 1981, Mallory Construction Company (Mallory) and Indiana Gas Company (Indiana Gas) entered into a contract for the construction of a water line at Indiana Gas' new Danville, Indiana facility. The contract required Mallory to obtain a performance bond in the amount of $43,800.96, the full amount of the contract. Additional conditions of the agreement, attached to the contract, reiterate this requirement, one specifically stating: "2. Prior to the commencement of the work hereunder, the Contractor shall furnish to the Company a bond covering the faithful performance of this contract and the payment of all obligations arising hereunder. Such performance bond shall be in the amount of $43,800.96 with such surety as is agreeable to both parties." Record at 358A, Exhibit G-1, p. 4. Pursuant to this requirement of the contract, Mallory obtained a performance bond from Indiana Insurance Company (Indiana Insurance) wherein Mallory is named principal, Indiana Insurance is named surety, and Indiana Gas is designated obgligee. The work was to be completed within 120 days.

On June 15, 1981, Mallory entered into an agreement with Harco Leasing Co., Inc. (Harco) to lease a backhoe loader and an excavator. The lease was to run for a sixty (60) month period. Forty-five (45) monthly payments of $4,420.00 were to commence on June 15, 1981, and continue throughout the course of the agreement, with the exception of January, February, and March. Mallory had possession of the equipment from June 1, 1981, through August 6, 1981, and used it on the Danville job. The record indicates that Harco intended to purchase the equipment from Garco but abandoned this intention when Mallory defaulted on its initial lease payment. Record at 87. Subsequently, on June 15, 1981, Harco appears to have assigned all of its rights, regarding the contract with Mallory, to Garco.

Garco repossessed the equipment on August 6, 1981, when Mallory failed to make its first payment and failed to pay several material suppliers. Garco sued Mallory in the Johnson Circuit Court and obtained a default judgment in the amount of $24,750.51. Thereafter, Indiana Gas paid approximately $40,801.98 on the claims of the various suppliers of materials and was subsequently reimbursed by Indiana Insurance. However, Garco was not paid for the rental of the equipment. On September 16, 1982, Mallory declared bankruptcy and obtained discharge of the judgment debt owed to Garco.

Garco then brought this action against Mallory and Indiana Insurance, as surety, for the value of the construction equipment

over the two month period together with repair costs totaling $24,791.51. Both sides filed motions for summary judgment. The trial court granted Indiana Insurance's motion for summary judgment declaring Indiana Gas to be the sole obligee under the bond and finding no intention in the bond or the contract that the bond should run to the benefit of laborers, materialmen, subcontractors, or lessors of machinery. The court stated that Garco was neither an obligee nor a third party beneficiary under the bond. In addition, the court found that Mallory had not entered into a rental agreement with Garco and therefore Garco was not a party with an enforceable claim under the bond. Appellant then perfected this appeal.

ISSUE

Whether Garco has any grounds upon which it may recover the rental and repair value of its backhoe and excavator from the performance bond executed by Mallory and Indiana Gas.

DISCUSSION AND DECISION

A surety's liability is measured by the strict terms of his contract. Stewart v. Knight & Jillson Co. (1906), 166 Ind. 498, 76 N.E. 743; 26 I.L.E. Suretyship sec. 22 (1960). Usually, a suretyship contract is construed in accordance with the rules governing other contracts. 26 I.L.E. Suretyship sec. 23 (1960). Where the suretyship contract is entered into in relation to another agreement, both instruments must be construed together. National Surety Co. v. Rochester Bridge Co. (1925), 83 Ind.App. 195, 198-99, 146 N.E. 415, 416, trans. denied. While sureties are not "favorites of the law," gratuitous or accommodation sureties are entitled to a strict construction of the contract in their favor, so as not to impose a greater burden on them than they agreed to. This rule, however, does not apply in the case of a surety for hire. Instead, the contract of a surety for hire is viewed as analogous to an insurance contract, ¹ and is construed most strictly against the surety and in favor of the person to be protected. Knight & Jillson Co. v. Castle (1909), 172 Ind. 97, 109, 87 N.E. 976, 981; London & Lancashire Indemnity Co. of America v. Community Savings & Loan Ass'n. (1936), 102 Ind.App. 665, 675-76, 4 N.E.2d 688, 693; National Surety, 183 Ind.App. at 198, 146 N.E. at 416. Therefore, any contractual ambiguities are resolved in favor of the beneficiary. London, 102 Ind.App. at 675-76, 4 N.E.2d at 693; National Surety, 183 Ind.App. at 198, 146 N.E. at 416.

Usually, only parties to a contract or those in privity with them have the right to recover under a contract. Gonzales v. Kil Nam Chun (1984), Ind.App., 465 N.E.2d 727, 729; State ex rel. Lawson v. Warren Bros. Roads Co. (1945), 115 Ind.App. 452, 458, 59 N.E.2d 912, 915. Those not a party to a contract may enforce the contract by demonstrating that they are third party beneficiaries who were intended to be protected under the agreement by the imposition of a duty in their favor. Gonzales, at 729; Knight, 172 Ind. at 101, 87 N.E. at 977. As third party beneficiaries, they may recover under the contract even though they had no knowledge of the agreement at the time it was made. Knight, at 101, 87 N.E. at 977. The intent of the parties to benefit the third party is the controlling factor and this may be shown "by specifically naming the third party or by other evidence." Gonzales, at 729.

In Indiana, construction bonds have been found to benefit certain unnamed third persons despite a lack of privity. Lawson, 115 Ind.App. at 461, 59 N.E.2d at 915; Nash Engineering Co. v. Marcy Realty Corp. (1944), 222 Ind. 396, 54 N.E.2d 263; Knight & Jillson Co. v. Castle (1909), 172 Ind. 97, 87 N.E. 976; Ochs v. M.J. Carnahan Co. (1906), 42 Ind.App. 157, 76 N.E. 788, petition on rehearing, 80 N.E. 163. If one brings himself within a class of persons intended to be protected by the bond, he may seek his remedy against the bond. Lawson, 115 Ind.App. at 462, 59 N.E.2d at 915. The difficulity is in determining whether a claimant is such a beneficiary. Id. In Title Guaranty Co. v. State (1915), 61 Ind.App. 268, 109 N.E. 237, trans. denied, a case involving a road contractor's bond, the court developed a test for making this determination:

"The purpose, as expressed by the bond is to secure the payment of debts incurred in the prosecution of the work. Among such debts are those growing out of labor performed and material furnished. But if there are other debts, regardless of their nature or origin, that sustain such an intimate, immediate, and exclusive relation to the building of the road that it may be said that such debts were incurred in the prosecution of that work, they too are covered by the provisions of the bond literally interpreted."

Id. at 279, 109 N.E. at 24; See Lawson, 115 Ind.App. at 462, 59 N.E.2d at 915. In Lawson, the court adopted this test in determining the services of a materialman's employee did not bear an intimate, immediate, and exclusive relation to the building of a road and cautioned: "Nothing can be clearer, both upon principle and authority, than the doctrine, that the liability of a surety is not to be extended, by implication, beyond the terms of his contract." Lawson, at 463, 59 N.E.2d at 916, quoting Miller v. Stewart (1824), 22 U.S. 680, 9 Wheat. 680, 6 L.Ed. 189. Therefore, to extend liability on a contractor's bond where privity is lacking, it appears necessary to demonstrate that the materials or labor used bear a close relationship to the project.

Furthermore, while unnamed materialmen may recover, as third party beneficiaries, on private and public bonds, case law generally requires that specific language be present in the agreement in order to permit recovery. Greenfield Lumber & Ice Co. v. Parker (1902), 159 Ind. 571, 65 N.E. 747; Staples-Hildebrand Co. v. Metal Concrete Chimney Co. (1916), 62 Ind.App. 592, 594-95, 112 N.E. 832, 833; Knight, 172 Ind. at 101-03, 87 N.E. at 977-78. Where there is no express promise in the contract or bond to pay for labor and materials, the general provision of the agreement guaranteeing faithful performance of the contract does not authorize recovery by third persons. Knight, at 102-03, 87 N.E. at 978. In order to hold a surety liable to a materialman there must be a contractual provision binding the contractor to pay for labor and material or language indicating that without payment the contract cannot be complied with. Staples-Hildebrand, 62 Ind.App. at 594-95, 112 N.E. at 833. Thus, in each case the question is one of determining the intention of the parties as expressed by...