Reliance Insurance Company of Philadelphia, Pa. v. Colbert
| Decision Date | 18 July 1966 |
| Docket Number | No. 19680.,19680. |
| Citation | 365 F.2d 530 |
| Parties | RELIANCE INSURANCE COMPANY OF PHILADELPHIA, PENNSYLVANIA, Appellant, v. Malcolm B. COLBERT et al., Appellees. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Mr. Edward Gallagher for appellant.
Mr. Mark P. Friedlander, Washington, D. C., with whom Messrs. Mark P. Friedlander, Jr., Blaine P. Friedlander, Washington, D. C., and Harry P. Friedlander, Arlington, Va., were on the brief, for appellees.
Before EDGERTON, Senior Circuit Judge, and McGOWAN and TAMM, Circuit Judges.
The District Court, after trial without a jury, gave judgment for $18,374 against a defaulting contractor and the surety upon a completion bond. Only the surety has appealed, contending that material alterations were made in the construction contract without its knowledge and consent. We disagree with the District Court's conclusion that these alterations were of such a nature as to have no ponderable impact upon the surety's undertaking; and we reverse and remand for a determination of what that impact was.
Appellees are a group of church trustees who decided to build a Sunday School Annex. They executed a contract with a builder on October 20, 1962, and, on November 3 following, two addenda, the first enlarging the scope of the work to be done and the second fixing a total contract price and a payment schedule. Addendum No. 2 obligated the owner to reimburse the contractor for the full cost of a completion bond "at the time of delivery" of such bond. The contractor thereafter went to appellant surety company which, on November 21, 1962, issued and turned over to the contractor a completion bond. The bond remained in the possession of the contractor until after the execution of Addendum No. 3 on February 4, 1963.1 Addendum No. 3 altered the payment schedule in several respects. Construction was eventually abandoned before the building was finished. Appellant surety refused the demand to complete, and this suit followed.
The District Court found, among other things, that the church had in substance been victimized by the contractor; that the architect employed by the church had been grossly negligent in giving his approval to the work performed by the contractor; and that the value of the materials and labor contributed by the contractor did not exceed $6,251. It arrived at its judgment of damages by this formula:
Amount of Contract $57,450.00
Deduct value of work done 6,251.00
Cost to complete $51,199.00
Deduct unpaid contract price 32,825.00
__________
$18,374.00
The District Court both found as a fact and concluded in law that the changes in the contract wrought by Addendum No. 3 "were not so substantial vis-a-vis the Bonding Company as to affect its security"; and that the surety "must be held to a strict accounting," since there had "been no changes in the contract which materially changed its position vis-a-vis the obligee * * *." The District Court also appeared to conclude that the surety was, in essence, estopped from relying upon Addendum No. 3 as constituting an alteration in the contract to which its bond was addressed. This latter position is embodied in a finding
We turn first to the justification for the judgment derived from the estoppel alternative. The Church Trustees argued to us in this regard that "the bonding company made possible the overreaching of the Church by placing in the hands of the Construction Company an executed bond, and the bonding company must have known that that bond would cause the Trustees of the Church to feel secure * * *." This argument is curiously at odds with the District Court's purported finding of fact that the Church "had no knowledge of the bond until after Addendum No. 3 was signed." We have examined the record ourselves and we think the testimony does not support the finding literally.2 The finding may perhaps be interpreted to mean that appellees did not actually see the bond, as distinct from knowing of its existence, at the time they executed Addendum No. 3; and the testimony was not adduced with such clarity as to exclude this possibility. Indeed, the finding must be read in this non-literal way in order to make it at all compatible with the theory of estoppel argued to us by appellees, namely, that the surety should not have given the bond to the contractor for ultimate delivery to the Church; and that, by doing so, the surety made it possible for the contractor to overreach the trustees by representing its possession of the bond to the trustees as an inducement to sign Addendum No. 3.
In our view of the estoppel argument, it is not critical whether appellees actually saw the bond or merely knew of its existence. Had appellees been given, or had they insisted upon, an opportunity to look at the bond, they would have found nothing in it authorizing future changes in the contract without notice to the obligor.3 But, even if they had not seen the bond itself, they tell us in so many words that, because they knew of its availability in the contractor's hands, they could safely rely upon his representations that they would be protected by it even though they were to go ahead with a material alteration in the contract without notice to the surety. Although appellees, unfortunately, appear not to have been sophisticated men of business, they cannot reasonably have assumed that bonding companies customarily issue substantial completion bonds which are open-ended in relation to the terms of the contracts guaranteed. All that appellees were entitled to assume from bare knowledge of the existence of the bond was that it covered the contract in the form the latter was in as of the time the bond was issued, and not as it was about to be changed. The mere fact that the bond was in the contractor's possession does not enlarge the range of that assumption to include an apparent authority in the contractor to extend the bond's coverage to any new and different contract that might be made. Actual authority to bind the surety was, accordingly, necessary, and none has been proved.
Thus, even if appellees did not see the bond, such overreaching as caused them to execute Addendum No. 3 flowed from their readiness to rely upon whatever the contractor told them. But the coverage of the bond in fact is not to be defined by reference to those representations, absent an adequate basis for regarding them as binding upon appellant. Mere possession of the bond by the contractor affords no such basis, particularly where, as here, the contract provisions relating to the bond are not inconsistent with a conclusion that appellees contemplated that the bond would be procured in the first instance by the contractor. Thus, appellant was not estopped from showing what the coverage of the bond actually was.4
We return to the first — and primary — ground advanced by the District Court, i. e., its conclusion that the alterations made by Addendum No. 3 were not material in relation to the risk assumed by the surety. The payment schedule contained in the contract before the advent of Addendum No. 3 called for an initial deposit of $7,450, and for successive payments of $12,500 upon completion of certain described phases of the construction. The comparative payment schedules provided by Addendum No. 2 and Addendum No. 3 are as follows:
Addendum No. 2 Addendum No. 3
Initial Deposit $ 7,450 $ 7,500
Completion of first floor shell
to joists 12,500 10,000
Completion of second floor
joists 12,500 10,000
Roofed in 12,500 5,000
Completion of job 12,500 25,000
It was because of financing difficulties that Addendum No. 3 was formulated. Under it the trustees were themselves to provide current financing in the amount of $32,500, consisting of the preconstruction first payment of $7,500, and $25,000 to be paid in escrow. The contractor was to produce $25,000 against the receipt by him of a negotiable note for $25,000 signed by the trustees and secured by real and chattel mortgages on the Church property. Addendum No. 3 said that the initial deposit of $7,500 sic called for by the original contract was to be met by an immediate payment of $1450, plus $50, and release of $6000 which the trustees had already deposited in escrow some time before Addendum No. 3 was signed. The $25,000 to be paid into escrow by the trustees was to be released in successive amounts of $10,000, $10,000, and $5,000 as the three phases of construction prior to final completion were reached. Addendum No. 3 then added a new undertaking by the trustees to pay the contractor a 5 per cent commission on the $25,000 (or $1,250) which the contractor undertook in Addendum No. 3 to supply as a loan against the note.
Little discussion by way of comparison of Addenda Nos. 2 and 3 is necessary to demonstrate that the contract terms had undergone a substantial change, certainly of such a nature as to enable a surety to claim with reason that it should have had an opportunity to review its risk before deciding whether to adhere to its commitment to guarantee performance. A surety company is not a public utility. It may, for any or no reason,...
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