#### Lloyd Investment Company, Respondent, vs. Illinois Surety Company and another, imp., Appellants.

*October 25*

November *14, 1916.*

*Principal and surety: Discharge of surety: Building contract: Construction: Advance payments: Negotiable notes: Breach of contractor’s agreement to loan money: Damages: Final settlement: Questions for fury: Evidence: Harmless error.*

1. Where the performance of a contract is guaranteed by a surety, any material, substantial, and prejudicial variation of its terms will discharge the surety.

2. Advance payments not provided for in the contract, while they constitute a variation of its terms, will not discharge the surety if it affirmatively appears that under all the circumstances the departure from the agreement was immaterial and nonprejudicial.

3. A building contract which provided for payment of $5,000 on or before completion of the mason work, to be made by delivery of the owner’s promissory note payable on or before a specified date, and for a payment of $5,000 when the first-floor stores were ready for occupancy, also to be made by delivery of a promissory note “made, executed and dated on or before the time when said first-floor stores are ready” and payable on or before a specified date, and in which the contractor further agreed to accept payment of said notes and of the final amount ($3,000) due on the contract in notes payable $500 every three months, is construed as permitting the owner to give the two $5,000 notes in negotiable form, and the giving, of them in such form was therefore not such an advance payment as would discharge a surety; nor was the giving of the second note a short time before the first-floor stores were ready for occupancy a material or prejudicial departure from the contract.

4. The owner having given the two $5,000 notes in negotiable form, they were negotiated by the contractor, and when they became due the owner gave a new $10,000 note to take them up. *Held*that, the contractor having rendered himself incapable of taking new securities in payment of the $5,000 notes as he had agreed, the giving of the new note was not an election by the owner to pay those notes in cash rather than in new securities.

*5.*The agreement of the contractor to accept $13,000 in notes payable $500 every three months was in effect an agreement to loan *283the owner $13,000; and for his breach of such agreement the contractor was liable for such damages as should have been reasonably in contemplation by both parties, when the agreement was made, as a probable result of a breach of it, including in this case commissions necessarily paid in procuring a loan from other sources and the difference between interest at the rate agreed upon and at the rate the owner was compelled to pay.

6. Whether, at the time the contractor gave a receipt “for payment of balance due under the contract and for extras,” a complete settlement of all matters relating to the contract was made, thereby discharging the surety, was a question which, under the evidence, it was not clearly error to submit to the jury.

7. The rejection of evidence offered on behalf of the surety as to a conversation between the contractor and the president of thé owner regarding extras, was not a prejudicial error, there being no recovery or basis for a recovery for extras, and it not being probable that the reception of such evidence would have changed the finding of the jury on the question of settlement.

Appeal from a judgment of tbe circuit court for Milwaukee county: JoiiN J. Geegoey, Circuit Judge.

*Affirmed.*

Action to recover damages for alleged breaches of a building contract made between plaintiff and defendant Utley, September 2, 1913, whereby the latter agreed to furnish all the material and labor and construct for the former a building, according to certain plans and specifications, for the sum of $23,000, the performance of which was guaranteed by the defendant surety company.

The contract provided that the sum aforesaid should be paid, $2,500 in cash upon completion of the foundation, the same to be secured by plaintiff’s promissory note indorsed by one Jacobson, and bearing even date with the contract, payable on or before thirty days; $2,500 in cash when the walls and first floor were completed, secured by an indorsed note as before, payable on or before sixty days from date; $5,000 in cash upon the building being under roof, the same to be secured by plaintiff’s note payable to the order of Utley, guaranteed by said Jacobson and executed and delivered at the time of the completion of the first floor and walls to grade, *284■and payable on ox before sixty days from date; $5,000 on or before tbe time of completion of tbe mason work, tbe payment to be made by delivery of plaintiff’s promissory note indorsed ■or guaranteed by said Jacobson, payable on or before January 1, 1914, and to then be taken care of as hereinafter indicated; $5,000 upon tbe first-floor stores being ready for occupancy, payment to be made by note indorsed as before, said note to be made, executed, and dated on or before tbe time when tbe first-floor stores were ready for occupancy, and payable on or before January 1, 1914; and tbe balance, $3,000, upon completion of tbe building to tbe satisfaction of plaintiff, said $3,000 and tbe two $5,000 notes payable January 1, 1914, to be paid in casb or securities acceptable to Utley, at plaintiff’s option, said Utley to accept tbe promissory note, ■or notes, of plaintiff for tbe $13,000, secured by a second mortgage on tbe building and premises, in case of tbe first mortgage not being over $29,000; said note or notes not to bear interest at over five per cent, per annum, payable annually, and providing for tbe principal of said note or notes to be paid, $500 every three months; and provided further that tbe plaintiff shall have legal title to tbe property, incumbered for not more than $29,000.

The contract further gave Utley tbe privilege to provide or furnish plaintiff tbe money to enable him to pay tbe amount-due on tbe land contract be held on tbe premises and to provide for second-mortgage securities on tbe same, and plaintiff agreed, if acceptable to Utley, to undertake to procure a loan ■on tbe premises in excess of $29,000, so tbe latter would receive in casb, instead of mortgage securities, tbe amount thus raised on first mortgage in excess of tbe amount payable on tbe land contract, in such case Utley to have a mortgage on tbe premises for tbe balance that would then be due and owing. Tbe contract further provided that, in case plaintiff, with or without tbe assistance of Utley, should be unable to procure a deed of tbe property, so as to make mortgages there*285on, Utley should accept as security for payment of the. $13,000 in notes the land contract plaintiff held on such property, with an assignment thereon, on which contract plaintiff represented there was to be paid as principal not to exceed $29,000.

The last two $5,000 notes were given in negotiable form and were negotiated‘by Utley at the Merchants & Manufacturers Bank, in Milwaukee, Wisconsin. One was renewed at the bank January 3, 1914, for a short time. February 6,. 1914, plaintiff gave Utley a note of $10,000, payable to his order in three months with interest at the ráte of five per cent, per annum. It was guaranteed by the aforesaid Jacobson and indorsed by Utley and one Bitker. It was used at the bank to take up the two $5,000 notes, Bitker depositing stock as collateral security. The note was not paid when due. The bank put it in judgment and plaintiff paid such judgment.

Before the building was completed, Utley became financially embarrassed and appointed E. J. Patterson to act for him, who did so act thereafter in the matters appertaining to the building contract.

During the pendency of the action, Utley was adjudged a bankrupt and *James 8. Hopkins*was appointed receiver for the surety company and was duly made a defendant.

So far as the trial court regarded the evidence as in conflict, the issues were submitted to the jury for a special verdict. The result was, in effect, as follows: The requirement of the surety bond as to notice in writing to the surety company of defaults, also the requirement as to commencing suit for damages within six months after any breach of the contract, were waived. Defendant agreed to protect plaintiff from any loss that might result to it if the latter refused to pay the $10,000, note when due. There was no material alteration in the manner of erecting the building, to plaintiff’s knowledge. There, was no final settlement between the parties. There was de*286lay of 63 days in tbe contract, time for completing tbe stores-on tbe lower floor ready for occupancy. There was delay of. 101 days in tbe contract time for completing tbe building.

In addition to tbe foregoing tbe jury found damages on plaintiff’s claims which were submitted, aggregating $2,825- and tbe court found, on tbe undisputed evidence, as was supposed, other items of damages, making in all $9,472.94.. Included in tbe court’s findings were $2,000 for commissions-paid in procuring tbe loan which, it was claimed, Utley failed to provide as per contract-, and $2,087 for difference in interest between tbe rate agreed upon and tbe rate plaintiff was compelled to pay.

Judgment was rendered in plaintiff’s favor in accordance with the aforesaid findings.

For tbe appellants there was a brief by *Flanders,*Bottum>. *Fawsett & Bottum,*and oral argument by *F. L. McNamara*and *F. H. Bottum.*

For tbe respondent there was a brief by *Rubin, Fawcett & Dutcher,*attorneys, and *Paul B. Newcomb,*of counsel, and oral argument by *Mr. Newcomb.*

Maeshall, J.

No complaint seems to be made but what tbe court submitted to tbe jury all material disputed matters of fact. Tbe questions raised are mainly questions of law, and are few in number. All will be treated which seem to merit consideration.

Tbe contract is ambiguous in several particulars, so tbe trial court, in reaching its conclusion, was obliged to construe the language thereof.

Did tbe contract permit tbe plaintiff to give tbe contractor tbe two promissory notes which were made payable January 1, 1914, in negotiable form? That is tbe first matter submitted. It is contended on tbe part of appellants that it did not and that, in so doing, there was a material prejudicial departure from tbe agreement, in that, thereby, respondent was rendered incapable of protecting itself, to tbe extent of *287•$10,000;, from damages caused by the contractor’s failures to perform as be agreed.

It is well settled that any material, substantial, and prejudicial variation of tbe terms of a contract, where performance by the contractor is insured by a 'surety, will discharge such surety, and that advance payments, not provided for in the contract, constitute such a variation, as, thereby, the corn tractor’s interest in performing his agreement is lessened and the surety has a right to the benefit of such interest and is presumed to rely thereon. *Stephens v.*Elver, 101 Wis. 392, *77*N. W. 737; *Kunz v. Boll,*140 Wis. 69, 121 N. W. 601. But even advance payments will not discharge the surety if it affirmatively appears that, under all the circumstances, the departure from the agreement was immaterial and nonprejudicial. The principle must be kept in mind that a surety is so discharged only when the departure is material and prejudicial, and not otherwise.

If the giving of the two $5,000 notes in negotiable form was a departure from the contract, so as to amount, in effect, to an advance payment, as claimed, a pretty conclusive case of prejudicial variance would be presented.' But, as we construe the contract, it contemplated just such a circumstance. The agreement was to give promissory notes at the time they were given and payable at the time therein provided. The evident purpose was to aid the contractor in obtaining money to enable him to carry out his contract. The only way that could have been efficiently accomplished was by giving negotiable promissory notes, as was done. The provision was evidently inserted in the contract to enable him to have an equivalent of cash payments at the time of delivery of the notes. If it had been intended that nonnegotiable notes should be given, doubtless, an unmistakable stipulation on the subject would have been made.

We do mot overlook the fact that the contractor agreed to accept payment of the two $5,000 notes when due and the final amount of $3,000 on the contract in notes due $500 *288each three months. Doubtless, that required him to take up the $5,000 notes vdien due so as to carry out his agreement, but it did not operate to limit respondent to giving notes in nonnegotiable form.

It is suggested that the $5,000 note which was agreed to be given when the first-floor stores were ready for occupancy was given before that time and that such circumstance constituted a prejudicial departure from the contract. Here again the language of the agreement is involved in some obscurity. While it was provided that $5,000 should be paid “when the first-floor stores were ready for occupancy,” it was also provided that “the said payment to be made by delivery to said party of the first part of the promissory note of said party of the second part, indorsed or guaranteed by said Julius Jacobson, said note to be made, executed, and dated on or before the time when the first-floor stores are ready for occupancy.” It is considered that the parties probably meant thereby that the payment should be made when the first-floor stores were ready for occupancy but that the note might, at respondent’s option, be given on or before that time. But if that be not so, it is considered that the giving of the note a short time before the first-floor stores were ready for occupancy was not a material prejudicial departure from the contract.

It is further suggested that the circumstance of respondent taking up the notes and giving a new one was an election under that clause of the contract permitting it to pay when due in cash or by securities acceptable to the contractor.. That seems clearly wrong. The contractor rendered himself incapable of taking the new securities in lieu of cash for the two $5,000 notes and, therefore, respondent had no opportunity to efficiently make an election. It gave the new note because it was compelled to do so, not because it preferred to pay them in cash rather than in new securities which the contractor agreed to take if respondent so desired.

■ It is further contended that error was committed in awarding damages to the extent of $4,087.50 on account of the *289contractor failing to loan respondent $13,000 to provide for tbe two $5,000 notes and the $3,000 last to be paid on the contract. Counsel base this on the idea that the trial court was wrong in the theory that Utley agreed to furnish respondent $13,000 to take care of the two notes and such last payment. On the contrary it seems to us that such theory is clearly right. It was expressly stipulated that Utley, at respondent’s election, should take $13,000 in' notes, $500 due each three months after January 1, 1914, in payment of the two $5,000 notes and the last instalment on the contract. That is, in effect, Utley agreed to loan respondent $13,000 for the purposes of making such payment. He rendered himself incapable of doing it by putting the two notes beyond his control, thus compelling respondent, in the end, to pay them in cash, and by permitting liens on the building aggregating more than the $3,000 last payment which respondent was compelled to provide for. Had Utley carried out his agreement, respondent would have been enabled, through, in effect, a loan]by the former, to pay off this $13,000, $500 every three months, with interest at the rate of five per cent, per annum. So the claim of appellants that the basis for the court’s finding on this point is without foundation cannot be sustained.

The contract very clearly, as we view it, obligated Utley to provide the $13,000 which respondent was compelled to raise. ' That was one of the obligations covered by the surety bond. Under the peculiar circumstances which the contract shows were brought home when the contract was made, the damages awarded for his failure to provide the $13,000 were such as should have been reasonably in contemplation by both parties when the agreement was made as a probable result of the breach of it, and so fall within the rule for assessing damages for such breaches. *Guetzkow Brothers Co. v. A. H. Andrews*& *Co.*92 Wis. 214, 66 N. W. 119; *Bradley v. C., M. & St. P. R. Co.*94 Wis. 44, 68 N. W. 410; *Hammond v. Sandwich Mfg. Co.*146 Wis. 485, 131 N. W. 1097. Those *290circumstances were such, tbat in order to obtain tbe $18,000 on tbe property, tbe amount due on tbe land contract bad to be provided, making it necessary to raise, in all, some $44,000.

Tbe next complaint made is tbat tbe court erred in not bolding as a matter of law tbat plaintiff and Utley made a complete settlement of all matters involved in tbe case, thereby discharging tbe surety.

It appears tbat on October 5, 1914, tbe last payment under tbe contract bad not been made. Then, Mr. Patterson, acting for Utley and others, and Mr. Jacobson, president of respondent, acting for it, bad some negotiations in respect to tbe differences between tbe two principals and, in tbe main, in regard to providing money to pay off lien claims on tbe building amounting to some $3,500. As a result of such negotiation, Patterson loaned respondent $3,500, which was used to provide for such claims, taking its note therefor and receiving a paper reciting that such note was received “for balance due under tbe contract and for extras” in constructing tbe building in question. There was much evidence given by Jacobson and Patterson in respect to this subject and evidence in relation to bow tbe bookkeeper, by Patterson’s direction, entered tbe matter on tbe Utley books. On tbe whole, tbe evidence tends, pretty persuasively, to show tbat, at tbe time tbe receipt was given, a full settlement of all tbe differences between tbe parties was intended, but, in view of tbe decision of tbe trial court, we are unable to reach the conclusion tbat error was clearly committed in submitting tbe matter to tbe jury. There was considerable evidence, not very satisfactory it is true, which, in a reasonable view, tends to show tbat tbe giving of tbe receipt was not for tbe purpose of a full settlement between Utley and respondent. It is needless to recite such evidence here. It has been read and reread and weighed in all reasonable aspects with tbe result tbat we are not persuaded to overrule tbe trial court. Tbe *291receipt itself, in view of tbe evidence, is not very satisfactory. Instead of stating tbat it was in fnll for all claims under tbe contract, it states tbat it was for balance due and for extras. Tbat might well refer to tbe final payment of $3,000 and claims for extras, and bave no’reference to claims for damages for breach of contract. This view is consistent with, and rather suggested by, tbe provision of tbe contract tbat no payment “except tbe final payment shall be conclusive evidence of tbe performance of tbe contract or any part thereof, and no payment shall be construed to be acceptance of any defective work or materials.” Tbat seems to mean tbat tbe final payment, unexplained, would be conclusive evidence tbat tbe building bad been constructed according to tbe plans and specifications except as to material used and defective work, not, necessarily, tbat such payment would preclude tbe owner from bis remedy for failure to construct tbe building within tbe time agreed upon and for failure as to other provisions of tbe contract not having to do with tbe physical character of tbe building. Doubtless, under such a contract, tbe last payment could be made under such circumstances as to save tbe owner’s rights, as in this case, where tbe payment is made by wray of providing money to discharge lien claims on tbe property. Here there was no recovery for extras, so there is nothing contrary to tbe receipt in respect to tbat matter. There was a recovery for defective work, but tbe contract expressly provided tbat no payment should preclude claims being made therefor. Tbe other elements of damage bave nothing to do with tbe character of the building. They relate to failure to complete it within tbe time agreed upon and failures of Utley to protect tbe building from liens and to keep bis agreement to loan respondent tbe $13,000 to take care of tbe two $5,000 notes and provide for tbe last payment of $3,000 agreed to be made on tbe contract.

It is a reasonable view of tbe evidence tbat tbe receipt was not intended to cover these matters; tbat it referred to tbe *292$3,000 wbicb was to be paid last and any claim for extras and nothing else, and was accepted to raise money to pay off lien claims on tbe property.

A further and last complaint is made in respect to the rejection of some evidence offered by appellants as to a conversation between respondent’s president, Jacobson, and Utley, regarding extras. We are unable to see how that was prejudicial to appellants to the extent that the reception of the evidence might probably have changed the finding of tire jury on the question of settlement. There was no basis in the evidence for a recovery for extras. There was no such recovery. The evidence had no bearing, and is not claimed to have had, except to show that there were matters of difference between the parties at the time of the negotiations leading up to the giving of the receipt. There is no doubt but what there were such matters. The rejected evidence had reference to extras only and the receipt covered that. Whether it was intended to cover all other matters of difference then existing, or that might arise under the contract, is another question and one upon which, as before indicated, we are unable to reach the conclusion that the trial court clearly erred in submitting the matter to the jury.

*By the Court.*— The judgment is affirmed.