Treasure State Industries Inc. v. Welch

No. 13525

I N THE SUPREME COURT OF THE STATE OF MONTANA

TREASURE STATE INDUSTRIES
INC., a corporation,

P l a i n t i f f and R e s p o n d e n t ,

.DEL WELCH, d/b/a DEL WEI,CH
CONSTRUCTION C O . , AETNA LIFE AND
CASUALTY C O . , a c o r p o r a t i o n e t a l . ,

Defendants and A p p e l l a n t s .

Appeal from: D i s t r i c t Court of t h e Eighth J u d i c i a l D i s t r i c t ,
H o n o r a b l e P a u l G. H a t f i e l d , J u d g e p r e s i d i n g .

C o u n s e l o f Record:

For A p p e l l l a n t s :

J a r d i n e , S t e p h e n s o n , B l e w e t t & Weaver, G r e a t F a l l s ,
Montana
A l e x a n d e r B l e w e t t I11 a r g u e d , G r e a t F a l l s , Montana

F o r Respondent:

D z i v i , C o n k l i n , J o h n s o n & Nybo, G r e a t F a l l s , Montana
Dennis C. M c C a f f e r t y a r g u e d , G r e a t F a l l s , Montana

Submitted: May 25, 1977

Decided :

Filed:
 M r . J u s t i c e Gene B . Daly d e l i v e r e d t h e Opinion of t h e Court.

On December 1 9 , 1974, T r e a s u r e S t a t e I n d u s t r i e s , I n c . ,

f i l e d a complaint a g a i n s t f o u r defendants t o r e c o v e r c e r t a i n

monies a l l e g e d l y due f o r supplying m a t e r i a l s f o r use on a

p u b l i c works c o n s t r u c t i o n p r o j e c t . The d e f e n d a n t s named were:

(1) S l e t t e n C o n s t r u c t i o n Co., t h e g e n e r a l c o n t r a c t o r ,

who e n t e r e d i n t o t h e p r o j e c t w i t h t h e s t a t e of Montana f o r

t h e c o n s t r u c t i o n of a highway and c e r t a i n b r i d g e s i n Mineral

County, Montana;

(2) S t . P a u l F i r e and Marine I n s u r a n c e Co., S l e t t e n ' s

s u r e t y , who i s s u e d a bond f o r t h e b e n e f i t of t h e s t a t e of Montana

with S l e t t e n a s principal;

(3) Del Welch C o n s t r u c t i o n Co., S l e t t e n ' s s u b c o n t r a c t o r ,

who was f u r n i s h e d c e r t a i n m a t e r i a l s by T r e a s u r e S t a t e f o r which

T r e a s u r e S t a t e i s a t t e m p t i n g t o recover from a l l d e f e n d a n t s ; and

(4) Aetna L i f e and Casualty Co. t h e s u r e t y f o r De1,Welch

C o n s t r u c t i o n Co., who i s s u e d a bond w i t h S l e t t e n a s o b l i g e e and

w i t h Welch a s p r i n c i p a l .

The d i s t r i c t c o u r t , Cascade County, g r a n t e d a p a r t i a l summary

judgment a g a i n s t Aetna on t h e i s s u e of l i a b i l i t y , and judgment

was e n t e r e d f o r damages, which f o r t h e purpose of t h i s a p p e a l

o n l y , were agreed upon by T r e a s u r e S t a t e and Aetna. Aetna a p p e a l s

from t h i s judgment.

The major i s s u e p r e s e n t e d on a p p e a l i s whether T r e a s u r e

S t a t e , a t h i r d - p a r t y materialman, i s e n t i t l e d t o a cause of

a c t i o n a g a i n s t Aetna on i t s s u r e t y bond, which names S l e t t e n ,

the general contractor a s the sole obligee.
 I n t h e Aetna bond t h e r e i s no promise t o pay f o r any

m a t e r i a l s , although t h e u n d e r l y i n g s u b c o n t r a c t p r o v i d e s such

an o b l i g a t i o n f o r Welch, t h e s u b c o n t r a c t o r . ~ e t n as' o b l i g a t i o n s

under t h i s bond a r e n o t s p e c i f i c a l l y c o n d i t i o n e d upon t h e pay-

ment of any s u p p l i e d m a t e r i a l s . On t h e c o n t r a r y , t h e o b l i g a t i o n

o f Aetna under t h i s bond i s merely c o n d i t i o n e d upon t h e f a i t h f u l

performance of t h e s u b c o n t r a c t o r , i n t h e a l t e r n a t i v e , indemni-

f i c a t i o n of S l e t t e n , t h e o b l i g e e . A s u r e t y bond i s simply a

c o n t r a c t and should be i n t e r p r e t e d i n t h e same manner a s o t h e r

contracts. S e c t i o n 13-702, R.C.M. 1947, i s t h e Montana s t a t u t e

which governs t h e i n t e r p r e t a t i o n of c o n t r a c t s :

"Contracts--how t o be i n t e r p r e t e d . A c o n t r a c t
must be so i n t e r p r e t e d a s t o g i v e e f f e c t t o t h e
mutual i n t e n t i o n of t h e p a r t i e s a s i t e x i s t e d
a t t h e time of c o n t r a c t i n g s o f a r a s t h e same i s
a s c e r t a i n a b l e and l a w f u l .I'

I n i n t e r p r e t i n g t h e o b l i g a t i o n of Aetna under t h i s s u r e t y bond,

which i n c o r p o r a t e d by r e f e r e n c e t h e s u b c o n t r a c t between S l e t t e n

and Welch, it i s n e c e s s a r y t o c o n s t r u e t h e s u r e t y bond and t h e

underlying c o n t r a c t t o g e t h e r . Watson v . ~ ' N e i l l ,14 Mont. 197,

35 P. 1064; S e c t i o n 13-708, R.C.M. 1947.

N e i t h e r t h e language of t h e bond n o r t h e language o f t h e

underlying s u b c o n t r a c t s p e c i f i c a l l y mentions T r e a s u r e S t a t e i n

any way and f o r T r e a s u r e S t a t e t o recover from Aetna on t h i s

bond, T r e a s u r e S t a t e must do so a s a t h i r d - p a r t y b e n e f i c i a r y

pursuant t o s e c t i o n 13-204, R.C.M. 1947, which p r o v i d e s :

"When c o n t r a c t f o r b e n e f i t of t h i r d person may be
e n f o r c e d . A c o n t r a c t , made e x p r e s s l y f o r t h e
b e n e f i t o f a t h i r d p e r s o n , may be e n f o r c e d by him
a t any time b e f o r e t h e p a r t i e s t h e r e t o r e s c i n d it."

Unless i t was t h e i n t e n t of S l e t t e n , Welch and Aetna a t t h e time

of t h e e x e c u t i o n of t h e bond t o e x p r e s s l y b e n e f i t o r p r o t e c t T r e a s u r e

S t a t e , i t cannot recover from Aetna on t h e bond. Therefore, it
becomes necessary t o examine t h e mutual determination a s t o t h e

i n t e n t of t h e p a r t i e s a s i t e x i s t e d a t t h e time of t h e c o n t r a c t i n g .

Aetnamntends t h i s bond i s a t r u e indemnity bond. According

t o t h i s view, t h e i n s e r t i o n i n a bond o r c o n t r a c t made p a r t of

t h e bond, of a condition t o pay l a b o r e r s and materialmen and of

a condition t o indemnify t h e o b l i g e e , i n d i c a t e s an i n t e n t t h a t

t h e former condition was intended f o r t h e p r o t e c t i o n of t h e obligee

and n o t f o r t h e b e n e f i t of l a b o r e r s and materialmen. I n other

words, t h e condition f o r t h e indemnification of t h e owner modi-

f i e s and explains t h e condition f o r t h e payment of l a b o r e r s and

materialmen.

Treasure S t a t e contends t h i s i s n o t a t r u e indemnity bond

and t h a t i t was t h e i n t e n t of a l l p a r t i e s t h a t t h e materialmen -

should have a cause of a c t i o n on t h e Aetna bond i n t h e event they

remained unpaid. It i s argued t h a t performance of t h e subcontract

includes payment of t h e materialmen and t h e r e f o r e , an i n t e n t t o

d i r e c t l y b e n e f i t a l l materialmen i s evidenced by t h e bond.

Treasure S t a t e contends Weissman & Sons, I n c . , v . S t . Paul

Insurance Co., 152 Mont. 291, 448 P.2d 740, i s c o n t r o l l i n g . We

f e e l Weissman can be d i s t i n g u i s h e d on t h e f a c t s . I n Weissman

t h e s u r e t y bond and t h e c o n t r a c t contained an express provision

t o pay materialmen. The bond i n t h e i n s t a n t case contained no

such provision. I n Weissman t h e s u r e t y bond contained no

condition of indemnification of t h e named obligee. The sub-

c o n t r a c t i n Weissman did not contain a s p e c i a l provision whereby

the subcontractor agreed t o indemnify t h e c o n t r a c t o r . Such a

provision i s present i n t h e i n s t a n t case. F i n a l l y , s i n c e Weissman

did n o t d e a l with a public works c o n t r a c t , t h e r e was no s t a t u t o r y

provision ( s e c t i o n 6-401, R.C.M. 1947) allowing a l l materialmen a
r i g h t of a c t i o n on t h e prime c o n t r a c t o r ' s bond. Therefore, t h e

materialmen were n o t s p e c i f i c a l l y protected i n Weissman u n t i l

t h e prime c o n t r a c t o r required a bond from t h e s u r e t y company

s p e c i f i c a l l y conditioned upon t h e payment of a l l materialmen.

Weissman i s c l e a r l y d i s t i n g u i s h a b l e from t h e i n s t a n t case on

t h e f a c t s and t h e r e f o r e would n o t c o n t r o l .

This Court i n Gary Hay & Grain Co., Inc. v. Carlson,

79 Mont. 111, 255 P. 722, made i t c l e a r t h a t although t h e s u r e t y

bond and t h e underlying c o n t r a c t must be read together t o

ascertain the parties' intentions, the surety's obligations a r e

n o t coextensive with o b l i g a t i o n s of t h e underlying c o n t r a c t .

For t h i s proposition t h e Court c i t e d Blyth-Fargo Co. v. Free,

46 Utah 233, 148 P. 427, a case concerning a s u r e t y bond which

was conditioned upon t h e performance of t h e underlying c o n t r a c t

and upon indemnification of t h e obligee. I n Blyth-Fargo the

c o u r t found t h e r e was no i n t e n t on t h e p a r t of t h e s u r e t y o r

c o n t r a c t o r t o p r o t e c t o r b e n e f i t third-plrty materialmen, even

though t h e underlying c o n t r a c t contained a promise on t h e p a r t

of t h e c o n t r a c t o r t o pay a l l materialmen. This Court made

s p e c i a l note of t h e f a c t t h a t , unless a promise of t h e p r i n c i p a l

i s contained i n t h e underlying c o n t r a c t was a l s o s p e c i f i c a l l y

mentioned o r made a condition i n t h e s u r e t y bond, t h e s u r e t y

would not have o b l i g a t i o n s coextensive with and measured by t h e

promises of t h e p r i n c i p a l i n t h e underlying c o n t r a c t . I n the

i n s t a n t c a s e , even though t h e r e e x i s t s a promise on t h e p a r t of

Welch i n t h e subcontract t o pay a l l materialmen, t h e r e was no

condition i n Aetna's bond which would make t h i s o b l i g a t i o n on

t h e p a r t of Welch coextensive with t h e o b l i g a t i o n s of Aetna.
 The decision i n Gary Hay & Grain Co., Inc. v, Carlson, supra,

was approved by t h e 9 t h C i r c u i t Court of Appeals i n National

Surety Co. of N w York v , Ulmen, 68 F.2d 330, 336, i n t h i s lan-
e

guage :

"In view of t h e foregoing decisions of t h e Supreme
Court of Montana, i t i s our view t h a t , i n t h a t
s t a t e , a t h i r d person who i s a s t r a n g e r t o a con-
t r a c t o r a bond thereunder, cannot recover from
t h e s u r e t y even when t h e c o n t r a c t and bond, a s h e r e ,
contain some reference t o him o r t o t h e c l a s s t o
which he belongs, unless t h e r e i s a s p e c i f i c promise
t o pay such t h i r d person o r such c l a s s , contained
i n t h e c o n t r a c t and bond."

This decision f u r t h e r supports t h e r u l e t h a t t h e mere f a c t

t h e underlying subcontract of Welch contained a promise t o

pay a l l materialmen i n no way c r e a t e s an o b l i g a t i o n on t h e

p a r t of Aetna, t h e s u r e t y , unless t h e bond i t s e l f contains a

s i m i l a r promise t o pay t h e materialmen.

C l e a r l y a t t h e time S l e t t e n and Welch executed t h e sub-

c o n t r a c t agreement, a l l materialmen were adequately p r o t e c t e d

by t h e S t . Paul F i r e and Marine Insurance Co.'s bond given

pursuant t o s e c t i o n 6-401 and s e c t i o n 6-404, R.C.M. 1947. The

same p r o t e c t i o n s t i l l e x i s t e d f o r a l l materialmen on August 7,

1972, when Aetna's bond was executed. This r a i s e s t h e question

of whether S l e t t e n required Aetna's bond f o r i t s own b e n e f i t

o r whether it required t h i s bond f o r t h e b e n e f i t of t h e m a t e r i a l -

men who were already protected by t h e S t . Paul bond.

McGrath v. American Surety Company >of N w York, 307 N.Y.
e 552,

122 N.E.2d 906, d e a l s with a f a c t u a l s i t u a t i o n s i m i l a r t o t h e

i n s t a n t case. I n McGrath, a c o n t r a c t o r entered i n t o a p u b l i c

works c o n t r a c t with t h e United S t a t e s . The f e d e r a l s t a t u t e ,

T i t l e 40 USCA, $ 5 270a and 270b, known a s t h e M i l l e r Act, was i n

e x i s t e n c e and required a c o n t r a c t o r t o f u r n i s h a performance

bond guaranteeing t h e completion of t h e work and a payment bond
guaranteeing t h e p r o t e c t i o n of a l l persons supplying labor

and m a t e r i a l . For a l l i n t e n t s and purposes, t h i s f e d e r a l a c t

i s i d e n t i c a l t o s e c t i o n 6-401, e t . s e q . , R.C.M. 1947. The con-

t r a c t o r i n McGrath subcontracted a p o r t i o n of t h e work. The

p l a i n t i f f , who provided labor and s e r v i c e s f o r the subcontractor,

attempted t o recover on t h e s u b c o n t r a c t o r ' s bond which was con-

d i t i o n e d upon payment by t h e subcontractor of i t s o b l i g a t i o n s

t o l a b o r e r s and materialmen. The c o u r t held t h e p l a i n t i f f had

no r i g h t of a c t i o n upon t h e s u b c o n t r a c t o r ' s bond because t h e bond

was executed merely f o r t h e b e n e f i t of t h e c o n t r a c t o r , and n o t

t h e materialmen.

I n McGrath, t h e bond i n question was conditioned upon pay-

ment of a l l materialmen. I n t h e i n s t a n t case t h e o b l i g a t i o n of

Aetna i s merely conditioned upon indemnifying S l e t t e n o r , i n t h e

a l t e r n a t i v e , t h e performance of t h e subcontract. Therefore, t h e

i n t e n t of t h e c o n t r a c t o r , t h e subcontractor, and t h e s u r e t y , i n :

McGrath, was not a s c l e a r l y expressed a s i n t h e i n s t a n t c a s e

where t h e r e i s no promise whatsoever on t h e p a r t of Aetna, t h e

s u r e t y , t o pay materialmen. The o b j e c t i n S l e t t e n ' s r e q u i r i n g

Welch and Aetna t o execute t h e indemnity bond was only t o pro-

t e c t S l e t t e n a g a i n s t t h e contingency which would a r i s e i f

S l e t t e n o r i t s s u r e t y , S t . Paul, s u f f e r e d any damages because

of an a c t i o n brought by a l a b o r e r o r materialman pursuant t o

s e c t i o n 6-401. There i s no i n t e n t whatsoever expressed i n t h e

bond of Aetna t o provide any g r e a t e r r i g h t s f o r materialmen than

were already provided by s e c t i o n 6-401, e t seq.

I n Spokane ~ e r c h a n t s 'Association v. P a c i f i c Surety Co.,

86 Wash. 489, 150 P. 1054, a bond executed with a subcontractor

a s t h e p r i n c i p a l and conditioned upon t h e payment of a l l l a b o r e r s

and materialmen was found t o be only f o r t h e b e n e f i t of t h e prime
concracror who had a p u b l i c works c o n t r a c t w i t h t h e s t a t e of

Washington. Washington had s t a t u t e s s i m i l a r t o s e c t i o n 6-401,

e t s e q . , R.C.M. 1947, and t h e c o u r t found t h e i n t e n t of t h e

s u b c o n t r a c t o ~ sbond was merely t o b e n e f i t t h e prime c o n t r a c t o r

s i n c e i t was l i a b l e under i t s s t a t u t o r y bond t o t h e s t a t e f o r

a l l d e b t s i n c u r r e d by t h e s u b c o n t r a c t o r a s w e l l a s any o t h e r

d e b t s i n c u r r e d by i t s e l f .

Here, under t h e f a c t s and i n l i g h t of t h e a u t h o r i t i e s

h e r e t o i o r e c i t e d , S l e t t e n , Welch and Aetna d i d n o t i n t e n d t o

b e n e f i t o r p r o t e c t any t h i r d - p a r t y materialmen by t h e e x e c u t i o n

of A e t n a ' s bond, b u t merely meant t o p r o t e c t S l e t t e n , t h e named

sole obligee. A l l t h i r d - p a r t y materialmen were a l r e a d y adequately

p r o t e c t e d by t h e s t a t u t o r i l y r e q u i r e d bond executed by S t . Paul

F i r e and Marine Insurance Co.

I n C i t y of B u t t e v. Bennetts, 5 1 Mont. 27, 30, 149 P.92,

t h i s Court s t a t e d :

" ' S u r e t i e s have t h e r i g h t t o r e l y upon t h e l e t t e r
of t h e i r undertakings, and t h e i r l i a b i l i t y cannot
be extended by i m p l i c a t i o n . ' I '

The p r o v i s i o n s of A e t n a ' s bond a r e c l e a r and i t s o b l i g a t i o n

under t h a t . b o n d i s conditioned upon t h e f a i t h f u l performance

of t h e s u b c o n t r a c t o r , i n t h e a l t e r n a t i v e , i n d e m n i f i c a t i o n of

S l e t t e n , t h e named o b l i g e e . The bond does n o t c o n t a i n any

c o n d i t i o n o r promise concerning payment of materialmen. The

s u b c o n t r a c t between Welch and S l e t t e n c o n t a i n s a s i m i l a r provi-

s i o n f o r t h e i n d e m n i f i c a t i o n of S l e t t e n and a l s o c o n t a i n s a

promise on t h e p a r t of Welch t o pay a l l materialmen. Although

both documents must be construed t o g e t h e r , Aetna intended t o

l i m i t i t s o b l i g a t i o n under t h e bond and d i d so. Sletten, the

o b l i g e e , agreed w i t h t h i s l i m i t a t i o n and t h e e x p r e s s i n t e n t of

t h e p a r t i e s cannot be overturned because T r e a s u r e S t a t e d e s i r e d
t o sue Aetna i n l i e u of S t . Paul.

I n summary, t h e provisions i n Aetna's bond which provide

f o r indemnity of S l e t t e n only evidence an i n t e n t t o p r o t e c t

S l e t t e n , n o t Treasure S t a t e . For t h i s reason, Treasure S t a t e has

no r i g h t of a c t i o n a g a i n s t Aetna on t h e bond.

The f i n a l i s s u e on appeal i s whether t h i s Court should g r a n t

summary judgment f o r t h e defendant s u r e t y a g a i n s t p l a i n t i f f although

motLon f o r summary judgment was not made by defendant s u r e t y com-

pany t o t h e d i s t r i c t c o u r t .

Section 93-216, R.C.M. 1947, i n p e r t i n e n t p a r t , s t a t e s :

"Powers and d u t i e s of supreme c o u r t on appeals, The
supreme c o u r t may a f f i r m , r e v e r s e , o r modify any
judgment o r o r d e r appealed from, and may d i r e c t t h e
proper judgment o r order t o be e n t e r e d , o r d i r e c t a
new t r i a l o r f u r t h e r proceedings t o be had."

6 Pt.2 Moore's Federal P r a c t i c e , 7 56.27[2] g i v e s support

t o e n t r y of summary judgment by an a p p e l l a t e c o u r t and s t a t e s

t h a t an a p p e l l a t e c o u r t has t h e power t o If* * * order summary

judgment f o r a p p e l l a n t , both where he made no motion and a l s o

where he made a cross-motion i n the t r i a l c o u r t * * *."
There can be no doubt t h a t a s a matter of law Aetna i s

e n t i t l e d t o judgment a g a i n s t Treasure S t a t e . The summary judgment

granted Treasure S t a t e i s reversed. j u d g m ~ tf o r Aetna

a g a i n s t Treasure S t a t e i s ordered.

W Concur:
e

Judge, s i t t i n y Chief J u s t
Paul G. H a t f i e d.