BAYER & MINGOLLA CONSTRUCTION COMPANY, INC. vs. HECTOR J. DESCHENES & another.

CUTTER, J. The plaintiff (Bayer) was the general contractor on a State highway contract (the prime contract), awarded on a unit price basis. The defendant Deschenes made a subcontract with Bayer to do certain excavation work "in strict compliance with . . . the [p]rime [c]ontract" which was incorporated by reference in the subcontract. The subcontract unit prices were lower than the prime contract unit prices. Under the subcontract all work was to start not later than November 24, 1958. Deschenes started work on December 1. The work was to be completed on or before March 1, 1959, a period of three months plus one week. By June 22, 1959, when he quit, Deschenes had completed only about half the work.

The subcontract required Deschenes to "furnish a bond with surety satisfactory to" Bayer in the sum of $91,000, "conditioned that . . . [Deschenes] shall faithfully perform this [subc]ontract and satisfy all claims and demands

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in connection with the performance of same and shall pay all bills contracted for . . . in connection with the work . . . and shall reimburse . . . [Bayer] for all . . . expense which . . . [Bayer] may incur in making good any default of" Deschenes. Deschenes furnished a bond of Aetna Insurance Company (Aetna) for $91,000, which incorporated the subcontract by reference, to indemnify Bayer "against any loss or damage directly arising by reason of . . . [Deschenes's] failure . . . faithfully [to] perform . . . [the sub]contract" and to pay claims for labor and materials, "subject . . . to the following express conditions [among others] . . . (2) That upon receipt of written notice from . . . [Bayer] of [Deschenes's] default . . . [Aetna] shall have the right within thirty . . . days after the receipt of such notice to remedy the default or to proceed, or procure others to proceed, with the performance of such [subc]ontract; that if . . . [Aetna] does proceed or procure others to proceed with the performance of such [subc]ontract . . . all money that may at the time of such default be due, or that thereafter [may] become due to . . . [Deschenes] under said [subc]ontract shall become due and payable to . . . [Aetna] and . . . [Aetna] shall be subrogated to all the rights of . . . [Deschenes]." [Note 1]

There were various disputes between Bayer and Deschenes over quantities and billings. Certain portions of the work were done by Bayer prior to June 22, 1959, for Bayer's "own convenience and to facilitate other work . . . and Deschenes was either impliedly or expressly relieved from doing this work." [Note 2] In June, 1959, representatives of Bayer talked with Deschenes, who "told them that he had an opportunity to do another job . . . and was going to

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leave the Bayer . . . job." Bayer's chief engineer said that they were "far behind schedule" and that he "wanted him to stay on the job." It may easily be inferred that Bayer at all times was interested in getting Deschenes to perform his subcontract, rather than treating him as in default. On June 22, 1959, Deschenes removed his last equipment from the job.

Bayer sent to Aetna various progress reports (the first sent on February 2, 1959) showing in each instance a probable completion date later than that set out in the subcontract. The last report indicated a probable completion date of December 1, 1959. When Deschenes left the job site, Bayer proceeded itself to complete the subcontracted work and finished doing so by September 2, 1959. On August 18, 1959, Bayer notified Aetna of Deschenes's default. Deschenes was adjudicated a bankrupt on November 3, 1960.

As a consequence of these events, Bayer brought this action at law against Deschenes and Aetna for breach of contract and to recover on Aetna's bond. [Note 3] The facts already stated are based upon the report of an auditor, whose findings were to be final. He found that Bayer is entitled to recover $15,134.95 from Deschenes and Aetna for work that Bayer was required to do because of Deschenes's breach of the subcontract.

The auditor also found (a) that "any extensions of the completion date . . . [of the subcontract were] by mutual

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agreement of Bayer . . . and Deschenes"; (b) that Aetna "had knowledge that the completion date had been extended"; (c) that Aetna "was not [in] any way damaged by Bayer . . . performing the balance of the work required by the sub-contract" and that Bayer's delay in giving Aetna notice of Deschenes's default "was not injurious to Aetna"; and (d) that on August 21, 1959, Aetna acknowledged Bayer's notice to it of Deschenes's default.

The judge ordered judgments on the auditor's report for Bayer for $16,848.66 against both Aetna and Deschenes. From these orders Aetna and Deschenes appealed.

1. Aetna contends that it is discharged as surety by the extensions of time for performance given by Bayer to Deschenes, despite Aetna's knowledge of these extensions, and the absence of any finding of injury to Aetna caused thereby. Aetna, however, "is a compensated surety and is not entitled to invoke the ancient doctrine of strictissimi juris." Veneto v. McCloskey & Co. 333 Mass. 95, 104. See Agoos Leather Cos. Inc. v. American & Foreign Ins. Co. 342 Mass. 603, 608; Maryland Cas. Co. v. Dunlap, 68 F. 2d 289, 291 (1st Cir.). [Note 4]

In the case of an accommodation surety, "where the principal and creditor, without the surety's consent, make a binding agreement to extend . . . time . . . the surety is discharged unless the creditor in the extension agreement reserves his rights against the surety." Restatement: Security, Section 129 (1). See Brockton Sav. Bank v. Shapiro, 311 Mass. 695, 702-704. Cf. Northampton Inst. for Sav. v. Putnam, 313 Mass. 1, 5-6 (burden rests on surety of showing an extension and that it was discharged). The modern rule, however, with respect to a compensated surety, see

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Restatement: Security, Section 129 (2), is that such a surety "is discharged only to the extent that he is harmed by the extension." See Guaranty Co. v. Pressed Brick Co. 191 U.S. 416, 423-426; American Auto Ins. Co. v. United States, 269 F. 2d 406, 408-409 (1st Cir.); United States v. Bruce Constr. Corp. 272 F. 2d 62, 66 (5th Cir.); Phoenix Assur. Co. v. Buckner, 305 F. 2d 54, 57-58 (8th Cir.). See also Appleman, Insurance Law and Practice, Sections 6796, 6848-6851; annotation, 12 A.L.R. 382. Cf. Stearns, Suretyship (5th ed.) Sections 6.8, 6.16-6.19. Present day authority thus generally rejects, with respect to compensated sureties, the contrary rule stated in Schwartz v. American Sur. Co. 231 Mass. 490, 493-494 (where there was no apparent consideration of the circumstance that the case dealt with a compensated surety). Cf. Manufacturers' Fin. Co. v. Rockwell, 278 Mass. 502, 505; Taborsak v. Massachusetts Bonding & Ins. Co. 289 Mass. 8, 12-13; Hartford Acc. & Indem. Co. v. Cassassa, 301 Mass. 246, 252. [Note 5]

In any event, it is only by a binding, enforceable agreement for new consideration for an extension, which cannot be rescinded or disregarded, that the discharge of a surety will be effected. See Restatement: Security, Section 129, comment c. The auditor's finding concerning the extensions of time for performance is merely that they were made "by mutual agreement of Bayer . . . and Deschenes." This finding does not import to us an enforceable agreement for consideration but merely Bayer's effort to obtain even dilatory performance by Deschenes. Cf. Taborsak v. Massachusetts Bonding & Ins. Co. 289 Mass. 8, 12-13 (binding agreement).

We hold that Aetna, which has not shown itself to have been harmed by the extensions of time, was not thereby discharged as surety.

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2. Aetna contends that Bayer is barred from recovery on the performance bond by its failure to notify Aetna promptly of Deschenes's default, and thus to give Aetna "an opportunity, within thirty days after receiving [such] notice . . . to . . . complete the work left undone." Condition (2), see fn. 1, is stated in the bond to be an express condition.

Condition (2) does not expressly require Bayer, as obligee of the bond, to give notice of Deschenes's default. It does, however, imply that Bayer was bound to give such notice within a reasonable time (see Segal v. Aetna Cas. & Sur. Co. 337 Mass. 185, 187-188) so that Aetna might have opportunity to decide whether it would complete Deschenes's work as a method of minimizing its own loss.

No purpose of Condition (2) is stated other than to give Aetna the opportunity to make that decision. Indeed, the absence from Condition (2) of any specific requirement for giving Aetna notice of a default strongly suggests that no investigation by Aetna (other than of the appropriate method of keeping completion costs low) was contemplated.

Express requirements for prompt notice of a loss or an accident are often found in insurance contracts. In respect of insurance contracts, however, the situation is somewhat different, for it is frequently important that an insurer have such prompt notice, so that seasonable investigation of the facts relating to liability may be undertaken. Cf. Boston Elev. Ry. v. Maryland Cas. Co. 232 Mass. 246, 250-251; Kana v. Fishman, 276 Mass. 206, 210-211; Wainer v. Weiner, 288 Mass. 250, 251-252; Potter v. Great Am. Indem. Co. 316 Mass. 155, 157; O'Kane v. Travelers Ins. Co. 337 Mass. 182, 184; Maryland Cas. Co. v. Hunter, 341 Mass. 238, 243-244. Cf. also Appleman, Insurance Law and Practice, Section 4732.

Although Condition (2) is expressed as a condition, we regard it as designed only to assure Aetna that the cost of making good any default by Deschenes would not be greater than that for which Aetna itself could do the work, or could procure it to be done. This purpose has been accomplished,

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despite Bayer's delay in giving notice, for the auditor has found that Aetna "was not [in] any way damaged by Bayer['s] . . . performing the balance of the work." This finding we interpret as meaning that Bayer did the work as economically as Aetna could have arranged to have it done, and that Aetna was not otherwise harmed by the delay in giving notice. [Note 6]

Bayer's delay did not enlarge Aetna's risk. If Condition (2) is regarded only as limiting Aetna's liability to the amount for which it could get Deschenes's omitted work done, Aetna's risk remained essentially the same amount regardless of whether notice was given. Accordingly, non-compliance with Condition (2) would not extend Aetna's risk of loss in the same way in which an insurer's risk may be expanded by noncompliance with the notice provisions (designed to facilitate loss investigation) of an insurance contract. If Bayer is barred from recovery on the bond because of such noncompliance, even if in fact no loss or damage has been caused to Aetna, the consequence will be a forfeiture of all the protection for which Bayer has bargained and for which Aetna has been paid.

Considerations of this character have led some courts to hold compensated sureties upon bonds, notwithstanding the violation of a provision for notice of default, if the violation in fact has caused no harm to the surety. This result reflects a general reluctance to relieve a compensated surety of its obligation because of any insubstantial, harmless violation of such a notice provision, even if expressed as a condition. The principle is in some respects analogous to that underlying the authorities already mentioned, holding that a compensated surety is not discharged by an extension of time which has done him no harm. Indeed, the language of some of those authorities (see e.g. fn. 4) is broad enough to cover the present situation.

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Under the older cases, Condition (2) would have been regarded as an express condition of Aetna's liability and Aetna would have been treated as discharged by Bayer's failure to comply strictly with any express or implied provision of Condition (2). See National Sur. Co. v. Long, 125 Fed. 887, 891 (8th Cir.); United States Fid. & Guar. Co. v. Rice, 148 Fed. 206, 208 (8th Cir.); Stearns, Suretyship (5th ed.) Sections 5.7, 7.16. See also Burdett v. Walsh, 235 Mass. 153, 155 (where the court did not enforce a surety company bond when the precise circumstances which would give rise to liability, in accordance with the letter of the bond, had not occurred). [Note 7]

On the other hand, in addition to general language in cases cited in the first part of this opinion, the following authorities protect a compensated surety only to the extent that it has been harmed by nonperformance of a condition requiring notice of the principal's default. See School Dist. No. 1 v. McCurley, 92 Kans. 53, 55; Martin v. Robinson, 127 Kans. 100, 103; Rose v. Ramm, 254 Mich. 259, 261-262; MacNear v. Malow, 282 Mich. 239, 243; Merrill, Notice, Sections 536, 824; note, 42 Harv. L. Rev. 838. [Note 8] That there is a split in authority is recognized in Southern Sur. Co. v. MacMillan Co. 58 F. 2d 541, 545-546 (10th Cir.). See Simpson, Suretyship, 169-171; Dole, Notice Requirements of Guaranty Contracts, 62 Mich. L. Rev. 57, 92-97; annotation, 23 A.L.R. 2d 1065, 1071-1076.

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On balance, we do not extend the strict rule of the insurance cases to the present situation so as to cause a forfeiture. We hold that, in the circumstances, Aetna was not discharged by Bayer's failure to give prompt notice of Deschenes's default, where Aetna has not been harmed. We need not discuss to what extent a different result would be necessary if Aetna had been caused damage by nonperformance of Condition (2) or if the notice of default had been for the purpose (a) of investigating whether liability had arisen, or (b) of preventing loss of evidence or further loss, or (c) of avoiding other appreciable damage to the surety. Cf. Gilmour v. Standard Sur. & Cas. Co. 292 Mass. 205, 210-211.

3. Aetna contends that the claim of one Quinn against Deschenes and against Bayer and its surety should not have been allowed. [Note 9] Quinn, as intervener, filed a claim more than sixty days, but less than ninety days, after Quinn's work had been done, for about 241 hours of use of dump trucks and operators. The auditor in effect found "as a matter of fact" that Quinn's claim was not governed by the sixty day period for filing claims for the hire of "dump trucks . . . from common or contract carriers for use in the prosecution of such contract" under G. L. c. 30, Section 39A (inserted by St. 1951, c. 694), but was governed by the ninety day limitation provided by Section 29 (as amended through St. 1957, c. 682, Section 1; see later amendments by St. 1962, c. 696, and St. 1964, c. 609, Sections 4 and 5). Section 29, as amended, includes claims "for the rental or hire of vehicles" and "for labor performed," terms broad enough to include Quinn's claim so far as that claim is described in the record.

Section 39A and Section 29, in respect of dump trucks seem to have, in part at least, overlapping coverage, although Section 39A (unlike Section 29) in terms extends to charges for such vehicles incurred by others than prime contractors and subcontractors.

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Section 39A expressly states that the security required in accordance therewith is "in addition to the security required by" c. 30, Section 39. Section 39 (as amended through St. 1955, c. 702, Section 1), was repealed by St. 1957, c. 682, Section 2, and the provisions of c. 149, Section 29, were broadened by St. 1957, c. 682, Section 1, to supplant c. 30, Section 39, and to cover much the same ground. [Note 10] Because c. 30, Section 39A, provided security in addition to that required by former Section 39, we interpret it as providing also security in addition to that provided by c. 149, Section 29, although, as to persons protected by both sections, it is coextensive. There is no reason why a claimant, like Quinn, who is within the scope of c. 149, Section 29, and who complies with that section, should not have the benefit of the security thereby required, even if he does not comply with c. 30, Section 39A. As Quinn's claim under c. 149, Section 29, was seasonably filed, it is immaterial that any claim which Quinn might have under c. 30, Section 39A, was not seasonably filed. [Note 11]

4. The order for judgment against Aetna is affirmed. The questions raised by a bill of exceptions filed by Aetna (to the denial of its motion for judgment) have been dealt with upon its appeal. Aetna's exceptions are dismissed. Deschenes filed no brief. His appeal is dismissed.

So ordered.