S. L. Reed and Western Casualty & Surety Company, Appellants, v. Maryland Casualty Company et al., Appellees, 244 F.2d 857 (5th Cir. 1957)

On March 17, 1952, Reed-Meredith, Inc., with Maryland Casualty Company as surety, contracted in writing with S. L. Reed¹  to perform "certain items of work" embraced in a contract between him (Western Casualty and Surety Company as surety) and the Mississippi Highway Department for the building of a stretch of road in Coahoma County, Mississippi. Certain materials had previously been furnished to Reed and had later been turned over by him to, and used by, Reed-Meredith, and certain services had been performed in connection with the subject matter of the subcontract, prior to the execution of the surety bond; some of the materials so furnished were only used after May 17th. The question presented is whether Maryland, appellee, is liable under its bond (Reed-Meredith being insolvent) for such services and materials. The court below, sitting by agreement without a jury, answered that question in the negative and entered a final judgment on the merits in favor of Maryland and against Reed and Western.² 

The litigation was begun by complaint for declaratory judgment brought by Maryland against Reed and Western³  which, with amended complaint, prayed for judgment declaring that its bond did not cover liabilities to said claimants incurred or accruing prior to its execution and for other, related relief. The responsive pleadings of Reed and Western consisted of a general denial of the legal and factual averments of the complaint. Appellants and appellees agree that their rights are to be determined by the writings executed on March 17, 1952, consisting of the contract between appellant, S. L. Reed, and Reed-Meredith, Inc., the latter's application for bond, and the bond executed by appellee, Maryland. But all arguments proceed in recognition of the fact that a wide exploration of the facts is necessary to determine the nature of the respective claims and the situation and relationships of the various parties in connection with them. These facts may well be set out by abridging the findings of fact of the court below.⁴ 

The contract (prepared by Reed) of March 17, 1952, between S. L. Reed, contractor, and Reed-Meredith, subcontractor, referred to and incorporated within its terms the contract between Reed and the Highway Department insofar as it laid upon the subcontractor the duty of performing the six items here involved in conformity with the terms of said main contract. Pertinent provisions of the subcontract of March 17th appear in the margin.⁵  On the same date a representative of Reed-Meredith, in company with appellant, Reed, went to Maryland's agent and executed an application for a bond which contained the question, "When must work begin?" To which the answer was made with pen: "Immediately." Thereupon Maryland issued to S. L. Reed its "Performance Bond" incorporating by reference the terms of the written subcontract between Reed and Reed-Meredith. The bond was conditioned that it would be null and void "if contractor shall promptly and faithfully perform said contract."⁶  (Emphasis added.) The trial court found that Reed-Meredith had completed the contract and had been paid by S. L. Reed the sum of $41,041.32, being 90% of the full consideration, $7,813.76 of which was paid directly by Reed to Virginia Bridge Company, and that S. L. Reed retained 10% of the total contract price, amounting to $4,424.58. It held that Reed-Meredith was insolvent and had left unpaid the items involved in this litigation.⁷  It held also that neither Highway Materials nor Fairchild nor Lynn had any direct claim against Maryland but that they did have valid claims against appellant. This suit, therefore, resolves itself into a contest between appellant, Reed, obligee in the bond, and Maryland, the surety, as to whether Reed can recover from Maryland the amount of the contested items and the rental charge of Reed against Reed-Meredith.

The court construed the contract, the application, and the bond of March 17th to be entirely prospective in their terms and to apply only to work done and obligations incurred after the execution of the writings.

It held that Maryland had no notice or knowledge that any of the materials had been purchased or any obligation incurred or any work performed prior to the execution of its bond, but that it had relied entirely upon the language of the three written instruments as defining its obligation and limiting its liability to what should happen subsequent to its execution.

Appellants claim that the trial court committed error in its findings of fact and its conclusions of law in several particulars.⁸ 

We are unable to agree with the district court in its holding that appellee's obligation on the bond should be limited so as to exclude all materials acquired and all work performed by subcontractors after its execution if done in pursuance to subcontracts entered into before then. The written contract refers to Reed-Meredith's obligation to complete all of the work required in the performance of certain specified items of work, and to "furnish all necessary materials and pay all labor necessary for completion of the work specified," and the amount of the bond (and thus the compensation of the surety) is for the entire contract amount. By Mississippi law such construction contracts are indivisible, Clark v. Till, 177 Miss. 891, 172 So. 133. The crucial question, therefore, is whether section 374 of the Mississippi Code of 1942 must be interpreted to limit the surety's obligation under the above-quoted contractual provision which is also embodied in the bond, to the payment of labor and materials furnished after said contract was entered into, or whether the broader contractual obligation must be interpreted to include all labor and materials furnished to accomplish the purpose of the indivisible contract.

The district court relies on the well established rule that in the absence of special provisions a surety contract will be interpreted to be only prospective in effect. But the very quotation used by the court shows the inapplicability of that doctrine as generally stated to the present situation:

"A contract of suretyship is not retrospective in its operation and no liability attaches to the surety for defaults occurring before it is entered into, unless an intent to be so liable is indicated." (Emphasis added.) 72 C.J.S., Principal and Surety, § 108.

Similarly from 50 Am.Jur., Suretyship, § 34:

"Contract of suretyship affecting ordinary business transactions take effect from the date of their execution, and applying the rule that a surety cannot be held beyond the terms or legal effect of his engagement, the surety's liability will generally be restricted to defaults of the principal occurring during the period of the suretyship undertaking." (Emphasis added.)

This is merely a natural consequence of the fact that for practical purposes these suretyship contracts are much like contracts of insurance, whereby the insurer will assume the risk only of future occurrences but not of past and established ones. Here, however, there was no default which anteceded the execution of the bond, nor did the previous acquisition of materials and contracts for subprojects make such a default more probable.

Appellee relies on the fact that the Reed — Reed-Meredith contract incorporated in the bond requires Reed-Meredith to furnish the bond "prior to commencing operations under this subcontract," but this is merely in the form of an obligation on the subcontractor and is not a representation that the bond had actually been obtained as required — if indeed that were construed as a limitation or warranty on the bond, the argument would prove too much, for having been obtained subsequent to the start of the work the bond might then be considered void in its entirety. The same may be said for the purported reliance by the surety on Reed-Meredith's answer to the question: "When must work begin?" — "Immediately;" since it is not argued that this "misrepresentation" vitiates the entire bond, it cannot be read, since it does not state or even imply, that no obligations in connection with the work had yet been assumed.

It is clear that the purpose of the bond, in view also of the quoted statutory provision, is to assure the obligee that he will obtain the entire project contracted for as and when specified by the terms of the contract, and that all labor and material obligations incurred by the contractor in connection with the project shall have been paid by either the contractor or by his surety so as not to constitute liens against the project, i. e. to avoid the possibility of the kind of claim being asserted here. In the absence of any showing of prejudice to the surety, it seems completely irrelevant to the purpose of the bond that the contractor had already used labor to perform part of the work, had obtained some materials, or had entered into now partially executed subcontracts before the bond was executed and delivered. Naturally if there had been any proof that the surety was actually prejudiced by the advanced state of execution of the contract it was guaranteeing it would have a defense to the full extent that it was injured, but in the absence of such a showing there can be no such off-set. This is the implication of Metropolitan Casualty Ins. Co. of N. Y. v. Koelling, Miss., 57 So. 2d 562, in which it was held that where improper payments were made and work was apparently started before the execution of the bond, the surety would have a defense only to the extent of such improper payments. The case of United States Fidelity & Guaranty Co. v. Maryland Casualty Co., 191 Miss. 103, 199 So. 278, 281, on which the district court and appellees rely, is inapplicable, for there it was expressly determined that since the principal, by his contract with the obligee, did not assume liability for any obligations incurred for work done before the principal contracted to complete the construction, his surety could not have assumed such liability either; also, the contract incorporated into that bond referred only to "payment to all persons supplying the principal." In the present case, the principal, Reed-Meredith, expressly agreed to furnish all necessary materials and pay all labor necessary for "completion of the work specified," and the statutory provision read into the bond does not restrict the surety's obligation to payments made to persons supplying the principal, but, co-extensive with the terms of the contract, refers to "payments to all persons furnishing labor or material under said contract * * *."

We therefore hold that appellee is liable on its bond for all labor and materials furnished by third parties to Reed-Meredith either directly or under agreements originally made with S. L. Reed, and whether the materials and labor were furnished before or after the execution of the bond.

The judgment of the trial court is reversed and the case is remanded for further proceedings not inconsistent with this opinion.

On Petition for Rehearing.

PER CURIAM.

It is ordered that the petition for rehearing filed by the appellee and the motion of appellants for decision upon issue of legal expenses be and the same are hereby denied.

CAMERON, Circuit Judge (dissenting).

I would grant the petition for rehearing, set aside this Court's order of reversal entered April 22, 1957, and enter an order affirming the judgment of the District Court. The per curiam opinion rendered by this Court on the above date is, in my opinion, inconsonant with the facts so intelligently and accurately settled in the findings of the Court below and the Mississippi law as applied by it, Alabama Marble Co. v. United States Fidelity & Guaranty Co., 1927, 146 Miss. 414, 111 So. 573; Gammill Co. v. Guesnard, 1933, 167 Miss. 868, 150 So. 214; and United States Fidelity & Guaranty Co. v. Maryland Casualty Co., 1940, 191 Miss. 103, 199 So. 278. Therefore, I dissent.