While liability under a surety bond for honesty of an employee
would be defeated if the loss was due to neglect of the employer to
take the precautions required by the bond, the condition is
subsequent, and not precedent, and there is no occasion for an
averment in respect thereto; it is a matter of defense that must
come from the other side, upon whom the onus rests.
Where the evidence, as in this case, shows that examinations
were made, it is for the jury to determine whether reasonable
diligence had been used in making them.
The certificate of correctness of employee's accounts on
obtaining renewals of surety bond for his honesty
held in
this case not to be a
Page 224 U. S. 347
warranty, but a certificate that his books had been examined and
found correct.
The mere fact that the examination, if made by a reasonably
competent person, filed to discover discrepancies covered by false
entries and bookkeeping devices would not defeat renewals of the
policy.
On appeals from the courts of the territories, questions of
weight and credibility of evidence are not for the consideration of
this Court.
12 Ariz. 405 affirmed.
The facts, which involve the liability of a surety company on a
fidelity bond given to protect a bank against dishonesty of its
cashier, are stated in the opinion.
Page 224 U. S. 349
MR. JUSTICE LURTON delivered the opinion of the Court.
Action upon a bond executed by the plaintiff in error to protect
the Union Bank & Trust Company, of Phoenix, Arizona, against
the dishonesty of its cashier. There were two or more renewals.
Embezzlements by the cashier occurred during the currency of the
bond. After a right of action had accrued, the bond was assigned to
the defendant in error, who brought this action thereon.
The principal defense was that the loss was due to the neglect
of the employer to supervise the conduct of the employee by making
such monthly examinations of his accounts as it agreed to make or
have made. There was a jury and verdict for the plaintiff, and a
judgment against the surety company, which was affirmed by the
supreme court.
A number of errors have been assigned which relate to this
defense, but the argument has turned upon those which, in different
ways, raise the question as to whether, after the defendant in
error had made out a
prima facie case by proving the bond
and its breach by a refusal to indemnify him for losses sustained
during its currency through the dishonesty of the employee
guaranteed, the
Page 224 U. S. 350
onus devolved upon the surety company to plead and prove that
the loss had occurred through the fault of the employer in not
making the monthly examinations which it had agreed to make. The
trial judge ruled that the onus was upon the defendant, and this
ruling has been affirmed by the supreme court
Whether this ruling was right or wrong must depend upon whether
the requirement of the bond that monthly examinations of the books
of the employee should be made constituted a condition precedent or
a condition subsequent. The bond, on its face, requires the
employer
"to take and use all reasonable steps and precautions to detect
and prevent any act upon the part of the employee which would tend
to render the company liable for any loss."
It also provides that, if the statements by the employer in the
application "shall be untrue, the bond shall be void." The
obligation in respect to examinations of the employee's accounts is
found in the application. The questions propounded by the surety
company and the employer's answers, so far as relevant, were
these:
"To whom and how frequently will he account for his handlings of
funds and securities? Monthly; to board of directors."
"What means will you use to ascertain whether his accounts are
correct? Examination of books and count of money and securities.
How frequently will they be examined? Monthly or oftener. By whom
will they be examined? Our auditor."
"When were his accounts last examined? February 8th, 1905."
"Were they reported correct? Yes."
"Is there now or has there been any shortage due you by
applicant? No."
There was never any question but that liability under the bond
would be defeated if it appeared that the loss attributable to the
dishonesty of the employee was due
Page 224 U. S. 351
to the neglect of the bank to make the monthly examinations
required. And so the jury were instructed. The question was whether
this requirement was a condition precedent to liability, which the
bank was required to aver and prove, or whether it was a defense to
be made out by the defendant. But a construction which makes the
bond inoperative until the employer shows that it had made such
examinations is not a fair and reasonable interpretation. The
distinction between conditions precedent and subsequent is plain
enough. The condition here involved, if properly a condition at
all, is of the latter class.
The coming into effect of a contract may be made to depend upon
the happening or performance of a condition. But a condition
subsequent presupposes a contract in effect which may be defeated
by the happening or performance of a condition. Where, therefore,
an action is upon a contract subject to a condition precedent, the
performance of that condition must be averred and proved; but if
the contract sued upon is subject to a condition subsequent, there
is no occasion for any averment in respect to the condition. It is
a matter of defense, which must come from the other side. Chitty on
Pleading, vol. 1, pp. 246, 255.
The plaintiff was plainly entitled to recover upon proving the
bond, an embezzlement, and a breach by a refusal to indemnify. It
was not obliged to aver that it had made the examinations which it
agreed should be made. If it had failed in that duty, it was for
the surety company to so plead and prove. Such, indeed, was the
course of the pleading in this case, and a breach of the agreement
to make such examinations was set up as a defense. There was no
error in the ruling of the court that the onus was upon the surety
company to prove a breach of the obligation to make examinations.
Piedmont & A. L. Ins. Co. v. Ewing, 98 U.
S. 377;
American Credit Indemnity Co. v. Wood,
73 F. 81;
Redman v. Aetna Ins. Co., 49 Wis.
Page 224 U. S. 352
431;
Murray v. New York Life Ins. Co., 85 N.Y. 236;
Freeman v. Travelers' Ins. Co., 144 Mass. 572.
It has been argued that there was no evidence upon which the
case could go to the jury upon the question of whether reasonably
proper monthly examinations were in fact made. This insistence has
no foundation. The plaintiff in error brought out upon its own
cross-examination of McDowell, the defaulting cashier, that he made
monthly reports and that these reports were gone over by the
officers of the bank regularly, once a month. He testified that his
cash and securities were counted and examined and his report
verified from the book entries made by the bank's bookkeeper.
Indeed, he testified "that there never was a set of directors in
any bank that tried to watch things closer than that set of
directors." The cashier's embezzlements of money were covered by
false entries relating to remittances to the bank's correspondents,
whereby the balances in such banks were made to appear much larger
than they actually were. The defendant's expert evidence tended to
show that, if the returned vouchers or the reconciliation reports
of such banks had been compared with the ledger accounts, the
discrepancy would have appeared. But the cashier was cunning, and
he testified to the difficulties which he threw in the way of any
effort to verify the books in these particulars. He supported his
report by his cash and his bills receivable and a showing of the
books kept by another officer, who made the entries from "slips"
made by himself (the cashier), purporting to show cash used to buy
exchange for remittances. These "slips," being falsified memoranda,
were innocently used by the bookkeeper as the basis for the ledger
entries which misled the officers in their examinations. On this
evidence, the question as to whether reasonable diligence had been
used in making such examinations was one for the jury. It was so
submitted under a fair charge, and they found for the
Page 224 U. S. 353
plaintiff below. Finally, it is said that the greater part of
the loss occurred during the currency of renewal bonds, and that
each such renewal was made upon a certificate by the employer which
stated that, just prior thereto, the books and accounts of the
employee "were examined and found correct in every respect and all
moneys accounted for." It is said that this statement was untrue
inasmuch as, at the date of such renewals, the books and accounts
were not correct and the cashier was short in his cash. But the
certificate is not to be taken as a warranty of the correctness of
the accounts. The statement is that his books and accounts had been
examined and found correct. The mere fact that the examination, if
made by a reasonably competent person, failed to discover
discrepancies covered up by false entries or other bookkeeping
devices would not defeat the renewal. The case upon this point went
to the jury upon the fact of reasonable examinations and the good
faith of the bank in making the representation. The question of the
weight or credibility of the evidence is not one for our
consideration. There was some evidence which the trial judge
thought sufficient to carry the case to the jury. The Supreme Court
of Arizona agreed with the trial court, and with both courts we
concur.
The assignments of error relating to admission of evidence have
been examined so far as the state of the record admits. The court
below thought most of them insufficiently saved, and none of them
so material as to require a reversal for new trial. In this we
concur.
Judgment affirmed.
MR. JUSTICE McKENNA dissents.