Court Opinion

ID: 3985914
Source: CourtListenerOpinion
Date Created: 2016-07-06 10:42:05.648296+00
Date Added: 2024-06-11T07:44:19.240690
License: Public Domain

I dissent from the prevailing opinion as to the rules applicable between the owner, the contractor and the surety.
I find it impossible to believe there is fairness in making such an unlimited application of the rule applicable to a surety for compensation, as is done in the prevailing opinion. After all, we are but interpreting the terms of a contract. Considerations pass between the parties to many contracts which come up for our interpretation. This is just one of them.
In this case, the bond, the contract, and the specifications, are as one, expressly made so by their terms. In my opinion, one of the most important things about these instruments is, that by the contract, it was intended that expenditures from the contract price were not to run away from the quantum of performance. This is evidenced by the 90% provision of Article 3, quoted in the prevailing opinion, and also by the following provision entitled, "Payments withheld": *Page 327 
"The Architect may withhold or, on account of subsequently discovered evidence, nullify the whole or a part of any certificate for payment to protect the Owner from loss on account of:
                                  *      *      *
"(d) A reasonable doubt that the contract can be completed for the balance then unpaid."
For a discussion of the meaning of the 90% provision, I invite attention to the case of Southern Real Estate  Financial Co.
v. Bankers' Surety Co., Mo. Sup., 184 S.W. 1030.
Against what loss to the owner does the surety act as a shield? Can we not characterize it this way: "I will guaranty that the contractor will carry out the provisions of your contract within its limitations and all reasonable modifications and alterations thereof; but I do not guaranty that you, the owner, will abide those provisions." The surety does not guaranty the conduct of the owner. It is the contractor's misconduct from which the surety is paid to afford protection.
The Inter-Mountain Marble Company, in this case, did not abandon the contract, nor refuse to proceed. It apparently would have continued. What happened was, that, when it presented its request for a payment, as it had done numerous times before, the representative of the owner refused to make any further advances. The contractor was unable to continue without advances. The unfair thing about the owner's action in this case is, that such refusal did not occur until the expenditures, in relation to the contract price, outweighed the contractor's performance by a ratio of nearly 100% expenditures to about a 50% performance. Is it to be wondered that the contractor was willing to surrender responsibility — all incentive to continue was gone. However, that discrepancy alone might not justify a release of the surety, but if there is added to it a failure of the owner, through its agents the architects, to apply any of the provisions of the contract intended as a protection to the owner — and to the surety — I can see absolutely no reason for shifting to the shoulders of the surety losses which might well *Page 328 
have been avoided by the owner's compliance with those provisions.
One cannot escape the conclusion that the owner knew, or had good reason to believe, from the first, what would happen if its advancements were withdrawn. Having assumed the burden of financing the contractor from the beginning, it would seem that the owner should have been especially careful to apply the terms of the contract which afforded it protection against such a loss as occurred here.
The contractor was, from the first, seeking to finance itself solely out of the funds of this contract. Article 1 of the contract provided that it should bear the expense, and furnish the material, labor, etc., to deliver marble F.O.B. Washington, D.C. This provision was ignored by the owner. As one witness, one of the architects, stated:
"I know that over thirteen thousand dollars, including the first payment, was paid the Marble Company before the first car of marble had reached Washington, and it was paid because we had materials at the quarry which more than over paid anything they had requested. They had actually quarried the blocks out, which meant expense that they had been put to, which we considered collateral."
Is this attitude consistent with the express provisions of the contract?
The contract called for 90% payments. This was ignored. It required a 10% retention of amounts due until 15 days after completion. This was ignored. No effort was made by the architects to check expenditures against performance in the light of the balance remaining unpaid on the contract. It was provided that the final payment should constitute a waiver of all claims by the owner. Evidently this is to be ignored as well. Monthly payments were to be made. They ran as high as four a month. What can one say of such lack of interest in the terms of the contract, which are particularly applicable to the owner? Should it be ignored in order to allow the owner a recovery? I could list other provisions of the contract not applied by the owner, which, though they probably had no effect upon the ultimate outcome of *Page 329 
the action of the owner and the contractor, at least, with those above, indicate an utter indifference as to the terms of the contract. The waiver clause in the bond was not intended as an excuse for indifference in compliance with the terms.
One of the architects prepared the contract in this case, not an attorney, so that we should feel no hesitancy in believing that he knew of its contents. By its terms, the contract made the architects the agents of the owner.
In the case of Southern Real Estate  Financial Co. v. Bankers' Surety Co., referred to above, the court gives some explanation of the change from the rule applicable to accommodation sureties to the rule applicable to the surety for compensation. This is the court's language in part [184 S.W. 1033]:
"* * * They simply relaxed the rule strictissimi juris as against these corporations" [referring to corporate sureties for compensation], but did not deny them the aid of the courts in the enforcement of their fair and reasonable contracts, nor refuseto interpret them, as all other contracts are interpreted, inaccordance with the reasonable intent of the parties plainlyexpressed upon their face." (Italics added.)
Again the court said:
"The surety in these cases is between the upper and nether millstones. He is not in position to take care of himself. The contractor and owner have him in their power. If the job should prove an unprofitable one they have it in their power to make it profitable to themselves at the expense of the surety, as is demonstrated by the facts in this case. The only protection hehas lies in the carrying out of the terms of the contract whichgive him protection. He cannot interfere in the work, but isentitled to the reasonable performance of the duties of thearchitect, designed for his protection. * * * [Italics added.]
"While the owner may waive this provision of the contract so far as his own interest is affected by making the payments without a certificate, or upon a defective one, or by not makinga timely objection when an objection is called for by thecircumstances, it is equally evident that he cannot waive it for the surety, an adverse party to the same contract. * * *" (Italics added.) *Page 330 
It might be wondered in that case, why the decision was against the surety after such a recitation as above. This arose out of the fact that the sole question submitted to the court was whether or not payment upon defective certificates was such a breach as to release the surety, and the court held it was not as it did not go to the root of the contract so that a failure to perform it would make the performance of the rest of the contract a thing different in substance from what was contemplated. The question of lack of an allegation of performance by the owner was ruled out as coming too late. The question of whether the architect actually checked expenditures against contract price and performance was not involved. It was solely a question of a recitation of facts in the certificate.
In Royal Indemnity Co. v. Northern Granite  S. Co.,100 Ohio St. 373, 126 N.E. 405, 12 A.L.R. 382 and New York IndemnityCo. v. Hurst, 252 Ky. 59, 66 S.W.2d 8, 94 A.L.R. 876, other cases of similar import may be found. The Federal cases seem to recognize a release of the surety.
Williston on Contracts, Revised Edition, Vol. 4, sec. 1212A, page 3491, has this to say:
"In respect to the interpretation of the corporate compensated surety's contract, where the language used is clear, the rules of interpretation are the same as those applied to the contract of an accommodation surety. The contract `cannot be one contract where the surety is compensated, and another contract when the surety is not compensated'. * * *"
And at page 3493:
"In respect to the surety's defenses, however, some modifications have appeared. The courts `have recognized that the corporate surety is in a better position to protect itself against improper conduct on the part of the principal and obligee', than is the accommodation surety. And the same is true of other dealings between the principal and creditor. While the law will allow the accommodation surety to escape liability by the assertion of certain defenses even though he has suffered no harm, in general the corporate surety may not take advantage of such defenses unless he can show injury. * * *"
In Section 1243, page 3559, Williston says this: *Page 331 
"* * * Nevertheless, it is obvious that the surety's risk may be varied by the creditor's conduct, and, if it is, the surety should be discharged. Therefore, any breach by the creditor of his contract with the principal, if he thereby varies the surety's risk, discharges him. * * * Even though the creditor's variation from his promise is favorable to the principal so that he could make no objection, the surety may be freed. A common illustration of this arises where premature payment is made to a contractor whose performance has been guaranteed. * * *"
At page 3490, in Sec. 1212A, there is this definition:
"* * * Suretyship is a relation involving two persons, principal and surety, who are bound to a third person, the creditor, for the same debt. * * *"
It is apparent from the authorities that the reason for distinguishing between the paid surety and the accommodation surety is, that the former, having received consideration for its obligations, should not be permitted to escape liability upon a technicality. But it is a far step from a technicality to the failure of the owner in this case. The owner is just as much a contracting party as the surety. Why then should the owner be permitted to shift the burdens of its own derelictions to the shoulders of the surety and compel it to prove injury? The surety did nothing wrong. The harm was done before it came into the picture. Should one be given a premium for ignoring the terms of his own contract? It may be true that after the owner awakened to its duty and took over performance of the contract, the surety cannot prove that there was any waste or mismanagement; but the real injury to the surety was done before that, and no one knows what might have been the situation had the owner insisted upon an equilibrium between expenditures and performance upon the part of the contractor. It is not inconceivable that rather early in the transactions it might have developed that the contractor's estimates were so far afield that a modification of the contracts would, in fairness to all, have been justified.
I am of the opinion that we should, under these circumstances, recognize a complete release of the surety. *Page 332