Seaboard Sur. Co. v. Standard Acc. Ins. Co.

• Decision Date: 12 April 1938
• Citation: 14 N.E.2d 778,277 N.Y. 429
• Parties: SEABOARD SURETY CO. v. STANDARD ACC. INS. CO.
• Court: New York Court of Appeals Court of Appeals

277 N.Y. 429

14 N.E.2d 778

SEABOARD SURETY CO.

v.STANDARD ACC. INS. CO.

Court of Appeals of New York.

April 12, 1938.

Action on a subcontractor's bond by the Seaboard Surety Company against the Standard Accident Insurance Company. From a judgment of the Appellate Division of the Supreme Court of the First Judicial Department, 252 App.Div. 285, 299 N.Y.S. 385, which affirmed a judgment dismissing the complaint and from a judgment of the Appellate Division, 252 App.Div. 852, 300 N.Y.S. 998, denying a motion for leave to appeal, the plaintiff appeals.

Judgments reversed and motion by defendant for judgment on the pleadings denied.

LEHMAN, J., dissenting. Appeal from Supreme Court, Appellate Division, First Department.

David S. Konheim, of New York City, for appellant.

Daniel Combs, of New York City, for respondent.

FINCH, Judge.

Whether the surety of a subcontractor is liable on its bond to the general contractor for an unpaid bill for materials incorporated in the work under the subcontract made with a general contractor doing building work for the United States government where the subcontractor has failed to complete the work or pay for the material furnished, is the question of law presented.

A motion by defendant for judgment on the pleadings was granted, and the Appellate Division has affirmed.

The relevant allegations of the complaint are as follows: One Lundberg entered into a contract with the United States of America to remodel a post office and courthouse in Butte, Mont. Simultaneously with entering into this contract, Lundberg executed a bond conditioned upon his performance of the contract in accordance with its terms and providing that he would pay promptly all persons supplying labor and materials. This bond, obtained from the plaintiff, was required by the provisions of the Heard Act, U.S.Code, tit. 40, § 270, 40 U.S.C.A. § 270. Thereafter Lundberg entered into a subcontract for a portion of the work and materials with the Interstate Heating & Plumbing Company. This subcontract provided, among other things, that Interstate ‘shall and will provide all the materials and perform all the work for the plumbing, sanitary and roof drainage, heating apparatus, and ventilating in the present postoffice in Butte, Montana, and the addition thereto.’ The defendant herein, by its written bond, guaranteed to indemnify Lundberg in a sum not exceeding $14,000 ‘against loss or damage directly caused by the failure of the principal [Interstate Heating and Plumbing Company] to faithfully perform’ this subcontract.

Lundberg was unable to carry the work to completion and the plaintiff undertook and did complete the work in accordance with the contract. After the plaintiff undertook performance, the Interstate agreed to continue the performance of its subcontract under the direction of the plaintiff as general contractor, and the defendant, as surety for the Interstate, acknowledged the right of subrogation of the plaintiff in the bond, and acknowledged it as successor obligee thereunder. Interstate failed to complete the work under its subcontract. At the time there were unpaid material bills which had been incurred by Interstate amounting to approximately $6,700, and the plaintiff had in its hands moneys owing to Interstate under the subcontract totaling approximately $7,700. The cost of completion of the subcontract after the default by Interstate was approximately $5,500. Thus the net loss to the plaintiff was approximately $4,500.

The Heard Act, 40 U.S.C.A. § 270, requires any person contracting to do public work for the United States to execute a bond not only for completion but also conditioned on prompt payment of all persons supplying labor and materials in the prosecution of the work. It has been held that a materialman may recover on the bond of the general contractor, even though he supplied material to the subcontractor and even though the subcontractor has already been paid in full. United States, Use of Hill v. American Surety Co., 200 U.S. 197, 26 S.Ct. 168, 50 L.Ed. 437;Mankin v. United States, Use of LudowiciCeladon Co., 215 U.S. 533, 30 S.Ct. 174, 54 L.Ed. 315. See Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 380, 37 S.Ct. 614, 61 L.Ed. 1206. Where the general contractor fails to furnish such a bond, the laborers and materialmen who supply the subcontractors may sue the general contractor and recover from him. Strong v. American Fence Const. Co., 245 N.Y. 48, 156 N.E. 92.

The plaintiff was bound to pay all unpaid claims for labor and material supplied to its contractor, the Interstate Company, Not only had it undertaken by its bond to pay all such claims, but it had stepped into the shoes of the general contractor; and as noted above, a general contractor is bound to pay such claims. Therefore, when the Interstate defaulted on its contract, and the unpaid bills for materials were paid by the plaintiff, these bills were paid not as a voluntary act but by compulsion of law. The defendant, by the express terms of its bond, undertook to indemnity the plaintiff ‘against loss or damage directly caused by the failure of the principal to faithfully perform said contract. * * *’ When the principal, the Interstate Company, defaulted on the contract, the breach caused loss to the plaintiff arising out of the necessity for completing the work and the necessity for paying for the materials already incorporated in the work, for which the Interstate had failed to make payment.

The failure to pay for material incorporated in the work after the subcontractor had undertaken to ‘provide all the materials' constituted a breach of the contract with the general contractor. A contract as in the case at bar which requires the contractor to provide material, under any reasonable construction, means that he will pay for the material, and a bond which undertakes to guarantee the faithful performance of such a contract includes within its scope losses suffered because of the failure of the contractor or subcontractor to pay for materials furnished. Pacific States Electric Co. v. United States Fidelity & Guaranty Co., 109 Cal.App. 691, 293 P. 812;Mayes v. Lane, 116 Ky. 566, 76 S.W. 399;Closson v. Billman, 161 Ind. 610, 69 N.E. 449;Stoddard v. Hibbler, 156 Mich. 335, 120 N.W. 787, 24 L.R.A., N.S., 1075; Empire State Surety Co. v. Lindenmeier, 54 Colo. 497, 131 P. 437, Ann. Cas.1914C, 1189;Friend v. Ralston, 35 Wash. 422, 77 P. 794;Kiewit v. Carter, 25 Neb. 460,41 N.W. 586;Boone v. Maloney, 171 Okl. 454, 43 P.2d...