Treasure State Industries Inc. v. Welch

• Decision Date: 15 August 1977
• Docket Number: No. 13528,13528
• Citation: 173 Mont. 403,567 P.2d 947
• Parties: TREASURE STATE INDUSTRIES INC., a corporation, Plaintiff and Respondent, v. Del WELCH, d/b/a Del Welch Construction Co., Aetna Life and Casualty Co., a corporation, et al., Defendants and Appellants.
• Court: Montana Supreme Court

Page 947

567 P.2d 947

173 Mont. 403

TREASURE STATE INDUSTRIES INC., a corporation, Plaintiff and Respondent, v. Del WELCH, d/b/a Del Welch Construction Co., Aetna Life and Casualty Co., a corporation, et al., Defendants and Appellants.

No. 13528.

Supreme Court of Montana.

Submitted May 25, 1977.

Decided Aug. 15, 1977.

Jardine, Stephenson, Blewett & Weaver, Alexander Blewett, III (argued), Great Falls, for defendants and appellants.

Dzivi, Conklin, Johnson & Nybo, Dennis C. McCafferty (argued), Great Falls, for plaintiff and respondent.

DALY, Justice.

On December 19, 1974, Treasure State Industries, Inc., filed a complaint against four defendants to recover certain monies allegedly due for supplying materials for use on a public works construction project. The defendants named were:

(1) Sletten Construction Co., the general contractor, who entered into the project with the state of Montana for the construction of a highway and certain bridges in Mineral County, Montana;

(2) St. Paul Fire and Marine Insurance Co., Sletten's surety, who issued a bond for the benefit of the state of Montana with Sletten as principal;

(3) Del Welch Construction Co., Sletten's subcontractor, who was furnished certain materials by Treasure State for which Treasure State is attempting to recover from all defendants; and

(4) Aetna Life and Casualty Co. the surety for Del Welch Construction Co., who issued a bond with Sletten as obligee and with Welch as principal.

The district court, Cascade County, granted a partial summary judgment against Aetna on the issue of liability, and judgment was entered for damages, which for the purpose of this appeal only, were agreed upon by Treasure State and Aetna. Aetna appeals from this judgment.

The major issue presented on appeal is whether Treasure State, a third-party materialman, is entitled to a cause of action against Aetna on its surety bond, which names Sletten, the general contractor as the sole obligee.

In the Aetna bond there is no promise to pay for any materials, although the underlying subcontract provides such an obligation for Welch, the subcontractor. Aetna's obligations under this bond are not specifically conditioned upon the payment of any supplied materials. On the contrary, the obligation of Aetna under this bond is merely conditioned upon the faithful performance of the subcontract or, in the alternative, indemnification of Sletten, the obligee. A surety bond is simply a contract and should be interpreted in the same manner as other contracts. Section 13-702, R.C.M.1947, is the Montana statute which governs the interpretation of contracts:

"Contracts how to be interpreted. A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful."

In interpreting the obligation of Aetna under this surety bond, which incorporated by reference the subcontract between Sletten and Welch, it is necessary to construe the surety bond and the underlying contract together. Watson v. O'Neill, 14 Mont. 197, 35 P. 1064; Section 13-708, R.C.M.1947.

Neither the language of the bond nor the language of the underlying subcontract specifically mentions Treasure State in any way and for Treasure State to recover from Aetna on this bond, Treasure State must do so as a third-party beneficiary pursuant to section 13-204, R.C.M.1947, which provides:

"When contract for benefit of third person may be enforced. 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."

Unless it was the intent of Sletten, Welch and Aetna at the time of the execution of the bond to expressly benefit or protect Treasure State, it cannot recover from Aetna on the bond. Therefore, it becomes necessary to examine the mutual determination as to the intent of the parties as it existed at the time of the contracting.

Aetna contends this bond is a true indemnity bond. According to this view, the insertion in a bond or contract made part of the bond, of a condition to pay laborers and materialmen and of a condition to indemnify the obligee, indicates an intent that the former condition was intended for the protection of the obligee and not for the benefit of laborers and materialmen. In other words, the condition for the indemnification of the owner modifies and explains the condition for the payment of laborers and materialmen.

Treasure State contends this is not a true indemnity bond and that it was the intent of all parties that the materialmen should have a cause of action on the Aetna bond in the event they remained unpaid. It is argued that performance of the subcontract includes payment of the materialmen and therefore, an intent to directly benefit all materialmen is evidenced by the bond.

Treasure State contends Weissman & Sons, Inc. v. St. Paul Insurance Co., 152 Mont. 291, 448 P.2d 740, is controlling. We feel Weissman can be distinguished on the facts. In Weissman the surety bond and the contract contained an express provision to pay materialmen. The bond in the instant case contained no such provision. In Weissman the surety bond contained no condition of indemnification of the named obligee. The subcontract in Weissman did not contain a special provision whereby the subcontractor agreed to indemnify the contractor. Such a provision is present in the instant case. Finally, since Weissman did not deal with a public works contract, there was no statutory provision (section 6-401, R.C.M.1947) allowing all materialmen a right of action on the prime contractor's bond. Therefore, the materialmen were not specifically protected in Weissman until the prime contractor required a bond from the surety company specifically conditioned upon the payment of all materialmen. Weissman is clearly distinguishable from the instant case on the facts and therefore would not control.

This Court in Gary Hay & Grain Co., Inc. v. Carlson, 79 Mont. 111, 255 P. 722, made it clear that although the surety bond and the underlying contract must be read together to ascertain the parties' intentions, the surety's obligations are not coextensive with obligations of the underlying contract. For this proposition the Court cited Blyth-Fargo Co. v. Free, 46 Utah 233, 148 P. 427, a case concerning a surety bond which was conditioned upon the performance of the underlying contract and upon indemnification of the obligee. In Blyth-Fargo the court found there was no intent on the part of the surety or contractor to protect or benefit third-party materialmen, even though the underlying contract contained a promise on the part of the contractor to pay all materialmen. This Court made special note of the fact that, unless a promise of the principal is contained in the underlying contract was also specifically mentioned or made a condition in the surety bond, the surety would not have obligations coextensive with and measured by the promises of the principal in the underlying contract. In the instant case, even though there exists a promise on the part of Welch in the subcontract to pay all materialmen, there was no condition in Aetna's bond which would make this obligation on the part of Welch coextensive with the obligations of Aetna.

The decision in Gary Hay & Grain Co., Inc. v. Carlson, supra, was approved by the 9th Circuit Court of Appeals...