First National Bank v. Fidelity & Deposit Co. , 145 Ala. 335 ( 1906 )

SIMPSON, J.

This Avas an action by appellant against appellee, based upon a bond which appellee executed March 7, 1901, as surety for John W. Hood & Co. to secure the faithful performance of a contract by which said Hood & Oo. had agreed to furnish materials and erect a certain building in Montgomery, Ala.

The first point raised by the pleadings, and strenously and ably argued in the briefs of both the appellant and appellee, is AArhether or not, in a case like this, Avhere the building contract specifies that payment shall be made as the Avork progresses upon certificate of the architect, and estimates for material Avhen delivered, reserving 10 per cent, to be paid only when the Avork is completed, and the OAvner undertakes to pay in a different way, as by adAmncing money to the contractor to be repaid .as the estimates and certificates are made, and paying for lumber before it is delivered, Avitliout regard to the 10 per cent, reduction, the surety is released. The appellant relies upon the case of Fidelity & Deposit Company of Maryland v. Robertson, 136 Ala. 379, 34 South. 933, and especially the remark of the court, on page 409 of 136 Ala., page 943 of 34 South., to the effect that the provision of the contract, authorizing the temporary reservation from payments of 15 per cent, of estimated earnings, was solely for the benefit of the original contractor, and one AAdiich, in the absence of any prohibition in the bond, the original contractor might Avaive Avithout the consent of the surety.” It is a maxim of the laAV that all parties, whether principal or surety, avIio reduce their contracts to writing, haATe a right to insist upon the terms of the contract as Avritten, and it does not lie in the poAArer of the courts to say that, although a party has contracted to do one thing, yet he has done something else, which is more beneficial to the other party, and is therefore entitled to the enforcement of the contract. When a party enters into a contract to do certain work and on certain terms,- and procures a surety to guarantee the faithful performance of the work, the surety necessarily contracts with reference to the contract as made. The terms of the contract become a part of the terms of the bond. Otherwise the surety could never know whát obligation he was assuming. The contracts were made at the same time. The surety’s bond recites that, whereas the building contract has been made, etc. Then, in the absence of any explicit declaration to that effect, it is difficult to see how a qourt can undertake to say that certain provisions are made for the benefit of the principal alone, and can be waived or changed by him, without the consent of the surety. This is a matter, however, that has been so thoroughly discussed by the courts in England and in this country, and the trend of the best authorities is so evident, that it seems useless to go over the arguments of the courts.

The leading case in England is that of Oalvert v. London Bock Go., 2 Keen 638. And the Supreme Court of the United States in an able opinion by Justice White, in. which he reviews the decisions of that court and others, plants itself squarely on the English doctrine, declaring that “the rulings of this court haVe been equally emphatic in upholding the right of a surety to stand upon the agreement, with reference to Avhich he- entered into this contract of suretyship, and to exact compliance Avith its stipulations.”- — Prairie State Bank v. U. S., 164 U. S. 227, 237, 17 Sup. Ct. 142, 41 L. Ed. 312. Equally emphatic are the cases of Simonson v. Thori (Minn.) 31 N. W. 861 ; U. S. v. Am. B. & W. Co., 89 Fed. 925, 930, 32 C. C. A. 420 ; Backus v. Archer (Mich.) 67 N. W. 913, and cases cited; Stearns on Suretyship, § 79, and note ; 27 Am. & Eng. Ency. Law, 495. See, also, Manatee County State Bank v. Weatherly, 144 Ala. 655 ; 39 South. 988. It is unnecessary to extend this opinion by citing all the cases that could be produced, or by going over the arguments in those here cited. The declaration of the principle is clear and the reasoning satisfactory. We are compelled to hold that the court below committed no error in overruling the demurrers to the several pleas setting up the defense mentioned. The case of Fidelity & Deposit Company of Maryland v. Robertson, supra, in so far as it conflicts with this opinion is overruled. The case of Saint v. Wheeler & Wilson Mfg. Co., 95 Ala. 362, 10 South. 539, 36 Am. St. Rep. 210, is not in conflict with this opinion, as in that case it is disfiiicüy stated that the claim sued on was not in any way connected with the additional duties which had been placed on the agent, and which were distinct from the duties guaranteed; that, although the agent’s salary had been reduced, yet the settlement in question ivas based on the original contract at the original salary; also that allowing the agent to retain his wages out of weekly collections was not an alteration of the contract, as it did not provide the manner in which he was to be paid. Nor is there any conflict with the case of White’s Adm’r v. Life Association of America, 63 Ala. 319, 35 Am. Rep. 45 ; for that case announces the doctrine in all its strictness in regard to the discharge of the surety by an alteration of the terms of the contract, but merely states that mere indulgence does not constitute such a change. In the case of Perrine v. Fireman’s Ins. Co., 22 Ala. 575, the defendant was surety on a note given by a stockholder to the bank, and the only point decided by the court was that the fact that the corporation had the power, under its charter, to prohibit the transfer of the stock of the stockholders, who weak; indebted to it, did not make it obligatory on it to do so in order to protect the surety. The case of Stephens v. Elrer (Wis.) 77 N. W. 737 (referred to in the brief of appellant), really indorses the general doctrine hereinbefore stated and places its decision distinctly upon the ground that “the alleged advances were so inconsideralde and trifling in amount as not to constitute a material variation of the contract, and upon the further fact that the plaintiff is not in a position to insist upon release, because it was at his suggestion that Pickering made the request for an advance.” Page 740. Without passing upon the question as to whether that court was right in undertaking to say that the alteration -was not material, we only cited it to show that it does not militate against the position taken in his opinion. We do not say that there may not be some slight devitation, so clearly immaterial as not to affect the liabilities of the parties, but that is not this case. In the case of Smith v. Molleson, (N. Y.) 42 N. E. 670, which is greatly relied upon by appellant, the decision was realty based on the construction of the contract; the court holding that, in making payments, the value of the stone, which had been quarried, but not placed in the building, should be taken into consideration, and under that construction there had been no overpayment. The court affirms the doctrine that the surety “has the right to insist upon the strict performance of any condition for which he has stipulated, whether others would consider it material or not.” Page 670, second column. Allusion is also made to the special provisions in that contract to the effect that the owner was “at liberty to make any alterations, deviations, additions, or omissions from the said contract,” but the court says “it is not important to consider the real scope of this clause.”

Without subscribing to any intimations of the court on that point, it may be remarked that the corresponding, provision in the contract now before this court differs from that in the important particular that, after referring to the alteration, etc., it goes on to state that it shall not “make void the contract, but the difference shall be added to or deducted from the amount of the contract, as the case may be, by a fair and reasonable valuation,” showing clearly that the allusion is not to the manner of payment, but tu the alteration in the work. While, as between the original parties to the contract, either party may waive any of its provisions, yet when a third party becomes interested in the contract by binding himself to its faithful execution, the contract becomes a part of his obligation, and its provisions cannot be waived so' as to affect his interest without his consent. We hold that under the contract and bond in this case, which constitute one transaction, if the plaintiff did not pay for the work and the material in the manner provided by the contract, but instead thereof, by an arrangement made either at the- time the contract was made, or afterwards, with the contractor, without the consent of the surety, permitted^ the contractor to overdraw his account, so that considerable amounts of money were paid to him before any certificates were issued by the architect, and the material was paid for, without any estimate and before delivery, and without any regard to the retention of the percentage required, trusting to the certificates and estimates to be credited on said general account, then this was such a departure from the terms of the original contract as to release the obligation of the surety. The cases referred to by appellant’s counsel, which hold that, where a collateral security has been released, or lost, without the consent or fault of the surety, said surety is released only pro tanto, do not apply to a case like this, even as to the 10 per cent, reserve. Said provision in this case is one of the conditions of the contract, and it cannot be said that it is a mere security for the payment of such money; but it is reserved as much as a stimulus to insure the completion of the work by the contractor, as for a mere security of the amount of money.

Appellant next insists that by the terms of the bond the appellee waived so much of the construction contract as required payments to be made upon certificates and estimates, and he bases that construction on that part of the bond which recites that “whereas, under article 1 of chapter 71 of the Code of Alabama of 1896, certain liens are provided,” etc., and concludes with these words, to-wit: “But any such sum may be retained and paid such mechanic, laborer, or materialman, by the owner or proprietor, if he wishes, and shall be a credit on this contract as if paid to the contractors.” Appellant claims that this was an authorization to the appellant to pay all said bills, without any regard to certificates or estimates, and without reserving any per cent. We do not construe the bond in this way. The clause in question is really the conclusion of the first preamble, in which the writer of the bond is stating what he understands to be the statutes on the subject of liens of mechanics and materialmen. He goes on Avith another preamble, and then comes to the obligation of the appellee to appellant, which is to “secure and hold it harmless” against all these demands, and to release it of the necessity of inquiring into* these matters entirely, and from paying any such claims. It does not present a case where the parties have perfected their liens, which were guarantied against, and where the appellant had to pay them to save his property. Again, the contract and the bond being one contract, all the guaranties in the bond were conditioned on conformity to the requirements of the contract, with regard to the manner of payments, and if appellant had disregarded these it could not claim any thing of the surety. Even if the expression could bear the interpretation put upon it by appellant, authorizing appellant to pay such claims, it refers to claims presented and brought forward in the manner provided by the statute; but the further provision of the bond shows clearly that the intention of it was that appellant was not to concern itself about these matters, but was simply to make payments to Hood & Co. in accordance with the contract, leaving it to the surety, to hold it harmless against these.

In this connection appellant further insists that the words in the bond, “And to pay any claims of mechanics,” etc., are a waiver of the requirements as to the particular manner of making payments, and an authorization to appellant to pay said items, without regard to certificates or estimates. The grammatical construction of the sentence will not admit of such an interpretation. The infiinitive “to pay” is the object of the verb “agree” in the first line of the-paragraph. In other words, the surety company (with Hood & Co.) “agree” to hold appellant harmless from all these contracts, claims, etc., to exempt it from making demands for lists of .material-men, “and to pay any claims of mechanics, laborers, and materialmen,” etc. It is just as if it had read, “And we agree to pay,” etc., and, as if to make it clearer still, they exempt appellant “from any demands or liability whatever to any other person than John W. Hood & Co. In other words, it is clear that the intention was that appellant was not to pay anything to any one, except Hood & Co. If the materialmen said that they were not willing to furnish material on the responsibility of Hood & Co., they could have secured themselves by perfecting their liens, or appellant could have notified the surety company that the work was in danger of being delayed by these matters, and then the surety company would have been obliged to make some provision for securing the parties. Appellant did not choose to tesort to its surety, but undertook to attend to the matter itself, contrary to the provisions of the contract. It- is not for the court to say why the parties provided for the manner of payment and the reservation of the 10 per cent., thongli it is easy to suppose that it was for the purpose of having a continual stimulus to the contractors to finish the work, thus operating as a security to the surety as well as for the security of the owner. However that may be, it would be utterly futile .to make these requirements, and then provide in another clause that the owner might disregard it and pay for all the material furnished, without inspection or estimate.

Coming to the facts of the case: While it is true that the president of the bank denies that there was any agreement, at ¡the time the contract was made, that the business should be conducted as it was, which is contradicted by two wtinesses on the other side, yet the fact remains that it ivas conducted in that way, that the contract was not complied with in the manner of payment, nor in the reservation of the 10 per cent., and the circumstances make it very evident that there ivas an understanding between the parties that the1, money should be advanced and that the certificates and estimates should be credits (as they were) on the general accounts. The transaction bears none of the earmarks of a separate, independent loan. There was no separate account, but merely the general account. We can judge of the intention of the parties only by their acts; and the manner in which the advancements' were made, in excess of the certificates and estimates and of the 10 per cent, reserve, and the estimates subsequently credited thereon, changed the contractual relations of the parties, deprived the surety of the security which it had bargained for and released it from its obligations. It is not for the court to say why these stipulations were valuable to the surety company, though very good reasons readily occur to the mind, and the result in this case il- ' lustrates them. It is sufficient that they were a part of the contract, and according- fo the authorities heretofore cited the surety company had a right to demand that they complied with before it could be made liable on the bond.

The books show that the account was frequently overdrawn to the amount of several thousand dollars over the entire amount due. President Baldwin, in his letter of November 30, 1901, tells the contractors that at that time the bank had paid them more than the entire contract price. He testified that not a single estimate was paid in accordance with the contract, but that they were merely used in paying the checks drawn on said deposit account. He testified, also, ■ that he does not know whether the items in any of the various accounts, which were paid for before the abandonment of the contract, had in fact been delivered before that time; also that all the payments for material, etc., were charged to Hood & Co. on the general account at the bank, on which the estimates were also credited as they came in. The pay rolls were paid without any certificate, estimates, or reservation. All these facts show clearly that the parties made and carried out arrangements in regard to payments entirely different from the provisions of the contract.

The appellant next raises the point that President Baldwin had no authority under the proof in the case to make the agreement for the bank to pay otherwise than according to the provisions of the contract. The president’s testimony shows that the matter was in his hands on the part of the bank. It is also shown_that, where orders came in, they were taken to him, and he gave a slip to the teller, and that when he was not in the teller or other officer paid them; and it shows, also, that all these payments appeared on the books of the bank, many of them showing on their face what the payments were for; and in addition to all this the bank is here suing under the contract and claiming credit for these payments. From these facts the court had a right to infer that the entire transaction ivas with the knowledge and consent of the hank. — Bibb v. Hall & Farley, 101 Ala. 79, 14 South. 98 ; Talladega Ins. Co. v. Peacock, 67 Ala. 254.

The judgment of the court is affirmed.

Tyson, Anderson, and Denson, JJ., concur. McClellan, O. J. (sick), and Haralson, J. (disqualified), not sitting. Dowdell, J., dissents.