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Acoustics Inc. v. Hanover Insurance Co.

Decided: December 21, 1971.


Walsh, J.d.c. (temporarily assigned).


[118 NJSuper Page 363] The facts leading to the present controversy reveal that on November 4, 1968 Arnold Walter Nursing Home (Walter) entered into a contract with Russdick Construction Corporation (Russdick) for the construction of a nursing home. Under the terms of the contract Russdick agreed to furnish an FHA payment bond in the amount of $537,532.00, which also was executed on November 4, 1968. Under the terms of the bond Russdick appeared as principal, defendant as surety, Walter as owner-obligee and Ridgewood Savings Bank as lender-obligee. Among the specifications accompanying the contract were provisions calling for the installation of acoustical ceilings in certain areas of the nursing home. On or about October

27, 1969 plaintiff and Russdick entered into a contract whereby plaintiff agreed to install the acoustical ceilings at the nursing home for the sum of $9,595. They subsequently entered into three change orders providing for an additional $1,321. in extras.

Plaintiff was one of the last subcontractors to perform work at the nursing home since it was necessary to have the structure substantially completed before the acoustical ceilings were installed. Plaintiff completed the work and was paid on account $4,000, leaving an undisputed balance of $6,911.00. Russdick acknowledged its indebtedness to plaintiff in writing, and defendant sent a telegram on October 9, 1970 verifying its bond subject to the obligee's priority, the limit of liability of the bond and the two-year limitation for suits. The telegram also affirmed defendant's willingness to pay any valid claim for labor and material furnished by a subcontractor. On or about November 5, 1970 Russdick and Walter filed petitions under chapter 11 of the Bankruptcy Act. Plaintiff now seeks the balance of its money from defendant surety.

The applicable law governing plaintiff's claim is summarized in Graybar Electric Co. v. Continental Cas. Co. , 50 N.J. Super. 289 (App. Div. 1958), where the court stated:

The great weight of authority sustains the right of a person furnishing labor and materials on a private building to recover under a contractor's bond in which the owner is obligee and which is conditioned upon the payment by the contractor of all claims for labor and materials. [at 298]

Where the bond and contract refer to each other the two documents are considered to be integrated writings and must be considered together. The contract expressed the obligation of Russdick to pay for all material and equipment required for the job, and required him to furnish Walter with a payment bond known as a "contract bond-dual-obligee" which provided in part:

NOW, THEREFORE, the condition of this obligation is such that, if Principal shall well and truly perform all the undertakings, covenants, terms, conditions and agreements of said Contract on its part, and fully indemnify and save harmless Obligees from all cost and damage which they may suffer by reason of failure so to do, and fully reimburse and repay Obligees all outlay and expense which Obligees may incur in making good any such default, and further, that if Principal shall pay all persons who have contracts directly with Principal for labor or materials furnished pursuant to the provisions of said Contract, failing which such persons shall have a direct right of action against Principal and Surety under this obligation, subject to Obligees' priority, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

This language is similar to a provision contained in the standard form of the American Institute of Architects bond referred to in the case of Johnson Electric Co. v. Columbia Casualty Co. , 101 Fla. 186, 133 So. 850, 77 A.L.R. 1 (Fla. Sup. Ct. 1931). At the time of the Johnson decision that provision had been construed in several jurisdictions as being sufficient to protect subcontractors not direct parties to the bond or the contract secured.

A review of the law indicates that plaintiff in the present situation occupies the status of a third-party beneficiary. Restatement, Security , ยง 165, reads:

Where a surety for a contractor on a construction contract agrees in terms with the owner that the contractor will pay for labor and materials, or guarantees to the owner the promise of the contractor to pay for labor and materials, those furnishing labor or materials have a right against the surety as third party beneficiaries of the surety's contract, unless the surety's contract in terms disclaims liability to such persons.

The primary concern of the court in ascertaining the rights of the third-party beneficiary is to ascertain the intention of the parties to the agreements out of which the alleged rights emanate. In order to examine the intent of the parties the court must look at the integrated documents and accord their language a reasonable ...

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