Southern Pac. Co. v. Globe Indemnity Co., 21 F.2d 288 (2d Cir. 1927)

*289 *290 Burlingham, Veeder, Masten & Fearey, of New York City (Van Vechten Veeder and Eugene Underwood, Jr., both of New York City, of counsel), for plaintiff in error.

Daniel Combs, of New York City, for defendant in error.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

SWAN, Circuit Judge (after stating the facts as above).

Among several defenses raised by the surety at the trial was one involving the meaning of the bond. It was urged that the bond was intended to cover only the anticipation of the final installment payable on El Estero and El Isleo. The language of the condition of the bond is, however, too broad to admit of this construction. It recites the contract for the building of three ships; that payments are to be made as the work progresses, and the last payment after the final trial trip "by each ship"; that the principal desires to release a part of the moneys so retained; and the condition is to save harmless the obligee against "all loss sustained by reason of having released a portion of the moneys so withheld before the final trip has been run by each ship." We agree with the trial court's interpretation that the obligation of the bond protects the plaintiff in advancing any "progress payment" on any of the three ships.

The defendant has cited cases which hold that payments prior to the time specified in the contract discharge completely a surety on a contractor's bond for faithful performance. Justice v. Empire State Surety Co. (D. C.) 209 F. 105 (E. D. Pa.); Wells v. National Surety Co., 222 F. 8 (C. C. A. 3); Globe Indemnity Co. v. Unity Rys. Co., 272 F. 607 (C. C. A. 3). These cases are not deemed applicable to the case at bar. This bond was executed for the very purpose of securing advance payments. Moreover, the payment of $71,666.67 to the United States Mortgage & Trust Company was made after the builder's abandonment.

The ground upon which the learned judge dismissed the complaint was that this payment operated as a complete release of the surety's obligation. His reasons for holding this a complete release, rather than a release pro tanto, are not stated. The trust company, as assignee of the tenth installment on El Isleo, stood in the shoes of its assignor, the builder, and it is true that the plaintiff would not have been privileged to make any payment to the builder after its abandonment of the contract. Any money due the builder, which the plaintiff then held, must be deemed security which the plaintiff had against its damages for breach of the contract. A release of such security would be an injury to the surety, but such injury would be measured by precisely the amount of the payment. Regarding the payment as a release of collateral security, it is perfectly well settled that the surety is discharged thereby only pro tanto. Taylor v. Continental Supply Co., 16 F.(2d) 578 (C. C. A. 8); Boston Penny Savings Bank v. Bradford, 181 Mass. 199, 63 N.E. 427; Beaver Trust Co. v. Morgan, *291 259 Pa. 567, 103 A. 367; St. John's College v. Ætna Indemnity Co., 201 N.Y. 335, 94 N.E. 994; 2 Williston, Contracts, § 1232. If no injury in fact results to the surety, his obligation is in no way affected. Wood v. Brown, 104 F. 203 (C. C. A. 8); Pickens County v. National Surety Co., 13 F.(2d) 758 (C. C. A. 4). It is apparent, therefore, that the judgment must be reversed, unless the plaintiff's claim under the bond is less than the sum wrongfully paid to the trust company.

The plaintiff claims its loss under the contract is $207,781.31. Of this sum, $137,299 is on account of liquidated damages for delay in completion of the vessels, and $70,482.31 represents plaintiff's expenditures in excess of the contract price of the three vessels. Giving defendant credit for the $71,666.67 paid to the trust company would leave, instead of a loss, a credit to plaintiff of $1,184.36. These figures agree with the defendant's, and leave any recovery dependent altogether on the claim for liquidated damages.

It is urged that a liquidated damage clause does not apply when work under the contract is abandoned by the contractor. Murphy v. U. S. Fidelity & Guaranty Co., 100 App. Div. 93, 91 N.Y.S. 582, affirmed 184 N.Y. 543, 76 N.E. 1101, and Village of Canton v. Globe Indemnity Co., 201 App. Div. 820, 195 N.Y.S. 445, are cited as authorities to this effect, and a similar statement may be found in Williston, Contracts, § 785. A close examination of the cases, however, does not in our opinion establish such a rule, and we can see no justification for it, at least when the contractor abandons after the time for completion has passed. In such a case some part of the liquidated damages has accrued before the repudiation. No intelligible reason has been suggested why the owner should lose his right to them because of subsequent repudiation.

The Village of Canton Case seems to hold that he does lose it, but it purports to follow the Murphy Case and others which are easily distinguishable. In the Murphy Case the plaintiff sued for the damages actually sustained by him by reason of abandonment of the contract. The defendant tried to limit him to the stipulated per diem sum. The court allowed plaintiff to recover his actual damages, saying that the per diem allowance was not intended to be paid in lieu of performance, but upon performance after the time fixed in the agreement. Bacigalupi v. Phœnix Bldg. & Const. Co., 14 Cal. App. 632, 112 P. 892, also cited by Professor Williston, is to the same effect. In these cases the plaintiff made no claim to collect liquidated damages for delay, as well as the increased cost of completing the abandoned work. They are not, therefore, authorities for the alleged rule that he cannot do so. The other cases relied upon in the Village of Canton Case are in most instances decided upon a construction of other provisions of the contract. In none of them is the situation the same as in the case at bar.

On the other hand, there are a number of decisions which permit the owner to recover, not only the increased cost of completing the abandoned contract, but also liquidated damages for delay caused by the contractor's breach. School District v. De Lano, 96 Kan. 499, 152 P. 668; Watson v. De Witt County, 19 Tex. Civ. App. 150, 46 S.W. 1061; Comey v. United Surety Co., 160 App. Div. 698, 145 N.Y.S. 674, aff'd, 217 N.Y. 268, 111 N.E. 832, Ann. Cas. 1917E, 424; McKegney v. Ill. Surety Co., 180 App. Div. 507, 167 N.Y.S. 843; Bankers' Surety Co. v. Elkhorn River Drainage Dist., 214 F. 342 (C. C. A. 8). These cases do not limit the liquidated damages to delays occurring prior to the contractor's abandonment. They do require that the delay be caused by the contractor, but his default may be operative to delay completion by the owner. The contractor cannot, of course, be held for the delays caused solely by the owner in completing the work. Gilette v. Young, 45 Colo. 562, 101 P. 766. We think the owner must show the time that the contractor would have taken to complete the work. Ordinarily this will be no longer than the shortest time in which it could be completed, but that is a question of fact for him to answer. If he can show that, we see no reason why the contractor's repudiation should stop the running of the liquidated damage clause.

How much the plaintiff's liquidated damages will be this record does not show, but it is apparent that he will be entitled to some recovery on the bond, after giving the defendant credit for the wrongful payment to the trust company.

The judgment is therefore reversed, and the cause remanded for further proceedings.