The taking by a materialman of thirty- and sixty-day notes for
materials supplied to one contracting with the government and who
had given the bond of a surety company in pursuance of the Act of
August 13, 1894, 28 Stat. 278, to the effect, among other things,
that he would "promptly make payment to all persons supplying him
labor or materials" will not necessarily relieve the surety company
from obligation under the ordinary rule that exonerates a guarantor
in case the time fixed for performance of the contract by the
principal be extended without his consent, where it does not appear
that such extension was unreasonable or that the surety was
prejudiced thereby.
This was an action originally begun in the Circuit Court for the
District of Colorado by the United States, for the use and benefit
of the Golden Pressed & Fire Brick Company (hereinafter called
the Brick Company) against John A. McIntyre and the United States
Fidelity & Guaranty Company (hereinafter termed the Guaranty
Company), upon a bond executed April 11, 1898, in pursuance of an
Act of Congress of August 13, 1894, 28 Stat. 278, c. 280, to secure
the performance of a contract theretofore entered into by McIntyre
with the Secretary of the Treasury to furnish all the labor and
materials, and do all the work required for the foundation and
superstructure of a mint in the City of Denver.
The questions certified are founded upon the following facts:
McIntyre, having agreed to erect the building, executed a bond to
the United States, with the Guaranty Company as surety, conditioned
not only upon the faithful performance of his work to erect the
building according to his contract, and to any changes or additions
made thereto, but to "promptly make payment to all persons
supplying him labor or material in
Page 191 U. S. 417
the prosecution of the work contemplated by said contract."
During the progress of the work, the Brick Company furnished the
contractor brick for the construction of the building to the amount
of $6,517.55, which had been reduced by payments to $2,711.65, for
which the action was brought.
The defendant denied its liability upon the ground that, on
October 1, 1898, the Brick Company, without the knowledge or
consent of the Guaranty Company, granted to McIntyre an extension
of the time of payment of the balance then due on account of the
purchase price of such brick, and accepted two promissory notes,
one for thirty days after date (October 1), and another sixty days
after September 15, 1898, the first one of which was paid. There
was no allegation that, by reason of the extension of the time of
payment of the sum so due on October 1, the Guaranty Company had
sustained any loss or injury, but it was insisted that it was
nevertheless thereby released and discharged from any further
liability upon such bond.
The circuit court held that the extension did not operate to
discharge the Guaranty Company from its liability, and the circuit
court of appeals, to which the case was carried, certified to this
Court the following questions of law arising from these facts:
"First. Did the action of the Brick Company on October 1, 1898,
in taking two promissory notes, one for the sum of $1,275 and the
other for the sum of $2,508.10, for the amount of the Brick
Company's account, then due and payable, one of said notes running
for thirty days and the other for sixty days, and each bearing ten
percent interest per annum from date, operate to discharge the
United States Fidelity & Guaranty Company from its liability,
assumed under the provisions of the aforesaid bond, to pay to the
Golden Pressed & Fire Brick Company the amount of said
indebtedness?"
"Second. Did the extension of the time of payment of the balance
due from said McIntyre, on October 1, 1898, by the taking of two
notes in the manner and form aforesaid, operate
Page 191 U. S. 418
to discharge the United States Fidelity & Guaranty Company
of its liability to pay the amount of said indebtedness to the
Brick Company, irrespective of the question whether said Guaranty
Company did or did not sustain an actual loss or damage on account
of such extension? "
Page 191 U. S. 422
MR. JUSTICE BROWN delivered the opinion of the Court.
This bond was given in pursuance of the act of 1894, 28 Stat.
278, c. 280, "for the protection of persons furnishing materials
and labor for the construction of public works." The act
Page 191 U. S. 423
requires, in substance, that persons contracting with the United
States for the construction of any public building, etc., shall be
required, before commencing such work, to execute the usual penal
bond,
"with the additional obligations 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,"
with a right on the part of the materialman to bring suit in the
name of the United States for his use and benefit against the
contractor and his sureties. The bond in this case contained two
entirely distinct and separate obligations: First, that McIntyre
should fulfill all the conditions and covenants of his contract,
whatever changes in or additions to such contract might thereafter
be made; and second, promptly make payment to all persons supplying
him labor and materials in the prosecution of the work. Of course,
these covenants are to be read together, and the latter interpreted
in the light of the former.
The question involved is whether the ordinary rule that
exonerates the guarantor in case the time fixed for the performance
of the contract by the principal be extended applies to a bond of
this kind, executed by a Guaranty Company not only for a faithful
performance of the original contract, but for the payment of the
debts of the principal obligor to third parties. It is conceded
that, by the general law of suretyship, any change whatever in the
contract for the performance of which the guarantor is liable, made
without his consent, such, for instance, as an extension of time
for payment, if made upon sufficient consideration, discharges the
guarantor from liability.
Miller v.
Stewart, 9 Wheat. 681;
Smith v.
United States, 2 Wall. 219;
Reese v.
United States, 9 Wall. 13.
Counsel for the Brick Company argued with much persuasiveness
that this rule of
strictissimi juris, though universally
accepted as applicable to the undertaking of an ordinary guarantor,
who is usually moved to lend his signature by motives of friendship
or expectation of reciprocity, and without pecuniary
Page 191 U. S. 424
consideration, has no application to the guaranty companies,
recently created, which undertake, upon the payment of a stipulated
compensation and as a strictly business enterprise, to indemnify or
insure the obligee in the bond against any failure of the obligor
to perform his contract. It is at least open to doubt, however,
whether any relaxation of the rule should be permitted as between
the obligee and the guarantor, which may have signed the guaranty
in reliance upon the rule of
strictissimi juris and with
the understanding that it is entitled to the ordinary protection
accorded to guarantors against changes in the contract or
extensions of the time of payment. The government wisely protects
itself in these cases by providing in the bond that the obligation
of the surety shall extend to all changes in or additions to the
contract which may thereafter be made -- a clause which we have
held extends to such changes as might be found advantageous or
necessary in the plans or specifications, but does not extend to a
change in the location of the structure to be built.
United
States v. Freel, 186 U. S. 309. But
no provision was made in the bond in that case with respect to the
obligation of the principal and his surety to make payment to all
persons supplying labor or material to the contractor in the
prosecution of his work.
We do not, however, deem it necessary to express an opinion upon
this subject, as we prefer to rest our decision upon the peculiar
character of the covenant upon which this action is brought. In an
ordinary guaranty, the guarantor understands perfectly the nature
and extent of his obligation. If he becomes surety for the
performance of a building contract, he is presumed to know the
parties, the terms of their undertaking, the extent and feasibility
of the work to be done, the character and responsibility of the
principal obligor, and his ability to carry out the contract. If he
guarantees the payment of a particular debt, he usually knows the
exact amount of the debt, the time when it matures, and something
of the ability of the principal to meet it. If he becomes
responsible for the payment of the principal's debts generally, or
lends his credit
Page 191 U. S. 425
to a proposed purchaser of goods, he knows the amount of his
liability, and the means of his principal to meet them. In such
cases, he contracts in reliance upon the exact terms of his
principal's undertaking, and has a right to suppose that no change
will be made without his consent, and the courts have gone so far
as to hold that any change will exonerate him, though it really
redound to his benefit.
This covenant, however, is inserted for an entirely different
purpose from that of securing to the government the performance of
the contract for the construction of the building. Inasmuch as
neither the contractor nor his subcontractor can secure themselves
by a mechanic's lien upon the proposed building, the government,
solely for the protection of the latter, requires a covenant for
the prompt payment of his claims, and the same security that it
requires for the performance of the principal contract. In this
covenant, the surety guarantees nothing to the principal obligee --
the government -- though the latter permits an action upon the bond
for the benefit of the subcontractors. The covenant is made solely
for their benefit. The guarantor is ignorant of the parties with
whom his principal may contract, the amount, the nature, and the
value of the materials required, as well as the time when payment
for them will become due. These particulars it would probably be
impossible even for the principal to furnish, and it is to be
assumed that the surety contracts with knowledge of this fact. Not
knowing when or by whom these materials will be supplied, or when
the bills for them will mature, it can make no difference to him
whether they were originally purchased on a credit of sixty days or
whether, after the materials are furnished, the time for payment is
extended sixty days and a note given for the amount maturing at
that time. If a person deliberately contracts for an uncertain
liability, he ought not to complain when that uncertainty becomes
certain.
Stress is laid upon the fact that the defendant company
guaranteed that the principal obligor should "promptly" make
payment to his materialmen, and that this, properly
interpreted,
Page 191 U. S. 426
required that the contractor should pay at once upon the
maturity of the bills, and that, as such bills became due October
1, 1898, the promptness guaranteed required their immediate
payment. We are not impressed with the force of this contention. If
the word "promptly" has any particular significance in this
connection, it is satisfied by such payment as the subcontractor
shall accept as having been promptly made; or perhaps it was
intended to give him an immediate action upon the bond, in case
such payment be not made with sufficient promptness. It was not
intended, however, that the want of an immediate payment should be
set up as a defense by the surety. As these bills are rarely paid
the very day they become due, the narrow construction would destroy
the principal value of the security.
The facts of this case do not call for an expression of opinion
as to whether, if an unusual credit were given, and in the meantime
the principal obligor had become insolvent, or the surety were
otherwise damnified by the delay, it might not be exonerated, since
neither of these contingencies supervened in this case, and we are
remitted to the naked proposition whether the giving of a customary
credit, with no evidence of loss thereby occasioned, is sufficient
to discharge the surety. We find no difficulty whatever in
answering this question in the negative. The rule of
strictissimi juris a stringent one, and is liable at times
to work a practical injustice. It is one which ought not to be
extended to contracts not within the reason of the rule,
particularly when the bond is underwritten by a corporation which
has undertaken for a profit to insure the obligee against a failure
of performance on the part of the principal obligor. Such a
contract should be interpreted liberally in favor of the
subcontractor, with a view of furthering the beneficent object of
the statute. Of course, this rule would not extend to cases of
fraud or unfair dealing on the part of a subcontractor, as was the
case in
United States v. American Bonding & Trust Co.,
89 F. 921, 925, or to cases not otherwise within the scope of the
undertaking.
Page 191 U. S. 427
Bonds containing the covenant in question are not common, though
they have sometimes appeared in the state courts, and the
construction here given them has been generally adopted,
United
States v. Hazard, 53 App.Div. 410, although these cases have
generally turned upon the question whether the rights of the
materialmen were affected by a change made in the contract by the
principals.
Dewey v. State, 91 Ind. 173;
Conn v.
State, 125 Ind. 514;
Steffes v. Lemke, 40 Minn. 27;
Doll v. Crume, 41 Neb. 655;
Kaufmann v. Cooper,
46 Neb. 644;
Griffith v. Rundle, 23 Wash. 453.
Both of the questions certified are answered in the
negative.
