Opinion · Supreme Court of the United States

Equitable Surety Co. v. United States Ex Rel. McMillan

234 U.S. 448

Type
Opinion
Court
Supreme Court of the United States
Jurisdiction
Federal
Date
1914-06-22
Topic
general

How later courts describe this case

  • departure from building contract did not release surety

Citator

UpLaw has not yet analyzed Equitable Surety Co. v. United States Ex Rel. McMillan. The absence of a flag is not a finding that it is good law.

Cited by
102 opinions

Headnotes

  1. Contracts Law — Surety Bonds — Dual Obligation A bond given under the District of Columbia Materialmen's Act of 1899, modeled after the General Materialmen's Act of 1894, has a dual aspect: it secures to the Government the faithful performance of the contractor's obligations to it, and it protects third persons from whom the contractor obtains materials and labor, and these two agreements are as distinct as if contained in separate instruments. 234 U.S. at 454-55
  2. Contracts Law — Surety — Release by Alteration of Contract The rule of strictissimi juris, under which any change in the contract made between the principals without the surety's consent discharges the surety, rests on the foundation that the agreement altering the principal's undertaking be participated in by the obligee or creditor; where a bond is given under a statute such as the Materialmen's Act, there is no single obligee or creditor, since the nominal obligee is a mere trustee for third-party beneficiaries and cannot barter away their rights for its own benefit or convenience, so the surety is not released by statutory-bond changes that do not affect the general character of the work. 234 U.S. at 455-58
  3. Contracts Law — Surety Bonds — Notice to Surety A surety on a bond given under the Materialmen's Act is charged with notice that it is entering into a public obligation upon which persons supplying labor and materials will rely and who can in no manner control the conduct of the nominal obligee; the surety becomes bound both for the principal's performance of the work in accordance with the contract stipulations and for the prompt payment of sums due to all persons supplying labor and material in the prosecution of the work. 234 U.S. at 458-59
  4. Contracts Law — Interpretation The Materialmen's Act of 1899, like the Act of 1894, should receive a reasonably liberal interpretation in aid of its public object, since the security afforded by the required bond tends to lower the prices at which labor and material will be furnished to public works and substitutes for the mechanic's lien that is unavailable on Government buildings. 234 U.S. at 456-57
  5. Contracts Law — Surety — Effect of Unauthorized Contract Changes Where a contract contains no clause permitting changes, any change made between the principals without the surety's consent discharges the surety, regardless of whether the change was important or whether it prejudiced or benefited the contractor; but where a change-permitting clause exists in the contract, alterations made pursuant to it bind the surety unless they are so extensive and material as to amount to a departure from the original contract rather than a permissible modification of its details. 234 U.S. at 456
  6. Contracts Law — Surety — Liability to Materialmen Despite Contract Alteration A surety's responsibility to materialmen remains unaffected where the Government and the contractor, without the surety's knowledge or consent, change only the position and location of the building without affecting its general character, involving changes in grading but having nothing to do with the furnishing of the materials on which the action is based; a change so great as to amount to an abandonment of the contract and the substitution of a substantially different one, so that suppliers would necessarily be charged with notice of the abandonment, presents a different question. 234 U.S. at 459
  7. Contracts Law — Surety — Alteration of the Terms of a Contract for a Public Building Alteration by the District of Columbia and the contractor, without the surety's knowledge or consent, of the terms of a contract for erecting a schoolhouse, changing the building's location but not affecting its general character, does not release the surety from the obligation of a bond given under the District of Columbia Materialmen's Act of February 28, 1899. 234 U.S. at 460
EQUITABLE SURETY CO.v. McMILLAN,234 U.S. 448(1914)
34 S.Ct. 803
EQUITABLE SURETY COMPANYv. UNITED STATES OF AMERICA, TO THE USE OF
McMILLAN.
CERTIFICATE FROM THE COURT OF APPEALS OF THE DISTRICT OF COLUMBIA.
No. 861.
Argued April 15, 1914.
Decided June 8, 1914.
The obligation given by the surety under the District of Columbia Materialmen's Act of 1899 which is modeled after the General Materialmen's Act of 1894, has a dual aspect, being given not only to secure the Government the faithful performance of all the obligations assumed towards it by the contractor, but also to protect third persons from whom the contractor may obtain materials and labor; these two agreements being as distinct as though contained in separate instruments, the surety cannot claim exemption from liability to persons supplying materials merely on account of changes made by the Government and the contractor without its knowledge and which do not alter the general character of the work.UnitedStatesv.National Surety Co., 92 F. 549, approved. Under the rule ofstrictissimi juris, the agreement altering the contract must be participated in by the obligee or creditor as well as the principal in order to discharge the surety; in the case of a bond under the Materialmen's Acts of 1894 or 1899, there is no single obligee or creditor to consent thereto and the rule ofstrictissimi jurisdoes notPage 449apply where the alterations agreed upon do not change the general nature of the work. In this case the alterations of the terms of a contract for building a school house in the District of Columbia altering its location but without affecting its general character, without the knowledge or consent of the surety, did not have the effect of releasing the surety from the obligation of the bond given under the District of Columbia Materialmen's Act of February 28, 1899.Quare, and not involved in this case, what would be the result of a change not contemplated in the original contract as between the District of Columbia and so great as to amount to abandonment of the contract?
THE Court of Appeals of the District of Columbia certifies
that the record in the above entitled cause, now pending in said
court upon appeal from the Supreme Court of the District of
Columbia, discloses the following:
The declaration of the United States to the use of W. McMillan
and Son, filed February 11, 1913, against the Equitable Surety
Co. alleges:
That Allen T. Howison, as principal, and the Equitable Surety
Co., as surety, on July 24, 1911, executed a bond to the United
States in the penal sum of $110,350.00, conditioned for the
faithful performance by Howison of a certain contract made by him
with the Commissioners of the District of Columbia on that date.
A copy of the bond, made an exhibit, shows that the contract was
for the erection of a school building fronting on Eleventh
Street, N.W., between Harvard and Girard Streets, in the City of
Washington. The conditions of the bond are that if Howison shall
perform to the satisfaction of the Commissioners the work to be
done by him in accordance with the stipulations of the contract,
and shall save harmless and indemnify the District of Columbia
from any and all claims, delays, suits, charges, damages,
judgments, etc., on account of any accidents to persons or
property after the commencement of the work and prior to
completion and acceptance, and pay the same; and "will promptly
make payments to all persons supplying him
Page 450
with labor and material in the prosecution of the work provided
for in said contract," etc., the obligation shall be void;
otherwise to remain in force.
That thereafter W. McMillan Son, at the request of the
Butt-Chapple Stone Co., agreed to furnish to said contractor
certain stone materials to be used in the prosecution of the work
provided for in the contract by the contractor, and did furnish
to said contractor materials of the kind and quality specified in
his contract to the value of $4,452.84, of which material the
contractor used in the building a quantity of the value of
$3,952.84 for which he has failed to make payment. And that
defendant, though requested so to do, has refused to pay the
same. The affidavit of the plaintiff in support of the
declaration follows the requirements of Rule 73.
After the general issue, defendant filed a special plea
denying liability on said bond because after the execution and
delivery of the same, and without the knowledge or consent of
defendant, the Commissioners of the District of Columbia and the
said Howison, its principal, altered the contract the performance
of which was guaranteed by said bond. That said alteration
consisted in the entire changing of the building from one
fronting on Eleventh Street to one fronting on Harvard Street,
which alteration involved the contractor in considerable expense
not contemplated in the original contract, and prejudicial to
defendant. That said relocation of the building necessitated a
material change in grading the ground. That prior to the change
of location the contractor had graded the ground as required in
the contract and expended therein the sum of $2,393.90. And that
by reason of the change said sum was a total loss to the
contractor, and the further excavation made necessary by the
change of location was done at a cost of $1,300.90.
The affidavit of defense alleged the said change in the
contract without its knowledge or consent; and that the
Page 451
same necessitated a material change in the grading of the land
which had been previously performed by the contractor, at a
considerable expenditure not contemplated in the original
contract, and prejudicial to the defendant.
On motion under the 73rd Rule of the Supreme Court of the
District of Columbia the court entered judgment for the plaintiff
for the amount of the demand; and defendant has appealed
therefrom.
By stipulation two other cases involving the same question
here presented are to abide the result of this case.
The act of Congress, in compliance with the requirements of
which the aforesaid bond was executed, (c. 218,30 Stat. 906),
reads as follows:
"An Act Relative to the payment of claims for material and
labor furnished for District of Columbia Buildings.
"Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled, That
hereafter any person or persons entering into a formal contract
with the District of Columbia for the construction of any public
building, or the prosecution and completion of any public work,
or for repairs upon any public building or public work, shall be
required, before commencing such work, to execute the usual penal
bond, with good and sufficient sureties, with the additional
obligations that such contractor or contractors shall promptly
make payments to all persons supplying him or them labor and
materials in the prosecution of the work provided for in such
contract; and any person or persons making application therefor
and furnishing affidavit to the department under the direction of
which said work is being or has been prosecuted that labor or
materials for the prosecution of such work has been supplied by
him or them, and payment for which has not been made, shall be
furnished with a certified copy of said contract and bond, upon
which said person or persons supplying such labor and materials
shall have a right of action, and shall be authorized to
Page 452
bring suit in the name of the District of Columbia or the United
States for his or their use and benefit against said contractor
and sureties and to prosecute the same to final judgment and
execution: Provided, That such action and its prosecution shall
not involve the District of Columbia or the United States in any
expense: Provided, That in such case the court in which such
action is brought is authorized to require proper security for
costs in case judgment is for the defendant.
"Approved, February 28, 1899."
The Court of Appeals further certifies that the following
question of law arises upon the record; that its decision is
necessary to the proper disposition of the cause; and to the end
that a correct result may be reached desires the instruction of
the Supreme Court of the United States upon that question, to
wit:
Did the alteration of the terms of the contract by the
District of Columbia and the contractor, without the knowledge or
consent of the surety, have the effect to release the surety from
the obligation of the bond?
Mr. J.J. Darlington, with whomMr. Joseph A. BurkartandMr. William E. Ambrosewere on the brief, for the Equitable Surety Company:

The surety obligation is not to be extended because the surety is a corporation, or because a premium was paid.

The change of site created a new contract, not binding on the surety, either as to owner or sub-contractors.

The bond was security for labor and materials for work provided for in the contract guaranteed by the surety.

The argumentab inconvenientiwill not apply.

In support of these contentions, seeAtlantic Trust Co. v.Laurinburg, 163 F. 690;American Bonding Co. v.Pueblo Inv. Co., 150 F. 17;Abbottv.Morissette,46 Minn. 10;Bridge Co. v.Bogenshot,Page 45348 S.W. Rep. 97, 102;Baglinv.Title Guaranty Co., 166 F. 356;Brunthaverv.Talty,31 App.D.C. 134;Buchananv.Macfarland,31 App.D.C. 619,620;Bauschard Co. v.FidelityCo., 21 Pa. Sup.Ct. 375;Baglinv.Southern Surety Co., 42 Washb. Law Rep. 162, 164;Brown Co. v.Ligon, 92 F. 851;Chesterv.Leonard,68 Conn. 495,570;Carrollv.Lessee of Carroll, 16 How. 275, 286;Connv.State,125 Ind. 514;Chaffeev.U.S. Fidelity Co., 128 F. 918;Deweyv.State,91 Ind. 173;Grahamv.UnitedStates, 188 F. 651, 657;Guaranty Co. v.Pressed BrickCo.,191 U.S. 416;Harrimanv.Northern Securities Co.,197 U.S. 244,291;Henricusv.Englert,137 N.Y. 484,494;Millerv.Stewart, 9 Wheat. 680;McConnellv.Poor,113 Iowa 133,139;O'Nealv.Kelley,65 Ark. 550;Paolucciv.United States,30 App.D.C. 217,222;Pollockv.Farmers' L. T. Co.,157 U.S. 429,574;School Districtv.Greene,135 Mo. App. 421,426;Steffesv.Lemke,40 Minn. 29;Thompsonv.Chaffee,89 S.W. 285;UnitedStatesv.American Bonding Co., 89 F. 925;UnitedStatesv.Bagly,39 App.D.C. 105;United Statesv.Boecker, 21 Wall. 652;United Statesv.California BridgeCo., 152 F. 559;United Statesv.Freel,186 U.S. 309,318;Hillv.American Surety Co.,200 U.S. 197;UnitedStatesv.U.S. Fidelity Co., 178 F. 721;UnitedStatesv.Lynch, 192 F. 364, 368;United Statesv.National Surety Co., 92 F. 549;Wetmorev.Karrick,205 U.S. 141,155;Youngv.American Bonding Co.,228 Pa. 273,280;Zimmermanv.Judah,17 Ind. 286.Mr. Wharton E. Lester, with whomMr. Lucas P. LovingandMr. Daniel W. Bakerwere on the brief, for the United States to the use of McMillan Son:

Change of contract does not release the surety from liability to materialmen and laborers. There is a dual nature of bond required by act of 1899.Page 454

The agency of the District of Columbia ends with obtaining the bond.

The materials were furnished under contract for which bond was given.

In support of these contentions, seeMining Co. v.Cullins,104 U.S. 176;United States c. v.American SuretyCo.,200 U.S. 199;Fidelity Deposit Co., v.Smoot,20 App.D.C. 376;United Statesv.National Surety Co., 92 F. 549;Guaranty Co. v.United States,191 U.S. 416;UnitedStatesv.California Bridge Co., 152 F. 559;UnitedStatesv.Lynch, 192 F. 364;United Statesv.Freel,186 U.S. 309.
MR. JUSTICE PITNEY, after making the foregoing statement, delivered the opinion of the court.
The act of February 28, 1899 (c. 218,30 Stat. 906), under which the bond in question was given, was modeled after an act of August 13, 1894, entitled, "An Act for the protection of persons furnishing material and labor for the construction of public works," (c. 280,28 Stat. 278). In an action founded upon a bond given under the latter act, it was held by the Circuit Court of Appeals for the Eighth Circuit, inUnited Statesv.NationalSurety Co., 92 F. 549, 551, that the obligation has a dual aspect, it being given, in the first place, to secure to the Government the faithful performance of all obligations which a contractor may assume towards it; and, in the second place, to protect third persons from whom the contractor may obtain materials or labor; and that these two agreements are as distinct as if contained in separate instruments. It was consequently held that the sureties in such a bond could not claim exemption from liability to persons who had supplied labor or materials to their principal, to enable him to execute his contract with the United States, simply because the Government and thePage 455contractor, without the surety's knowledge, had made changes in the contract subsequent to the execution of the bond, the changes being such as did not alter the general character of the work contemplated by the contract or the general character of the materials necessary for its execution.

In support of this decision several cases from the state courts were cited, among themDeweyv.State,91 Ind. 173,185;Connv.State,125 Ind. 514,518;Steffesv.Lemke,40 Minn. 27,29; andDollv.Crume,41 Neb. 655,660. They fairly sustain the conclusion reached. The cases cited from the Indiana and Minnesota reports antedated the passage of the act of 1894, and may have furnished the suggestion for that enactment.

The decision of the Circuit Court of Appeals inUnitedStatesv.National Surety Co., supra, although never until now brought under the review of this court, has been many times cited and followed in the other Federal courts.Brown Haywood Co. v.Ligon, 92 F. 851, 857;United Statesv.Rundle, 100 F. 400, 402;United States Fid. Guar. Co. v.Omaha Bldg. Constr. Co., 116 F. 145, 147;Chaffeev.United States Fid. Guar. Co., 128 F. 918;UnitedStatesv.Barrett, 135 F. 189, 190;Henningsenv.United States Fid. Guar. Co., 143 F. 810, 813;CityTrust c. Co. v.United States, 147 F. 155, 156:United Statesv.California Bridge Constr. Co., 152 F. 559, 562;Title G. T. Co. v.Puget Sound Engine Works, 163 F. 168, 174.

InGuaranty Co. v.Pressed Brick Co.,191 U.S. 416, andHillv.American Surety Co.,200 U.S. 197,203, this court adopted a reasonably liberal construction of the act of 1894, in view of the fact that it was evidently designed to furnish the obligation of a bond as a substitute for the security which might otherwise be obtained by attaching a lien to the property; such lien not being permissible in the case of a Government work.Page 456

It seems to us that the construction given to that act in the case in 92 Fed. Rep. is correct, and that it applies equally to the Act of 1899, now under consideration; and that this act, like the other, should receive a reasonably liberal interpretation in aid of the public object whose accomplishment is so evidently intended. Its title is, "An Act relative to the payment of claims for material and labor furnished for District of Columbia buildings." The enacting clause, as well as the title, shows that Congress recognized that no legislation was necessary in order to enable the Commissioners of the District to require "the usual penal bond with good and sufficient sureties" from a contractor engaged for the construction of a public building. The object of the legislation was to give legal sanction to the "additional obligation that such contractor or contractors shall promptly make payments to all persons supplying him or them labor and materials in the prosecution of the work provided for in such contract," and to give to such a laborer or materialman the right to bring an action if necessary upon the bond, either in the name of the District of Columbia or of the United States, for his own benefit, against the contractor and sureties. The nominal obligee is, with respect to these third parties, a mere trustee, and the obligors, including the surety as well as the principal contractor, enter into the obligation in full view of this. The public is concerned not merely because laborers and materialmen (being without the benefit of a mechanic's lien in the case of public buildings) would otherwise be subject to great losses at the hands of insolvent or dishonest contractors, but also because the security afforded by the bond has a substantial tendency to lower the prices at which labor and material will be furnished, because of the assurance that the claims will be paid.

Stress is placed by counsel for the Surety Company upon the fact that the building was materially altered, and in aPage 457manner that involved the contractor in considerable expense not contemplated in the original contract. If these alterations were made pursuant to a stipulation for that purpose contained in the contract, they were binding upon the surety, unless they were so extensive and material as to amount to a departure from the original contract rather than a permissible modification of its details.United Statesv.Freel, 92 F. 299; 99 F. 237;186 U.S. 309.

So far as the certificate shows, however, the contract here in question contained no clause permitting changes. In such case it is beside the question to inquire whether the changes were important, or, indeed, whether they prejudiced or benefited the contractor. The rule that obtains in ordinary cases is that any change in the contract made between the principals without the consent of the surety discharges the obligation of the latter, even though the change be beneficial to the principal obligor.

But it lies at the foundation of this rule ofstrictissimijuristhat the agreement altering the undertaking of the principal must be participated in by the obligee or creditor, in order that it may have the effect of discharging the surety. This is expressed or implied in all the cases.Millerv.Stewart, 9 Wheat. 680, 703, 708, 709;Spriggv.Bank of MountPleasant, 14 Pet. 201, 208;Mageev.Manhattan Life Ins.Co.,92 U.S. 93,98;Union Mutual Life Ins. Co. v.Hanford,143 U.S. 187,191;Prairie State Bankv.United States,164 U.S. 227,233;United Statesv.Freel,186 U.S. 309,310,317.

In the case of a bond given under a statute such as the act of February 28, 1899, there is no single obligee or creditor. The surety is charged with notice that he is entering into what is in a very proper sense a public obligation, and one that will be relied upon by persons who can in no manner control the conduct of the nominal obligee, and with respect to whom the latter is a merePage 458trustee, and therefore incapable, upon general principles of equity, of bartering away, for its own benefit or convenience, the rights of the beneficiaries. In the light of the statute, the surety becomes bound for the performance of the work by the principal in accordance with the stipulations of the contract, and for the prompt payment of the sums due to all persons supplying labor and material in the prosecution of the work provided for in the contract.

What would be the result of a change not contemplated in the original contract, as between the District of Columbia, consenting to the change, and the Surety Company, not consenting thereto, is a question not now before us, and respecting which we express no opinion. But with respect to obligations incurred by the contractor to laborers and materialmen, at least so far as their labor and materials are supplied in accordance with the original contract, it is obvious, we think, that a construction which would discharge the surety because of any change to which the laborers and materialmen were not parties would defeat the principal object that Congress had in view in enacting the statute. If the change were so great as to amount to an abandonment of the contract and the substitution of a substantially different one, so that persons supplying labor and materials would necessarily be charged with notice of such abandonment, a different question would be presented. But, in the case of such a change as was here made — a mere change of position and location of the building, without affecting its general character; involving changes in grading, but having nothing to do with the furnishing of the materials upon which the action is based — it seems to us that the responsibility of the surety to the materialman remains unaffected.The question certified will be answered in the negative.Page 459