Opinion ID: 1288894
Heading Depth: 1
Heading Rank: 2

Heading: Liability of Surety to the Owners.

Text: Before taking up the surety's defenses we further consider the form of the judgment appealed from. It awarded the owners judgment against the surety in the sum of $21,935.17, which was in addition to the amount of plaintiff's recovery and did not include the surety's potential liability on liens filed against the owners in seven other suits, totaling a further amount of over $14,000 according to the court's findings. The owners concede an error of $10,287.30 in the judgment in their favor, inasmuch as the court itself ordered that the judgment reflect the fact that Defendants Felix have not paid the amount of $10,287.30, being the last payment on the residence, due under the building contract, and the judgment did not reflect this. Moreover, the judgment failed to reflect the liability of the owners for extras, which the court fixed at $1000. Thus the judgment, if made to conform to the court's findings and conclusions, would be in the amount of $10,647.87, consisting in the following: Defects and Deletions in the performance of the contract ($5136), and additional defects ($1000) ______________________________________ $ 6,136.00 Advancements _______________________________________ 7,314.47 Penalty for delay in completion ($1725.00), and interest ($1711.50) [13] __________ 3,436.50 Attorney's fees ____________________________________ 5,000.00 Costs of court _______________________________________ 48.20 __________ $21,935.17 Less: Amount of last payment ($10,287.30) and amount fixed for extras ($1000) __________________ 11,287.30 __________ $10,647.87 The surety contends, as set out in its amended specification of error No. 5(a), that the court erred in considering any damages of the owners other than damages suffered by them in regard to plaintiff's claim. The point is well taken. The record shows as follows: No cross-claim was asserted by the owners against the surety until they filed their amended answer on October 11, 1963. The cross-claim set out the filing of plaintiff's lien; that this might entail payment by the owners of plaintiff's claim, costs and attorney's fees; that it had been necessary for the owners to incur attorney's fees and other costs and expenses in defense of the action; and that there may be damages in addition to those herein above mentioned arising on account of the failure of Defendants EDWARD M. KIRK and SHUMAN LUMBER & SUPPLY Co., Inc. to fulfill and discharge their obligations under the above-mentioned Bond   , the terms of which had been set out in a previous paragraph. However, the prayer for relief was for damages on account of the claims made by Plaintiff herein, and that an order be made requiring the surety to hold them [the owners] harmless from all other liens, suits, actions or damages on account of said claims   . There were no allegations that any defects or deletions in construction had occurred, or that the contractor was liable for delays. Before the filing of the amended answer which asserted the cross-claim, a pre-trial conference had been held. On the basis of this conference a pre-trial order was prepared and signed on October 22, 1963, stating under the heading Nature of the Case that The nature of the case is for the purpose of foreclosing Mechanic's Lien No. 61 [plaintiff's lien], a notice of which has been given to the owners. On November 6, 1963, over objection of the surety, the owners obtained a modification of this order, and it thereafter was filed. The modification substituted the following for the original statement under the heading Nature of the Case: The case will be heard for the purpose of determining the rights of the Plaintiff against the Defendant Contractor on his contractual obligations to the Plaintiff, against Defendants Albert M. Felix and Irene P. Felix as Owners of the property subject to Plaintiff's lien, and against Defendant Shuman Lumber & Supply Co., Inc. as bondsman, all on account of materials and work alleged to have been furnished in the improvement of the said Owners' premises at 1054 Ainako Avenue, Hilo, Hawaii. It will be noted that, even as modified, the pre-trial order was confined to plaintiff's claim. It did not set out any claim on the part of the owners against the surety. Likewise, the surety's claim against the owners for the last payment was not set out in the pre-trial order or pleaded as a defense or counterclaim at any stage of the case. [14] While it is now contended by the surety that nonpayment of the last installment called for by the contract is a defense, there is no such issue in the case at the present time. This matter has the same status as the owners' claim against the surety for damages. In short, the case was not so framed as to call for striking a balance between the owners and the surety. However, it is conceded by the surety that the damages suffered by the owners in regard to the plaintiff's claim were within the scope of the issues brought to trial. [15] But the surety interposed valid objections to the extension of the issues to encompass the owners' claims against the surety for damages on account of defects, deletions and delays in the construction of the residence contracted to be built. [16] By virtue of these objections the judgment recovered by the owners against the surety must be set aside. Mere correction of the judgment to reflect the $10,287.30 fixed as the amount of the last payment and the $1000 fixed as the amount of extras will not suffice. And we shall not proceed to dispose of the case as one involving only the amount of damages suffered by the owners in regard to the plaintiff's claim because as will appear there was error affecting even such a judgment; and because it would be inappropriate for this court to direct the entry of a judgment restricted in scope with the consequent splitting of the owners' cause of action when the judgment appealed from was not so restricted and opportunity should be allowed to amend. The principal point for review is the surety's contention that it was and is entitled to be discharged altogether. This contention cannot be sustained. In this connection, three points merit consideration. A fourth point to be taken up is the matter of fees of the owners' attorney, and a fifth point is the matter of the proceedings to ensue upon remand of the case. 1. The surety contends that there can be no recovery by reason of the proviso of the bond reading as follows: Provided, however, that no suit, action or proceeding by reason of any default whatsoever shall be brought on this Bond after 60 days from the date on which said contract is completed. Amended specification of error No. 5(f) asserts that the trial court erred in finding and concluding that the improvement called for in the contract had not been completed. It is to be noted that the findings were that the contract is not completed, and the Contract was not performed according to the plans and specifications. The sixty day clause is tied to the completion of the contract, to which the court directed its attention, not the completion of the improvement, on which the specification of error was based. As stated in Pacific Hardware Co. v. Lincoln, 12 Haw. 358, 361:    The completion of the contract is not synonymous with the completion of the building.    The surety nevertheless contends that the date on which said contract is completed refers to the time when there has been substantial completion of the improvement under the contract, such as to permit the contractor to recover on the contract. [17] The dwelling was substantially completed, it is argued, when the owners occupied it early in December, 1962, or at least when the owners filed their affidavit of publication of notice of completion under the mechanic's lien law on January 14, 1963. R.L.H. 1955, section 193-42 of the mechanic's lien law, provides that publication of notice of completion shall not be construed as an admission    that the improvement has been satisfactorily completed. And at the time when the owners commenced occupancy of the residence, they informed the surety that they did so because they had to vacate their old home, which had been sold, and that the contract had not been completed. The mere commencement of occupancy did not signify that the owners waived their contention that there were defects in performance. 13 Am.Jur.2d, Building and Construction Contracts, § 56; Cf., Stewart v. Spalding, 23 Haw. 502, 522-23 (architect's certificate reserving owner's right to hold the contractor responsible for defective work). Under the court's findings in this case the contract work was not satisfactorily completed. The court found defects and deletions requiring $5136 to remedy them, and other defects and deletions impractical to remedy but depreciating the value of the house to the extent of $1000. While, under our holding that the issues brought to trial did not encompass the owners' claims for damages, these figures are not binding on the parties when it comes to striking a balance as to amounts owing, [18] the question of whether there were defects and deletions was at issue. Throughout the argument in this court the surety has not contended at any time that there were no defects or deletions. [19] As the case stands, we must take it to be the fact that the specifications of the contract were not met, though the amount involved is not necessarily as great as the court found, the amount not having been at issue. In this situation even if the contract was substantially performed the contractor  in this case the surety as assignee of the contractor  had no right to recover the balance of the contract price, but only the price less a sum sufficient to compensate for defects. Mackey v. Eva, 80 Idaho 260, 328 P.2d 66, 69. Apart from the question of crediting the owners with the sums advanced by them (see infra ), the amount to be deducted on account of defects remained undetermined at the time of suit, and still is undetermined under our holding supra that the issues did not encompass this point. As above noted, the language of the bond calls for determination of the date on which said contract is completed, which is not the same as the date of completion of the work. In Edgewood Knoll Apartments v. Braswell, 239 N.C. 560, 80 S.E. 2d 653, 663, the court ruled that in the case of a bilateral contract, the contract is not completed until fully performed by both parties. We are not prepared to go that far. We hold only that substantial performance by a contractor, when there are defects to be remedied and the amount to be paid remains undetermined because of the defects, [20] does not constitute completion of the contract within the meaning of a bond limiting the owners' time for suit on the bond. This is decisive of the surety's contentions under the sixty-day clause. The surety argues that it is common knowledge that no building is ever completed according to all the details of any plans or specifications. The argument is, in effect, that the limitation period specified in the bond will be nullified if the date on which said contract is completed is not given the meaning for which the surety contends. We do not agree. Our interpretation of the sixty-day clause does not nullify it. Suppose an owner accepts a building and makes the last payment, so that the contract definitely is completed. The sixty-day clause, if deemed reasonable, [21] would apply to any suit by the owners for latent defects, failure to discharge liens, or the like. But it would be most unreasonable for the sixty days to start running at the point when it could be said by hindsight that the work had been substantially performed. We do not deem it material to consider in this connection the legislative policy as to when the time for filing mechanic's liens starts to run. [22] The interpretation of mechanic's lien statutes is based upon considerations inapplicable here, as illustrated by Lansing v. Dondero, supra, 21 Haw. 736, 740-41; Delany v. Carpenter, 114 N.Y.S. 990; Coffey v. Smith, 52 Or. 538, 97 Pac. 1079, 1081. Applicable in the present case is the principle that a provision limiting the time for suit against a surety on its bond is to be strictly construed against the surety. In Lewis v. Hopper, 140 Cal. App.2d 365, 295 P.2d 93, 95, this principle was applied, and it was held that completion of the work described in said contract occurred when plaintiff installed four soap dispensers, the work taking four hours and being worth $100. The court noted cases holding that substantial completion was completion for purposes of the mechanic's lien law but did not decide whether or not those cases were dependent on the peculiar wording of the lien statute. This supports our view that cases which interpret mechanic's lien statutes as calling for filing of liens upon substantial performance of the work are not in point here. So in Honeywell, Inc. v. Babcock, ___ Wash.2d ___, 412 P.2d 511, where the time for suit on the bond ran from the date on which Principal [general contractor] ceased work on said Contract, and it was established that the building was substantially completed on July 29, 1963, it was held that the action was timely on the ground that the owner, while moving into the new building on July 29, 1963, had required further work to be performed which subsequently was done by subcontractors, and: The general contractor could not `bring to an end' the building contract until his subcontractors had finished their work. The general contractor was responsible to the owner for the satisfactory and full completion of the subcontractors' work under the contract. (412 P.2d at 514.) 2. A total discharge is claimed by reason of alterations or changes made in the building contract. This is amended specification of error No. 5(e). The parties contemplated changes in the contract. The contract of May 9, 1962, referred to in the bond, provided that all payments due under the contract were to be made through Shuman Lumber & Supply Co., subject to such additions thereto and/or deductions therefrom as may be mutually agreed upon in writing during the progress of the work. The signatory parties were the owners and the contractor; so Shuman's agreement in writing was not required at this point for changes in the contract. However, as noted by the court below, the accompanying bond signed by the surety provided that it would not cover any additions or extras to said contract unless such additions or extras are approved in writing by the Surety. By letter of May 24, 1962, in response to a request for a first payment of $15,396.06, being 35 percent of $43,998.75, the contract price set out in the contract, the owners informed the surety that they had agreed with the contractor to supply the following: appliances; grading, filling and landscaping; fence; hot-house; drapes; carpeting; and fireplace accessories. The amount to be deducted for each was set out, the total deduction being $9,697.75. The letter concluded by stating, in effect, that the contract price was reduced to $34,291 and the first payment to $12,001.85, that $1240 for salaries of workmen had been advanced to the contractor's brother, who was supervising the job, and that the sum approved as the first payment was $10,761.85. This sum was paid, and a second payment in the amount of $12,001.85 likewise was made. The schedule of allowances was made a part of the contract through incorporation therein of the specifications, to which this schedule was appended. The amounts allocable to such items therefore cannot be disputed. Other changes made either were of the type within the contemplation of the parties or represented defaults on the part of the contractor. The case is governed by Hustace v. Davis, 23 Haw. 606, in which the court said:    It is well settled that where a building contract provides that the owners shall have the right to order changes to be made in the work the sureties for the contractor are deemed to assent in advance to the making of the alterations, and if they are made, although they may be material, the sureties are not released thereby. (p. 610) The court further said as to the necessity of written authorization where required by the terms of the contract itself, as distinguished from the bond:    the reducing of a verbal order for changes in the work to writing is an immaterial formality so far as the surety on the bond is concerned and that the lack of a written order will not release him from liability.    (p. 609) See also 17 Am.Jur.2d., Contractors' Bonds, § 27 at 211. Of course, the owners are not in a position to assert non-liability for the extras by reason of the absence of a writing, upon a proper claim for the extras being asserted by the surety under the terms of the assignment, [23] if the formality of a writing has been waived. See 13 Am.Jur.2d., Building and Construction Contracts, § 24. The owners apparently recognize the applicability of this rule. We note that the court below stated in the decision rendered July 14, 1964: He [defendant Felix] told Harold Kirk [the contractor's supervisor] and Mr. Shuman that he expected to pay for additions and agreed to do so; that he, on the other hand, expected the Contractor and the Surety to perform what they agreed to do under the Contract, or else have them deducted from the final payment. We note further that, were the owners to arrange to receive the benefit of work not called for by the contract, plans and specifications, and then deny liability therefor, that might introduce an element of prejudice and pro tanto discharge of the surety. But this is a matter of detail which does not concern us now. The record is inadequate for us to indicate at this time what should and what should not be treated as items for which the owners are liable upon remand of the case. 3. It further is contended that the surety is entitled to a total discharge by reason of payments made by the owners to the contractor or others in a manner deviating from the terms of the contract. This is amended specification of error No. 5(f). As seen, the contract itself provided that the owners would make their payments to Shuman. Moreover, at the time of execution of the bond an instrument called assignment and power of attorney [24] was executed, whereby the contractor assigned to Shuman all moneys now due and payable or that may hereafter become due and payable to the Contractor on, under, by virtue or in respect of that certain contract dated May 9, 1962, made between Mr. and Mrs. Albert M. Felix and the Contractor for Forty-Three Thousand Nine Hundred Eighty-Eight & 75/100 ($43,988.75)    (a duplicate copy of which contract is hereto attached and made part hereof) together with all moneys now due and payable or that may hereafter become due and payable to the Contractor for extra work and/or extra material now or at any time hereafter furnished by the Contractor pursuant to the terms of said contract and/or any alteration or modification thereof. The owners signed an agreement endorsed on the instrument, whereby they acknowledged receipt of a copy and agreed to make all payments as therein provided. Since this assignment merely covered the moneys due under the contract, which contained a schedule of allowances of which the owners availed themselves as above set forth, we find no error in the court's conclusion that the surety was entitled to only $34,291 under the assignment, plus extras. The payments made to Shuman, the surety, as agreed, totaled $22,763.70. The remaining amount, $11,527.30, was paid to others or not paid at all. According to the court's findings [25] the payments made to others were: Date Amount Person Receiving Payment May 25, 1962 $1240.00 Contractor [26] June 23, 1962 245.00 Charles Ishii [27] July 20, 1962 1100.00 Contractor August 17, 1962 1400.00 Contractor September 4, 1962 1069.00 Contractor September 14, 1962 1150.00 Contractor November 13, 1962 190.00 Hilo Iron Works December 1, 1962 200.00 Wallace Izumi December 5, 1962 1089.00 S. McCabe Paving Co. December 5, 1962 200.00 M. Iyo December 6, 1962 35.98 M. Iyo December 24, 1962 143.97 Wallace Izumi December 30, 1962 180.09 M. Iyo February 5, 1963 311.43 Hawaii Hardware ________ $8554.47 After applying the $1240 payment of May 25, 1962 on the first payment due under the contract  as did the owners according to their letter to the surety dated May 24, 1962 but evidently mailed a little later  the court allowed the balance of $7314.47 as advancements for which the surety was indebted to the owners, the court further stating that the judgment would reflect the fact that the last payment of $10,287.30 had not been made. As above set out, the judgment failed to reflect this fact. Under our holding above set out that the issues were not so framed as to call upon the court to strike a balance between the owners and the surety, the only point squarely at issue was whether or not the surety was entitled to a total discharge ipso facto. The surety was not so entitled. This court, in Hustace v. Davis, supra, 23 Haw. 606, 612, held that:    As to the latter [departure from the terms of the contract relating to the method of procedure or performance in the manner of carrying out the contract], deviations will not result in the release of the surety unless they tend to prejudice his rights. [Citations.] An immaterial deviation from the terms of the contract in the matter of making payments will not release the surety on the bond.    The court in Hustace did not distinguish between a compensated and an accommodation surety, although the record of the case shows that the surety, the appellee, endeavored to make the point that he was an accommodation surety, arguing that he had been ready to prove it but the evidence had been rejected on objection of the owner. Previously, in Hackfeld & Co. v. Medcalf, 20 Haw. 47, 53, a case involving the suretyship contract of a wife, the court had required literal compliance with the terms and conditions upon which the wife became a surety. Many courts make a distinction between a compensated and an accommodation surety in respect of deviations from the contract in the matter of payments, applying the rule of pro tanto discharge to the extent of the prejudice suffered in the case of a compensated surety, as illustrated by Young Men's Christian Ass'n v. United States Fidelity & Guaranty Co., 90 Kan. 332, 133 Pac. 894, modified on rehearing, 92 Kan. 467, 140 Pac. 892; Corporation of President of Church of Jesus Christ of Latter Day Saints v. Hartford Acc. & Indemnity Co., 98 Utah 297, 95 P.2d 736, 741; National Union Indemnity Co. v. Bass, 369 F.2d 75 (5th Cir., applying Mississippi law); United States v. Duby, 201 F.2d 300 (9th Cir., applying Washington law); Annot., 127 A.L.R. 10, 69. Under these cases the surety has a right of recoupment reducing the damages to the extent of the prejudice suffered. Is the surety here involved a compensated surety? The surety argues that the owners failed to allege consideration for the execution of the bond by the surety and that the cross-claim was defective in this regard. This point is without merit, but the question of the surety's status  whether a compensated or an accommodation surety  requires consideration. In the Restatement a surety is not treated as a compensated surety merely because it receives some pecuniary advantage from the undertaking; only one in the business of executing surety contracts for a premium is treated as a compensated surety. Restatement, Security, § 82(i). While there is some support for that view, e.g., City of Philadelphia v. Philadelphia Gas Works Co., 49 Pa. D. & C. 314, 320-21, we are of the opinion that the better rule is that a lumber company executing a bond as surety for a contractor in order to become the supplier of lumber to the contractor, is to be treated as a compensated surety. Mathes v. Stewart, 249 Ill. App. 558; cf., Stephens v. Elver, 101 Wis. 392, 77 N.W. 737, 740. That rule applies here. In accord are cases holding that officers, directors and stockholders of a bank who execute a bond as sureties to indemnify a depositor, such as a city, against loss from the deposits made by it, are not entitled to be treated as gratuitous sureties. Vogel v. City of Vinita, 170 Okla. 235, 39 P.2d 94, 96-97; Overly Special School District v. Haber, 193 Wis. 403, 214 N.W. 342, 343-44; Standard Acc. Ins. Co. v. Mueller, 291 Ill. App. 56, 9 N.E.2d 361, 363-64; Holmes v. Elder, 170 Tenn. 257, 94 S.W.2d 390, 392. Similarly, it has been held that a vendor who guarantees his buyer's payments in order to use the buyer's contract as part consideration for another deal is not a gratuitous surety, Rose v. Ramm, 254 Mich. 259, 237 N.W. 60, 61. We conclude that if there is a distinction to be made between an accommodation and a compensated surety, Shuman is the latter and only a pro tanto discharge is involved. We recognize that in some cases the prejudice suffered by a surety when advance payments are made may be larger than the amount of such payments, due for example to the removal of the contractor's incentive to finish the work in order that he may qualify for the last payment. However, on this record we are not concerned with any such matter. Cf., Globe Indemnity Co. v. Southern Pacific Co., 30 F.2d 580 (2d Cir.). The court below found that owner A.M. Felix, by letter of September 17, 1962, notified the surety of the advances made to the contractor and of his intention to continue to make payroll advances unless he heard from the surety otherwise. The court further found: Mr. Felix has written Defendant Shuman on numerous occasions on the progress of the building, and the advances he made from time to time. In addition thereto, he telephoned Mr. Shuman on many occasions, also. As to the latter finding, we note that it is not clear when the mentioned telephone conversations occurred or the subject matter of the conversations. Of particular interest is the question of whether they related to the matter of payroll advances or indeed any advances to the contractor. The court stated in the decision that: According to Defendant Felix, he made advances to the employees in order to keep the men on the job; that Defendant Shuman was notified of the advancements. But the court made no finding that the surety was informed of the advances made to the contractor other than by the letters of May 24, 1962 and September 17, 1962, which are in evidence. The court at another point found that: I am satisfied that Defendant Shuman at no time prior to September 17, 1962, did ask Defendant Felix not to make advances; that the surety has not sustained the burden of proving its defense of material alterations or payments contrary to the terms of the contract; and that the surety by its acts and conduct waived its right to claim release from the Bond. The owners were credited with all of the advancements made. The court further found that all of these advancements were utilized for construction of the house and that none were used for `extras'. It, of course, is true that aside from the questions involved in the special situation exemplified by the July and August payments considered below, the owners ordinarily would be entitled to credit for payments which satisfied claims for labor or materials for which the surety otherwise would have been liable. See Sandusky Grain Co. v. Borden's Condensed Milk Co., 214 Mich. 306, 183 N.W. 218, 221; Ardsley v. United Pacific Ins. Co., 74 Nev. 377, 332 P.2d 1000, 1001; Annot., 127 A.L.R. 10, 55. However, the matter of credit for the advancements does not turn merely on the question of whether the items paid by the owners were all proper items under the contract, as to which there is some room for dispute. [28] Other considerations aside, we are of the opinion that the court erred in its approach to this matter. The court overlooked the assignment altogether. Except as to payments made at the request of the assignee, [29] the owners acted at their peril when they made payments to persons other than the assignee, who was also the surety. Howard v. Public Schools of the City of Holland, 50 Mich. 94, 14 N.W. 712; 13 Am.Jur.2d, Building and Construction Contracts, § 92; 6 Am.Jur.2d, Assignments, § 112. The burden was on the owners [30] of showing that they were entitled to credit for the payments that, contrary to the terms of the assignment, were made to the contractor and others. [31] Furthermore, the assignment represented security for the surety. The question is one of release by the owners of moneys payable to the surety both under the terms of the assignment accompanying the bond and under the provisions of the contract itself. In other words, it is a case where there has been a release of security in which the surety had rights. This approach has been applied even when the rights of the surety were not spelled out, as in State v. Shain, 334 Mo. 153, 66 S.W.2d 102, 106; Kiessig v. Allspaugh, 91 Cal. 231, 27 Pac. 655. We need not pass on that situation [32]  here the rights of the surety were express, both under the terms of the assignment accompanying the bond and under the provisions of the contract itself. The failure to retain and ultimately pay over to the surety the moneys due in accordance with the agreed terms of the surety's liability operated as a pro tanto release, in the absence of special circumstances calling for a deviation from this general rule. Cf., Paxton v. Spencer, 71 Utah 313, 265 Pac. 751, 755-56; Metropolitan Casualty Ins. Co. v. Koelling, 57 So.2d 562 (Miss.). As held in Holzinger v. Goo, 36 Haw. 506, 510, citing Stearns, Suretyship, [33] the creditor (the obligee on the bond) has a duty to exercise ordinary diligence in preserving security under his control which is applicable to the debt for which another is surety. A voluntary release of security held by a creditor or obligee in which the surety has rights will discharge the surety to the extent of the security released, unless the surety has suffered no detriment. Stearns, Suretyship, § 6.46 (5th ed.). Of course, under ordinary principles, [34] a party may be estopped by his failure to object to expenditures made by another party, but this rests upon the circumstances. In the present case the findings of the court are not sufficiently specific to show estoppel of the surety to assert its rights under the assignment as to at least some of the advances. We now develop this point insofar as it bears on the question of pro tanto release of the surety. We shall confine our attention to the payments made by the owners to the contractor in July and August, 1962. It will not be necessary to review all of the payments made by the owners, inasmuch as we have before us only the question of the surety's right of recoupment against the owners' claim on account of plaintiff's lien. As seen, we do not have before us the whole matter of striking a balance between the owners and the surety. The payments made by the owners to the contractor in July and August, 1962, which were for payroll, may have resulted in a duplication of payments, due to the surety also having made payments to the contractor for payroll. The court did not rule on this point, merely stating that the surety had not sustained its burden of proof and finding a waiver. As seen, in so ruling the court overlooked the assignment. As to the August 17, 1962 payment it does not even appear that the money paid to the contractor actually reached the employees. But even if both payments went to satisfy just claims for labor, it appears that the surety paid out to the contractor on July 30, 1962 the sum of $1500 for the July 20, 1962 payroll, and on August 18, 1962 the sum of $1350 for payment in full of all labor to that date on the Felix job, thus presenting a question of duplication of payments as above noted. The findings of the court do not take into consideration many pertinent questions. For example, one of the owners, A.M. Felix, testified that the payrolls were made up to Friday and paid on Saturday. While it is not clear whether this was true in July and August, 1962, it is noteworthy that each of the July 20, 1962 and August 17, 1962 payments by the owners was made on a Friday. On what dates, other than May 24, 1962 and September 17, 1962, was notice given to the surety of the various advances made? Was immediate notice given to the surety of the moneys advanced by the owners to the contractor and their purpose? At the time when the surety made its July 30, 1962 and August 18, 1962 payments, was it aware that payroll payments were being made by the owners without waiting for a reasonable period [35] for the surety to make them? The findings are not specific on these points. As has been stated, an obligee on a bond has a duty of prudence in preserving security under his control. On the previous occasion of a payroll advance made by the owners in May, 1962, immediate notice of the payment was given to the surety. As to the advancements in question, i.e., the July and August payments, the first notice may have been by the letter of September 17, 1962 from the owners to the surety. Meanwhile, the surety had made payments on July 30 and August 18, 1962, as above set out. On July 18, 1962 the owners had addressed the surety stating many complaints, but not stating that the owners proposed to repudiate the assignment. We therefore conclude that while the surety is not entitled to a discharge ipso facto, as distinguished from the striking of a balance between the parties, the court erred in its determination of the credits to which the owners are entitled. This is true not only because the court went beyond the issues that were before the court for trial, but also because the court's findings failed to take into account the assignment and the burden resting on the owners of showing that they were entitled to credit for the payments they made contrary to the terms of the assignment. The amount to be credited to the owners for these advancements will be an open question upon remand of the case. 4. The surety, by amended specification of error No. 5(h), has attacked the trial court's allowance of a $5000 fee for the owners' attorney. This again is outside the issues properly brought to trial, except insofar as the fee was allowed for services in connection with plaintiff's claim. But since the point will arise on remand of the case we will consider it. It appears that the $5000 fee was for all of the services of the owners' attorney, including not only services in defending the owners against plaintiff's lien but also services in seeking recovery on the bond. The fee for the latter was not within the coverage of the bond. As to the former  the services in defending the owners against plaintiff's lien  the provisions of the bond calling upon the surety to deliver the work free from all liens and claims and without further claims and without cost, expense or charge to the Owner other than that provided in the contract, also to hold and save the Owner    harmless from all liens, suits, actions or damages of every nature and kind arising or caused from or on account of any failure on the part of the Principal   , covered not only indemnity against the fee of plaintiff's attorney, which was part of plaintiff's statutory claim against the owners' property, but also the reasonable fee of the owners' attorney in defending against plaintiff's claim, necessitated by the surety's denial of liability under the bond. [36] Cf., Frommeyer v. L. & R. Construction Co., 261 F.2d 879, 881 (3d Cir.); Fausett Builders v. Globe Indemnity Co., 220 Ark. 301, 307, 247 S.W.2d 469, 472 (dissenting opinion). As to the latter  the services in seeking recovery on the bond  a different situation is presented. R.L.H. 1955, § 219-16.5, as amended by S.L. 1959, c. 218 (Supp. 1965), specifically provides in the third paragraph of the section that: Any law to the contrary notwithstanding, no such attorney's fee shall be allowed to the plaintiff by any court: (a) if prior to or at the time the debt was incurred, the debtor did not sign an instrument in writing which provided for the payment of an attorney's fee;   . The word such refers back to the first paragraph of the section, which provides for an award of an attorney's fee where action is instituted on a written contract which provides for an attorney's fee. The intent of the above clause (a) of the third paragraph is to add to the authorization contained in the first paragraph a positive prohibition against the recognition of a contractual obligation for an attorney's fee of a plaintiff unless the conditions of said clause (a) are met. As stated in the report of the House Committee on Judiciary on H.B. 1204, which became S.L. 1959, c. 218, supra (Stand. Com. Rep. 103, House Jour., Regular Session of 1959, p. 617), the purpose is to prohibit the collection of attorney's fees when not provided for in an instrument in writing. This makes applicable the reasoning of the Montana court in Federal Surety Co. v. Basin Construction Co., 91 Mont. 114, 5 P.2d 775, 778, that the obligee on the bond cannot recover, as damages covered by the bond, the expense incurred for an attorney's fee in enforcing the bond. There is no room under our statute for adoption of the different view taken by some of the cases. See Annot., 69 A.L.R. 2d 1046. However, the statute is not applicable to the attorney's fee reasonably incurred in defending against the claim. The latter situation is comparable to that of an insurer who unjustifiably refuses to defend an action against the insured. See 29A Am. Jur., Insurance, § 1460. The $5000 fee having been allowed as a lump sum, without distinguishing between the services of the owners' attorney in defending against plaintiff's claim and his services in seeking recovery on the bond, it will be necessary for the court below to determine what is a reasonable fee for the former. As to the latter, R.L.H. 1955, § 219-14, governs. 5. Upon remand of the case it will be the duty of the court below to set aside the judgment awarded the owners (as well as that awarded the plaintiff concerning which we have ruled in Part I). It further will be the duty of the court to make appropriate orders providing for such amended and further pleadings as the parties may desire to file, consistent with this opinion. It is manifest that there are many issues arising from the bond and assignment that have not been pleaded or brought to trial. Our consideration of the case so far has brought to light the following: (1) The right of the surety to recover the amount of the last payment under the assignment made to it; (2) the right of the owners to be credited with the payments made by them to persons other than Shuman, the assignee, by reason of the same having been requested by Shuman, or by reason of Shuman having suffered no detriment through such payments or being estopped to stand on the assignment; (3) the liability of the owners for work done that was not provided for by the contract; (4) the liability of the surety for defects, deletions and delays in the performance of the contract; (5) the right to interest, if any; (6) the amount recoverable by the owners as indemnity against liability for plaintiff's claim; and (7) the amount recoverable by the owners on account of the attorney's fee reasonably incurred by them in defending against plaintiff's claim. In summary, the striking of a balance between the owners and the surety, taking into consideration the amount of the last payment and all of the other claims and defenses arising out of the bond and assignment, was not a matter brought before the trial court, and further proceedings in respect thereto are dependent upon the reshaping of the issues. [37] We have not adverted heretofore to the surety's motion to disqualify the trial judge, which is the subject of both amended and original specification No. 3. We agree with the ruling below that the motion was not timely. R.L.H. 1955, § 213-3(b) (Supp. 1965), under which the motion was made, requires filing of the disqualifying affidavit before the trial or hearing of the action or proceeding, or in the alternative that good cause shall be shown for the failure to file it within such time. As this court stated in In re Bouslog, 41 Haw. 270, 274, it is required that the filing precede the hearing of contested preliminary motions, if any, unless the failure to file within such time is excused for good cause. It is argued here that until the filing of the cross-claim and until the court's ruling that it would entertain the same, made by denial of the surety's motion to dismiss the cross-claim, the surety had no occasion to seek the disqualification since it was based on the relationship between the trial judge and owner A.M. Felix as fellow judges; that the owners and the surety were on the same side until the court entertained the cross-claim; and that the surety could not have sooner moved to disqualify the trial judge for bias and prejudice in favor of said A.M. Felix. It is true that in order to disqualify a judge for bias or prejudice in favor of a party that party must be an opposite party, under the terms of the statute. But after careful review of the record we cannot accept the contention that the surety was entitled to await a ruling on its motion to dismiss the cross-claim before making the suggestion of disqualification. The record shows that the cross-claim was filed on October 11, 1963. On October 19, 1963, the owners joined with the plaintiff in addressing interrogatories to the surety, to which the surety objected on October 30, 1963 on the ground that under the pleadings it does not appear that said Albert M. Felix and Irene P. Felix are adverse parties to Defendant Shuman Lumber & Supply Co., Inc. On November 6, 1963, the surety appeared and argued a motion made by plaintiff and the owners to strike this objection, which motion was granted. Furthermore, on November 6, 1963 the surety noted its objection to the modification of the pre-trial order, which then was filed. As above noted this modification was submitted by the owners. Thus, on November 6, rulings adverse to the surety were received on matters litigated between the surety and A.M. Felix. As stated in In re Bouslog, supra : Unless the matters of disqualification are unknown to the party at the time of the proceeding and are newly discovered, there can be no excuse for delaying the filing of the suggestion until after rulings are made in the matter, particularly where such rulings may be considered adverse to the movant. (p. 274) Again, on November 8, 1963 the surety appeared and argued the motion to dismiss the cross-claim, which motion had been filed October 30, 1963. This motion likewise was denied. The disqualification motion, made November 21, 1963, came too late. However, after the ruling against the disqualification motion the trial judge sua sponte raised and took under advisement the question whether or not the best interest of justice for both parties would be subserved if I withdraw from this case. The judge announced on November 29, 1963 that in the interest of justice and fairness to all parties concerned it was his feeling that he should not disqualify himself on his own motion. We now direct our attention to his feature of the case. However the case may have appeared to the trial judge at the time, our concern now is with the proceedings that will ensue on remand of the case. It is evident from the proceedings already had that owner A.M. Felix is a principal witness in the case and that questions of conflicting testimony have arisen and may again arise. The judge who heard the case and A.M. Felix are the only two circuit court judges in the County of Hawaii, which constitutes the third circuit. One would expect the two judges to be associated constantly or as averred by the affidavit suggesting the disqualification they have enjoyed mutual companionship and comradeship, brought about by constant communication and conferences between the two   . Moreover, this is not a large community. The population of the county is about 59,000, while the population of the city of Hilo where the court sits is about 25,000. R.L.H. 1955, § 213-3(b), supra, provides that: Any judge may disqualify himself by filing with the clerk of the court of which he is a judge a certificate that he deems himself unable for any reason to preside with absolute impartiality in the pending suit or action. As stated in In re Bouslog, supra, 41 Haw. 270, 283: A judge owes a duty not to withdraw from a case  however much his personal feelings may incline him to do so  where he is not legally disqualified, yet there may be circumstances that cast suspicion on the fairness of the judge proceeding in the case so that it may be advisable for a judge not technically disqualified to withdraw sua sponte. We have arrived at the conclusion that the circumstances of this case are such that we should direct the second judge of the third circuit to recuse himself as to all further proceedings in this case, and we do so direct. Remanded with directions to set aside the judgment, and for further proceedings consistent with this opinion.