Gary Hay & Grain Co., Inc. v. Fidelity & Deposit Co. of Maryland
| Decision Date | 13 April 1927 |
| Docket Number | 6058,6085. |
| Citation | 255 P. 722,79 Mont. 111 |
| Parties | GARY HAY & GRAIN CO., Inc., v. FIDELITY & DEPOSIT CO. OF MARYLAND et al. (two cases). |
| Court | Montana Supreme Court |
Rehearing Denied April 29, 1927.
Appeal from District Court, Park County; H. J. Miller, Judge.
Action by the Gary Hay & Grain Company, Inc., against the Fidelity & Deposit Company of Maryland and another, in which defendand named filed a cross-complaint against the First National Bank of Columbus. From the judgment the Fidelity & Deposit Company of Maryland and the First National Bank of Columbus separately appeal. Reversed in part, and remanded with instructions.
Appeal by the Fidelity & Deposit Company from a judgment against it and in favor of plaintiff, and appeal by the bank from a judgment against it and in favor of the Fidelity & Deposit Company.
In September, 1922, Albert Carlson entered into a contract with the state highway commission for the construction of approximately 3 miles of road in Park county, a part of a federal aid project, which contract required him to furnish all equipment, labor, and material for the prosecution of the work. As a condition precedent to the complete execution of the contract, Carlson was required to furnish a surety bond conditioned upon the faithful performance of his covenants and agreements under the contract, and, as a part of the contract, he was required to promise to pay for labor and material used. Carlson secured his bond from the Fidelity & Deposit Company and arranged with the First National Bank of Columbus to finance him during the performance of his contract, attempting to secure the bank by an assignment in advance of all moneys due or to become due under the contract. This assignment was filed with the state highway commission, which body agreed to pay the moneys, as they fell due, to the bank on condition that the assignee see that all creditors of the contractor were paid in accordance with the contract; this condition was accepted by the assignee. For brevity and convenience, the various parties will hereafter be referred to as the plaintiff, the contractor, the surety the bank, and the commission.
Under the arrangement above referred to, all but the final payment of the contract price was paid by drafts in favor of the contractor sent to the bank; these were indorsed by the contractor and by the bank placed to the credit of the contractor in an account to which loans by the bank were also credited and against which the contractor checked in payment of accounts due on the contract. When final payment was due, it was disclosed that certain claims of which the commission had notice had not been paid, and the final payment was withheld and these claims paid, at least to the extent of the final payment due.
There remained certain claims in addition to those treated above, the largest of which was that of the plaintiff herein, and, for the purpose of combining all such claims in one action, the remaining creditors assigned their claims to the plaintiff who commenced action against the contractor and the surety by the filing of a complaint containing nine causes of action, or a separate cause of action on each claim outstanding. The complaint alleges that each claim is for "materials furnished and to be used in and about the construction of the highway."
The first and seventh causes of action are for hay and grain fed to the horses used; the fourth, fifth, and sixth for oil, gasoline, and grease used as fuel and lubricants for machinery, trucks and a Ford car employed in and about the construction; the eighth and ninth for foodstuffs consumed by the laborers, the contractor, and his family while the work was in progress. The second cause of action contains charges for coal used for cooking and heating purposes in camp; lumber, nails, etc., used in erecting a cook shack, mangers for the horses, and frames for tents used as sleeping quarters at a camp established some 5 or 6 miles from Livingston on the highway; a small amount of lumber used in making concrete forms and in flume work, and a small amount of cement used in the construction. The third cause of action is for gravel sold to the contractor and used for surfacing the highway.
The surety denied liability on each of the alleged causes of action, and, as an affirmative defense and cross-complaint, alleged that, under its contract, it was liable only for "labor and material actually used in and which went into the construction of the highway"; that the assignment to the bank was given without its knowledge or consent, was void and without effect; and that the bank should be compelled to return the money received from the commission for the payment of any award which might be made against the surety.
During the trial the surety was permitted, over the objection of the bank, to amend its cross-complaint to state, in effect, that it was entitled to be subrogated to the rights of the commission for the above purpose.
The bank was served with process, interposed a special demurrer to the cross-complaint and a general demurrer to the complaint, both of which were overruled, and thereafter answered, joining issue as to the allegations of the cross-complaint. The cause was finally brought to trial but, at the close of the evidence in which there was no conflict, on motion of the plaintiff, the court directed a verdict in favor of plaintiff and against the surety on each cause of action, and thereupon the surety moved that the court also withdraw the issues between it and the bank from the jury, which motion was sustained, and, later, the court found these issues in favor of the surety. Judgment was thereafter entered in favor of the plaintiff and against the contractor and surety on each cause of action stated in the complaint, and in favor of the surety and against the bank on the cross-complaint. Thereupon the surety appealed from the judgment against it, and by a separate appeal the bank challenged the right of the court to require it to reimburse the surety. Upon the hearing before us, the appeals were united and will now be disposed of as one.
1. On its appeal the bank contends that the complaint herein does not state a cause of action against the surety, for the reason that there is no privity of contract between the persons who furnished labor and material to the contractor and the surety. In other words, it contends that a person not mentioned in a bond cannot sue upon it in his own name, even though its provisions incidentally benefit him. This is the rule "in some jurisdictions," as stated in the recent work by Donnally on the Law of Public Contracts, section 336, but only certain of the authorities cited in support of the statement technically so hold; others hinge rather upon the general rule stated in section 337 of said work, which is that:
"A bond conditioned for the faithful performance of the work is a bond for the indemnity of the public body merely, and laborers and materialmen cannot sue upon such a bond to recover wages or money due them."
The first rule is, however, in effect in New York, where it was adopted in construing the section of the "Field's Code" adopted in this state, and now appearing as section 7472 of of the Revised Codes of 1921, which reads:
"A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it." Fosmire v. National Surety Co., 229 N.Y. 44, 127 N.E. 472, and cases there cited.
Following the New York rule and certain decisions of this court, construing the above statute to mean that the contract must be made "in direct terms" for the benefit of the person suing, we held in Martin v. American Surety Co., 74 Mont. 43, 238 P. 877, that the rule applied to the surety bond under consideration in that case, and the bank now relies upon statements made therein to support its contention. As hereinafter shown, there is substantial conflict in the authorities as to the liability of a surety on a given set of facts, and, had the Martin Case come to us as one of original impression in this state, we might now feel bound to follow all that is said therein; but while the result reached may be upheld under an exception to the rule hereinafter stated, the broad declaration or the rule therein contained is unfortunate in the light of the fact that we had, a short time prior to this decision, committed ourselves to the rule that, under proper conditions of the bond and contract, laborers and materialmen could recover from the surety on the bond. We refer to Lanstrum v. Zumwalt et al., 73 Mont. 502, 237 P. 205, under which authority the plaintiff herein would be entitled to recover, provided it was entitled to sue in its own name, and the supplies described in the complaint come within the designation of "materials" found in the contract and bond. Owing to the apparent conflict in these two decisions, it will now be necessary to go thoroughly into the question of the liability of sureties on bonds furnished in connection with contracts for the performance of public improvements.
2. "A surety is one who, at the request of another, and for the purpose of securing to him a benefit, becomes responsible for the performance by the latter of some act in favor of a third person," etc. Section 8195, Rev. Codes 1921. Such third person may enforce the obligation at any time before the contract is rescinded. Section 7472, above. Where the bond is given for the performance of a contract, the bond is made with relation to the contract and as a part of it. Cole Mfg. Co. v. Morton, 24 Mont. 58, 60 P. 587; Butte Machinery Co. v. Carbonate Hill M. Co., 75 Mont. 167, 242 P. 956. The two are to be construed together. Lyon v. Dailey Copper Co....
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