Equitable Surety Company v. United States/Opinion of the Court

The act of February 28, 1899 (30 Stat. at L. 906, chap. 218), under which the bond in question was given, was modeled after an act of August 13, 1894, entitled, 'An Act for the Protection of Persons Furnishing Materials and Labor for the Construction of Public Works' (28 Stat. at L. 278, chap. 280, U.S.C.omp. Stat. 1901, p. 2523). In an action founded upon a bond given under the latter act, it was held by the circuit court of appeals for the eighth circuit, in United States use of Anniston Pipe & Foundry Co. v. National Surety Co. 34 C. C. A. 526, 92 Fed. 549, 551, that the obligation has a dual aspect, it being given, in the first place, to secure to the government the faithful performance of all obligations which a contractor may assume towards it; and, in the second place, to protect third persons from whom the contractor may obtain materials or labor; and that these two agreements are as distinct as if contained in separate instruments. It was consequently held that the sureties in such a bond could not claim exemption from liability to persons who had supplied labor or materials to their principal, to enable him to execute his contract with the United States, simply because the government and the contractor, without the surety's knowledge, had made changes in the contract subsequent to the execution of the bond, the changes being such as did not alter the general character of the work contemplated by the contract, or the general character of the materials necessary for its execution.

In support of this decision several cases from the state courts were cited, among them Dewey v. State, 91 Ind. 173, 185; Conn. v. State, 125 Ind. 514, 518, 25 N. E. 443; Steffes v. Lemke, 40 Minn. 27, 29, 41 N. W. 302; and Doll v. Crume, 41 Neb. 655, 660, 59 N. W. 806. They fairly sustain the conclusion reached. The cases cited from the Indiana and Minnesota reports antedated the passage of the act of 1894, and may have furnished the suggestion for that enactment.

The decision of the circuit court of appeals in United States ex rel. Anniston Pipe & Foundry Co. v. National Surety Co. supra, although never until now brought under the review of this court, has been many times cited and followed in the other Federal courts. Brown & H. Co. v. Ligon, 92 Fed. 851, 857; United States use of Fidelity Nat. Bank v. Rundle, 40 C. C. A. 450, 100 Fed. 400, 402; United States Fidelity & G. Co. v. Omaha Bldg. & Constr. Co. 53 C. C. A. 465, 116 Fed. 145, 147; Chaffee v. United States Fidelity & G. Co. 63 C. C. A. 644, 128 Fed. 918; United States ex rel. Maxwell v. Barrett, 135 Fed. 189, 190; Henningsen v. United States Fidelity & G. Co. 74 C. C. A. 484, 143 Fed. 810, 813; City Trust, S. D. & Surety Co. v. United States, 77 C. C. A. 397, 147 Fed. 155, 156; United States use of Phoenix Iron Co. v. California Bridge & Constr. Co. 152 Fed. 559, 562; Title Guaranty & Trust Co. v. Puget Sound Engine Works, 89 C. C. A. 618, 163 Fed. 168, 174.

In United States Fidelity & G. Co. v. Golden Pressed & Fire Brick Co. (United States Fidelity & G. Co. v. United States) 191 U.S. 416, 48 L. ed. 242, 24 Sup. Ct. Rep. 142; and United States use of Hill v. American Surety Co. 200 U.S. 197, 203, 50 L. ed. 437, 440, 26 Sup. Ct. Rep. 168, this court adopted a reasonably liberal construction of the act of 1894, in view of the fact that it was evidently designed to furnish the obligation of a bond as a substitute for the security which might otherwise be obtained by attaching a lien to the property; such lien not being permissible in the case of a government work.

It seems to us that the construction given to that act in the case in 92 Fed. is correct, and that it applies equally to the act of 1899, now under consideration; and that this act, like the other, should receive a reasonably liberal interpretation in aid of the public object whose accomplishment is so evidently intended. Its title is, 'An Act Relative to the Payment of Claims for Material and Labor Furnished for District of Columbia Buildings.' The enacting clause, as well as the title, shows that Congress recognized that no legislation was necessary in order to enable the commissioners of the District to require 'the usual penal bond, with good and sufficient sureties,' from a contractor engaged for the construction of a public building. The object of the legislation was to give legal sanction to the 'additional obligation that such contractor or contractors shall promptly make payments to all persons supplying him or them labor and materials in the prosecution of the work provided for in such contract,' and to give to such a laborer or materialman the right to bring an action, if necessary, upon the bond, either in the name of the District of Columbia or of the United States, for his own benefit, against the contractor and sureties. The nominal obligee is, with respect to these third parties, a mere trustee, and the obligors, including the surety as well as the principal contractor, enter into the obligation in full view of this. The public is concerned not merely because laborers and materialmen (being without the benefit of a mechanics' lien in the case of public buildings) would otherwise be subject to great losses at the hands of insolvent or dishonest contractors, but also because the security afforded by the bond has a substantial tendency to lower the prices at which labor and material will be furnished, because of the assurance that the claims will be paid.

Stress is placed by counsel for the surety company upon the fact that the building was materially altered, and in a manner that involved the contractor in considerable expense not contemplated in the original contract. If these alterations were made pursuant to a stipulation for that purpose contained in the contract, they were binding upon the surety, unless they were so extensive and material as to amount to a departure from the original contract rather than a permissible modification of its details. United States v. Freel, 92 Fed. 299, 39 C. C. A. 491, 99 Fed. 237, 186 U.S. 309, 46 L. ed. 1177, 22 Sup. Ct. Sup. 875.

So far as the certificate shows, however, the contract here in question contained no clause permitting changes. In such case it is beside the question to inquire whether the changes were important, or, indeed, whether they prejudiced or benefited the contractor. The rule that obtains in ordinary cases is that any change in the contract made between the principals without the consent of the surety discharges the obligation of the latter, even though the change be beneficial to the principal obligor.

But it lies at the foundation of this rule of strictissimi juris that the agreement altering the undertaking of the principal must be participated in by the obligee or creditor, in order that it may have the effect of discharging the surety. This is expressed or implied in all the cases. Miller v. Stewart, 9 Wheat, 680, 703, 708, 709, 6 L. ed. 189, 195-197; Sprigg v. Bank of Mt. Pleasant, 14 Pet. 201, 208, 10 L. ed. 419, 422; Magee v. Manhattan L. Ins. Co. 92 U.S. 93, 98, 23 L. ed. 699, 700; Union Mut. L. Ins. Co. v. Hanford, 143 U.S. 187, 191, 36 L. ed. 118, 120, 12 Sup. Ct. Rep. 437; Prairie State Nat. Bank v. United States, 164 U.S. 227, 233, 41 L. ed. 412, 416, 17 Sup. Ct. Rep. 142; United States v. Freel. 186 U.S. 309, 310, 371, 46 L. ed. 1177, 1178, 1181, 22 Sup. Ct. Rep. 875.

In the case of a bond given under a statute such as the act of February 28, 1899, there is no single obligee or creditor. The surety is charged with notice that he is entering into what is, in a very proper sense, a public obligation, and one that will be relied upon by persons who can in no manner control the conduct of the nominal obligee, and with respect to whom the latter is a mere trustee, and therefore incapable, upon general principles of equity, of bartering away, for its own benefit or convenience, the rights of the beneficiaries. In the light of the statute, the surety becomes bound for the performance of the work by the principal in accordance with the stipulations of the contract, and for the prompt payment of the sums due to all persons supplying labor and material in the prosecution of the work provided for in the contract.

What would be the result of a change not contemplated in the original contract, as between the District of Columbia, consenting to the change, and the surety company, not consenting thereto, is a question not now before us, and respecting which we express no opinion. But, with respect to obligations incurred by the contractor to laborers and materialmen, at least, so far as their labor and materials are supplied in accordance with the original contract, it is obvious, we think, that a construction which would discharge the surety because of any change to which the laborers and materialmen were not parties would defeat the principal object that Congress had in view in enacting the statute. If the change were so great as to amount to an abandonment of the contract and the substitution of a substantially different one, so that persons supplying labor and materials would necessarily be charged with notice of such abandonment, a different question would be presented. But, in the case of such a change as was here made,-a mere change of position and location of the building, without affecting its general character; involving changes in grading, but having nothing to do with the furnishing of the materials upon which the action is based,-it seems to us that the responsibility of the surety to the materialman remains unaffected.

The question certified will be answered in the negative.