
    ÆTNA CASUALTY & SURETY CO. v. RUSSELL et al.
    (No. 1150—5448.)
    Commission of Appeals of Texas, Section B.
    Feb. 19, 1930.
    
      Harry P. Bawther, of Dallas, for plaintiff in error.
    Gib Callaway, of Brownwood, for defendants in error.
   SHORT, P. J.

The defendant in error employed Fred C. Herbst, a contractor, to erect a brick building and to move and repair another building for a price of $18,317.80, the contractor to pay out of this sum for all the labor and all the material used in the construction of the brick building and the repair of the other. The contract between these two parties was reduced to writing, and, among other things, this language was used:

“One Herbst and the Defendant in error, Russell, entered into a builder’s contract whereby said Herbst agreed to furnish all material and labor and to perform the work specified in the contract for a consideration of $18,000.00, increased to $18,317.80 by additions and changes provided for in the contract. To secure the performance of the contract, Herbst entered into a bond with Plaintiff in Error, as surety, in the sum of $9,000.-00. As to the manner of payment, the contract provided that payments for labor were to be made in full every week; the payments for the material were to be made every two weeks, the provision being * * * payment of 15% of the value of all material furnished in the construction of said building will be made every two weeks. * * * Payment of the other 25% of the balance covering all materials up to the full amount of said contract price will be made after final approval and acceptance by the first party of ail other material and work embraced in this contract.”

The defendant in error required Herbst to procure the execution of a $9,000 bond, which he did, by securing as his surety the plaintiff in error. The contractor having failed to comply with his part of the contract, and the surety company having failed to comply with the demands of the defendant in error, to pay what the latter had assumed he had been compelled to pay, in order to release his property from alleged liens against it, by reason of Herbst’s failure to fully pay for labor and material, this suit was brought by the defendant in error, and, upon a trial to a jury with the submission of special issues, based upon the answers thereto, judgment was rendered against the plaintiff in error for $3,969, plus $600 attorney’s fees. Upon appeal to the Court of Civil Appeals, the judgment of the trial court was affirmed [14 S.W.(2d) 78], and writ of error was granted upon the error assigned, committed by the Court of Civil Appeals, in construing the following language, among other things, upon which the bond was conditioned: “ * * * To indemnify Russell against loss or expense resulting from the failure of Herbst to pay all labor and material bills in connection with the contract” The Court of Civil Appeals held that defendant in error bound himself to pay all of the labor bills as and when presented to him, and 76 per cent, of all of the material bills as and when presented to him, and that the plaintiff in error obligated itself to guarantee the compliance by Herbst with the obligations imposed by the terms of the contract. It is the contention of the plaintiff in error that, under the quoted provisions of the contract, the company’s obligation was to indemnify defendant in error against any legal liability by reason of the failure of Herbst to pay any labor or material bills.

At the conclusion of the testimony, the plaintiff in error requested the court to deliver to the jury a summary instruction in its favor. This, was refused, and the alleged error,- committed by the trial court, has been duly preserved in the record. We have read the statement of facts and the findings of fact by the Court of Civil Appeals, and have •reached the conclusion that the plaintiff in error was entitled to have this instruction given.

The Court of Civil Appeals, in its opinion, correctly says: “The parties agree that tbe facts were without dispute, and on the substantive law of the case regulating their relations to each other, as announced by the Supreme Court in Bullard v. Norton, 107 Tex. 671, 182 S. W. 668, that any material alteration in the terms of the contract without appellant’s consent would release it from liability, and that whether the change in the contract was injurious to appellant or favorable.”

Tbe testimony of tbe parties, as well as that of tbe other evidence in tbe case, being without dispute to tbe effect that tbe defendant in error, in bis contract with tbe contractor, reserved “tbe right to require each week a pay roll receipt from all men employed showing full payment to all laborers as said amount is advanced by first party,” and further that tbe owner feserved “tbe right to require a receipt from tbe concerns furnishing said materials showing payments made to said concerns and tbe payment of tbe other 25%, or tbe balance covering all material up to tbe full amount of said contract price, will be made after final approval and acceptance by first party of all of tbe material and work embraced in tbe contract,” and tbe testimony being further without dispute that, after tbe .owner bad paid tbe contractor tbe full amount of tbe contract price, be then discovered for tbe first time that the contractor had failed to pay laborers’ bills, amounting to more than $1,000, and material-men, amounting to nearly $3,000, and it being apparent that tbe provisions in tbe contract above quoted were material parts of it, in which tbe plaintiff in error bad a substantial interest as surety, it clearly appears that these quoted provisions of tbe contract were not complied with by the defendant in error.

While tbe defendant in error bad tbe right to waive these provisions so far as requiring tbe contractor to comply with them bad he not required tbe contractor to give a bond guaranteeing tbe faithful performance by him of those things mentioned in tbe contract, yet, when the plaintiff in error became interested, by virtue of tbe obligations evidenced by the bond, it then became tbe duty of the defendant in error, which be owed to the plaintiff in error, to demand of tbe contractor a . substantial compliance of these terms of tbe contract, for tbe reason that such compliances furnished to tbe.plaintiff in error a security in tbe bands of tbe defendant in error to reimburse tbe latter for any sums of money it would owe to the defendant in error, by reason of the failure of the contractor to comply with the terms of bis contract.

This contract of tbe parties, evidenced by tbe two instruments, tbe one executed by Herbst and tbe defendant in error and tbe other executed by tbe plaintiff in error, are unambiguous in their terms, and need no construction. Upon tbe one band, tbe contractor agreed with tbe defendant in error to build a brick bouse and repair another building, according to the specifications, furnishing all tbe labor and all of tbe material, payments for tbe labor to be made weekly, tbe amount of which was to toe evidenced by a receipt from all of the men employed, showing full payment to all laborers, and every two weeks payment for tbe material, to tbe extent of 75 per cent, of material furnished, based upon tbe receipts from the concerns furnishing tbe materials, showing full payments made to said concerns by Herbst.

Tbe testimony shows that tbe amounts paid for labor by tbe defendant in error aggregated some $10,000, and tbe balance of tbe contract price representing materials furnished, paid by tbe defendant in error during the course of tbe construction, amounted to the remainder of tbe contract price, aggregating something less than $8,000. Tbe defendant in error stated in a letter to tbe plaintiff in error this: “Tbe building is practically finished except tbe tile which, you will note, has been allowed for, and a few other small items as follows: piping of a part of tbe building for gas, banging screen doors, replacing broken light in sky light, cleaning up trash and rubbish around building. Mr. Herbst, however, has agreed to complete these items in tbe next few days.”

It also appears they embraced in tbe amounts paid tbe contractor, and deducted therefrom a sufficient sum, by agreement of tbe parties, to pay for the finishing of tbe buildings, according to contract, except in tbe items which tbe letter states' Herbst bad agreed to complete “in the next few days.” With tbe information in bis possession at the time this agreement was made, tbe defendant in error had evidently reached tbe conclusion there were no outstanding bills either for labor or for material. However, after making this settlement, tbe defendant in error then discovered there were unpaid labor bills and unpaid material bills, of which he bad no knowledge at the time he made the agreement with the contractor. He then paid these bills, and called upon tbe plaintiff in error for reimbursement. Had the defendant in error complied with tbe terms of tbe contract, in which the plaintiff in error became an interested party as surety, in tbe absence of any fraud, and n& fraud was alleged, there could not have been any unpaid labor bills, and tbe defendant in error would have bad in bis possession information that the material bills, which tbe contractor had not paid, would have amounted at least to the sum of 25 per cent, of the whole of tbe bills for material furnished tbe contractor. These bills amounted to something more than $11,000 in. fact, and tbe contractor would have had in his hands one-fourth of whatever sum he had paid for material, had the defendant in error performed the duties imposed upon him in the interest of the plaintiff in error by the terms of the contract heretofore quoted.

However, it appears from the testimony of the defendant in error himself that he not only did not retain in his hands 25 per cent, of the amount paid by the contractor for material, assuming that the contractor had paid, as he was required by the terms of the contract to pay, the whole of the material bill presented, but that he did not pay all of the labor 'bills actually incurred. In this connection the plaintiff in error testified: “The amount of material still due and unpaid at that time (at the time he settled with the contractor and toot over the job, by paying the contractor the full amount of the contract price, less the amount necessary to complete the contract) was $4,123.91. -I did not incur any new bills after Herbst threw up the job. When I sent them that statement (meaning the statement he sent to the plaintiff in error) I had paid out $18,317.80, except those allowances I was given credit for them. That amount included the credits. Eater on, on account of bills incurred by Herbst, I paid $1,016.90 for labor. That was labor bills that had not been paid when I gave the bonding company notice. I paid $4,123.90 for materials and $1,010.90 for labor. Those bills had already been incurred by Herbst, and some of the parties had threatened suit on them. It was necessary for me to pay those bills in order for me to complete the building and clear the property.”

So it appears from this testimony that none of the excess, beyond the contract price, was included in any of the expenses incurred by the defendant in error after he made the agreement with the contractor to finish the buildings himself, but that the amount necessary to finish the buildings was deducted from the contract price. He further testified that, when he toot over the buildings, he had not in his hands any of the retainage for which the contract provided.

It further appears from the testimony, without contradiction, that many of the bills presented by the contractor, and paid by the defendant in error in full, embraced both material and labor. The plain language of the contract required the bills for labor to be presented as such and the bills for material to be separately presented for material furnished. This not having been done, and it clearly appearing that the contract provided that it should be done, there was a failure of duty which the defendant in error owed the plaintiff in error to comply with the terms of the contract in this respect. It further appears that the parties contemplated that the labor bills should reasonably amount to 60 per cent, of the contract price and the bills for material for the remainder. From this understanding it clearly appears that the defendant in error should have had in his hands, when the contractor notified the defendant in error he could not complete the job, 10 per cent, of the contract price, that is, 25 per cent, of 40 per cent. He did not retain anything, but, under a misapprehension of the situation, made final settlement with the contractor, and accepted the buildings in the condition in which they were at the time the settlement was made, retaining out of the contract price a sufficient sum to complete the buildings, according to contract.

The rule applicable to the plaintiff in error is thus stated by 32 Cyc. 73. “Sureties are said to be favorites of the law, and a contract of suretyship must be strictly construed to impose upon the sureties only those burdens clearly within its terms, and must not be extended by implication oivpresumption.” This contract is simple, and states clearly the respective rights and duties of the parties. The burden of establishing the allegation that the plaintiff in error was liable rested upon the defendant in error. He has not discharged this burden, but by his own testimony demonstrates the fact to be that he had failed in several essential particulars to do that which, by the plain terms of the contract in the discharge of his duty to the plaintiff in error, he was required to do. The bills for material, which had been used by the contractor up to the time the defendant in error settled with him, amounted to $11,485.39. Of this sum $4,123.91 was unpaid, and their existence was unknown to the defendant in error. The defendant in error had paid material bills amounting to $7,381.48. In addition to the unpaid material bills, there were unpaid labor bills, which the defendant in error afterwards paid, amounting to $1,016.90. This fact was also unknown to the defendant in error, when he settled with the contractor and paid him the full contract price.

Had the defendant in error complied substantially with the plain terms of the contract, he would have had, as a basis for his payments to the contractor, vouchers in the form of receipts from each laborer that the full amount due the laborer had been paid by the contractor, and also vouchers showing that the contractor had paid the full amount to each material man for all of the material furnished up to the time the vouchers were presented. With these vouchers, .which he was entitled to have, and which, under the law, he was required to have, in order to discharge his duty to the surety, no such condition could have arisen as did in fact arise. No labor bills would have been unpaid. All material bills would have been paid until the aggregate sum due for labor and material amounted to the contract price. But, in the meantime, the defendant in error would have had in his possession a retainage in a substantial amount which could have been used in diminishing the obligation of the plaintiff in error. The authorities are uniform in holding that a surety has the right to have the retainage percentage provided for in the contract applied to the exoneration of losses sustained by breach of the conditions of the bond. While the parties have agreed as to the law of the ease, yet the following authorities support the conclusion we have reached: Ryan v. Morton, 65 Tex. 258; Bullard v. Norton, 107 Tex. 571, 182 S. W. 668; Barkin v. Pruett Lbr. Co. (Tex. Civ. App.) 200 S. W. 443; Porter v. Hope (Tex. Civ. App.) 279 S. W. 535; AStna Casualty & Surety Co. v. Robertson Lbr. (Tex. Civ. App.) 3 S.W.(2d) 895; Prairie State National Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412.

We therefore recommend that the judgment of the Court of Civil Appeals and that of the trial court, in favor of -defendant in error against the plaintiff in error, be reversed, and that judgment be rendered that defendant in error take nothing, and that plaintiff in error recover" of the defendant in error costs incurred in all the courts.

CURETON, C. X The judgments of the district court and Court of Civil- Appeals are both reversed, and judgment .rendered for the plaintiff in error, as recommended by the Commission of Appeals.  