Mayor of Baltimore v. Fidelity & Deposit Co.

Orth, J., delivered the opinion of the Court. The background of this case was set out in American Structures v. City of Balto., 278 Md. 356 , 364 A. 2d 55 (1976): “In May, 1974, the [Mayor and City Council of Baltimore (the City)] entered into a contract with American Structures, Inc. (the Contractor) for the construction of a storm drain outfall, in accordance with the specifications prepared by the Maryland ⁴³⁴ State Highway Administration (the Highway Administration). “Work commenced in September, 1974, and thereafter the Contractor encountered subsurface conditions which allegedly differed substantially from those contemplated by the contract documents. Apparently in reliance on a provision of contract documents which required the giving of prompt notice should conditions be identified which increased the character of the work to be performed under the contract, the Contractor, in January, 1975, notified the City that it was confronted with such a situation. The City apparently directed the Contractor to proceed with the work. “When negotiations looking toward an adjustment of the contract price proved inconclusive, in September, 1975, the Contractor brought a declaratory judgment action in the Circuit Court of Baltimore City against the City and the Highway Administration, which had as its purpose the construction of the contract provisions.

Both defendants interposed the defense of sovereign immunity, the City by a motion to dismiss, and the State by a motion raising preliminary objection. From an order dismissing the action, the Contractor has appealed.” Id at 358. We determined that “municipalities and counties have been regularly subject to suit in contract actions, whether the contracts were made in performance of a governmental or proprietary function, as long as the execution of the contract was within the power of the governmental unit.” Id. at 359-360 . We concluded “that on the record before it the trial court was quite correct when it granted the State’s motion raising a preliminary objection, but that the City’s motion to dismiss should have been denied.” Id. at 360 .

Affirming the order in part and reversing it in part, we remanded the case for further proceedings. Id. at 361 . Fidelity and Deposit Company of Maryland (the Surety), a ⁴³⁵ corporation authorized to serve as a compensated surety, executed a bond required by the City as a condition to the award of the contract. The Contractor ceased work under the contract on 1 June 1976, and formal default by it and notification to the Surety occurred on 26 June 1976.

On 1 September the Surety filed a petition in equity in the Circuit Court of Baltimore City (the action was subsequently transferred to the law side, Superior Court of Baltimore City) for a declaratory judgment and other relief (the Suit) against the Contractor, the City, James H. Graves and Ellen Graves, his wife, and Louis Tabor and Aline Tabor, his wife (the Indemnitors), and three representative claimants under the bond for work done and materials provided for the project (the Claimants). The City filed a third party claim against Ballard-Diver Joint Venture (Ballard-Divex*), which had allegedly performed design engineering services relating to the project for the City, seeking indemnity for all “sums that may be adjudged due to (the Surety).” Ballard-Diver demurred to the third party claim. Count One of the Suit sought, in essence, a determination with respect to the validity of the opposing contentions of the Contractor as principal and the City as obligee, and the rights and obligations of the Surety based on each determination. Count Two sought an interpretation of the surety bond in the light of the “Little Miller Act,” (the Act), now codified as Maryland Code (1974, 1977 Cum.

Supp.) § 9-113 of the Real Property Article. With respect to Count Two, the Surety filed a motion for partial summary judgment and for declaration of rights. On 22 June 1977 the trial court sustained the demurrer of Ballard-Diver without leave to amend and granted the Surety’s motion. On 11 July the City wrote the court requesting clarification of the order with regard to claims of sub-contractors.

On 18 July the court replied that its order of 22 June was correct and “accordingly should stand.” It set out its reasons for so ruling. On 21 July the City noted an appeal from the order of 22 June. Of course, the order of 22 June was not immediately appealable unless the trial court, in accordance with Maryland Rule 606 a, expressly ⁴³⁶ determined that there was no just reason for delay and expressly directed the entry of final judgment. Tedrow v. Ford Motor Co., 260 Md. 142, 144 , 271 A. 2d 688 (1970); Harkins v. August, 251 Md. 108, 110-111 , 246 A. 2d 268 (1968).

The City ultimately realized this and on 3 August filed a motion for the entry of a final judgment as required by Rule 605 a. The court, “upon an express determination ... that there is no just reason for delay in appealing the ruling of the Court of June 22, 1977,” ordered “that final judgment be entered granting the Motion of Fidelity and Deposit Company of Maryland for partial summary judgment and declaration of rights as stated in the Ruling of the Court dated June 22, 1977.” The City thereupon again noted an appeal to the Court of Special Appeals. We granted a writ of certiorari before decision by that court. I Ballard-Diver moved in its brief to dismiss the appeal from that part of the order of 22 June 1977 which sustained its demurrer without leave to amend.

Maryland Rule 1035 b 1 and 1036 d. It is manifest that the order of 3 August, issued to permit the appeal as contemplated by Rule 605 a, did not contain an express direction for the entry of final judgment in favor of Ballard-Diver, but dealt only with the Surety’s partial summary judgment and declaration of rights. Therefore, that part of the order affecting Ballard-Diver remained interlocutory, and the City’s appeal therefrom was premature. Harkins v. August, supra.

We grant Ballard-Diver’s motion and dismiss the appeal as to that appellee. II For almost two decades it has been the statutory requirement that before any contract exceeding $5,000 for the construction of any public work of any city is awarded to any person, he shall furnish to the city the following bonds which shall become binding upon the award of the contract: “(1) A performance bond executed by a surety ⁴³⁷ company authorized to do business in this State satisfactory to the public body awarding the contract, and in such amount as it shall deem adequate, for the protection of the public body. “(2) A payment bond executed by a surety company authorized to do business in this State satisfactory to the public body for the protection of all persons supplying labor and materials to the contractor [the person awarded the contract] or his subcontractor in the prosecution of the work provided for in the contract for the use of each such person. The bond shall be in the amount not less than fifty per centum (50%) of the total amount payable by the terms of the contract.” Maryland Code (1957, 1964 Repl. Vol.) Art. 90, § 11 (a). 1 The required bonds shall be payable to the City and shall be ⁴³⁸ approved by its attorney as to form.

Code (1974, 1977 Cum. Supp.) § 9-113 (e) of the Real Property Article. 2 We pointed out in State Hwy. Adm. v. Transamerica Ins., 278 Md. 690, 697 , 367 A. 2d 509 (1976), quoting Montgomery County v. Glassman, 245 Md. 192, 201 , 225 A. 2d 448 (1967) and citing Hamilton v. Board of Education, 233 Md. 196, 200 , 195 A. 2d 710 (1963), that the purpose of the payment bond, based on the statute, is to protect subcontractors and materialmen on public projects where they have no lien on the work done. We observed in Transamerica, at 697, that the purpose of the performance bond, in the words of the statute, “ ‘is for the protection of the public body,’ ” here, the City. “Its statutory object is to assure the construction and completion of the work contracted for.

That is, the purpose of the performance bond, as its name implies, is to secure to the [City] the performance of the contract for the construction of the public work.” Id. Ill Only one bond was executed with respect to the contract here. The Surety’s allegation in its petition for declaratory judgment that it executed the bond “required by and drafted by the City and included in its bid proposal, which bond was to be executed as a condition to the awarding of the contract...” was admitted by the City in its answer. 3 ⁴³⁹ The bond bound the Contractor, as principal, and the Surety, as surety, unto the City in “the full and just sum” of $5,346,278, the amount of the contract price for the project. The bond obligated the Contractor to “well and truly perform, fulfill and comply in all respects the undertakings, covenants, terms, conditions and agreements” of the contract for the construction of the project.

The City was indemnified and saved harmless “against and from all costs, expenses, damages, injury or loss to which the [City] may be subjected by reason of any wrongdoing, misconduct, want of care or skill, negligence or default upon the part of the said [Contractor] or in any manner arising directly or indirectly from any and all causes whatsoever, in or about the execution or performance of the Contract....” The bond provided that the Contractor “shall promptly settle, pay, and satisfy, all claims, demands, and suits made or instituted against the said [Contractor] by any and all persons, firms and/or corporations for the nonpayment of labor performed in and about the work to be done under the Contract for which the said [Contractor] is liable, including any and all extra work that may become part of the Contract, for all material furnished, installed, erected and incorporated in said work for which the said [Contractor] is liable, and shall save and keep harmless the said [City] against and from all losses to it from any cause whatsoever ... in the matter of construction of all the aforementioned____” If this all was done, then the obligation was void; otherwise it remained “in full force and virtue at law.” The bond concluded with a proviso: “IT IS PROVIDED HOWEVER, That no person, firm and/or corporation other than the said [City] shall have any right, title or interest in, to and/or ⁴⁴⁰ under this instrument until and after the said [City] shall have been fully paid and/or reimbursed for any and all costs, expenses, damages and/or losses of every kind, nature and description sustained by it or which may be sustained by it and as to which it is or may be entitled to indemnification under the terms of this instrument.” Why the City, in the face of the Act, drafted, approved and included this document with its bid proposals instead of clearly complying with the statute is difficult to comprehend. The surety apparently executed the document because the City had approved it as the bond to be furnished with the bid. In any event, it became binding upon the award of the contract, and upon default in the contract by the Contractor the parties inevitably became at odds as to their rights and obligations under it vis-a-vis the statutory prescriptions. 4 The Surety and the City agree that the bond here was intended to comply with the Act. They also agree that, therefore, it is to be construed as imposing the obligations established by the Act.

This is in accord with the view expressed by this Court in Westinghouse Electric v. Minnix, 259 Md. 305, 316 , 269 A. 2d 580 (1970) in which we said that the following statement in City of Charles City v. Rasmussen, 210 Iowa 841, 847 , 232 N. W. 137 (1930) reflected our thinking: “The bond in this case is a statutory bond, and the liability of the parties to the bond must be measured by the statute and not the wording of the bond * * *. We have said repeatedly that any addition to such bond will be treated as surplusage, and any omission ⁴⁴¹ of the provisions of the statute will be read into the bond.” Thus, the bond here is to be construed as comprising both a performance bond and a payment bond. The issue is what is its coverage, respectively, as a performance bond and as a payment bond. IV In granting the Surety’s motion for partial summary judgment and declaration of rights as to Count Two of the declaration, the court first found that “the total liability of [the Surety] on the bond in question was and is $5,346,278.00, the bond on its face binding [the Surety] 'in the full and just sum of Five Million, three hundred forty-six thousand, two hundred seventy-eight ($5,346,278.00) dollars.’ (emphasis added).” We agree. “[T]he liability of a surety upon his bond is dependent upon his covenants and agreements, or, in other words, that an ordinary conventional bond is a simple contract____” Women’s Hospital v. Fid. & Guar.

Co., 177 Md. 615, 619 , 11 A. 2d 457, 459 (1940). “The cardinal rule in the interpretation of bonds, as in the interpretation of all written contracts, is to ascertain the intention of the parties and to give effect to that intention if it can be done consistently with legal principles.” Levy v. Glens Falls Indem. Co., 210 Md. 265, 273 , 123 A. 2d 348 (1956). “It is elementary that a surety on a bond is bound only to the extent and under the circumstances stipulated in the obligation.” Levy at 271 . “Nothing can be clearer, both upon principle and authority, than the doctrine, that the liability of a surety is not to be extended, by implication, beyond the terms of his contract. To the extent, and in the manner, and under the circumstances pointed out in his obligation, he is bound, and no farther.” Miller v. Stewart, 9 Wheat. 680, 702-703 , 6 L. Ed. 189 (1824), quoted in Art. Etc. Corp. v. Fidelity Con.

Corp., 194 Md. 110, 116 , 69 A. 2d 808 (1949). See Transamerica Ins., 278 Md. at 700 ; Duffy v. Buena Vista Ice Co., 122 Md. 275, 277-278 , 90 ⁴⁴² A. 53 (1914); Booth v. Irving Nat. Exch. Bank, 116 Md. 668, 672 , 82 A. 652 (1911).

There is no statute authorizing the penalty of the bond to be in excess of that specified therein. The Act requires that the payment bond shall be in the amount not less than 50% of the total amount payable by the terms of the contract. § 9-113 (a) (2). The amount of the performance bond shall be such as the public body