
    John W. Klauck, Plaintiff, v. The Federal Insurance Company et al., Defendants.
    (Supreme Court, Erie Special Term,
    July, 1908.)
    Contracts — Parties and persons by whom or against whom enforceable — Promise for benefit of third persons and rights of third persons — Agreement between underwriters and wrecking company.
    Indemnity — Extent and fixing of liability under express contract — Necessity for actual loss; Discharge — Release of indemnitee from claim indemnified against.
    Where two vessels, insured against marine perils, were stranded by a violent gale and a wrecking company contracted with the underwriters to release and float the vessels and guaranteed to release them before April 15, 1907, and did release them, but not until July I, 1907, in an action by the assignee.of the wrecking company for the contract price, held:
    The contract was made for the benefit of the underwriters, and the owner of the vessels had no right of action for its breach.
    The guaranty of the wrecking company was a guaranty against loss and not against mere liability; and the underwriters could not, therefore, set up by way of counterclaim damages arising from the failure of the wrecking company to release the vessels before April fifteenth until they had paid them.
    In such a case it seems that, where the owner of the vessels, in consideration of being permitted to defend the action brought upon the contract to float the vessels and upon the underwriters’ agreement to pay said owner the amount of any judgment recovered in the action not exceeding the contract price, agreed to release all its claims against the underwriters except so far as they could be worked out in said action, such release would constitute a valid defense to the underwriters’ counterclaim for damages.
    Demurrer to the sufficiency of certain portions of the plaintiff’s reply to the defendants’ answer, setting up alleged counterclaims to the plaintiff’s alleged cause of action.
    George Clinton, for plaintiff.
    H. Tracey Duncan and Daniel J. Kenefick, for defendants.
   Wheeler, J.

The following essential facts appear by the pleadings in this case:

In January, 1907, two steam vessels owned by the United States Transportation Company were driven ashore and stranded by reason of a violent gale occurring at that time. The vessels were insured against such marine perils under policies of insurance issued by the defendants as underwriters.

The underwriters, as they had the right to do under their policies, undertook to release and float the stranded vessels. Proposals for doing the work were invited; and the Donnelly Salvage and Wrecking Company, Limited (plaintiff’s assignor), made an offer to release the vessels for the sum of $.39,500. The proposal contained, among other things, the following: Work to commence as soon as we can assemble the plant and proceed with all possible dispatch. We further guarantee that we will release these steamers before the 15th of April, 1907.” The offer was accepted by the underwriters ; and the wrecking company began work, bnt did not succeed in releasing the stranded vessels until about July 1, 1907.

The plaintiff, as the assignee of the claim of the wrecking company, sues to recover from the defendants the contract price for releasing the vessels.

The defendants answered and, by way of counterclaim, set up the issuing of the insurance policies upon the stranded vessels; that the United States Transportation Company as owner had the right, under such policies, to safeguard and recover the steamers and to charge the defendants with the cost thereof, according to the amount of their insurance; that, under such conditions, the defendants invited the proposal from the wrecking company which was subsequently accepted and became the contract sued on. However, before accepting said offer, it is alleged the defendants entered into an agreement with the transportation company, the owner of the vessels, that it would waive its right under said policies to release said steamers by its own efforts and permit the defendants to release them and for that purpose enter into a contract with the wrecking company on the terms contained in its proposal; that said contract with the wrecking company was entered into for the purpose of enabling the defendants to perform their obligations to the owner, all of which was known to the wrecking company; that, by reason of the delay of the wrecking company to release and float said vessels by April 15, 1907, the transportation company was deprived of their use from said date to the time they were in fact gotten off the beach, and thereby the defendants were damaged in the sum of $39,258 20, being the fair rental or charter value of said, steamers for the time between said 15th of April, 1907, and the time the vessels were actually released.

The answer also further alleges that the transportation company, in order to reduce the delay and thereby diminish the damages, expended $9,624.50 in releasing the said steamers, which sum, in addition to the $39,258.20 above mentioned, the defendants ask he set off against the plaintiff’s damages, if any, in respect to the matters complained of in the plaintiff’s complaint.

The plaintiff replied to the counterclaims set forth in the answer and, among other things, by the tenth paragraph of the reply, alleged that the defendants entered into a certain agreement with the transportation company, the owner of said vessels, which agreement is set forth in full in the reply.

This alleged instrument sets forth many stipulations of the parties to it which it is unnecessary here to quote. The essential parts, however, so far as they relate to the questions here involved, provide in substance that the underwriters, the defendants here, will turn over the defense of this action to the transportation company, and that the attorneys for the transportation company shall appear for the defendants in this action and conduct the defense, with power to set up any defense, set-off or counterclaim which the transportation company may desire to set up.

The defendants, the underwriters, agreed to pay any judgment recovered against them in this action, not exceeding the sum of $39,500, and, in case the recovery is less than $39,-500, to pay the transportation company the difference between the amount of such judgment and the sum of $39,500.

The instrument contained the following clause:

The "United States Transportation Company is to dismiss at its own costs the suit brought by it against these underwriters in the Supreme Court of Erie County, New York, and the suit against the Donnelly Salvage and Wrecking Company, brought by it in the Court of Common Pleas of Cuyahoga County, Ohio, and will enforce whatever claims for damages or otherwise, of what nature or description soever, which it may have against the underwriters or Hr. P. Parry-J ones, arising out of or in any manner connected with the underwriters’ operations in salving and releasing said boats after they had been stranded in the month of January, 1907, or the contract for such salvage and release, through the underwriters’ right to recoup or recover over therefor against the Donnelly Salvage & Wrecking Company, in the pending action by Klauck, or in such other action as may be brought by the Donnelly Salvage & Wrecking Company or its assignee; and the United States Transportation Company hereby releases said claims against underwriters and Mr. Parry-Jones, except so far as they can be worked out in the Klauck action in the manner above stated, and agrees that it will never enforce or prosecute said claims in any proceeding or manner whatsoever against underwriters or said Parry-J ones.
The United States Transportation Company agrees, at its own expense and by means of its own attorneys, to carry on the defense of the case of John W. Klauck vs. The Federal Insurance Company et ah, and also to defend at its own expense and by its. own attorneys any other suit now begun or which may be begun by the Donnelly Salvage & Wrecking Company, or its assignee, against the underwriters on the steamers Nottingham and Smith, by reason of the salving and releasing of said vessels, or either of them, at Buffalo, in the year 1907.
Nothing herein contained is intended to operate as a release of underwriters from any legitimate liability to owners arising out of the policies of insurance themselves — such, for instance, as expenses properly incurred by owners under said policies in connection with said disaster, or other disasters, none of which liabilities is to be either acknowledged on the one hand, or prejudiced on the other by this agreement; provided, however, that no allegation made or act done by owners in connection with the litigation hereby turned over, and no result or effect of said litigation shall ever be held to prejudice the underwriters or increase their liability under said policies.”

The reply then alleges that, pursuant to said agreement, the said transportation company has, in fact, assumed the conduct of the defense of this action and set up the alleged counterclaims and that, by reason of the premises, the transportation company “ has waived any and all claims which it has or may have against the said defendants for or on account of delay in releasing said vessels or either of them or for or on account of any expenses incurred in attempting to release said vessels or otherwise ” and, therefore, is not entitled to counterclaim or offset any claim for damages which it has against the Donnelly Salvage and Wrecking Company, etc.

The defendants demur to this portion of the reply, upon the ground that said reply to the counterclaim is insufficient in law to constitute a defense to said counterclaim.

The question then presented is whether, under the facts alleged, the defendants can avail themselves of damages sustained by themselves or the transportation company for failure to release the vessels in question by April fifteenth, as agreed, without first having paid to the transportation company the amount of such damages. The right to avail themselves of such counterclaims will turn upon the interpretation to be given the agreement to release the vessels,' made between the wrecking company and these defendants. If this agreement is to be deemed a contract of indemnity, then the defendants cannot call on the wrecking company or its assignee to respond in damages for delay until the defendants have in fact made payment to the transportation company. If, on the other hand, the contract is to be construed to be one againgt liability, then the defendants’ cause of action is complete without actual payment of the damages sustained by the transportation company.

The contract sued on was made by the plaintiff’s assignor with the defendants and not with the transportation company. There is no privity of contract between the wrecking company and. the transportation company. It was not made primarily for the benefit of the transportation company, but for the benefit of the underwriters, these defendants, who had undertaken, by arrangement with the owner, to release the steamers. The wrecking company promised to do nothing for the transportation company. The transportation company had no control over the contract. The underwriters were at liberty to cancel their contract with the wrecking-company (if the wrecking company assented) and make a new arrangement with others to release the steamers. The transportation company would have had nothing to say as to such a cancellation. The underwriters might release the wrecking company altogether from any liability or damages sustained by reason of their failure to keep the agreement, and the vessel owner would have had no right to interfere. We mention these things to show that the owner had no legal interest in the contract in question and, therefore, no cause of action for its breach. This subject has been frequently under consideration by the courts of this State and the conclusions above stated are supported by many decisions. Judge Rapallo said, in the case of Garnsey v. Rogers, 47 N. Y. 233, when speaking of the doctrine of Lawrence v. Fox, 20 id. 268, that he did not understand that the case went so far as to hold that every promise made by one person to another, from the performance of which a third person would derive a benefit, gives a right of action to such third party, he being privy neither to the contract nor to the consideration. To entitle him to an action, the contract must have been made for his benefit; he must be the party intended to be benefited.

To the same effect are the cases of Vrooman v. Turner, 69 N. Y. 280; Pond v. New Rochelle Water Co., 183 id. 330-336; Embler v. Hartford Steam Boiler Inspec. & Ins. Co., 158 id. 431-436; Rochester Dry Goods Co. v. Fahy, 111 App. Div. 752.

We must, therefore, conclude that the transportation company had no cause of action against the wrecking company for damages by reason of its failure to release the steamers by April 15, 1907. On the other hand, the transportation company did have the right to recover from the underwriters its damages for delay in releasing the steamers, not by virtue of the wrecking company’s agreement, but under the policies of insurance issued by the defendants; and, if the defendants had paid such damages, the defendants would have had a cause of action over against the wrecking company for its failure to float the steamers by April fifteenth, as agreed in its contract with the underwriters. Ocean Steam. Nav. Co. v. Campania T. Espanola, 134 N. Y. 461; Mayor v. Brady, 151 id. 611; Dunn v. Uvalde Asphalt Paving Co, 175 id. 217, 218.

One who, without default on his part, has been held legally liable for the default or negligence of another is entitled to indemnity from the latter, whether contractual relations exist between them or not.

While these propositions are true, the question still remains in this case whether the underwriters may maintain an action to recover for the breach of the wrecking company’s contract to release the steamers by April 15, 1907, before they have in fact paid anything to the transportation company. The decision of this question turns, it would seem, upon whether the guaranty to release and float the steamers by April fifteenth is to be construed as a guaranty against liability or a contract of indemnity. The contract of the wrecking company is set forth in full in the defendants’ answer and is as follows:

“ We hereby offer to release Steamers c H. W. Smith ’ and ‘ William Nottingham ’ from their present position ashore on the beach and deliver them safely afloat at their moorings, inside the breakwater, for the lump sum of $39,500.00, this sum to include both vessels. Work to commence as soon as we can assemble the plant and proceed with all possible dispatch. We further guarantee that we will release these steamers before the 15th of April, 1907.
“ It is further agreed that satisfactory proof shall be produced, if required, of our ability to perform the work mentioned and the method adopted for floating shall be subject to the approval of owner’s and underwriters’ representatives.
Payment to be made upon a faithful completion of contract.”

It will be seen that there is no express guaranty on the part of the contractor to indemnify against liability and, so far as that is concerned, none to indemnify against loss. Nevertheless, the law implies and supplies from the language used certain agreements and covenants; and, in determining what those are in this particular case, we must apply and enforce certain well recognized principles of construction.

A very recent and important case bearing on the question involved is that of Dunn v. Uvalde Asphalt Paving Co., 175 N. Y. 217, where the plaintiff, a subcontractor, sued the general contractor for work, labor and services rendered and the general contractor set up as a counterclaim damages alleged to have been sustained owing to the negligent performance of the work by which third persons suffered injuries for which the general contractor became liable. Some of these damages had not been paid by the defendants, but actions for their recovery were pending. The court held that, although the subcontractor stood in the relation of an indemnitor to the person held legally liable, nevertheless, the general contractor had no right to a counterclaim until the damages had been actually paid.

The court said that “ the contract of indemnity implied by law, in favor of one who is legally liable for the negligence of another, covers loss or damage, and not mere liability ” Citing Sedg. Dam., § 785; Oceanic S. N. Co. v. Campania T. Espanola, 134 N. Y. 461; Village of Port Jervis v. First National Bank, 96 id. 550.

In Brown v. Mechanics & Traders’ Bank, 16 App. Div. 207, it was held that, where the president of a bank had given a bond and mortgage for the benefit of the bank, which was subsequently foreclosed, resulting in a deficiency judgment against the president, personally and in his individual capacity, the implied contract of indemnity arising therefrom did not require the bank to pay the amount of such judgment until the president had actually paid the judgment. See also the case of Howe v. B. N. Y. & E. R. R. Co., 37 N. Y. 267; Maloney v. Nelson, 144 id. 182.

In the ease of Maloney v. Nelson, 144 N. Y. 182, a mortgage had been given to one who had gone upon the bail bond of another. The mortgage recited the mortgagee had signed such bail bond and that the mortgagor was “ desirous of indemnifying and saving harmless ” said mortgagee “ from all loss or damage on said bond.” The prisoner had failed to appear, and his bond became forfeited, and the mortgagee began a foreclosure of the mortgage given for his protection; and, in the absence of proof that the mortgagee had paid any money by reason of the bail bond, it was held the action could not be sustained.

The cases cited are sufficient to illustrate the general rule which prevails in cases of this character.

The counsel for the defendants, however, contend that the case at bar takes it out of the general rule and forms one constituting exceptions to it.

It is contended that the contract to release the steamers “ was not only an express agreement to do the thing but an agreement to indemnify defendants against their liability to the owner in the event that the thing was not done.”

The defendants cite and particularly rely on the cases of Lothrop v. Atwood, 21 Conn. 117, and of Rector v. Higgins, 48 N. Y. 532, as sustaining their contention.

In the Connecticut case, there was an agreement by one to pay certain firm debts and an express agreement to save the plaintiff from " liability ” by reason thereof. So in that case the plaintiff stood upon the express terms of the contract, not upon any implied agreement. As said in Brown v. Brown, 16 App. Div. 207, it was competent for the parties to make any contract they chose. So that the facts in the Lothrop case seem to take it out of the general rule that the law will not, in the absence of express agreement against liability, imply one by construction.

In the case of Rector v. Higgins, 48 N. Y. 532, a tenant in his lease covenanted and agreed to pay an assessment levied against the leased property. He failed to do this and it was held the lessor, might maintain an action against the lessee for damages without first paying these assessments. The reason for this holding is fully explained in Maloney v. Nelson, 144 N. Y. 187, because, as the court explained, the covenant of the lessee was a primary and not a collateral or secondary one in its terms. The court said: “ Thus, if A entered into a bond to pay money to B. at a certain time, and C. thereupon entered into another bond to A. to himself pay that money to B., in such case C. becomes liable to pay the money and the condition of the bond is broken by his failure to pay and A. has a right of action against C. to recover the money without proof that A. has paid his bond to B. But •where the real purpose of the undertaking is indemnity against loss or damage to be sustained from a payment by A. of the obligation which he has entered into, then the surety to A. can be proceeded against and a recovery had from him only upon proof that A. has paid the money or some portion of it which he was obliged to pay.”

In the first instance C made himself the debtor to B and, as held in the case of Rector v. Higgins, the defendant was not at liberty to say the assessments were the debts of the lessor and that he must pay them, because the assessments were by his covenants the lessee’s own debts.

These elements are lacking in the case at bar. There is no privity of contract with the owner. The owner of the steamers is not mentioned in the contract. The wrecking company undertook to do nothing for the transportation company. The engagement of the wrecking company was wholly and entirely with the underwriters. It is true the wrecking company, in its offer to the underwriters, used this language: "We further guarantee that we will release these steamers before the 15th of April, 1907.” This, however, is nothing more or less than an agreement to release by the day named; and the agreement would be just exactly as strong, if the wrecking company had simply said: “ We further agree that we will release,” etc. It guarantees nothing in any event to the owner and cannot be construed as a guaranty for the owner’s benefit. The court, under well-known rules of construction, cannot spell into the agreement an agreement for the benefit of the owners by implication. A guarantor, like a surety, is bound only by the strict letter or precise terms of his contract. Creamer v. Mitchell, 162 N. Y. 486; Mc-Afee v. Wyckoff, 44 Misc. Rep. 382; 112 App. Div. 892; Beagle v. Cable, 55 id. 158.

It is true the answer of the defendants, setting up the counterclaim in dispute, alleges that the contract of the underwriters with the wrecking company was for the express benefit and use of the owner; but that is denied in the reply and, upon the disposition of this demurrer, the denial of the reply must be treated as true. Beach v. Berdell, 2 Duer, 327.

There are manifest reasons why a guaranty should not be enlarged into one against liability, except where there is a clear intent so to do. As a rule, one should not be required to pay another for loss or damages until such other has himself paid the claim; for, until that has been done, it cannot he said to he certain that the person indemnified will ever have to pay anything at all.

The reason against construing an agreement of indemnity into one against liability gains additional force when the claims are uncertain and unliquidated in amount, such as the one at bar necessarily is.

What we have so far said renders it unnecessary to discuss the proposition advanced by the defendants’ counsel that they have the right to sue and recover full damages as trustees for the benefit of the owners.

We must conclude, therefore, that, in this case, the true construction of the guaranty of the wrecking company is one against loss and not one against liability by reason of a failure to release the vessels by April fifteenth. And it follows, of course, that these defendants are in no position to assert any claim by way of counterclaim or offset, until they have actually paid the transportation company, the owner of the steamers, the damages sustained by the transportation company. Inasmuch, however, as the transportation company has agreed with the defendants by which it “releases said claims against the underwriters and Hr. Parry-Jones, except so far as they can he worked out in the Klauck action, in the manner above stated, and agrees it will never enforce or prosecute said claims in any proceeding or manner whatsoever against underwriters or said Parry-Jones,” it would appear that such an arrangement constituted a good reply to the counterclaim set up in the answer.

For these reasons, we are of the opinion that the demurrer must be overruled.

So ordered, with leave to withdraw demurrer upon payment of the costs of this demurrer and plead over.

Demurrer overruled, with leave to withdraw demurrer upon payment of costs and plead over.  