Opinion
No. 20664
Decided April 18, 1928.
Suretyship — Indemnity bond reasonably construed to effect parties' intention — Bond does not inure to one not party thereto or designated therein, when — Materialmen not protected by bond to bondholders securing erection of building.
A bond of indemnity should receive a reasonable construction in order to carry out the intention of the parties as expressed by the language used. Such bond cannot be held to inure to the benefit of one not a party thereto nor designated therein unless it clearly appears from its terms that it was intended that such party should be the beneficiary thereof, or the terms employed therein are ambiguous and susceptible of two interpretations which seem equally fair, in which event that interpretation should be adopted which affords the greater indemnity.
ERROR to the Court of Appeals of Cuyahoga county.
The issue in this case is made by general demurrer to the petition. The facts essential to the consideration of the legal question presented are as follows:
The Wade Chateau Company, being the owner of a certain leasehold, issued $100,000 par value first mortgage bonds, and to secure the same executed a first mortgage deed of trust upon said leasehold to the Guardian Savings Trust Company, as trustee for such bondholders. That instrument contained a covenant upon the part of the Wade Chateau Company that it would construct upon said premises a new building, in accordance with the plans and specifications deposited with said trustee, "which upon completion shall be free from all liens or liability for liens under any materialmen's, mechanics', laborers', or other similar lien laws, or the possibility thereof, resulting from said improvement, and fully paid for."
The instrument also contained the following covenant:
"The company further covenants that before beginning any construction of said building and before any contracts therefor are let, it will furnish to the trustee hereunder a surety bond, in the penal sum of at least $50,000.00 with sureties satisfactory to the trustee hereunder, conditioned that the company will erect such building in accordance with said plans and specifications and that the same shall be completed within the time and in the manner above stipulated, free from mechanics' liens as aforesaid, fully paid for and ready for use and occupancy."
The Wade Chateau Company, as principal, and the National Surety Company, as surety, executed to the Guardian Savings Trust Company a bond, which, after reciting the fact of the execution of the mortgage deed of trust above referred to and the agreement contained therein for the erection of a new building upon the leased premises, and referring to the covenant relative to the giving of such surety bond and the making of the building clause in said mortgage deed of trust by reference a part thereof, set forth the condition of said bond as follows:
"Now, if said principal shall erect or cause to be erected said building in the manner provided in said mortgage deed of trust and in said plans and specifications and details and shall complete the same by October 1, 1920, subject, however, to lockouts, strike, acts of God and other causes over which said principal has no control, free and clear of any and all liens and incumbrances arising from the claims of architects, mechanics, materialmen, laborers and others for labor done and material furnished in and about the construction of said building and shall indemnify and save harmless said obligee and the holders of said bonds from all suits, demands, counsel fees and damages of whatsoever nature which may be incurred or suffered by them on account of any architects, mechanics, laborers or other claims or liens that may now or hereafter be entered against said building or premises on account of said building construction, or in event of default of said principal for any cause whatsoever to erect and complete said building free from all liens and incumbrances according to said mortgage deed of trust and the aforesaid plans, specifications and details therefor, the surety will save harmless the obligee and said bondholders from all cost, suits, demands, counsel fees and damages of whatever nature which may be incurred or suffered by them on account of architects, mechanics, laborers or other liens which are now or may hereafter be entered against said building, then this obligation shall be void; otherwise to remain in full force and virtue in law, but in no event shall the surety's liability exceed the amount of the said bond, and should the principal fail to complete the said building by October 1, 1920, as hereinbefore stated, the damages to the said trustee or others shall not exceed daily cost of carrying charges for the length of such delay of completion."
The plaintiff below, the Cleveland Window Glass Door Company, furnished certain material which went into the construction of the building referred to. The Wade Chateau Company became insolvent.
In a proceeding in the insolvency court growing out of the assignment of the Wade Chateau Company for the benefit of its creditors, the plaintiff, having duly perfected a mechanic's lien covering its claim, was adjudged to have a lien on the proceeds arising from the sale of said leasehold along with other numerous liens there asserted, and by payment of its pro rata share of these proceeds the claim of the plaintiff was reduced to $597.71, which it seeks to recover in this action.
The plaintiff asserts that before it contracted to furnish material and labor to the Wade Chateau Company it had knowledge of the execution of said bond, and relied thereon. It asserts that under the terms and conditions of such bond the National Surety Company became bound to pay plaintiff's claim upon the failure of the Wade Chateau Company so to do.
The court of common pleas sustained the demurrer to the petition and rendered judgment dismissing it, which judgment was affirmed by the Court of Appeals ( 27 Ohio App. 65, 160 N.E. 720). Upon motion the record was ordered certified to this court.
Messrs. Day Day and Messrs. Simmons, De Witt Vilas, for plaintiff in error.
Messrs. Tolles, Hogsett Ginn and Mr. John M. Garfield, for defendant in error.
The claim of the Cleveland Window Glass Door Company against the National Surety Company for material furnished for use in the construction of the building of the Wade Chateau Company is based upon the theory that the bond executed to the Guardian Savings Trust Company, trustee for the bondholders, inured to the benefit of those who furnished labor and material for said building.
There can be no doubt as to the real purpose of this bond. A consideration of all the terms and conditions makes clear that purpose, which was to indemnify and save harmless the bondholders represented by the Guardian Savings Trust Company, as trustee. It was to assure the erection and completion of the contemplated building upon the mortgaged premises, in accordance with the plans and specifications therefor, and free from any and all liens and incumbrances which could in any wise impair the mortgage security. That purpose was accomplished. The contemplated building was erected in the manner stipulated and was completed in accordance with the plans and specifications. Although mechanics' liens were perfected for labor and material which went into the construction of the building, they did not in any wise affect or impair the security of the bondholders, and hence the conditions of the bond protecting and safeguarding the interests of the bondholders were not violated; on the contrary, they have been fully complied with.
A bond of indemnity should receive a reasonable construction in order to carry out the intention of the parties as expressed by the language used. Such bond cannot be held to inure to the benefit of one not a party thereto, nor designated therein, unless it clearly appears from its terms that it was intended that such party should be the beneficiary thereof, or unless the terms employed therein are ambiguous and susceptible of two interpretations, which seem equally fair, in which event that interpretation should be adopted which affords the greater indemnity. Livingston and Taft, Trustees, v. Fidelity Deposit Co. of Md., 76 Ohio St. 253, opinion, page 264, 81 N.E. 330, and cases there cited.
Upon the authority of the decision of this court in Royal Indemnity Co. v. Northern Ohio Granite Stone Co., 100 Ohio St. 373, 126 N.E. 405, 12 A. L. R., 378, it is sought to hold this bond liable for the payment of the portion of the claims for material and labor which went into the construction of said building not satisfied from the proceeds of the sale of the leasehold, which was sold subject to the bonded indebtedness. To so hold would be to extend the principle announced in the Royal Indemnity case, supra, which we are not disposed to do. In that case the bond was given to the owner by a building contractor, and the conditions of that bond were that the contractor should well and truly execute all and singular the stipulations by him to be executed, and one of those requirements was the furnishing of all labor and material "at his own cost and expense."
The bond involved in the instant case was executed by the owner of the leasehold in order to make good the security upon which the bonds issued were based, in fact as additional security to the mortgagee of the leasehold, and it was specifically provided therein that the obligations thereof would be satisfied if the holders of said bonds were saved harmless from laborers' and mechanics' liens, or other claims or liens, against said building.
The condition of the bond, which it is claimed renders the surety liable for the payment of claims for material and labor, is the provision requiring the building to be erected in the manner provided in said mortgage deed of trust. The manner of construction can of course relate only to the detailed plans and specifications with reference to said building. This provision clearly evidences the purpose and the only purpose intended to be served by this bond, which was to require the completion of the building in accordance with the plans and specifications, with unimpairment of the bondholders' security by claims of any kind. Another very clear distinction between the Royal Indemnity case and the instant case is that the former involved a public contract, in which neither the materialmen nor laborers could be afforded the protection of a lien. One of the reasons for the conclusion of the court that the bond involved in that case was given for the purpose of protecting mechanics and materialmen, and inured to their benefit, was set forth in the opinion as follows:
"While under our statute our mechanic's lien law may not have provided for liens on this particular structure, because of its public nature, the city, in this case, knowing that fact, may have had in contemplation the protection of mechanics and materailmen who could not obtain a valid lien upon this structure."
In the instant case not only was the provision for perfecting mechanics' liens applicable, but the claimant availed himself of it, and whatever interest the owner had was subjected to the payment of the claims for material and labor.
We are in accord with the conclusion reached by the United States Circuit Court of Appeals in the case of National Surety Co. v. Brown-Graves Co., 7 F.2d 91, which was an action on this same bond by another lien claimant.
Judgment affirmed.
KINKADE, ROBINSON and JONES, JJ., concur.
DAY, J., not participating.