Interstate Equipment Co. v. Smith

• Court: North Carolina Supreme Court
• Writing for the Court: MOORE
• Citation: Interstate Equipment Co. v. Smith, 292 N.C. 592, 234 S.E.2d 599 (N.C. 1977)
• Decision Date: 10 May 1977
• Docket Number: No. 56,56
• Parties: INTERSTATE EQUIPMENT COMPANY, v. C. Christopher SMITH et al.

Page 599

234 S.E.2d 599

292 N.C. 592

INTERSTATE EQUIPMENT COMPANY, v. C. Christopher SMITH et al.

No. 56.

Supreme Court of North Carolina.

May 10, 1977.

Haywood, Denny & Miller by John C. Martin, Durham, for Great American Ins. Co., defendant-appellee.

MOORE, Justice.

Great American, as surety, contends that it cannot be held liable for the amounts alleged to be due Interstate from the principal Bollinger for rental payments, repairs, tire adjustments and interest, for the reason that the amounts claimed to be due are not "labor and materials" under the condition of its bond with Bollinger.

It has long been established that a third party, for whose benefit a contract has been made, may maintain an action for breach of that contract. See, e. g., Products Corp. v. Sanders, 264 N.C. 234, 141 S.E.2d 329 (1965); Gorrell v. Water Supply Co., 124 N.C. 328, 32 S.E. 720 (1899). This principle also applies to the intended beneficiaries of a contractor's or subcontractor's bond, and such a beneficiary may maintain an action against the surety on the bond. Glass Co. v. Fidelity Co., 193 N.C. 769, 138 S.E. 143 (1927). The bond executed between Bollinger and Great American was a payment bond for the protection of those supplying labor and materials to Bollinger. Interstate, occupying the position of one who has supplied labor and materials to Bollinger, is an intended beneficiary of the bond agreement and may maintain this action against the surety.

In Overman v. Indemnity Co., 199 N.C. 736, 155 S.E. 730 (1930), Mulligan Construction Company entered into a contract with the State Highway Commission to build a road. Mulligan executed a bond which was conditioned upon Mulligan's paying all persons furnishing labor and materials "for which the contractor is liable." The surety argued that the clause "for which the contractor is liable" limited its obligation on the bond to the labor and materials for which the contractor was directly responsible, thus excluding all claims by those persons who had supplied labor and materials to the subcontractors. In rejecting this argument, the Court held that the obligation of a bond must be read in conjunction with the contract which the bond was given to secure. Further, the extent of the surety's obligations are ordinarily measured by the terms of the principal's agreement. Thus, since the contract between Mulligan and the State Highway Commission provided that all persons furnishing labor and materials in the construction of the roadway would be paid, the surety was properly held liable for claims against the subcontractors. See also Dixon v. Horne, 180 N.C. 585, 105 S.E. 270 (1920); Fidelity and Casualty Co. v. Copenhaver Contracting Co., 159 Va. 126, 165 S.E. 528 (1932). Accordingly, this Court should construe the surety's liability in conjunction with the contract underlying the bond.

In determining the extent of a surety's obligation, we are guided by the statement of Chief Justice Stacy in Wiseman v. Lacy, 193 N.C. 751, 753, 138 S.E. 121, 123 (1927):

"The principle to be deduced from those and other like decisions is that such bonds are construed liberally for the protection of those who furnish labor and materials in the prosecution of public works (Electric Co. v. Deposit Co., 191 N.C. 653, 132 S.E. 808), and it is not thought that the surety can complain at such holding, or that any hardship is imposed thereby, because in entering into the contract the surety is chargeable with notice, not only of the financial ability and integrity of the contractor, but also with notice as to whether he possesses the plant, equipment, and tools required in undertaking the particular work, or will be compelled to rent and hire the same, or some part thereof, all of which matters are factors to be considered in determining the risk, and upon which the surety fixes the premiums exacted for executing the bond. Sherman v. Amer. Surety Co., 178 Cal. 286, 173 Pac. 161." See also Owsley v. Henderson, 228 N.C. 224, 45 S.E.2d 263 (1947).

In Wiseman v. Lacy, supra, plaintiffs leased to the contractor a steam shovel and a boiler which were used by the contractor in the construction of the road in question. On appeal, the contractor's surety resisted liability on the ground that a bond conditioned upon the payment of all claims for "labor and material" would not cover rental payments for equipment. In rejecting this contention, the Court held:

"The renting of the machines in question was but the substitution of mechanical power for manual labor. Taylor v. Connett, 4 Cir., 277 Fed. 945; Bricker v. Rollins & Jarecki, 178 Cal. 347, 173 Pac. 592; Hansen v. Remer, 160 Minn. 453, 200 N.W. 839; Multnomah County v. U.S.F. and G. Co., 92 Or. 146, 180 Pac. 104." 193 N.C. at 752, 138 S.E. at 122.

In United Bonding Insurance Co. v. M. D. Moody and Sons, Inc., 213 So.2d 263 (Fla.App.1968), Moody leased road building equipment to a subcontractor which was bonded by United, as surety. Upon default of the subcontractor, Moody instituted action against the subcontractor and its surety. The surety contended that rental payments for equipment were not covered by a bond obligating the surety to pay for "labor and materials." The court held that rental payments were covered by such a bond since "(t)he fair rental value of equipment so furnished is as much incorporated in the job as the sweat of a laborer's brow or the concrete from a supplier's mixer." 213 So.2d at 264. In reaching this conclusion, the court reasoned that a surety is chargeable with notice of the extent of its principal's plant and equipment, and of the principal's capability of performing the contract. See also United Bonding Ins. Co. v. Donaldson Engineering, Inc., 222 So.2d 447 (Fla.App.1969); C. S. Luck and Sons v. Boatwright, 157 Va. 490, 162 S.E. 53 (1932).

We find the reasoning of the above cited cases to be persuasive. A compensated surety is not a ward of the court and it must be charged with notice of its principal's plant, equipment and financial integrity. The surety is further charged with notice of the contract between its principal and the contractor. This is particularly true in the case at bar, wherein the bond states: "WHEREAS the Principal (Bollinger) and the Obligee (Teer) have entered into a written contract . . . dated the 17th day of April 1974. . . ."

In the case at bar, the contract between Bollinger and Teer, in part, provided:

"You (Bollinger) will finance your operations in every detail and promptly, or upon demand, pay all indebtedness arising our of your operations hereunder. . . .

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"You are to furnish us satisfactory Payment bond being in the full amount of this subcontract.

". . . You shall have available the necessary workmen and equipment so as to be ready to begin work immediately following our direction to do so. . . .

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"You will furnish all supervision, labor and materials, including equipment and incidentals, to do properly the items of work listed below at the designated unit prices and in accordance with the contract, plans, specifications, special provisions and directions of our representative who is in charge of the project."

The contract in present case obligated Bollinger to furnish all labor and materials, including equipment, which were necessary to properly perform the contract. It further obligated Bollinger to pay all indebtedness arising from its operations on the Bland County project. Reading the bond in conjunction with the contract, we are of the opinion that the rental payments constitute an indebtedness for labor and materials for which Great American may be held liable as surety.

Great American contends, however, that the bond in present case is a "private bond" and therefore only those items expressly included in the bond should be covered. In support of this conclusion, Great American cites 17 Am.Jur.2d, Contractors' Bonds § 7 (1964), which states that the costs of renting equipment are not covered by a "private" bond agreement guaranteeing payment for labor and materials. This proposition is supported by Great American Ins. Co. v. Busby, 247 Miss. 39, 150 So.2d 131 (1963), and Western Cas. and Sur. Co. v. Stribling Bros. Mach. Co., 244 Miss. 12, 139 So.2d 838 (1962). To the contrary, in Annot., 77 A.L.R. 21, 51 (1932), which thoroughly analyzes the cases on point, the author states: "(T)here is little or no distinction between public and private contractor's bonds, as regards the rights of laborers and materialmen." See also Standard Oil Co. v. National Surety Co., 234 Ky. 764, 29 S.W.2d 29 (1930); Ochs v. M. J. Carnahan Co., 76 N.E. 788 (Ind.1906).

We see no valid reason to follow the law of Mississippi or to construe the language of the bond in present case any differently than if the bond were "public." The machines in question were used to construct a public road. As stated by Chief Justice Stacy in Wiseman v. Lacy, supra, at 753, 138 S.E. at 123: "(S)uch bonds are construed liberally for the protection of those who furnish labor and materials in the prosecution of public works." Further, the reasoning in Wiseman v. Lacy, supra, has been adopted by our General Assembly for bonds required on public contracts by enacting G.S. 44A-25(5) which, in part, provides: " 'Labor or materials' shall include . . . rental of equipment or the reasonable value of the use of equipment directly utilized in the performance of the work called for in the construction contract."

The differences between "public" and "private" bonds which Great American urges upon this Court are artificial and not supported by the contract and bond in this case. By the...