Price, Sullivan and Leonard. The opinion of the court was delivered by Leonard, J.s.c. (temporarily assigned).
Plaintiff appeals from a final judgment of the Superior Court, Law Division, in favor of defendant.
Prior to July 1955 defendant (contractor) became the general contractor for the construction of a hangar at the Burlington Airport, Vermont, for the U.S. Government. On July 18, 1955 contractor entered into a contract with Industrial Associates, Inc. (subcontractor) to supply and erect structural steel on this job. Subcontractor then applied to plaintiff (surety) for the surety bond required by the subcontract. Surety then executed a payment and performance bond conditioned upon the faithful performance of the subcontractor-principal's obligations, as well as the payment of all persons supplying labor and material under the subcontract.
Thereafter, contractor and subcontractor entered into two other contracts -- one for construction work at an Air Force base in Delaware and the other for construction work at a hospital in New York State. Neither of those contracts required a payment and performance bond.
Subsequently, pursuant to a petition filed on November 14, 1956, subcontractor was adjudicated a bankrupt and defaulted on all three of its contracts. Contractor then notified surety that its principal, subcontractor, was in default on the Vermont contract. Surety replied that it elected to complete performance of the contract and assert its rights as surety. Thereupon, by agreement with surety, contractor completed the remaining work itself for the agreed sum of $2,386.33, which amount was deducted from the unpaid balance of the contract, leaving a total due of $9,603.37. Also, in accordance with its obligation, surety paid the sum of $17,956.05 on account of labor and material expended on the Vermont project. Surety then demanded
the unpaid balance due on the Vermont contract. Contractor refused to pay because it had finished the New York and Delaware jobs itself at a cost of $9,937.09 over the prices established in its contract with subcontractor, and it claimed the right to set off the losses it sustained on the New York and Delaware contracts against the unpaid balance due on the Vermont contract.
The trial court found in favor of defendant, dismissing plaintiff-surety's complaint.
Surety bases its appeal upon two grounds. (1) It reasons that the subcontract obligated subcontractor to pay its suppliers and, in the event of default, contractor had the right to apply the contract monies to this end; therefore, when subcontractor did default and surety paid the suppliers, it became subrogated to contractor's right to apply the contract monies to offset the loss; (2) it relies on the assignment of the contract price in its agreement with subcontractor, claiming that this was prior to the New York and Delaware contracts and that contractor had notice of such assignment and of its priority in point of time.
Paragraph 27 of the Vermont contract between contractor and subcontractor gives contractor the right, in case of default, to apply the monies due subcontractor to the payment of the claim of subcontractor's suppliers. Surety, in its bond, undertook to reimburse subcontractor's suppliers should subcontractor default in making prompt payment to them. As hereinbefore stated, upon subcontractor's default, surety, in accordance with its bond, paid to the laborers and suppliers the sum of $17,956.05 and, in addition, it paid contractor $2,386.33 to complete the Vermont contract. As a result, surety now claims to be subrogated to contractor's right to apply the balance due subcontractor on that contract.
A surety, by paying the debt of his principal at the time he is obligated so to pay, normally acquires an immediate right to be subrogated, to the extent required for his reimbursement, to all rights, remedies, and securities
which were available to the creditor to obtain payment. 83 C.J.S., Subrogation , § 47 a , at p. 667 (1953).
"As applied to suretyship, subrogation denotes that the surety, upon performance, is placed in the position of the creditor both in respect of the creditor's right against the principal and of security held by the creditor." Restatement, Security , § 141, comment (a), at p. 384 (1941).
Cf. Hackensack Brick Co. v. Borough of Bogota , 86 N.J. Eq. 143 (Ch. 1916). When a surety pays his principal's laborers and materialmen, he is fulfilling his obligation not only to his defaulting principal's suppliers but to the contractor-creditor as well. Under those circumstances, a surety becomes subrogated to the rights of the contractor who required a bond as a condition of his contract with the principal and who reserved the right to withhold earned contract funds and apply them to the payment of materialmen in case of default. Continental Casualty Co. v. United States , 145 Ct. Cl. 99, 169 F. Supp. 945 (Ct. Cl. 1959). Thus a surety, paying for the labor and materials of his principal, is generally entitled to reimbursement out of the funds which are due the principal on the bonded contract. United States F. & G. Co. v. Triborough Bridge Authority , 297 N.Y. 31, 74 N.E. 2 d 226 (Ct. App. 1947).
The elements of subrogation are as follows:
"* * * '(1) that the persons seeking its benefits must have paid a debt due to a third party, before he can be substituted to that party's rights; and (2) that in doing this he must not act as a mere volunteer, but on compulsion, to save himself from loss * * *.'" Prairie State National Bank v. United States , 164 U.S. 227, 231, 17 S. Ct. 142, 41 L. Ed. 412, 416 (1896).
Cf. Henningsen v. United States Fidelity & G. Co. , 208 U.S. 404, 28 S. Ct. 389, 52 L. Ed. 547 (1908); United States F. & G. Co. v. Triborough Bridge Authority, supra. Since the surety paid the debt due by the subcontractor under the ...