
    The City of New York, Appellant, v. William P. Baird, Defendant, Impleaded with James Baird and James Everard, Respondents.
    First Department,
    June 11, 1909.
    Principal and surety — bond indemnifying city for acts of municipal ""1,1 • contractor -construed —. when sureties -not discharged. :
    The bond of a municipal contractor provided that he should properly g-pard and light an- excavation and’indemnify the city against all actions and' for-all cost and'damage to which -it might be- put by reason- of Injuries resulting -from •negligence in -the performance of -the-work or in guarding, .the same. The -undertaking also provided that moneys due the contractor would be retained by the municipality until all suits for damages should have been settled. A person who was injured by falling into the excavation made by the -contractor sued both-him'and'the City. The city having retained a -sum óf rhoney -'due: under • thercoritraet.nthe contractor gave a. -bond to-secure--the city. against: any judg-ment whichunight be'.obtained, whereupon the amount -withheld was paid to the contractor. The city subsequently compromised a judgment obtained against it and recovered over against the contractor on his second undertaking, the recovery, however, being only sufficient to cover part of 'the sum. paid $n" - compromise. -In a'sui-tton'.the-oiigi-nal bond to recover the.-balance paid on the settlement, = . ■ ' .. .
    
      Reid, that the sureties of the original bond were hot released by reason of ¡the fact that .the city paid over to the contractor the moneys retained upon the execution of the second bond of indemnity, although the amount' "covered-by that bond was1 less than- the'sum paid'to the contractor.- ' ■ -■■■-■
    
    Housht.oít, J.,-..dissented; with opinion.
    Appeal by the plaintiff, The City of New York, from that part of a judgment" of tlié 'Supreme Court which is "in "favor of the defendants 'James 'Baird arid James Evérard, and which was -énteréd in'-:thé" office of the clerk of the county of New York on the" 21st.day of October, 1908, upon the dismissal of the complaint by direction of the qou-r-t.ns to'-said defendants, after a trial,at-the New York Trial Term, a verdict in favor of the plaintiff against the-defendant William .'P. Baird having been rendered by direction of the court.
    
      Terence Farley of counsel [Theodore Connoly with him on the brief], Francis K. Pendleton, Corporation Counsel, for the appellant.
    
      J. Woolsey Shepard of counsel [ Woolsey A. Shepard with him on the brief], for the respondents.
   Clarke, J.:

This is an appeal from a judgment entered upon a dismissal of the complaint at the close of plaintiffs case as against James Baird and James Everard, sureties on a general bond to secure the due performance of a contract made by William P. Baird with the city for laying water mains in Fifth avenue. Clause P of that contract provided that the contractor should properly guard and light the excavation and that he will indemnify and save harmless the parties of the first part (that is the city) against and from all suits and actions of every name and description brought against them, and all costs and damages to which they may be put for or on account or by reason of any injury or alleged injury to the person or property of another, resulting from negligence or carelessness in the performance of the work, or in guarding the same, or from any improper materials used in its prosecution, or by or on account of any act or omission of the said party of the second part or his agents.

And the said party of the second part hereby further agrees that the whole or so much of the moneys due to him under and by virtue of this agreement as shall or may be considered necessary by the Commissioner of Public Works, shall and may be retained by the said parties of the first part until all such suits or claims for damages as aforesaid shall have been settled, and evidence to that effect furnished to the satisfaction of the said Commissioner.”

A fireman, Kelly, driving up Fifth avenue to a fire, went into the excavation, dug by the -contractor, with his horses and engine and was severely injured. He filed a claim against the city with the comptroller thirty days before February 18, 1898, for $50,000, on which day he began a suit against the city -and- Baird for that amount. Prior to February, 1898, the city had retained $25,000, money due to Baird under his contract which provided that he should be paid from time to time, upon progress certificates, ninety per cent of the amount earned. Baird gave a bond in ,the sum of $10,000 to secure the city against any judgment which might be obtained by Kelly, which bond has been subject to litigation. (City of New York v. Baird, 74 App. Div. 238; revd., 176 N. Y. 269 ; 117 App. Div. 659 ; affd., 191 N. Y. 501.) After the giving of this bond the $25,000 which had been retained was paid to Baird. Subsequently Kelly obtained a judgment against the city for $22,553.36, which was. subsequently compromised by the city by payment of $17,500. The city then sued on the $10,000 bond alluded to and has finally obtained a judgment.'

This suit is On the original bond, given upon execution of the contract to insure due performance thereof,: to recover the amount paid in. compromise ■ of the Kelly judgment." The- city having recovered on the $10,000 bond, of course 'the amount here in issue is $7,500, the balance of the amount paid. A verdict Was directed for that amount against the contractor under his contractual obligation to hold the city harmless. In the case at bar the liability to Kelly was established" by original proof precisely as if Kelly whs siring. The respondents claimed that as the city was entitled to retain from the contractor moneys due to him sufficient to meet a claim founded upon negligence, and as matter of fact when Kelly’s claim was filed the city had retained- $25,000, and thereafter had paid that $25,000 to the contractor upon taking a bond of indemnity for a less- sum, to wit, $10,000, by such conduct upon the city’s part, they, as sureties, were released from the obligation upon their bond, because security in the" possession of the obligee applicable to the payment of" the debt guaranteed, which was within the contemplation of the parties and entered into the bond and upon which they had a right to rely, had been given up. The learned trial court took this view of the case and dismissed the complaint as to the sureties. -

The question involved centers upon -the proper construction- of clause P of the-contract heretofore quoted. In clause Q there.is. another provision, that if a mechanic’s lien should be filed, then and in every such ease the said parties of the first part shall retain, anything herein contained to the contrary thereof notwithstanding, from the moneys under their control" and due or to grow due under this agreement, so much of such moneys as shall be sufficient to pay off, satisfy and- discharge the amount ” of such lien. The moneys so retained shall be retained by the said parties of the first ’ part until the lien thereon created by the said act and "the filing of the said notice shall be dischaiged pursuant to the provisions of the said act.” . •

If this cause of action was based upon -a violation of the duty of the contractor to pay his materialmen and the city had been compelled to pay them and had not retained money sufficient to meet the liens and had then sought to recover over against these bondsmen, I agree that it could not recover, for the positive provision of clause Q that the city shall retain a sufficient amount to meet such liens until finally, disposed of, was a part of the contract, within the contemplation of the parties when the bond was given upon which the sureties were entitled to rely. But the provisions of paragraph P are quite different. This is not an agreement made by the city. A previous clause of the contract had required the city to pay ninety per cent of the amount due for work done as shown by the progress certificates. This clause P does not begin as'does clause Q : And it is further agreed by and between the parties,” but it begins, “ And the said party of the second part,” to wit, the contractor, agrees to projierly guard and light and hold the city harmless, and then, “ And the said party of the second part hereby further agrees ” that so much of the moneys due to him as shall or may be considered necessary by the Commissioner of Public Worles, shall and may be retained by the said parties of the first part until all such suits or claims for damages as aforesaid shall have been settled.” That is a provision for the benefit of the city and it puts the determination of the amount, or of any amount, to be retained within the discretion of the commissioner of public works, and when the discretion of the commissioner has been exercised as to the amount, within the further discretion of the city whether it shall order the amount to be retained.

Said provision did not create such a security as comes within the cases relied on by the respondents. The strongest case is Antisdel v. Williamson (165 N. Y. 372). What was there before the court was an extension of time for the payment of a mortgage for three years after the time due, without notice to or consent from the guarantors for the payment of the amount secured thereby. This was held to be a change which discharged the sureties.

In Mayor, etc., of N. Y. v. Brady (70 Hun, 250), Mr. Justice Follett said: “ The fact that the city made payments to the contractors after Cruikshank was injured and presented his claim, is no defense to this action, for the contract provides: ‘ The said party of the second part (contractors) hereby further agrees that the whole or so much of the moneys due to Mm (them) under and by virtue of this agreement, as shall or may be considered necessary by the Commissioner of Public Works, shall or may be retained by the said parties of the first part (city) at their sole and exclusive option, until all such suits or claims for damages aforesaid shall have been settled, and evidence to that effect furnished to the satisfaction of the said Commissioner.’ ” The only difference between the language of the contract there construed and the one at bar is the addition after “ shall or may be retained by the said parties of the first part ” of these words, at their sole and exclusive option.” This adds nothing to the legal effect'of the. language used iir paragraph P of the contract at bar, as I" look at" it.. The words “ shall or may be ” upon which respondents lay such stress are the same in both contracts.'

In Mayor, etc., v Brady (15.1 N. Y. 611) the court said : “ The only other question in the case that requires any notice arises upon the defendants’ contention that they were discharged from the obligation by the act of the city in paying over to the contractors the balance of the contract price in its hands after the action by Cruikshank against it had been commenced, and when it knew that an outstandibg claim for damages for the injury existed. The stipulations of ■ the contract on this point covered two distinct classes of cases. One where tho claim, was brought to the attention of the city by notice, in writing, to" the commissioner, before the contract was completed, or within ten days thereafter. In such a case the. obligation on tho part of the city to "retain the fund was absolute unless the claim had been shown to be discharged. There was no notice under this provision given by the defendants or any one, and hence it has no application to the facts of the case.” This is the case here. There were, as pointed out, absolute obligations, but they do not apply. The opinion proceeded : “ The claim upon which this action was based does not fall within that provision of tile' contract. The other provision of the contract left it optional with the city, in cases where notice was not served upon the commissioner, either to retain the fund or to pay it to the contractor, and it could do either without any breach of the contract. The stipulations of the contract in this respect were apart of the defendants’ undertaking. They became bound as sureties for the faithful performance by the contractors of their contract, with full knowledge that the city could, at its option, in such a case, pay the balanee of the contract price to the contractors, and they cannot complain if the city exercised that option in the manner stipulated. The defendants, when they guaranteed performance, with knowledge of this provision, virtually consented that the city might do what it did, and hence they have not been prejudiced. The contract was not changed in any of its terms, nor was there any departure from it in the performance. The city did nothing that it had not the right to do by the contract, or that the defendants had not consented in advance that it might do. The claim proved by the plaintiff fell directly within the conditions of the bond, and the defendants were, not in any manner released or discharged from their obligation of, indemnity against it,” and so the judgment, which was upon a direction of a verdict in favor of the plaintiff, was affirmed, all concurring..

One of the grounds stated in the motion for the dismissal of the complaint was “ because the city having elected to retain from the amount due the contractor the sum of $25,000,. which was more than sufficient to pay and discharge the claim filed against it, it became a trustee of that fund not only for itself but for .the sureties as well, and the city haying released and surrendered the. amount so-retained, thereby released and discharged these sureties- from liability.”

This claim is disposed of by Mansfield v. Mayor (15 App. Div. 316 ; affd., 165 N. Y. 208). It was there held that this provision was for the benefit of the city and indemnity against claims, and that “it certainly is a novel proposition that, where a party takes an indemnity against claims which might be urged against it by reason of the acts of another, it,becomes a,trustee in respect to the indemnity fund, and that such fund is security for the claimant, and is not solely an indemnity to the party to whom it was given.” That case made the distinction between the clause in regardto liens and the clause in regard to retaining amounts by way of indemnity. In the Court of Appeals, Landon, J., said: “ The city is not the trustee of a fund in dispute.”

The dismissal of the complaint was error. The judgment,, so far as the sureties are concerned, should be reversed and a new trial ordered, with costs to the appellant to abide the event.

Ingraham, McLaughlin and Laughlin, JJ., concurred; Houghton, .L, dissented.

Houghton, J. (dissenting) :

I think the judgment dismissing the complaint was. tight and should be affirmed. There is no dispute that the city had $25,000 in cash which belonged to Baird when the Kelly claim for damages was tiled, and that it proposed to keep the money to meet that claim. Hor is there any dispute that negotiations were! had by Baird with the city for payment to him of the $25,000, which negotiations resulted in the city Consenting'to pay the sum over to him upon liis-giving a new bond in the sum of $10,000 to meet whatever damages Kelly, might establish. ■ I concede that the defendant sureties -could not -complain if the city had not' retained in its hands any moneys due Baird on his contract, and that the city was under no legal obligation to do so for the purpose of reducing ■or guarding against the sureties’ liability. But the city had retained the money and had it ir its hands, and the' Kelly claim had been presented and the liability óf his recovering a judgment was under discussion, and the city was advised by its counsel to retain the money for the purpose of meeting any judgment which Kelly might obtain. Such condition of affairs is not only shown" by the evidence- and stipulations made on the trial of this action, but is fully illustrated in City of New York v. Baird (74 App. Div. 241; 176 N. Y. 273), the records of which case appear to have been embraced -in the stipulations. With all this situation confronting it, the city voluntarily entered into a new contract with the principal, Baird, whereby it agreed to pay him the $25,000 and take from him a new and independent bond conditioned for the payment of any judgment which Kelly might obtain- to the extent of $10,000. This was a new and independent contract between the obligee of the original bond given by these respondents and their principal, Baird, and.it seems to me that the new bond" and agreement took the place of" the- original bond so far as the Kelly claim Was concerned, and released the sureties from any obligation to pay any sum because of that claim. That the city 'did- hot exact a bond sufficien t to pay the claim as ultimately established was its own fault. It was not a case of taking additional security from the principal, but was the taking of a substituted security. While, the city was not obliged to retain any moneys, it did actually have in hand a sum moré than sufficient to satisfy the' Kelly claim. Having the money in hand and virtually setting it apart to meet the Kelly claim, the city voluntarily released it and paid it over to the principal.

As early as the decision of Law v. East India Company (4 Ves. Jr. 829) the master of the rolls said: “ It cannot be contended upon any principle that prevails with regard to principal and surety that where the principal has left a sufficient fund in the hands of the obligee and he thinks fit instead of retaining it in his hands to pay it back to the principal, the surety can ever be called upon.”

The situation presented is not unlike that of a creditor secured by bond levying upon the property of his principal and voluntarily releasing the levy, which was held in Commonwealth v. Miller’s Admrs. (8 Serg. & Rawle, 452). to discharge the surety.

I cannot see how the question as to whether the city was obliged to retain any moneys is decisive of the question at bar. The moneys had been retained and were being retained to meet the Kelly claim, and were voluntarily released and paid over to the principal and a new obligation was taken. It seems to me that such a transaction released these respondents from any further liability under their bond respecting the Kelly claim, and that the judgment of nonsuit was right and should be affirmed.

Judgment reversed and new trial ordered, with costs to appellant to abide event.  