Court Opinion

ID: 9642628
Source: CourtListenerOpinion
Date Created: 2023-08-22 18:04:49.500167+00
Date Added: 2024-06-11T11:49:10.560938
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
I shall refer to the contract between the Surety Company and the MacMillan Company as “the bond” and to the contract between MacMillan Company and the Book Company as “the contract.”
As early as May 29, 1926, the Book Company breached the provision of the sixth paragraph of the contract requiring it to make quarterly reports and remittances. In May, 1928, the agent of the MacMillan Company condoned the Book Company’s failures to remit as required by the contract by stating, in a letter to the Book Company: “I am not asking for remittances * * * I understand * * * they will come along as usual and convenient.” On November 24, 1928, the Book Company wrote the MacMillan Company stating that public accountants had discovered one of its employees had been carrying on peculations for a period of years and this had “left the stores in bad shape,” and that it was surprised to learn that it owed the MacMillan Company $10,000 more than its records showed. On October 13, 1928, the Book Company owed the MacMillan Company $5,124.76 on the previous year’s balance. These, are examples of many defaults whieh occurred between May 29, 1926, and July 30, 1929. The president of the Book Company died on July 30, 1929. The circumstances surrounding his death aroused the suspicions of the MacMillan Company and caused it to write the following letter:
“July 30, 1929.
“Southern Surety Company, R. W. Wells, Manager, Tulsa, Oklahoma.
“Dear Sir: You are hereby notified that the Oklahoma Book Company, Oklahoma City, has failed to meet its obligations to us arising out of a contract entered into on August 18,1924. As surety of Oklahoma Book Company you are advised that we shall look to you for protection to the amount of the bond, $20,000, against loss from said default.
“Very truly yours,
“The MacMillan Company “By (Signed by J. Henry Phillips). “JHP-ab”
*551This is the only notice given of any breach of the contract by the Book Company.
The last report made by the Book Company to the MacMillan Company was dated May 27, 1929, and covered the quarter ending March 31, 1929. An audit made after July 30, 1929, disclosed that books to the amount of $24,377.01 had been sold and not reported by the Book Company. Since the period following March 31, 1929; was at the end of the sehool year, a substantial portion of such books must have been sold and not reported long prior to the last report.
Notwithstanding such breach of the contract and knowledge that the employees of the Book Company had falsified its records with reference to the MaeMillan Company’s account, and embezzled the funds of the Book Company in substantial amounts, the MaeMillan Company neither investigated the condition of the Book Company nor reported such information to the Surety Company in order that it might be warned of the necessity for investigation on its part.
The bond is in the nature of a contract of insurance and the rules applicable to ordinary contracts of insurance should be applied thereto. United States Fidelity & Guaranty Co. v. Centropolis Bank (C. C. A. 8) 17 F. (2d) 913, 918, 53 A. L. R. 295.
The rule is well settled in the United States courts that contracts of insurance, like other contracts, should be construed according to the sense and meaning of the terms employed, and that those terms ought to be taken, understood, and given effect in their plain, ordinary, and popular sense, and that it is only where, because of ambiguity in the language employed, the contract is fairly susceptible of two constructions — one favorable to the insured and the other to the insurer— that the rule of liberal construction in favor of the insured may be applied. Chase v. Business Men’s Assur. Co. of America (C. C. A. 10) 51 F.(2d) 34; United States Fidelity & Guaranty Co. v. Guenther, 281 U. S. 34, 37, 50 S. Ct. 165, 74 L. Ed. 683, 72 A. L. R. 1064; Bergholm v. Peoria Life Ins. Co., 284 U. S. 489, 52 S. Ct. 230, 76 L. Ed.-, decided Feb. 15,1932.
The majority opinion holds that the paragraph of the bond with respect to notice is an independent covenant and not a condition.
Mr. Williston, in his work on Contracts, vol. 2, § 665, .says:
“The distinction between a promise or covenant on the one hand, and a condition on the other, both in their legal effect and in their wording, is obvious and' familiar. Breach of promise subjects the promisor to liability in damages, but does not necessarily excuse performance on the other side. Breach of condition prevents the party failing to perform from acquiring a right, or deprives him of one, but subjects him to no liability.”
The provision as to notiee was breached. Therefore if it was a condition to the liability of the Surety Company, the judgment below was erroneous.
The majority opinion state: “No one of the expressions customarily used to condition such liability is found in this bond.” With this I cannot agree. The word “provided” is an appropriate word to import a condition and is frequently so used in insurance contracts. Huggins v. Daley (C. C. A. 4) 99 F. 606, 610, 48 L. R. A. 320.
In Home Ins. Co. v. Union Trust Co., 40 R. I. 367, 100 A: 1010, 1011, L. R. A. 1917F, 375, the court said:
“The word 'provided’ in instruments of this character [insurance contracts] in general has a well-settled legal meaning, and, construed in its natural and primary sense, imports a condition, and not an agreement.”
In Graves v. Deterling, 120 N. Y. 447, 24 N. E. 655, 657, the court said:
“For time out of mind, conditions have usually been preceded by sueh words as 'proviso,’ ‘ita quod,’ and 'subconditione,’ or their modem equivalents.”
The word “provided,” construed in its natural and primary sense, imports a condition and not' a covenant or agreement. Home Insurance Co. v. Trust Co., supra; Ormsby v. Phenix Ins. Co., 5 S. D. 72, 58 N. W. 301, 303; De Vitt v. Kaufman County, 27 Tex. Civ. App. 332, 66 S. W. 224; Rich & Hotchkiss v. Atwater, 16 Conn. 409, 419; Trust Co. of St. Louis County v. Phoenix Ins. Co., 201 Mo. App. 223, 210 S. W. 98, 102; Streicher v. Heimburge. (Cal. App.) 262 P. 774, 776; Stockton v. Weber, 98 Cal. 433, 33 P. 332, 334; Southern Colonization Co. v. Derfler, 73 Fla. 924, 75 So. 790, L. R. A. 1917F, 744; Huggins v. Daley, supra.
In Home Insurance Co. v. Trust Co., supra, the court said:
“The plaintiff claims that the words in the mortgage clause, 'Provided that in ease the mortgagor or owner shall negleet to pay any premium due under this poliey, the mortgagee (or trustee) shall, on demand, pay the same,’ import a contract by the mortgagee to pay the premium if the mortgagor does not pay it. The defendant claims that this clause *552should be construed as a condition, and not as an agreement. * * *
“In Bouvier’s Law Dictionary the following definition is given:
“ ‘A proviso always implies a condition unless subsequent words change it to a covenant.’
“In Rich & Hotchkiss v. Atwater, 16 Conn. 409, at page 419, the court says: * * *
“ ‘It is certain, as is said by Judge Swift, that there is no word more proper to express a condition than this word “provided”; and it shall always be so taken, unless it appears from the context to be the intent of the parties that it shall constitute a covenant.’ * * *
“Had the intention been that the word ‘provided,’ as used in this clause, should not be given its primary legal meaning and effect, but that the clause should be construed as a covenant rather than a condition, any possible ambiguity could easily have been removed by the addition of a few words such as ‘and it is agreed’ or any similar phrase.”
In Ormsby v. Phenix Insurance Co., supra, the court said:
“It will be noticed that the stipulation in the mortgage clause is that the insurance as to the interest of the mortgagee shall not be invalidated by any act or neglect of the owner or mortgagor, provided that in ease the owner or mortgagor neglects or refuses to pay any premium due under this policy, then, on demand, the mortgagee or trustee shall pay the same; and provided, also, that the mortgagee or trustee shall notify the company of any change of ownership or increase of hazard whieh shall come to his or her knowledge, and shall have permission for such change of ownership or increase of hazard indorsed upon the policy. * * *
“‘Provided’ is defined by Webster as: ‘On condition; by stipulation.’ * * *
“Mr. Anderson, in his Dictionary of Law, says of ‘provided’: ‘No word better expresses a condition, and it is always so taken, unless the context shows that the intent was to create a covenant.’ Rich v. Atwater, 16 Conn. 409. In this ease there appears to be nothing in the subsequent language of the agreement indicating that the term ‘provided’ is intended as a covenant. Therefore, the clause in the mortgage contract that the insurance as to the interest of the mortgagee should not be invalidated by any act or neglect of the mortgagor or owner of the property insured ceases to be operative whenever there is a change of ownership or an increase of hazard that comes to the knowledge of such mortgagee, and he fails or neglects to give notice of the same to the insurer, and has permission for such change of ownership or increase of hazard indorsed on the policy.”
The word “provided” will be construed to express a condition unless from the context or from an examination of the instrument as a whole it appears that the parties intended otherwise. Cummings v. Lohr, 246 Ill. 577, 92 N. E. 970, 972; Rich v. Atwater, 16 Conn. 409; Streicher v. Heimburge, supra; Stockton v. Weber, supra; Home Insurance Co. v. Trust Co., supra; Southern Colonization Co. v. Derfler, supra.
Is there anything in the context or in the bond viewed as a whole which indicates that the parties intended the provision with respect to notice should be a covenant rather than a condition ? The courts hold that notice is not due under such provisions until the insured or obligee has knowledge of the fact of whieh the insurer or surety is to be apprised, or until by the exercise of reasonable diligence the insured or obligee would acquire knowledge thereof. Van Buren County v. American Surety Co., 137 Iowa, 490, 115 N. W. 24, 126 Am. St. Rep. 290; Eggleston v. Ins. Co., 65 Iowa, 316, 21 N. W. 652; Bumstead v. Ins. Co., 12 N. Y. 81; Norton v. Ins. Co., 7 Cow. (N. Y.) 649; Lawrence v. Ins. Co., 11 Johns. (N. Y.) 260.
Thus construed such provision imposed no impossible condition or onerous requirement on the MacMillan Company. When the' Book Company failed to make a quarterly report or remittance within the time required by the contract, or remitted only a portion of the amount due as shown by the report, it would have been a simple matter for the MacMillan Company, within the period of sixty days after such a default, to have mailed a duly verified notice thereof to the Surety Company.
The plain purpose of such provision was to insure that the Surety Company would be apprised or warned of any_ change in the condition of the Book Company that might increase the hazard of the guaranty so that it might investigate and, if it deemed the hazard so changed that it ought not to continue to insure against future defaults, that it might take advantage of its right to terminate the bond.
Not only is such provision preceded by the word “provided” — an appropriate word to express a condition — -but it does not contain “promise” or “agree” or any word of like import. It will be noted that, while the *553preceding paragraph states, “The MacMillan Company shall keep, do and perform * * * said contract,” the provision as to notice not only does not in terms bind the MacMillan Company to do anything, but it does not even refer directly or indirectly to the MacMillan Company. The provision is:
“Provided, * * * (on condition) That in the event of any default * * * written notice thereof * * * shall within 69 days after such default be mailed to the Surety Company. * * * ”
While it may be urged with some degree of logic that the provision with reference to the performance of the contract by the MacMillan Company is in the form of a covenant since it states what the MacMillan Company shall do, the provision as to notice in contrast thereto does not, and clearly is in the form of a condition.
The majority opinion suggests the bond does not in terms provide, as is frequently done in contracts of insurance, that a breach of condition shall forfeit the bond. It is not necessary for a contract to provide that which the settled law recognizes to be the effect of a breach of condition. -
Finally, to construe the provision with respect to notice as an independent covenant would render it valueless to the Surety Company. The only remedy for the breach of an independent covenant is an action for damages; it constitutes no defense. In order to recover damages, the Surety Company would have to show that had it received notice it would have investigated the affairs of the Book Company and would have discovered conditions which would have caused it to terminate the bond. Such facts would be difficult if not impossible to prove.
Mr. Williston in his work on Contracts, vol. 2, § 665, says:
“As matter of construction, it seems better to favor bilateral contracts than unilateral, and in bilateral contracts better, where the meaning of the agreement is doubtful, to construe words as involving a promise by the party who is expected to do the act in question than as words of condition. Such a construction protects both parties to the transaction, and also does not involve the consequences that a slight failure to perform wholly destroys all rights under the contract.”
I do not believe the meaning of the language is doubtful, and furthermore to construe the provision concerning notice as an independent covenant will not protect both parties to the transaction. On the contrary the result of so construing it is that the MacMillan Company responds to no damage for its flagrant, repeated, and substantial breaches of the provision on its part, and recovers from the Surety Company the full penal provision of the bond.
The guaranty of the Surety Company broadly provided for indemnity against any breach on the part of the Book Company of the contract which was to run for five years. Having regard for the broad scope of the guaranty, the period of time it was to run, the fact that the hazard of the risk might increase, the fact that damages for breaches of the notice provision would be difficult to prove, and the fact that the parties did not use apt words of covenant or promise) and did use words appropriate to import a condition, it is my opinion that the word “provided” should be given its usual signification and that such provision should be construed to be a condition.
The Surety Company is discharged if a condition known to the obligee, upon which the Surety Company agreed to be bound, is not complied with. Home Building & Savings Ass’n v. New Amsterdam Casualty Co. (C. C. A. 8) 45 F.(2d) 989, 991. In such a ease the insurer need not show prejudice. Home Association v. Casualty Co., supra; St. Louis A. Iron Co. v. New Amsterdam Casualty Co. (C. C. A. 8) 49 F.(2d) 344.
For these reasons I am of the opinion that the judgment should be reversed with instructions to enter judgment for the Surety Company.