Opinion ID: 1550665
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Heading: The Appeal of the Surety Company.

Text: In 1931 Pike & Cook, Inc., whom we shall refer to hereafter as the contractor, entered into a contract with the United States Government for the construction of a post office building in Louisville, Ky. and entered into bond in the usual form for proper performance of the contract and for payment of claims of laborers and materialmen. The contractor thereupon entered into a contract with the Wheeling Structural Steel Company, heretofore and hereafter referred to as the steel company, to furnish and erect the steel framework of the building. The steel company then entered into a contract with the Detroit Steel Erection Company, heretofore and hereafter referred to as the construction company, to erect the steel framework. The contract provided that the construction company should give bond guaranteeing the faithful performance of this contract and the completion of said erection work and the payment of all bills for water, power, light and tools, and for the payment of wages of workmen to the general satisfaction of the United States Treasury Department, the General Contractor (Pike & Cook Company), as well as the Fabricator (the Wheeling Company), and indemnifying Fabricator against any loss it may suffer by reason of being required to pay a penalty or otherwise for delay in erection caused by Erector. The construction company, pursuant to this provision of the contract, on September 30, 1931, gave bond to the steel company in the penal sum of $30,000 for the faithful performance of its contract, the condition thereof being in the following language: The condition of this obligation is such, that if the principal shall faithfully perform the contract on his part, free and clear of all liens arising out of claims for labor and materials entering into the construction, and indemnify and save harmless the owner from all loss, cost or damage which he may suffer by reason of the failure so to do, then this obligation shall be void; otherwise to remain in full force and effect. The bond contained the provision that no suit should be brought on it after the 2nd day of March 1932; but this limitation was later extended by agreement of the parties to May 2, 1932. The steel work of the building was approved and accepted by the government on August 15, 1932. The steel company had retained under its contract with the construction company only the $2,451.97 above referred to. In the meantime claims against the construction company had been filed with the steel company and with the contractor in the sum of $10,527.47, although it appears that of this amount only $4,239.81 represented claims which were properly allowable as liens on funds under the contractor's bond. Nevertheless, the contractor, because of the filing of these claims, withheld the full sum of $10,527.47 in making settlement with the steel company. This suit was filed September 30, 1932, to determine the liability of the surety company with respect to these claims, the steel company, the construction company and the contractor being made parties to the suit, as well as the creditors of the construction company who had asserted claims. The contractor, who was represented by the same counsel as the steel company, filed answer admitting that it was retaining from the moneys due the steel company funds in the amount of the claims filed with it, and prayed the direction of the court as to the application of these funds. In 1933 the contractor became insolvent and in 1935 a receiver was appointed for it. In an amended answer filed November 6, 1935, the steel company alleged the insolvency of the contractor and its consequent loss of the funds withheld under its contract. It was this loss for which the court below allowed recovery on the bond of the construction company signed by the surety company, the recovery being allowed on the theory that the steel company had lost the amount of the funds withheld by the contractor as a result of the failure of the construction company to pay claims against it, the withholding of funds by the contractor on this account and the subsequent failure of the contractor so that the funds withheld could not be recovered. We do not think that such an element of loss is recoverable under the bond as damages for breach of contract, for the reason that it was not an element of damage reasonably within the contemplation of the parties at the time of the execution of the bond. The bond was given to secure the performance of the contract and the payment of claims for labor and materials contracted by the construction company. The contract having been properly performed, the limit of recovery under the bond was the amount of the claims for labor and materials which the construction company had failed to pay. Loss arising from the insolvency of the contractor, and consequent failure of the contractor to pay the amount due by it to the steel company, was not a loss arising from the failure of the construction company to pay the claims against it, but a loss arising from an independent intervening cause, not reasonably within the contemplation of the parties at the time the bond was executed. In such case the rule properly applicable was that laid down by Baron Alderson in the leading case of Hadley v. Baxendale, 9 Exch. 345, as follows: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i. e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. This is the classical statement of the rule applicable in case of damage arising out of breach of contract, now generally accepted here and in England. 15 Am.Jur. 451. That it correctly states the law in West Virginia, see Lewis v. Welch Wholesale Flour & Fuel Co., 96 W.Va. 694, 123 S.E. 801, 39 A.L.R. 383; State ex rel Mundy v. Andrews, 39 W.Va. 35, 19 S.E. 385, 45 Am.St.Rep. 884. And it is the law in Kentucky, the state where the contract was to be performed. Paducah Lumber Co. v. Paducah Water Supply Co., 89 Ky. 340, 12 S.W. 554, 13 S.W. 249, 7 L.R.A. 77, 25 Am.St.Rep. 536. No case is cited in which recovery of such an element of loss has been allowed in a case of this character; and we know of none. Applying the principle of Hadley v. Baxendale, supra, it is clear that no recovery for such loss should be allowed. There is no evidence of any special circumstances known by or communicated to the parties at the time which would justify such recovery; and they can only be supposed to have had in contemplation the amount which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. In other words, for failure of the construction company to pay proper claims for labor and materials, it must have been contemplated that the surety would be liable for the amount of such claims, not for losses sustained by reason of the failure of the general contractor to make payments to the steel company. No one would contend that the construction company, because of failure to pay claims for labor and materials, was rendered liable to the steel company for loss resulting from the failure of the contractor. And certainly the surety is not liable where no liability could be asserted against the principal. The steel company virtually admits that it could not recover on the bond for the reasons stated, if this were a suit which it had instituted for that purpose. It contends, however, that a distinction should be made by reason of the fact that this suit was instituted by the surety company for the purpose of settling all claims under the bond and because the contractor and the steel company were made parties for the purpose of determining rights as to the $10,527.47 withheld by the contractor. For this position it relies upon Sanders v. Frankfort etc. Ins. Co., 72 N.H. 485, 57 A. 655, 101 Am.St.Rep. 688; Patterson v. Adan, 119 Minn. 308, 138 N.W. 281, 48 L.R.A.,N.S., 184; and Elliott v. Aetna Life Ins. Co., 100 Neb. 833, 161 N.W. 579, L.R. A.1917C, 1061. These cases, however, are not in point. They hold merely that an insurance or indemnity company that undertakes, pursuant to provisions of a policy of employers' liability or automobile liability indemnity insurance, the defense of an action for damages against the insured is bound by the policy to pay the judgment rendered in the action, notwithstanding the insolvency of the insured. We need not consider the soundness of these decisions, since they have no bearing whatever on the question before us. The question here is whether the coverage of the bond is enlarged by reason of the fact that the surety has instituted the suit to have its liability under the bond determined. We do not think so, and we cannot see that joining the contractor as a party could possibly affect the matter. Having reached this conclusion, we need not consider the other contentions made by the surety, viz., that claim for loss arising from the insolvency of the contractor was not brought into the suit within the time limited in the bond; that the steel company was guilty of negligence in asserting its claim against the contractor and is estopped by such negligence; and that, in proving claim in the Hurd Act suit in Louisville, Ky., the steel company released the surety on the contractor's bond from liability for its claim against the contractor, thereby releasing a security to which the surety here would have been subrogated if required to pay the claim. Interesting questions are presented by each of these contentions, but they become immaterial in view of our decision that the loss in question was not covered by the bond.