Verdugo Highlands, Inc. v. Security Ins. Co. of New Haven

• Decision Date: 02 March 1966
• Citation: 240 Cal.App.2d 527,49 Cal.Rptr. 736
• Court: California Court of Appeals Court of Appeals
• Parties: VERDUGO HIGHLANDS, INC., a corporation, Plaintiff and Respondent, v. SECURITY INSURANCE COMPANY OF NEW HAVEN, a corporation, defendant and Appellant. Civ. 29242.

Page 736

49 Cal.Rptr. 736

240 Cal.App.2d 527

VERDUGO HIGHLANDS, INC., a corporation, Plaintiff and Respondent, v. SECURITY INSURANCE COMPANY OF NEW HAVEN, a corporation, defendant and Appellant.

Civ. 29242.

District Court of Appeal, Second District, Division 2, California.

March 2, 1966.

Rehearing Denied March 16, 1966.

Hearing Denied April 27, 1966.

Anderson, McPharlin & Conners, by Robert C. Haase, Jr., Los Angeles, for appellant.

Sydney J. Dunitz, Beverly Hills, for respondent.

ROTH, Presiding Justice.

Respondent Verdugo Highlands, Inc., plaintiff below, was in the process of developing property owned by it and located in the City of Glendale, into residential lots. A contractor who had commenced grading work required in the project was relieved and respondent engaged G. W. Boggus, Inc. (Boggus) to complete the grading. Pursuant to a contract executed August 16, 1961 (August contract) Boggus was to 'furnish all labor, materials, supplies and equipment and do all work necessary to complete in good, substantial and workmanlike manner in place grading improvement work relating to the development of said property described in the attached plans in accordance with the plans, profiles and specifications prepared by Amco Engineers, Owner's engineer.'

Appellant Security Insurance Company of New Haven (Surety) executed a Performance and Material and Labor Bond (bond) in the amount of $200,000, insuring Boggus' performance under the August contract.

Prior to the completion of the grading work, Boggus abandoned the project in violation of the terms of the August contract. The surety by the terms of its bond was privileged to enter upon the property and complete the job. It did not do so. The question raised as to whether surety was properly notified is treated infra.

Respondent was compelled to and did complete the grading. After completion of the grading at a cost greatly in excess of $0.36 per cubic yard of earth cut, the price fixed by the August contract, respondent filed suit against surety for the difference between the contract price and the actual cost of completion. The trial court found that respondent cut and moved 182,947 cubic yards of dirt, for which the agreement provided payment of $65,862.82 and which cost the respondent a total sum of $269,943.38, or an excess of $204,082.56. Since the limit of the bond was $200,000, the court gave judgment for respondent in that amount less $26,561.66 previously paid by the surety for labor and materials.

At some given time, either prior to or during Boggus' work on the grading (the record is vague), respondent discovered that the tentative grading plans of its engineers required work on property surrounding the tract but not owned by respondent. Negotiations ensued whereby respondent acquired various parcels of land adjacent to and contiguous with the primary tract. It is to be noted that these parcels as acquired (primarily to so-called Donnelly and Stadler parcels) extended beyond the originally designed grading areas and in the case of the Donnelly property, beyond the edges of the grading plan itself.

During the course of the grading, precisely when is unclear, extra dirt was encountered which had to be disposed of either by hauling off the property or by use on the property. The latter being more economical, additional building pads were designed for the Donnelly and Stadler properties in which the extra materials could be used. Apparently, work in these areas was begun by Boggus, but the major portion of this grading, including the clearing of vegetation and alluvial materials from the areas to be filled, was done by respondent subsequent to Boggus' abandonment.

The surety argues strenuously that the creation of the additional pad areas on the Donnelly and Stadler properties so materially altered the principal contract between Boggus and respondent, that appellant is exonerated from liability under Civil Code, § 2819. Section 2819 provides: 'A surety is exonerated * * * if by any act of the creditor, without the consent of the surety the original obligation of the principal is altered in any respect, or the remedies or rights of the creditor against the principal, in respect thereto, in any way impaired or suspended.'

It is settled that when there is a material alteration of the principal obligation irrespective of whether it is prejudicial, the surety is discharged. (Barrett-Hicks Company v. Glas, 9 Cal.App. 491, 497, 99 P. 856; Wolf v. Aetna Indemnity Company, 163 Cal. 597, 605, 126 P. 470; First Congregational Church of Christ v. Lowrey, 175 Cal. 124, 126, 165 P. 440; Roberts v. Security Trust & Savings Bank, 196 Cal. 557, 564, 238 P. 673; Hills & Morton, Inc. v. Coughlan, 214 Cal.App.2d 545, 548, 29 Cal.Rptr. 550.) A material alteration is one that works a change in the meaning or legal effect of the contract (Hill & Morton, Inc. v. Coughlan, supra, at p. 549, 29 Cal.Rptr. 550.)

It is clear, therefore, that the validity of appellant's contention hinges on a construction of the bond and the August contract which would exclude from the scope of the undertaking, work done on properties not shown on the original grading plan.

It is to be noted at the outset that the bond itself provides that the '* * * Principal shall faithfully perform the work contracted to be performed under said contract [of August 16, 1961] * * *'. This, in effect incorporates the terms of the grading contract into the bond, so that the scope of the bond is determined by the limits of the August contract. (Roberts v. Security Trust & Savings Bank, supra, 196 Cal. at p. 566, 238 P. 673; Culbertson v. Cizek, 225 Cal.App.2d 451, 466-467, 37 Cal.Rptr. 548.)

Under Civil Code, § 2837 a contract of suretyship is to be interpreted by the ordinary rules of contract construction. On this subject we think that the observations of the court in Roberts v. Security Trust & Savings Bank, supra, 196 Cal. at pp. 566-567, 238 P. at p. 677, are apt: "* * *. Such construction does not mean that words are to be distorted out of their natural meaning, or that, by implication, something can be read into the contract that it will not reasonably bear; but it means that the contract shall be fairly construed with a view to effect the object for which it was given, and to accomplish the purpose for which it was designed. * * *' A bond may incorporate, by reference * * * other contracts, in which case the bond and the contract should be read together and construed fairly and reasonably as a whole according to the intention of the parties. [Citation.] * * *. In other words, we must, in order to ascertain the nature and extent of the the liability to which the sureties extent of the liability to which the sureties of the undertaking by the light of the agreement; faithful performance of the terms of which it guarantees [citation], or, as was said by this court, the extent of the surety's liability must be gathered from the language used when read in the light of the circumstances attending the transaction. [Citation.]'

In the case at bench, Boggus, by the August contract, was required to 'complete in good, substantial and workmanlike manner in place grading improvement work relating to the development of said property described in the attached plans * * *.' (Emphasis added.)

This and other language appearing in the August contract, ¹ indicated that the grading plan at the outset was merely an estimate and that the project was to be flexible. There was considerable expert testimony that hillside urban developments such as the one at bench involve many unknown and unforeseen obstacles which require alteration from the original plans; that such plans are considered in the industry to be subject to alteration as the project progresses; and that changes in the ultimate number, size, and elevation of graded lots is a usual occurrence.

In the instant case, the grading plan incorporated by reference into the bond was designed, as are most such plans, to balance the cuts (removal of dirt from the hillside) with the fills (deposits of additional dirt). This is done so that all dirt removed on the project can be disposed of in the immediate area, eliminating hauling costs while simultaneously creating usable building pads. Understandably, a balance will be achieved only if the terrain allows strict adherence to the original lot design, and shrinkage factors upon compaction of the fill are as estimated. In this case, an overage of fill was somehow created, a not unusual occurrence, due to no fault of respondent. In order to dispose of this overage, additional lots were created on the Donnelly and Stadler properties which were at lower elevations. There was abundant evidence that such disposal was proper and of benefit to both the respondent and Boggus, and that the availability of these areas for disposal of the extra dirt was fortunate for all concerned.

Usage and custom are, of course, acceptable aids in the interpretation of contracts (Civil Code, § 1655; Code of Civil Procedure, § 1870(12); 1 Witkin, Summary of California Law, p. 253, and cases cited.) In light of the evidence of such usage and custom, and the circumstances prevailing at the execution of the August contract and the bond, we think that the events leading up to the creation of additional pads...