U.S. Fidelity & Guaranty Co. v. Olds Bros. Lumber Co.

• Decision Date: 30 June 1967
• Docket Number: No. 7847,7847
• Citation: 430 P.2d 128,102 Ariz. 366
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Appellant, v. OLDS BROS. LUMBER COMPANY, an Arlzona corporation, W. A. Olds and Jane Doe Olds, his wife, J. W. Olds and Jane Doe Olds, his wife, Appellees.
• Court: Arizona Supreme Court

Page 128

430 P.2d 128

102 Ariz. 366

UNITED STATES FIDELITY AND GUARANTY COMPANY, a corporation, Appellant, v. OLDS BROS. LUMBER COMPANY, an Arlzona corporation, W. A. Olds and Jane Doe Olds, his wife, J. W. Olds and Jane Doe Olds, his wife, Appellees.

No. 7847.

Supreme Court of Arizona, In Banc.

June 30, 1967.

Rehearing Denied Sept. 19, 1967.

Moore, Romley, Kaplan, Robbins & Green, Phoenix, for appellant.

Head & Palmer, Prescott, for appellees.

BERNSTEIN, Chief Justice.

Appellant, plaintiff herein, sued appellees, defendants herein, in Navajo County Superior Court for damages allegedly due it under a 'General Indemnity Agreement' in which defendants were indemnitors and plaintiff indemnitee. From an adverse verdict and judgment, the plaintiff took this appeal.

Defendants owned and operated a retail lumber and building supplies company in Winslow, Arizona. During the course of their business they had occasion to deal frequently with one Jack Reeder, a building contractor who purchased material for his construction jobs from defendants. With apparent intention of preserving their beneficial commercial relationship with Reeder, the defendants had agreed, on a number of occasions, to indemnify the plaintiff for any losses it might sustain as a result of posting performance bonds in the name of Jack Reeder on individual construction jobs. These early agreements which were individually executed, were designated 'Special Indemnity Agreements' by the contracting parties.

On September 12, 1957 the plaintiff and defendant then decided to enter into what was titled a 'General Indemnity Agreement.' The basic substance of this more expansive contract is explained in its first three paragraphs, which read as follows:

'GENERAL INDEMNITY AGREEMENT

THIS AGREEMENT made by the Undersigned in favor of UNITED STATES FIDELITY AND GUARANTY COMPANY (hereinafter called the Surety), its successors and assigns, WITNESSETH:

WHEREAS, the Surety, at the special instance and request of the Undersigned and because of the promise of the Undersigned to execute this indemnity agreement, has assumed or may in the future assume suretyship on bonds or other obligations, in different penalties, of various dates, on behalf of any one or more of the Undersigned, the undersigned's subsidiary associated or affiliated companies, or

JACK V. REEDER, ALSO KNOWN AS J. V. REEDER AND JOHN V. REEDER dba REEDER CONSTRUCTION COMPANY

(any and all of the aforesaid being hereinafter called the Principal), and in favor of different obligees, any and all of which bonds and other obligations are made a part hereof, to all intents and purposes as if fully written herein; and

Whereas, the Undersigned expressly agrees that the Surety's acceptance of the application, written or otherwise from a representative who is believed by the Surety in good faith to be an authorized agent of the Principal and the execution of any of such bonds and other obligations shall constitute in each instance a request from the Undersigned for the Surety to assume suretyship, both prior and subsequent to the execution of this agreement, including suretyship assumed by any continuation, extension, alteration or renewal of the original obligation or any new bond or obligation, and bring all and each of such bonds, obligations, continuations, extensions, alterations or renewals within the provisions of this agreement; * * *'

This continuing agreement was reached with the purpose of avoiding the time and effort expended in executing special indemnity agreements each time Jack Reeder was in need of a performance bond.

In reliance on this 'General Indemnity Agreement' the plaintiff thereafter issued several performance bonds in the name of Jack Reeder, and sustained a resulting loss on one bond in the amount of $24,186.69. Plaintiff seeks indemnification.

At trial, the defendants endeavored to show that the parties had orally agreed, concurrently with the execution of the General Indemnity Agreement, that the defendants would not be bound to indemnify the plaintiff for losses on any bond issued to Jack Reeder unless and until the plaintiff first notified and obtained the approval of the defendants. This oral evidence was relied upon to establish the foundation for their defense of 'conditional delivery' of the indemnity agreement. In this respect defendants argued that since their approval had neither been sought nor given prior to the issuance of the bond upon which the loss was sustained, they had no liability under the agreement. The defendants' further contention that their signatures on the agreement had been obtained by fraud was also based on the alleged oral agreement. The defense of fraud, however, was stricken upon motion at trial.

The plaintiff on appeal contends that the evidence of the alleged oral agreement should have been stricken from the record pursuant to its motion following dismissal of the fraud defense. Plaintiff maintains that the trial court's refusal in this respect constitutes reversible error.

It is firmly established that where an agreement is reduced to writing in such terms as to express a complete contract, evidence of a contemporaneous oral agreement relating to the same subject matter, varying, contradicting or enlarging the written agreement, is inadmissible, in the absence of an allegation of fraud or mistake. Brand v. Elledge, 101 Ariz. 352, 419 P.2d 531; Komarek v. Cole, 94 Ariz. 94, 381 P.2d 773; Lee v. Nichols, 81 Ariz. 106, 301 P.2d 1022; S. H. Kress & Co. v. Evans, 21 Ariz. 442, 189 P. 625.

The parol evidence rule, stated above, is not applicable, however, where there is no integration of the agreement or contract. It may be proven by parol evidence, therefore, that a writing was never executed or delivered as a contract. Parker v. Gentry, 62 Ariz. 115, 154 P.2d 517; Brown v. First National Bank of Nogales, 44 Ariz. 189, 36 P.2d 174; Williston on Contracts, § 634 (3rd edition, 1961). Accordingly, a party may show by parol either that the contract, although signed by him, was never delivered or that there was merely a conditional delivery and that the condition has failed. Mapes v. Santa Cruz Fruit Packing Corp., 26 Wash.2d 145, 173 P.2d 182. 'In so doing, the written terms of the contract are not varied by parol but the showing made is merely to the effect that the contract was never completely executed.' Chicago Title and Trust Co. v. Cohen, 284 Ill.App. 181, 1 N.E.2d 717, 723.

It is necessary to keep clearly in mind, however, that the parol evidence must be directed solely to the fact of delivery and to the conditions thereof, and that it may not operate to alter in any way the terms of the contract. Restatement, Contracts § 241 (1932); Yoder v. Nutrena Mills Inc., 8 Cir., 294 F.2d 505; Meadow Brook National Bank v. Bzura, 20 A.D.2d 287, 246 N.Y.S.2d 787; Mapes v. Santa Cruz Fruit Packing Corp., supra. Also, while oral testimony is admissible to prove that a contract, fully executed and unconditional on its face, had been delivered subject to a condition precedent, this proposition has no application to conditions subsequent. National Bank and Trust Co. of South Bend v. Becker, 38 Ill.App.2d 307, 187 N.E.2d 355; Security National Bank v. Pulver, 131 Minn. 454, 155 N.W. 641.

The issue then in the present case is whether the oral agreement establishes a condition precedent to delivery within the exception to the parol evidence rule. Assuming the oral condition in question to be, as defendants contend, a condition precedent rather than a condition subsequent, we are still called upon to examine the borderline separating the rule which forbids the admission of contemporaneous parol evidence to vary a writing and the rule permitting parol evidence to establish conditions upon which an instrument has been delivered. Although this line is a fine one, it is essential that it be carefully protected in order to give a continuing significance to the parol evidence rule.

In dealing with the above rule distinction in a case where the defendant contended that the mortgage then in question was delivered on a condition that it was not to be enforced against personal property, the Supreme Court of Iowa said:

'Nor can the contention be sustained as supporting the plea of Conditional delivery. Concededly the mortgage was then and there delivered to the payees and was intended to go into effect so far as the real estate was concerned. The condition contended for was not to be precedent to delivery, but had relation to the enforcement of the instrument after delivery. A condition to delivery suspends for the time being the contract as a whole. It can have no effect to qualify or modify the terms of the contract as written. The performance of the condition must be precedent to the delivery. The case presented by the defendants is not one of conditional delivery at all. The gist of their contention is that the provisions of the mortgage were to be waived and qualified after delivery. * * * The district court properly rejected the evidence, so far as it sought to qualify the terms of the mortgage.' (Emphasis in original) Farmers Savings Bank of Slater v. Weeks, 209 Iowa 26, 227 N.W. 508, 509.

In Travers-Newton Chautauqua System v. Naab, 196 Iowa 1313, 196 N.W. 36, 37, 32 A.L.R. 780, it was stated:

'* * * Delivery is largely a matter of intention. Where there is a condition precedent to the full legal delivery of a written instrument, the writing does not become effective until such condition has been complied with, and it may generally be proven by parol evidence that there was such a condition precedent to the full legal delivery of the instrument and to its becoming effective. This rule is of necessity applied in cases where the written instrument itself is silent on the subject-matter of the condition precedent which it is sought to establish by parol. But, where the written instrument speaks on the very subject-matter of the condition precedent...