McLaughlin Elec. Supply v. American Empire Ins. Co.

Decision Date24 August 1978
Docket NumberNo. 12042,No. 12030,12030,Nos. 12016,12031 and 12042,No. 12016,No. 12031,E-M,12016,12031,12042,s. 12016
Citation269 N.W.2d 766
PartiesMcLAUGHLIN ELECTRIC SUPPLY, a South Dakota Corporation, d/b/a Plainsco, Plaintiff and Respondent, v. AMERICAN EMPIRE INSURANCE COMPANY, Defendant and Appellant, () and Pete Lien & Sons, Inc., Defendant and Appellant, () and Henry J. Bachmeier and Elaine D. Bachmeier, Defendants and Appellants, () and Wesley Scholl, d/b/a Scholl Construction Company, Defendant and Appellant, () and Knecht Industries, Inc., Birdsall Sand & Gravel Company, and Northwest Pipe Fittings, Defendants and Respondents, and Black Hawk Industrial Service, Inc., a South Dakota Corporation, National Bank of South Dakota, Hills Red-ix, and Black Hills Masonry, Defendants.
CourtSouth Dakota Supreme Court

James H. Wilson of Wilson, Olson & Goodsell, Rapid City, for plaintiff and respondent McLaughlin, and defendants and respondents Knecht, Northwest Pipe Fittings and Birdsall, and defendant and appellant Lien; Gunderson, Farrar, Aldrich, Warder, DeMersseman & Johnson, Rapid City, on the brief for defendants and respondents Knecht and Northwest Pipe Fittings, Bangs, McCullen, Butler, Foye & Simmons, Rapid City, on the brief for defendant and appellant Lien and defendant and respondent Birdsall.

Carleton R. Hoy of Davenport, Evans, Hurwitz & Smith, Sioux Falls, for defendant and appellant American Empire Ins. Co.

Franklin J. Wallahan of Hanley, Wallahan, Huffman & Konenkamp, Rapid City, for defendants and appellants Bachmeier.

Verne E. Thorstenson, Rapid City, for defendant and appellant Scholl Const. Co.

DUNN, Chief Justice.

This case arises as a result of an alleged failure of Black Hawk Industrial Services, Inc. (Black Hawk), to adequately construct a trailer campground for the Bachmeiers. The issues raised involve mechanics' liens and the liability of American Empire Insurance Company (American), the bonding company. We affirm in part and reverse and remand in part.

The Bachmeiers decided to construct a campground in the Black Hills in 1973. They hired one contractor who could not secure a performance bond, so in May of 1973, they hired Amos Lane, sole owner and stockholder of Black Hawk, to do the job. Mr. Lane and the Bachmeiers agreed on a price of $62,000. An "agreement in principal" was drawn up on June 2, 1973.

Mr. Lane contacted Tony Meier of Kluthe and Lane Insurance Agency about getting a performance bond and left a copy of the June 2nd proposal. Mr. Meier knew it was a rough draft and assumed the attorneys for the various parties would fill in the details as instructed by their clients. The June 2nd document contained no completion date or liquidated damages clause. The process of drafting the final contract was delayed by errors in the drafts and circumstances at the work place. A final contract was signed on July 23, 1973, but backdated with the permission of Mr. Meier to June 29, 1973, the date the bond was issued by American. Mr. Meier did not request a copy of the final contract before agreeing to backdate the document.

Mr. Lane originally told the Bachmeiers that the job would be done by July 4, 1973, for the tourist season. When it became apparent that it would be much later than that, discussion of a liquidated damages clause took place. Prior to July 23, 1973, Mr. Lane was informed by state and local health officials that all the trailer beds had to at least have a water hookup. This required a change in the water tank size and more dirt work to place the tank. Both parties agreed to raise the price to $66,000 to cover the new plans and the $66,000 figure was the one that appeared on the final contract and the bond. The Bachmeiers made it clear that they could spend no more than that amount.

A final contract contained an August 6, 1973 completion date, a $300 per day liquidated damages clause, and a change in the number of trailer beds as set out later in this opinion. The work was not completed on time, and the work that was done was of a very poor quality.

McLaughlin Electric Supply, one of the holders of a mechanic's lien, sued the Bachmeiers, Black Hawk, the bank holding the mortgage, and American. The Bachmeiers cross claimed against Black Hawk and American. The following mechanic's lien claimants were joined in the action: Birdsall Sand & Gravel, Black Hills Masonry, Hills Red-E-Mix, Knecht Industries, Pete Lien & Sons, Inc. (Lien), Northwest Pipe Fittings and Wesley Scholl, d/b/a Scholl Construction Company (Scholl). Trial was had before the Circuit Court, Seventh Judicial Circuit, commencing on October 1, 1974, without a jury, and judgment was entered July 1, 1976.

The trial court concluded that Black Hawk had breached its contract and awarded the Bachmeiers $56,882.91 plus $18,000 in liquidated damages for delay in completion. The $18,000 was not allowed to be collected against the bond, and the court also set off $12,993.80 for "extra dirt work" that the contractor had done pursuant to a "separate, oral agreement" according to the court. A further $20,849.66, which was the amount the Bachmeiers still owed Black Hawk on the contract, was set off from the Bachmeiers' award. Lien and Scholl, as well as several other lien claimants, were found to have filed defective mechanic's liens but were allowed to recover against the bond money as unpaid materialmen on the theory of unjust enrichment. They were not allowed attorney fees, however. American appealed the decision, the Bachmeiers cross-appealed, and, finally, Lien and Scholl cross-appealed from that part of the judgment which was adverse to them.

The trial court placed a $66,000 maximum on the total recovery against American, so the issues raised involve a dispute among all the appellants as to how to divide the money. Further factual details are given in the discussion of the various issues raised on appeal.

We must first determine whether the changes between the contract signed on July 23, 1973, and backdated to June 29, 1973, and the "agreement in principal" were so material that American should be relieved of liability on its bond. This court has stated that:

" ' * * * The rule seems to be thoroughly well established that where alterations and changes are made pursuant to such agreement they are binding upon the surety unless they are so extensive and material as to amount to a departure from the original contract rather than a permissible modification of its details.' " Independent School District No. 41 v. Sloan, 1929, 54 S.D. 646, 649, 224 N.W. 182, 183.

A paid surety must show prejudice or damage as a result of the change, and if the prejudicial aspect of the change can be easily measured and excised, the surety remains liable on the original contract. Restatement of the Law, Security, § 128(b); Zuni Construction Co. v. Great American Ins. Co., 1970, 86 Nev. 364, 468 P.2d 980; Pacific Cty. v. Sherwood Pacific, Inc., 1977, 17 Wash.App. 790, 567 P.2d 642; United Bond. Ins. Co. v. Atlantic Roofing & Sh. Met. Co. 1969, Fla.App., 221 So.2d 461; Ferguson Contract. Co. v. Charles E. Story Const. Co., 1967, Ky., 417 S.W.2d 228; Development Corp. of America v. United Bonding Ins. Co., 1969, 5 Cir., 413 F.2d 823.

The major changes between the two agreements were the liquidated damages clause, a completion date, and a change in the number of camper pads from 115, including 75 with no utility hookups, to 108, including 68 pads with water-only hookups. The change in the number of pads did not increase the risk in any way and is the kind of change expected to result as a project develops, so the bonding company should not escape liability on that basis. The completion date and the liquidated damages clause definitely increased the risk and for that reason were excised by the trial court. The Bachmeiers contend that American's agent knew of the damages clause before agreeing to the contract, but the evidence on this point was contradictory. The trial court refused a proposed finding to that effect and concluded that American was not liable for the liquidated damages. Since there was evidence in the record to support this decision by the trial court, we will not disturb that finding by the trial court. SDCL 15-6-52(a); City of Rapid City v. Hoogterp, 1970, 85 S.D. 176, 179 N.W.2d 15; Mulder v. Tague, 1971, 85 S.D. 544, 186 N.W.2d 884. We hold, therefore, that the trial court properly concluded that American was liable on the contract after excising the liquidated damages clause. The damages from this claim ($18,000) were easily ascertained and left American liable on the balance of the contract.

We must next determine whether the trial court erred in setting off a sum for "extra dirt work" done pursuant to a separate oral agreement between the Bachmeiers and Amos Lane. Mr. Lane conceded at trial that he knew in mid-June that the work had to be done and that it was all completed by the middle of July. The record also shows that the Bachmeiers made it very clear that they could not spend over $66,000 on the project. The contract was signed in late July and backdated to June 29, 1973, and no mention was made in it of the "extra work." SDCL 53-8-5 states:

"The execution of a contract in writing, whether the law requires it to be written or not, supersedes all the oral negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument."

In addition to the above testimony, Mr. Lane testified that the oral agreement was made on June 20 or 21, 1973; therefore, we are of the opinion...

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