Court Opinion

ID: 9557775
Source: CourtListenerOpinion
Date Created: 2023-08-21 16:57:20.363488+00
Date Added: 2024-06-11T09:06:35.715101
License: Public Domain

*553DENECKE, C. J.
Plaintiff is an engineering firm which provided services used in construction of the Portland General Electric (PGE) Company headquarters building in Portland. The services were provided for Target Dredging and Piledriving Company. Target has since been adjudicated bankrupt without paying plaintiff $10,891.94 due under its subcontract. In accordance with its contract with PGE, Target secured a bond through defendant. After Target was adjudicated bankrupt, plaintiff instituted this action asserting that it was a third party beneficiary on the bond executed by defendant. Defendant demurred to plaintiff’s complaint on the ground that it failed to state facts constituting a cause of action. The demurrer was sustained. Plaintiff refused to plead further. Judgment was entered for defendant and plaintiff appealed.
The bond at issue in this case is of standard form. After reciting that Target as principal and defendant as surety are bound to PGE in the sum of $820,771, the bond lists the "conditions” which will void the obligations. The bond recites: "NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH that if the Contractor [Target] shall
"(a) Pay all persons, firms and corporations who perform labor or furnish equipment, supplies and materials for use in the work under the Contract;
jfc H* Jfc *
"(d) Fully complete the work as provided in the Contract, free from all liens and claims of any kind whatsoever, and in all other particulars shall faithfully and fully perform the Contract on its part according to all the terms, covenants, and conditions thereof, and within the time specified therein;
"(e) Fully indemnify and save harmless the Owner [PGE] against and from all cost and damage which it may suffer by reason .of a default in the performance of any of the foregoing provisions, and fully reimburse and *554repay the Owner all outlay and expense which the Owner may incur in making good any such default; then this obligation shall be void; otherwise the same shall remain in full force and effect.”
It is clear that the conditions have not all been satisfied and that the bond remains in effect. The question, however, is whether plaintiff is party which may maintain an action on the bond.
Plaintiff candidly admits that the question was squarely answered in the negative by this court in Tait & Co. v. D. Diamond Corp., 228 Or 602, 365 P2d 883 (1961). In Tait we recognized that our decision followed the minority rule and that our approach had been strongly criticized, but we felt that our prior decisions dictated the result. Parker v. Jeffrey, 26 Or 186, 37 P 712 (1894), and Pankey v. National Surety Co., 116 Or 648, 239 P 808 (1925).
In Parker and Pankey we held we would not imply a promise to pay the third party plaintiff. We did not interpret the language of the bond to constitute a promise, only a condition.
This is the principal ground for the dissent; that is, that the surety did not promise to pay laborers and the words of condition are irrelevant on the issue of to whom the surety owes the obligation to pay.
The difficulty is caused by the archaic form which continues to be used in surety bonds. Most courts have not interpreted the archaic form literally but consider the words of condition to be words of promise. To do otherwise would be erroneous in instances even more obvious than in this case.
Corbin states:
"* * * The extent of this undertaking [of the surety] is to be determined not only by the surety’s words of express promise, but also by the 'condition’ of the bond. Words of 'condition’ are not words of 'promise’ in form; but in the case of a penal bond they must be construed to be words of promise, inasmuch as the only express words *555of promise are those in which payment of the penal sum is promised. * * 4 Corbin, Contracts § 800, 173-174 (1951).
«* * * Words of 'condition’ are not words of 'promise’ in form; but in this class of cases it is sound policy to interpret the words liberally in favor of the third parties. In a majority of states, it is already done; and without question the surety’s rate of compensation for carrying the risk is sufficiently adjusted to the law. The compensated surety has become an institution that is well suited to carry the risk of the principal contractor’s default, whereas individual laborers and materialmen are frequently very ill prepared to carry the risk. The legislatures have recognized this fact, and in the case of public contracts have required surety bonds to protect the third parties. While this has not been done in the case of private construction, and while the courts should not on their own motion put such a provision into a private surety bond, they may well interpret a bond that is expressly conditioned on the payment of laborers and materialmen as being a promise to pay them and made for their benefit. The words reasonably permit it, and social policy approves it. * * Corbin, supra, at 177-178.
In Socony-Vacuum Oil Co. v. Continental Casualty Co., 219 F2d 645, 647-648 (2d Cir 1955), the second circuit followed this view:
"It is true that in the bond here sued on the only expressly promissory words are those whereby the surety acknowledges itself bound to the prime contractor, as obligee, in the penal sum of $162,000. But since the bond is stated to be on condition that the principal— here the subcontractor — 'shall pay all labor and material obligations,’ the words of the condition are the full equivalent of words of direct promise.”
1 Restatement 154, Contracts § 133, Illustration 4, states:
"D contracts to build a house for A. A obtains from B a bond in which B promises A that all D’s creditors for labor and materials who may acquire a lien on the house shall be paid. C is such a creditor of D’s. C is a donee beneficiary.”
*556Simpson, Contracts (2d ed), 252, n 57, states:
"Words of condition in a bond are necessarily construed as words of promise, since no words of express promise appear save that to pay the penal sum which is enforceable.”
As stated, most courts are in agreement with these statements.
Some sureties have discarded the ancient form and inserted language expressly providing that unpaid laborers shall have a direct action against the bond. In our opinion this was not intended to change the surety’s obligation from that stated in the archaic form but to express that same obligation in understandable language.
If the dissent is correct, that language in the bond in this case, "Pay all persons * * * who perform work * * *” does not amount to a promise to pay persons such as plaintiff, the quoted condition is completely superfluous. PGE does not need this condition for protection; it is fully protected by other conditions in the bond. Condition (d), before quoted, includes a requirement that the work shall be completed, free of all liens and claims. Condition (e) provides that the contractor shall fully indemnify PGE against damage suffered by reason of any default in contractor’s performance. Because the above-quoted condition is unnecessary to protect PGE, the inference necessarily arises that it is a promise to pay an unpaid laborer or materialman.
Other forms of bonds continue to use the archaic words of condition rather than promise, yet it is even more obvious in some of those instances that the bond is for the protection of third parties. An example is the statutory bond required by ORS 657.100 for collection agencies.1 The bond is written in the archaic language *557of condition: "Now, therefore, if the said [collection agency] shall * * * pay to customers the net proceeds due and payable * * * then this obligation shall be void, otherwise to remain in full force and effect.” The surety is expressly bound only to the State of Oregon.
There are no express words of promise to pay customers. The wording of the bond is legally identical to the bond in the present case. It seems clear, however, that the intention of the legislature was that the bond was for the benefit of unpaid creditors of the collection agency. If it were otherwise, only the state *558could bring an action on the bond and collect something in the nature of a fine or forfeiture. The statutes have no provision for the state using the proceeds of its collection to pay unpaid creditors of the collection agency.
We conclude, therefore, that our decisions in Parker and Pankey were incorrectly decided.
When an express promise to pay a third party has been found the subjective intent of the promisee, in this case PGE, is immaterial; the third party can maintain an action against the promisor surety. The general principle which is the basis for that proposition has always been the law in Oregon. "On the second point, the authorities with us are quite decisive that when A., for a valuable consideration, agrees with B. to pay his debt to C., the latter can enforce the contract against A.” Baker & Smith v. Eglin, 11 Or 333, 334, 8 P 280 (1883).
This same principle applies to contracts of surety:
"* * * And thirdly, the third party has an enforceable right if the surety promises in the bond, either in express words or by reasonable implication, to pay money to him. If there is such a promissory expression as this, there need be no discussion of 'intention to benefit.’ We need not speculate for whose benefit the contract was made, or wonder whether the promisee was buying the promise for his own selfish interest or for philanthropic purposes. It is a much simpler question: Did the surety promise to pay money to the plaintiff?” 4 Corbin, Contracts, supra, at 163-164.
In addition to the lack of persuasive precedents supporting Tait, it should be overruled because it failed to follow a recognized rule of the construction of contracts. The defendant in this case is a compensated surety; its business is writing surety bonds for a fee. The universal rule is that a compensated surety is regarded as an insurer and the contract it draws will be construed most strongly against it. Hagey v. Mass. Bonding & Ins. Co., 169 Or 132, 159, 126 P2d 836, 127 P2d 346 (1942).
*559In Tait we chose not to repudiate our former decisions because we stated, "an untold number of surety contracts have been entered into in reliance upon the unequivocal holdings of this court,” and we could not "judge the repercussions that could occur within the construction industry by an abrupt reversal of the rule.” 228 Or at 604-605.
We are now of the opinion that in Tait we were unrealistic in our concern over the possible magnitude of the effect of repudiating our former decisions and since Tait the effect of repudiating our former decisions has been lessened by changes in the mechanic’s lien laws. The only persons who are vitally interested in bringing an action on the payment provision of a bond are those who have no lien rights in the owner’s property or who failed to perfect their lien rights. At the time of Tait most persons performing services for or furnishing material to a construction project had statutory mechanic’s lien rights. ORS 87.010. Since Tait the legislature provided for lien rights for more classes of persons, including engineers such as plaintiff. (Plaintiff did not have lien rights at the time it performed the work for Target.) For these reasons the number of persons affected by a change would be small.
In addition, the defendant and other sureties can change the form of their bonds and clearly provide that unpaid engineers, laborers and materialmen have no right of action. This will not affect outstanding bonds; however, as we observed, this will not be of concern to many sureties or claimants.
If this were a "custom” contract, "tailor made” for these parties for this project, it is very unlikely that we would repudiate the interpretation reiterated in Tait. In that situation it would be likely that the parties relied upon our holding in Tait and wrote the clause accordingly. But that is not the situation in this case. This is a standard clause in bonds. It is not part of a contract of adhesion but it is not a clause that is *560normally negotiated. Under these circumstances there is no reason we should not overrule our past decisions interpreting the clause to the contrary if we conclude the past decisions are clearly erroneous.
The surety argues that if we permit the plaintiff to have a cause of action, we are treating it more liberally than unpaid materialmen are treated in bonds which expressly provide that the unpaid materialman has a cause of action. In that latter type of bond the claimant is normally required to both give notice of claim and file suit within a short time after his claim has accrued. The present bond has no such requirements.
There is no showing that this defendant was in any way prejudiced because of the time when the plaintiff gave notice of claim to defendant or by the time when plaintiff filed its action. If defendant believes it advisable, it can provide in its future bonds a time which is reasonable within which notice of claim must be given and a lawsuit filed.
We hold that the plaintiff has a right of action against the surety. Tait & Co. v. D. Diamond Corp., supra, (228 Or 602), is overruled. Therefore, the demurrer should be overruled.
Reversed and remanded for setting aside the judgment for defendant and for further proceedings.

"The bond required by subsection (2) of ORS 697.070 shall be in the form substantially as follows:
*557"Know All men by These Presents that we,_, as principal, and __ as surety, are held and firmly bound unto the State of Oregon, in the penal sum of_, ($_), lawful money of the United States, for the payment of which well and truly to be made we, and each of us, bind ourselves, our heirs, executors, administrators, successors and assigns jointly and severally, firmly by these presents.
"The condition of this obligation is such, that whereas, the above bounden principal has applied to the Real Estate Commissioner of the State of Oregon for a billing agency, factoring agency or collection agency license under the provisions of ORS 697.010 to 697.470, and is required by the provisions of that law to furnish a bond conditioned as herein set forth.
"Now, therefore, if the said_shall, within 30 days after the close of each fiscal or calendar month, report and pay to customers the net proceeds due and payable of all collections and receipts made during said calendar or fiscal month, and shall strictly, honestly and faithfully comply with the provisions of ORS 697.010 to 697.470, and all amendments thereof and supplemental thereto, now or hereafter enacted, then this obligation shall be void, otherwise to remain in full force and effect.
"This bond shall become effective on the_day of_, 19__ The surety_may be relieved of future liability hereunder by giving 60 days’ written notice to the principal and to the Real Estate Commissioner of the State of Oregon.
"This bond shall be one continuing obligation and the liability of the surety for the aggregate of any and all claims which may arise hereunder shall in no event exceed the amount of the penalty hereof.