Fidelity Deposit Co. of Baltimore, Md. v. Rainer , 220 Ala. 262 ( 1929 )

This is an agreed case certified to this court by virtue of section 6095 of the Code. Appellant was the surety on a bond executed by one Hanna as principal payable to appellee Rainer, and conditioned that "if the principal shall faithfully perform the contract on his part and satisfy all claims and demandsincurred for the same, and shall fully indemnify and save harmless the owner from all cost and damage which he may suffer by reason of failure to do so and shall fully reimburse and repay the owner all outlay and expense which the owner may incur in making good any such default, and shall pay allpersons who have contracts directly with the principal forlabor and material, then this obligation shall be null and void," etc. The contract was for the building of a dwelling house and garage for the obligee of the bond. The agreed facts show that the beneficial plaintiff, by contract with Hanna, furnished him material used in constructing the building, for which it has not been paid. The circuit court rendered judgment for plaintiff, and defendant has taken this appeal.

It is apparent that there is here presented the question of whether a suit may be maintained for the use of a materialman, by virtue of the condition of the bond copied herein, when the contract was not a public one. When the contract is a public one, we have held that such a suit may be maintained. Union Indemnity Co. v. State, 217 Ala. 35, 114 So. 415; Union Indemnity Co. v. State (Ala. Sup.) 118 So. 148;¹ Jefferson County Board of Ed. v. Union Indemnity Co. (Ala. Sup.)119 So. 837.² The basis of these cases is that it must be held that, in this respect, the bond was for the direct benefit of such materialman, when the contract was with a public corporation, and no lien or liability against the owner was created by law or contract, for that the bond could have no other meaning in that respect. There was nothing against which the obligee needed protection to that extent. It lost nothing if the contractor failed to pay, and gained nothing if he did. It could sustain no damage by such a breach of the condition of the bond. Such condition was in the bond, and could have but one purpose, and that was the direct benefit of such parties who came within its terms. This court pointed out that in so holding it was following the decisions of practically all the courts of the Union. The application of the rule was there expressly limited to "public contracts," and not those with private parties. We are here confronted with a contract of the latter class.

We recognize that it presents the anomalous position of construing the same provisions of a bond differently, when the obligees are different; in one instance it is a public corporation and in another it is a private person or corporation. The theory recognized in all authorities is that, for a suit to be maintained by or for the use of such materialman, the bond must be construed as having been executed for his direct benefit, in that respect. We pointed to this general rule as the basis of construction in our cases mentioned above, citing the authorities. The only difference of opinion in any of the courts on that subject has been whether, and when, such materialman was so intended to be directly benefited. All the cases state that as the crucial point in determining the question. 1 Williston on Contracts, § 380; Simson v. Brown, 68 N.Y. 355, 361; Copeland v. Beard, 217 Ala. 216,115 So. 389; Meyerson v. New Idea Hoisery Co., 217 Ala. 153,115 So. 94, 55 A.L.R. 1231; Fite v. Pearson, 215 Ala. 521,111 So. 15; Parker v. Jeffery, 26 Or. 186, 37 P. 712.

The following statement from Simson v. Brown, supra, is often quoted: "It is not every promise made by one to another, from the performance of which a benefit may ensue to a third, which gives a right of action to such third person, he being neither privy to the contract nor to the consideration. The contract must be made for his benefit as its object, and he must be the party intended to be benefited."

While we think the condition of the bond here in question was for the direct benefit of materialmen having no lien on public buildings, we also think, in agreement with many authorities, that the condition does not have such meaning when the materialman is furnished by law with a lien on the owner's property, who has a direct financial interest in protecting himself against such a lien. It will be observed that the bond does not in terms obligate the bondsmen to pay for such material, but only provides that, if such material is paid for, the bond shall be void, otherwise will remain in full force and effect. Its terms then do not import a direct benefit to the materialman. The difference in meaning of such a condition when used in bonds for building contracts for private parties and public organizations is thus smmarized from the cases and approved in 1 Williston on Contracts, § 372, p. 702:

"It is a common stipulation in a building contract that the contractor will pay all bills for labor and materials. In most cases the fufilment of this promise by the contractor operates to discharge a liability of the owner of the building, whose building would be liable to satisfy the liens given by the law to workmen and materialmen. It cannot, therefore, be inferredthat the promisee requires the promise in order to benefit suchcreditors of the contractor. The natural inference is that hisobject is to protect himself or his building. When, however, the owner of the building is a municipality, or county, or state, such an inference cannot so readily be justified, for the laws give no liens against the buildings of such owners." (Italics supplied.)

A fair illustration of what the cases hold on that subject is a statement from the Supreme Court of Washington, wherein the court holds the condition has a different meaning under the different circumstances. We quote from Rust v. U.S. F. G. Co., 87 Wn. 93, 151 P. 248, as follows:

"In Armour Co. v. Western Const. Co., 36 Wn. 529,78 P. 1106, we held that a surety company on a private bond was not liable to a materialman, as no privity existed between them; that is, the bond was not given for their benefit, and this is the general rule.

"But respondent argues that we held in effect in State, ex rel. Bartelt v. Liebes, 19 Wn. 589, 54 P. 26; Baum v. Whatcom County, 19 Wn. 626, 54 P. 29; McDonald v. Davey, 22 Wn. 366,60 P. 1116, and Pacific Bridge Co. v. U.S. Fidelity, etc., Co., 33 Wn. 56, 73 P. 772, that contracts such as this are for the benefit of the creditors, and that they may sue on such a bond for their own benefit. All of these cases, except the McDonald case, involved public bonds, which are presumptively given for the benefit of the creditors, to take the place of a lien which does not lie against a municipality. While the court in the McDonald case apparently based the holding on the decisions on the same ground, there was sufficient in the case to show that the bond was intended to protect the creditors. Whether that case is in harmony with the rule stated or not, we regard the Armour case as controlling.

"There being no privity between the creditors and the appellant surety company, and the bond not being for their benefit, it follows that they received no rights under the contract or bond which respondent could enforce for their benefit."

The foregoing quotation was copied in a later case by the Washington Supreme Court in Du Pont, etc., v. Nat. Surety Co.,90 Wn. 227, 155 P. 1050. In that case the court again points out in great detail and with much elaboration the distinction between a "public" and "private" bond in this respect.

The Supreme Court of Oregon makes the distinction in Pankey v. Nat. Surety Co., 115 Or. 648, 239 P. 808. Likewise the following cases support this view: Indemnity Co. v. Am. University, 58 App. D.C. 184, 26 F.(2d) 556; Nat. Surety Co. v. Brown-Graves Co., 7 F.(2d) 91 (C.C.A. 6th Dist.); Maryland Cas. Co. v. Johnson, 15 F.(2d) 253 (U.S. Dist. of Mich.). Several cases in Texas take a decided position to the same effect after much consideration. Gen. Bonding Co. v. Waples Lbr. Co. (Tex.Civ.App.) 176 S.W. 651; Oak Cliff Lbr. Co. v. Am. Ind. Co. (Tex.Civ.App.) 266 S.W. 429; Murphy v. Huey Philp Hardware Co. (Tex.Civ.App.) 267 S.W. 338.

The same is true in Missouri, Uhrich v. Globe Surety Co.,191 Mo. App. 111, 166 S.W. 846; and in Pennsylvania, First Methodist Church v. Isenberg, 246 Pa. 221, 92 A. 141; and in Ohio. Cleveland Metal Roofing Co. v. Gaspard, 89 Ohio St. 185,106 N.E. 9, L.R.A. 1915A, 768, Ann. Cas. 1916A, 745; in Kentucky, Dayton Lbr. Co. v. New Cap. Hotel, 222 Ky. 29,299 S.W. 1063. In Kansas this rule is recognized, but the facts were different in Algonite Mfg. Co. v. Fid. D. Co.,100 Kan. 28, 163 P. 1076, L.R.A. 1917D, 722, and in Minnesota, Jefferson v. Asch, 53 Minn. 446, 55 N.W. 604, 25 L.R.A. 257, 39 Am. St. Rep. 618. There is a complete annotation on this subject in 27 L.R.A. (N.S.) beginning on page 573.

On the other hand, in the following states a different view is taken: Arkansas (Mansfield Lbr. Co. v. Nat. Surety Co.,176 Ark. 1035, 5 S.W.[2d] 294); Georgia (American Surety Co. v. DeWald, 30 Ga. App. 606, 118 S.E. 703); North Carolina (Pittsburg Plate Glass Co. v. Fid. Dep. Co., 193 N.C. 769,138 S.E. 143); Wisconsin (Yawkey-etc., Lbr. Co. v. Sinaiko,189 Wis. 298, 206 N.W. 976); Nebraska (Forburger Stone Co. v. Lion Bonding Surety Co., 103 Neb. 202, 170 N.W. 897,171 N.W. 288). This last case was based upon those relating to public contracts.

In Knight Jillson v. Castle, 172 Ind. 97, 87 N.E. 976, 27 L.R.A. (N.S.) 573, the facts were that the promise to pay the materialmen was not a condition of the bond, but there was a distinct obligation to pay them. In Indiana, Ochs v. Carnahan, 42 Ind. App. 157, 76 N.E. 788, 80 N.E. 163, states that it is based upon the doctrine applicable to public contracts. It will be observed that in each of the above cases the ruling results from a conclusion that the bond was for the benefit of the materialman as well as the owner.

We agree that the correct result follows from a proper determination of that question. It is a question of intention, to be derived from the language used, the situation of the parties, and legal principles which they are presumed to know and have in mind. When the contract is a public one, the parties all know that the materialman (and others similarly situated) are the only ones who can be benefited by the clause, either directly or indirectly, and therefore it must be intended of necessity to apply to them, if it has any meaning at all. When it is a private contract, they all know that the owner has sought to be and is thereby protected from liens and claims of materialmen and others, and therefore that he is the one directly and immediately intended to be protected, and that the protection to the materialmen and others is only incidental. The letter of the contract shows that it is to protect the owner only, and there is no principle of law pertaining to private contracts showing a different intent. It is here repeated that there is no promise or obligation of any kind expressly stated to pay the materialmen. Wherever there is such obligation expressed, a different result follows. Fite v. Pearson, supra.

Without prolonging the discussion, we observe that we have arrived at the conclusion that appellant was due the judgment in the circuit court. The case was tried without a jury on agreed facts.

Let the judgment be here entered reversing that of the circuit court, and in favor of the appellant.

Reversed and rendered.

ANDERSON, C. J., and GARDNER and BOULDIN, JJ., concur.

¹ 218 Ala. 132.

² 218 Ala. 632.

On Rehearing.