Interstate Equipment Co. v. Smith

BROCK, Chief Judge.

It has long been established that a person for whose benefit a promise is made to another, though not a party to the agreement or privy to the consideration, may maintain an action upon the promise, and one who has assumed or contracted for the payment of another’s debt may be sued directly by the creditor. 2 Strong, N. C. Index, Contracts, § 14. The same principle applies to the intended beneficiaries of a contractor’s or subcontractor’s bond, and such a beneficiary may maintain an action in his own name against the surety on such bond. Glass Co. v. Fidelity Co., 193 N.C. 769, 138 S.E. 143 (1927). The problem in the present case is whether the plaintiff, Interstate, is a beneficiary under the bond upon which the defendant, Great American, is the surety.

Both parties, as well as this Court, view the contractor’s bond given by Bollinger to Teer as one not required by statute, but rather as a private bond agreement. In a private contractor’s bond the parties are free to agree at arm’s length on the extent of coverage desired.

The bond executed by Bollinger and Great American as surety was a payment bond for the protection of those supplying labor and material. Plaintiff claims that this bond should cover the rental of equipment. In private contractor’s bonds neither equipment nor rental of equipment is considered “materials.” 17 Am. Jur. 2d, Contractor’s Bonds, § 7, p. 196. “Materials” within a surety bond, conditioned upon the contractor paying those furnishing materials in the construction of a roadway, consist of articles necessary and indispensable to performance of the contract, which the parties must reasonably contemplate will be incorporated into the work and which lose their identity in the finished product. Hardware Co. v. Indemnity Co., 205 N.C. 185, 170 S.E. 643 (1933). Equipment, such as the Wabco scrapers in this case, is neither used up nor incorporated into the work but is rather a component of the contractor’s plant.

Under the above-stated general principle, plaintiff’s claims against the surety for amounts due on the equipment leases ($27,447.29) are invalid. Plaintiff argues, however, that if the contractor’s bond is read in conjunction with the construction contract, the equipment leases would come within the coverage of the bond. We disagree.

The pertinent provisions of the contract relied on by the plaintiff are:

“You [Bollinger] will fiance your operations in every detail and promptly, or upon demand, pay all indebtedness arising out of your operations hereunder.”

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“You are to furnish us satisfactory Payment bond being in the full amount of this subcontract.”

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“You will furnish all supervision, labor and materials, including equipment and incidentals, to do properly the items of work listed below at the designated unit prices and in accordance with the contract, plans, specifications, special provisions and directions of our representative who is in charge of the project.”

While it is certainly a correct rule of construction that the payment bond be read in conjunction with the construction contract, the provisions of a contractor’s bond should not be extended beyond the reasonable intent of the parties gathered from the language and purpose of the bond. Lumber Co. v. Lawson, 195 N.C. 840, 143 S.E. 847, 67 A.L.R. 984 (1928). Furthermore, where the provisions of the bond conflict with those of the contract, the terms of the bond are controlling over those of the contract in determining the surety’s liability. 17 Am. Jur.' 2d, Contractor’s Bonds, § 4, p. 194.

In the case at bar the contract called for Bollinger to provide Teer with a “satisfactory Payment bond.” Bollinger and Great American as surety executed a bond conditioned simply on “payment to all persons supplying labor and material in the prosecution of the work provided in said contract.” While the contract also required Bollinger to “pay all indebtedness” arising out of his operations, there is no wording in the condition of the bond that in any way extends coverage to include “all indebtedness.” The language of the bond conflicts with that of the contract; therefore, the terms of the bond must control. Those terms encompass only labor and materials, and not equipment.

Plaintiff argues that the provision requiring Bollinger to furnish “all supervision, labor and materials, including equipment and incidentals” shows the intent of the parties to include equipment within the category of labor and materials. By reading the contract as a whole and thereby placing the provision in its proper context, it is evident that the provision is not intended to bring equipment within the category of materials. The provision comes at a point in the contract describing the items of work to be performed by Bollinger. The language of the provision is but a preface to the specific job description. It merely defines Bollinger’s construction responsibilities. Furthermore, the contract itself makes the traditional distinction between equipment and materials. In the paragraph immediately after the provision for a satisfactory payment bond, the contract says:

“You [Bollinger] shall immediately procure and prepare your materials and manufactured products to be incorporated in the completed work and advise us of your source of supply and delivery schedule of said materials. You shall have available the necessary workmen and equipment so as to be ready to begin work immediately following our direction to do so.” (Emphasis added.)

The contract called for Bollinger to pay all indebtedness and provide a satisfactory payment bond. Bollinger and Great American as surety provided a payment bond simply covering labor and materials. Teer accepted this bond as satisfactory. These parties were dealing at arm’s length and were free to agree on the extent of the bond’s coverage. They could have easily included rental of equipment, and had they done so, the surety would have been liable. The parties did not affirmatively include equipment rental within the bond coverage, nor can their contract be properly construed to include such coverage. Summary judgment denying plaintiff’s claims for amounts due on rental of equipment was proper.

Besides its claims for lease payments, plaintiff also claims the cost of repairs made on the leased equipment ($1,304.08), a tire adjustment charge ($6,000.00) also claimed as a repair, and service charges ($4,419.46) on the overdue lease and repair accounts. As to the two items classed as repairs, the question is whether they are “labor and materials” within the coverage of the payment bond. The term “labor and materials,” as used in a payment bond, means such labor and materials as are necessary to construct the work in accordance with the contract. 17 Am. Jur. 2d, Contractor’s Bonds, § 7, p. 196. Whether the labor and parts used in repairing equipment are within the bond depends on whether the repairs are major or incidental. Major repairs add materially to the value of the equipment and render it available for other work. The replacement of tires falls into this category. 67 A.L.R. 1241. Thus, the tire adjustment charge claimed by the p’aintiff as a repair does not fall within the labor and materials covered by the bond.

Non-major repairs are those which are incidental to the carrying on of the work. They consist of labor and parts which are needed to keep the equipment operational during the construction period, which are not of a permanent nature, and which do not appreciably add to the value of the equipment. 67 A.L.R. 1242. The only materials before Judge Collier concerning repairs, other than the tire adjustment considered above, show that the repair charges claimed by plaintiff were for work done after the equipment had been returned to plaintiff. The repairs in question were not needed to keep the equipment operational during the construction work. The defendant as surety is not liable on the bond because the repairs claimed were not necessary for the construction and therefore not within the covered category of “labor and materials.”

Since Great American is not liable as surety on the lease payments or repair charges, it follows that Great American is not liable for the service charges attached to Bollinger’s failure to pay those claimed amounts.

The judgment of the Superior Court of Iredell County denying plaintiff summary judgment and granting defendant summary judgment is

Affirmed.

Judges Britt and Morris concur.