1. On appeal from a judgment of the highest court of a state, in
a suit in which the validity of a statute of the state is
challenged, the decision of the state court as to the meaning of
the statute is binding upon this Court. P.
291 U. S.
358.
2. A state statute providing that any bond executed after its
enactment for the faithful performance of a building contract shall
inure to the benefit of materialmen and laborers notwithstanding
any provision of the bond to the contrary is not an arbitrary
restraint upon the liberty of contract enjoyed by surety companies
under the Fourteenth Amendment. Pp.
291 U. S.
358-359.
So
held where the bond was not required by the statute
and where statutory effects of its voluntary execution were to
exempt the building contract and the moneys collected or payable
under it from statutory rights that would otherwise exist for
protection of
Page 291 U. S. 353
materialmen and laborer, and to substitute the bond as their
security, but in subordination to the interests of the obligee
building owner.
3. The business of insurance is one peculiarly subject to
supervision and control by the state. P.
291 U. S.
360.
4. Liberty of contract is not an absolute concept, but is
relative to many conditions of time and place and circumstance. P.
360.
147 So. 815 affirmed.
See also 166 Miss. 222, 135 So.
497.
Appeal from the affirmance of a judgment against building
contractors and the surety on their bond in favor of the assignee
of a materialman. The surety company, and the surety on its appeal
bond in the court below, joined in the appeal to this Court.
Another branch of the same litigation was here before, but that
appeal was dismissed for defect of parties appellant.
285 U.
S. 169.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
The controversy hinges upon the validity of a statute of
Mississippi whereby the bond of a contractor guaranteeing to an
owner the faithful performance of a contract for the construction
of a building shall inure to the benefit of persons furnishing
material or labor, and this though the bond expresses an intention
to exclude them.
The statute challenged by the appellants was enacted in March,
1918, and is framed for the protection of subcontractors,
materialmen, laborers, and journeymen who have had a part in the
making of buildings or of structures akin thereto. Laws Miss.1918,
c. 128; Mississippi Code 1930, §§ 2274-2281.
Page 291 U. S. 354
By section 1 (which amended § 3074 of the Code of 1906),
materialmen or laborers not paid by a contractor may give notice in
writing to the owner, and thereupon any amount due from the owner
to the contractor shall be bound in the hands of the owner for the
payment
pro rata of claims covered by the notice.
By section 2, no contractor may "assign, transfer, or otherwise
dispose of in any way, the contract or the proceeds thereof, to the
detriment or prejudice" of materialmen or laborers, and "all such
assignments, transfers, or dispositions" shall be in subordination
to their rights,
"provided, however, that this section shall not apply to any
contract or agreement where the contractor or the master workman
shall enter into a solvent bond"
conditioned as provided for in section 3 thereof.
By section 3, any bond for the faithful performance of a
building contract shall include a guaranty that the contractor
shall make payment to materialmen and laborers, and, if such a
provision is omitted, the bond shall inure to the protection of
materialmen and laborers as if the provision were expressed. The
text of this section is quoted in the margin. [
Footnote 1]
Page 291 U. S. 355
In October, 1926, Natchez Investment Company, Inc., the owner of
land in Natchez, Mississippi, made a contract with builders J. V.
and R. T. Burkes for the construction of a hotel. The Burkes made a
subcontract with Acme Engineering Company for the plumbing,
heating, and ventilating work, and the subcontractor assigned its
contract to the N. O. Nelson Manufacturing Company, the appellee in
this Court. By the principal contract, provision was made for the
giving of a bond which was to secure materialmen and laborers, as
well as the owner. [
Footnote 2]
Thereafter, the contractors did furnish a bond for the cost of the
building ($316,822) with the Hartford Accident & Indemnity
Company as surety, but a bond giving narrower protection, or so the
surety contends, than the one that had been promised. The bond that
was furnished refers to and incorporates the contract between the
owner and the builders. It provides that, if the principal shall
indemnify the obligee against loss or damage directly caused by the
failure of the principal faithfully
Page 291 U. S. 356
to perform the contract, the obligation shall be void, otherwise
to remain in force, provided, however, that the obligee shall have
complied with certain conditions precedent for the protection of
the surety. One is that the terms of the building contract shall be
faithfully fulfilled insofar as they call for performance on the
part of the owner, the surety to be relieved of all liability in
the event of a default. Another is that, if the obligee shall have
notice of any claim against the contractor for unpaid labor or
material, no further payments shall be made by the obligee to the
contractor until such claims are satisfied. Finally, in an effort
to cut off materialmen and laborers, the bond provides that "no
right of action shall accrue upon or by reason hereof to or for the
benefit of any one other than the obligee named herein."
The contractors for the building made default in the performance
of their contract owing large sums of money to materialmen and
laborers, including Acme Engineering Company, appellee's assignor.
Thereupon, the investment company, the owner, sued in the chancery
court of Adams County, Mississippi, for a decree construing the
bond, adjudging that it was subject to the rights and liabilities
defined in § 3 of the statute, and determining the proportionate
interests of those entitled thereunder. The contractors, the
surety, and various subcontractors, materialmen, and laborers were
joined as defendants, as well as an assignee of moneys due upon the
contract. Other subcontractors and materialmen intervened, and by
cross-bill and otherwise sought relief upon the bond. The Supreme
Court of Mississippi held upon demurrer that the bond was one for
the faithful performance of a building contract within § 3 of the
statute; that its effect was to substitute a new security for the
protection of materialmen and laborers in place of that provided by
§§ 1 and 2, and that, by force of that substitution, the contractor
had become free to assign and dispose of the
Page 291 U. S. 357
contract and the proceeds thereof. An assignment to a bank of
moneys due from the owner to the amount of upwards of $26,000 was
accordingly sustained.
Hartford Accident & Indemnity Co. v.
Natchez Investment Co., 155 Miss. 31, 119 So. 366. The cause
having been remanded to the court of chancery, there was a trial of
the issues, which was followed by a new appeal.
Hartford
Accident & Indemnity Co. v. Natchez Investment Co., 161
Miss.198, 219, 132 So. 535, 538, 135 So. 497. On that appeal the
court reiterated its ruling as to the operation of the bond. It
held that "none of the provisions of the bond had the effect of
writing out of the contract" the provisions of the statute,
"and could not have that effect. . . . All stipulations contrary
to the statutory provisions must be disregarded so far as persons
furnishing labor or material are concerned."
An appeal to this Court was dismissed for defect of parties.
Hartford Accident & Indemnity Co. v. Bunn,
285 U. S. 169.
In the meantime, the N. O. Nelson Manufacturing Company, the
present appellee, had intervened in the court of chancery by leave
of that court, and had made claim to its proportionate share of the
proceeds of the bond. The surety renewed the contest, as it was
privileged to do (
Bigelow v. Old Dominion Copper Co.,
225 U. S. 111,
225 U. S.
127), insisting that the bond was unaffected by the
statute and that there could be no holding to the contrary without
an arbitrary interference with liberty of contract and a resulting
violation of the Fourteenth Amendment. The chancellor, overruling
these contentions, gave judgment upon the bond in favor of the
intervening claimant. The Supreme Court of Mississippi affirmed
upon the authority of its earlier opinions. 147 So. 815.
See
also U.S.F. & G. Co. v. Parsons, 147 Miss. 335, 112 So.
469. An appeal to this Court followed; the surety on the appeal
bond joining as appellant with the surety on the bond in suit.
Hartford Accident & Indemnity Co. v. Bunn, supra.
Page 291 U. S. 358
As to the meaning of the statute now challenged as invalid, the
Supreme Court of Mississippi speaks with ultimate authority.
Knights of Pythias v. Meyer, 265 U. S.
30,
265 U. S. 32;
Great Northern Ry. Co. v. Sunburst Co., 287 U.
S. 358,
287 U. S. 362;
Guaranty Trust Co. v. Blodgett, 287 U.
S. 509,
287 U. S. 513. We
assume in accordance with its ruling that the statute was intended
to apply to such a bond as the one in controversy here, and to blot
out the causes repugnant to the statutory scheme. The only question
in this Court is whether the result is consistent with the
Constitution of the United states. Opposition is asserted by
counsel for the surety. We think it is unreal.
Materialmen and laborers may be secured by mechanics' liens upon
land improved or affected by their material or labor, and this
without reference to technical and ancient concepts of privity of
contract.
Great Southern Hotel Co. v. Jones, 193 U.
S. 532,
193 U. S. 550;
Jones v. Great Southern Hotel Co., 86 F. 370;
Piedmont
& George's Creek Coal Co. v. Seaboard Fisheries Co.,
254 U. S. 1,
254 U. S. 9-10.
For like reasons, they may be secured as against the owner by a
lien upon any moneys due to the contractor, and secured as against
the contractor by a lien upon any moneys collected from the owner.
Hartford Accident & I. Co. v. Natchez Investment Co.,
155 Miss. 31, 51, 119 So. 366;
U.S.F. & G. Co. v. Parsons,
supra; cf. United states v. American Surety Co., 200 U.
S. 197;
Mankin v. United states, 215 U.
S. 533;
Illinois Surety Co. v. John Davis Co.,
244 U. S. 376,
244 U. S. 380.
The fundamental liberties protected by the Fourteenth Amendment do
not include immunity from restraints so deeply rooted in policy and
justice.
Hardware Dealers Mutual Fire Ins. Co. v. Glidden
Co., 284 U. S. 151,
284 U. S. 157;
Advance-Rumely Thresher Co. v. Jackson, 287 U.
S. 283. The owner contracting with a builder or making
payments under the contract may be required to give heed to the
equities of a subcontractor or a workman adding
Page 291 U. S. 359
value to the land. The builder may be required to give heed to
the same equities in contracting with the owner or in disposing of
his contract or of the moneys paid thereunder.
The statute of Mississippi was framed in a genuine endeavor to
make these equities prevail. Neither owner nor builder is commanded
to give a bond, though decisions are not lacking that such a
command will be upheld. [
Footnote
3]
Cf. Gant v. Oklahoma City, 289 U. S.
98;
Brazee v. Michigan, 241 U.
S. 340. All that the statute does by force of § 3 is to
standardize the form, at least in some particulars, when bonds are
freely given, and to define the consequences attaching to the
standard thus prescribed. The form shall include a clause for the
protection of materialmen and laborers; the consequences shall
include the exemption of the owner from the burden of a lien, and a
like exemption of the builder.
U.S.F. & G. Co. v. Parsons,
supra. The security of the bond becomes a substitute for the
security of the building contract and of the moneys due thereunder.
No arbitrary restraint of liberty of contract is laid upon the
owner. His personal liability toward materialmen and laborers is
not greater by a dollar than it was at the beginning. To the
contrary, it is less. By force of the new security, he is relieved
of the burden of a lien, yet he has priority of interest in the
proceeds of any suit upon the bond.
See § 3, quoted
ante. No arbitrary restraint of liberty is laid upon the
builder. Upon the giving of a bond, he is charged with a liability
in favor of materialmen and laborers, a liability consistent with
fair dealing between men in that relation, but he is relieved of
the duty of holding present
Page 291 U. S. 360
and future payments as a fund impressed with a trust and devoted
to specific uses.
U.S.F. & G. Co. v. Parsons, supra.
Indeed, this very builder took advantage of that privilege, making
an assignment of the contract and its proceeds to a bank, and,
because of the bond, the assignment was upheld.
Hartford
Accident & I. Co. v. Natchez Investment Co., 155 Miss. 31,
53, 119 So. 366. Plainly he is in no position to complain that the
statute is invalid in its application to himself. Indeed, owner and
builder do not declare themselves aggrieved, but, through silence
and inaction, if not otherwise, evince submission and consent. The
only other person whose interests are affected is the surety on the
bond. If the statute is valid in its application to owner and
builder, to obligee and principal, there can be no privilege of the
surety to contract on better terms. The secondary obligation must
follow the primary one and conform to its restraints. The surety
has the alternative either to write its indemnities and guaranties
upon the only terms permitted to obligee and principal or to
renounce the writing altogether. The business of insurance is one
peculiarly subject to supervision and control.
German Alliance
Ins. Co. v. Kansas, 233 U. S. 389;
National Ins. Co. v. Wanberg, 260 U. S.
71;
Hardware Dealers Mutual Fire Ins. Co. v. Glidden
Co., supra. The Fourteenth Amendment does not make it
necessary that materialmen and laborers shall be deprived of fair
protection to the end that sureties for profit may be given an
opportunity to diversity their bonds.
Liberty of contract is not an absolute concept.
Hardware
Dealers Mutual Fire Ins. Co. v. Glidden Co., supra; Advance-Rumely
Thresher Co. v. Jackson, supra; Atlantic Coast Line R. Co. v.
Riverside Mills, 219 U. S. 186,
219 U. S. 202;
Chicago, Burlington & Quincy Ry. Co. v. McGuire,
219 U. S. 549,
219 U. S. 567;
Mutual Loan Co. v. Martell, 222 U.
S. 225,
222 U. S. 235;
Highland v. Russell Car & Snowplow Co., 279 U.
S. 253,
Page 291 U. S. 361
261. It is relative to many conditions of time and place and
circumstance. The Constitution has not ordained that the forms of
business shall be cast in imperishable moulds. There is no question
here of the impairment of the obligation of a contract by later
legislation. The act assailed by the appellants was in existence
for many years before the bond in suit was written. Principal and
surety, in writing it, became subject to the statutes then in
force, and by these they must abide.
The judgment of the Supreme Court of Mississippi is
accordingly
Affirmed.
[
Footnote 1]
"Sec. 3. That, when any contractor or subcontractor entering
into a formal contract with any person, firm or corporation for the
construction of any building or work or the doing of any repairs,
shall enter into a bond with such person, firm, or corporation
guaranteeing the faithful performance of such contract and
containing such provisions and penalties as the parties thereto may
insert therein, such bond shall also be subject to the additional
obligations that such contractor or subcontractor shall promptly
make payments to all persons furnishing labor or material under
said contract, and in the event such bond does not contain any such
provisions for the payment of the claims of persons furnishing
labor or material under said contract, such bond shall nevertheless
inure to the benefit of such person furnishing labor or material
under said contract the same as if such stipulation had been
incorporated in said bond, and any such person who has furnished
labor or materials used therein for which payment has not been
made, shall have the rights to intervene and be made a party to any
action instituted on such bond, and to have his rights adjudicated
in such action and judgment rendered thereon, subject, however, to
the priority of the rights or claim for damages or otherwise, of
the obligee. If the full amount of the liability of the surety
thereon is insufficient to pay the full amount of said claims and
demands, then, after paying the full amount due to obligee, the
remainder shall be distributed
pro rata among said
intervenors. The bond herein provided for may be made by any surety
company authorized to do business in the State of Mississippi."
[
Footnote 2]
The specifications state that
"it shall be the obligation of every contractor and
subcontractor estimating upon work under this contract operation to
figure and include within his bid to furnish a bond in the sum and
conditioned as the law of the State of Mississippi requires, in a
surety company satisfactory to the Owner or Architects. . . . The
bond shall . . . secure the Owner the faithful performance of the
contract, in strict accordance with plans and specifications,"
and "shall protect the Owner against all liens or claims that
may be filed against the building according to the laws of the
Mississippi."
[
Footnote 3]
Rio Grande Lumber Co. v. Darke, 50 Utah, 114, 167 P.
241;
Roystone Co. v. Darling, 171 Cal. 526, 154 P. 15;
American Indemnity Co. v. Burrows Hardware Co., 191 S.W.
574;
cf., however, Gibbs v. Tally, 133 Cal. 373, 65 P.
970;
Hess v. Denman Lumber Co., 218 S.W. 162, 164.