Aetna Indemnity Co. v. Baltimore, Sparrows Point & Chesapeake Railway Co.

TIeNKe, J., delivered the opinion of the Court. When this case was considered on a former appeal (112 3J!d. 389) the question for decision was presented upon bill and answer, and as some of the material allegations upon which relief was prayed were either denied or not admitted, the decree below granting the prayer of the bill was reversed and the cause was remanded for further proceedings. At that time the sole object of the suit was to secure the reformation of the bond executed by the Aetna Indemnity Company as surety, and intended to be also executed by the Constructing Engineers’ Company as principal, conditioned for the due performance by the latter company of its contract with the Baltimore, Sparrows’ Point and Chesapeake Railway Company for the building of an electric railway. This relief was sought in order that an action pending at law on the bond might be successfully prosecuted.

It was alleged in the bill that the bond for which the contract provided was delivered by the Constructing Company to the Railway Company and by it accepted; that the bond had been executed by the Aetna Company as surety, but by inadvertence had not been executed by the Constructing Company as principal ; that the construction work was begun and partially performed, but the railway company, finding that it would not be completed according to the terms of the contract, entered into a supplemental agreement with the constructing ⁵²⁶ company for tbe co-operation of the two companies in the further progress of the work; that the Aetna Company consented in writing to this arrangement, with the stipulation that its liability in any event should be limited to the payment of $10,000, as prescribed by the bond; that a receiver was shortly afterwards appointed for the constructing company, but as he was not authorized to proceed with the work, the railway company was compelled to employ other contractors for its completion; that the cost of having the road finished was largely increased over the amount the constructing company was to have received because of the fact that the unfinished work had to be done during the winter, and as a result .the railway company sustained a loss for which a suit at law had been brought on the bond; that after the bringing of that suit and within two weeks before the filing of the bill in this case, it was discovered that the bond was not executed .by the constructing company, this omission not having been noticed at the time of its delivery, and the bond having since been kept among the records of the railway company under the belief by its officers that it had been duly executed both by the principal and the surety. The constructing company and its receiver filed answers admitting that it was the intention of the company to' deliver a good and sufficient bond, and its president and secretary stated their understanding that they had in fact executed the instrument for the company before it was delivered. The Aetna Company, however, answered separately alleging that the execution of the bond by the constructing company was a condition precedent to liability on the part of the surety; and that the railway company had been guilty of laches. It averred .that it had consented to the supplemental agreement referred to in the bill in the mistaken belief that the bond had been duly executed.

It charged that the railway company as custodian of the bond knew or ought to have known that it had not been executed, but failed to disclose the fact until long after the alleged liability had occurred and the action at law had been instituted. The answer denied ⁵²⁷ that tbe railway company was compelled to pay for tbe completion of tbe work tbe sum mentioned in tbe bill in excess of tbe amount contracted to bo paid to the constructing company, or that there was any reason for the work to cost more than tbe amount which that company was 1o have received; and it alleged that the railway company owed the constructing company a large sum of money. One of the averments of the bill which the answer neither admitted nor denied was that the plaintiff in good faith accepted the instrument as the properly executed bond of the constructing company, with the Aetna Company as surety, given in performance of the agreement to that effect, that it was received without such scrutiny as to disclose the fact that the constructing company had not executed it, and that being regarded as a good and binding obligation on the part of both companies, it was placed among the records of the railway company for safe keeping. In this condition of the pleadings, and in the absence of evidence to sustain the material allegations of the bill as to which the answer did not waive the necessity of proof, it was held that a decree of reformation could not properly be passed, but that tbe cause should be remanded in order that a replication might be filed and testimony taken to establish the essential facts.

It was said, however, by Cintur Judgts Boyd in the opinion disposing of tbe case as then presented that “If a surety executes such a bond, and gives it to tbe principal to be executed by him, and then to deliver it to tbe obligee, and the principal does so deliver it, having simply overlooked the fact that he had not executed it, and the obligee, believing it was properly executed, and not observing that it had not been by the principal, placed it away for safe keeping with its papers, all three parties believing it had been regularly executed and intending that it should be, it would be a confession of a very limited power to do justice, if a Court of equity would have to admit that it could not require the bond to be put in the shape it was intended and believed to be by all the parties, merely because one of tbexn ⁵²⁸ was a surety. But we do not understand the powers of a Court of equity to be so restricted.” The- opinion suggested that upon the remanding of the proceedings it might “be better to amend the bill, so far as necessary to have the whole matter disposed of in the equity case, if the Court- concludes that the plaintiff is entitled to have the bond corrected ;” and the principle was stated that “When a Court of equity ’reforms an instrument, it can retain control and enforce- it as reformed, administering full relief.” The present appeal is from a decree passed upon pleadings amended in consequence of the suggestion of this Court and upon evidence directed to the issues’ of fact thus raised. The relief prayed by the pending bill, and granted by the decree now under review, involves both the reformation of the bond and the payment of the sum it prescribes on account of the loss claimed and found to have been sustained by the railway company as the result of the constructing company's discontinuance of the work. We have now to determine upon the evidence whether the appellee is entitled to have the bond reformed and to enforce against it the liability asserted in the bill.

There are also questions arising upon a plea of contractual limitations filed by the Aetna Company, and upon its petition that the complainant be required to elect between its suits at law and in equity. The constructing company and its receiver did not dispute the right, of the railway company to have the bond corrected. Their defence was based upon the ground that the-railway company’s conduct was responsible for the failure of the constructing company to complete the -work according to the contract. They have not appealed, however, from the decree overruling this contention, and the questions before us are to be decided from the standpoint of the Aetna Company as the sole appellant.

In our judgment the evidence in the present record fully sustains the allegations of the bill and gratifies the rule announced upon the former appeal with respect to the circumstances upon which the right of reformation was predicated. It is made perfectly clear by the testimony that the ⁵²⁹ bond was executed by the Aetna Company and given by it to the constructing company to be by it executed and then delivered to the obligee, that it was delivered by the principal to the railway company as the bond required by the contract between them, both overlooking the fact that its execution by the principal had been omitted and both believing that it had been properly executed by each of the obligors, and that in this belief the railway company filed the bond away for safe keeping and remained in ignorance of the defect in its execution until shortly before the institution of this suit. There can be no possible doubt that all the parties to the bond intended and understood it to be a perfected obligation when it reached the hands of the railway company, and that upon the faith of this indemnity the contract of the principal for the construction of the obligee’s railway was allowed to become effective. These are the precise conditions which this Court described in the prior appeal a« presenting an appropriate case for the reformation of a bond even as against a surety, and as there is no evidence of laches to which the appellant points beyond the mere continuance of the original misapprehension of the parties, and as the surety does not appear to have been prejudiced in any way by the fact that the error was not sooner discovered, we must concur in the action of the learned Court below in decreeing that the instrument should be reformed.

There is a provision in the bond that any suit at law or proceedings in equity to recover any claim against the surety must be instituted within six months after the completion of the work specified in the contract. The suit at law on the bond was brought within the period prescribed, but the original bill in equity was not filed until three} years later. In its answer to the present bill the Aetna Company pleads the provisions just mentioned as a bar to recovery against it. as surety. The theory of this plea is that since the bill is now directed to the enforcement of the bond as well as to its reformation, the limitation in question is available as a defence. ⁵³⁰ The primary purpose of the bill was exclusively for the reformation of the bond, and as against such relief it is conceded that the contractual limitation could not be pleaded.

If the appellees had followed the procedure originally contemplated, the bill would have retained its character as an auxiliary remedy. In that event the liability of the surety would doubtless have been enforced in the action at law after the hond had been reformed in equity. If this course had been pursued, the question now being considered could not have arisen, and if we were to reverse the decree and dismiss the bill so far as recovery against the surety is concerned, the suit at law could still be prosecuted to judgment. The bill was amended in conformity with a suggestion of this Court which was made with a view to the convenient and economical administration of justice between the parties, and was based upon the well established principle stated in the former opinion.

It is obvious that the whole purpose of the provision upon which the appellant relies was to protect the surety against prejudicial delay in the assertion of its liability on the bond. As this purpose has been fully accomplished by the institution of the suit at law within the specified period, and as the proceeding now before us is predicated upon that prior and pending action, we can have no hestitation in deciding, under the circumstances of this .case, that the plea of limitations should not be sustained. The petition of the surety to require the complainant to elect between its suits at law and in equity was refused by the Court below, but an order was passed restraining the prosecution of the former during the pendency of the latter action. In reference to this application we think it- sufficient to observe that the conditions which would make such a course appropriate are not here present.

The legal action could not be maintained without a reformation of the bond, and this could be secured only in the equity proceedings. To require an election, therefore, would be to simply force a dismissal of the suit at law. The effect of this might be to enable the surety to urge with greater force the defence of limitations upon which it seeks to rely. If the bill had not been ⁵³¹ amended, it would not be proposed that an election or dismissal should be required, and we are certainly not justified in compelling such action merely because the scope of the bill has been enlarged, at tbe suggestion of this Court, to admit of a complete adjudication of the rights and liabilities of the parties in one proceeding.

The principle defence in the case is founded upon the contention that the conduct of the railway company, both before the contract was awarded and during the prosecution of the work, brought about the failure of the constructing company to fully perform its undertaking. In order that this defence may be understood it will be necessary to state briefly the facts relating to the inception of the contract and its partial performance and eventual abandonment. When the constructing company and others were invited to make proposals for the building of the road they were furnished by the railway company with blue prints containing what was known as the