Knecht, Inc. v. United Pacific Insurance Company

SLOVITER, Before GREENBERG COWEN, Judges. Circuit OF THE COURT OPINION GREENBERG, Judge. Circuit appeal on This matter is before the court by defendant Pacific Insurance Company denying from an order its motion 59(e) pursuant to alter or to Fed.R.Civ.P. summary judgment entered in fa amend a Knecht, plaintiff Inc. and from an vor attorney’s for fees in this action on payment bond. The dis labor and material for sum judge trict ruled on cross-motions mary judgment that Knecht was entitled to scope our recover on the bond and thus plenary. review on this issue See Good F.2d man v. Meade Johnson & (3d Cir.1976), 429 U.S. cert. denied L.Ed.2d 748 97 S.Ct. summary judgment affirm the but We will fees. will reverse the order leading ap- undisputed facts to this 19,1983 peal are as follows. On November bond, i.e., Sordoni, International, Inc., owner, entered with the Knoll Construction into a contract with Sordoni or with a subcontractor of the contractor, of a for the construction reasonably and material used facility adjacent to assembly/shipping new quired of the contract. Greenville, Montgom- plant Knoll’s East provided princi- The bond further Pennsylvania. This was a sub- ery County, pal surety agreed severally and jointly and with maximum cost project stantial unpaid every “may sue on claimant and, $14,700,000 surprisingly, Knoll of claimant, the use prose- this bond for complex. documents were the contract cute the suit to final for such judgment protection of Knoll from They provided for sum or sums as be due claim- also forth that claims and set lien “[i]f ant, and have execution The own- thereon. [Knoll], Contractor requested Owner er, pay- shall not be for the liable [Knoll] shall, cost, provide at Owner’s [Sordoni] any expenses any ment of costs or such (a) bonds to assure the surety bond or suit.” in full performance of the Work timely September On 1984 Sordoni and W.J. Drawings compliance with the Final and Ambrose, Inc. entered into subcontract (b) Project and Specifications for the incorporating the Knoll-Sordoni contract labor, materials, equipment assure that all providing perform and for Ambrose to incorporated into the Work or supplies and ventilating heating, conditioning and air employed in therewith will be connection project. work on the Knoll The Sordoni- in full. Such or bonds bond Ambrose subcontract included Article 19.1 sureties, issued amounts and will be provided that: which acceptable in com- on terms to Owner and ASSIGNMENT AND SUBCON- pliance the laws of Penn- State TRACTING. sylvania.” Agreement any Neither nor monies 28, 1983, anticipation On October due or to become due hereunder shall be contract, the execution of Knoll assignable prior without con- written stipulation barring made a lien sent of Contractor nor shall against property by [Sordoni] claims Sordoni and any part or subcontractor, materialman, whole of the Work be any workman prior person subcontracted without like written any any or labor or mate- stipula- Any assignment consent. such or supplied project. rial This sub- Montgom- contracting in the without prior tion was filed office of the such written ery County Prothonotary on November shall be void effect consent and of no pursuant apparently to section 402 of right right shall vest or of action in Mechanics’ Lien Law of assignee or sub-subcontractor (Purdon Pa.Stat.Ann. tit. against Contractor. Contrac- 1965). any consent to assignment tor’s or sub- contracting shall not relieve Subcon- November and Unit- On 1983 Sordoni any agree- tractor of its [Ambrose] ed, respectively surety, ments, duties, responsibilities or obli- payment a labor executed and material gations under this Agreement and the binding jointly and sever- themselves other Contract Documents and Sub- $14,700,000. ally to Knoll for The condi- shall fully contractor be and remain as incorporated tion of defaults, responsible and liable for the contract, Knoll-Sordoni was that if Sordoni neglects, assign- acts and of its omissions promptly “shall make to all claim- per- defined, ees and sub-subcontractors and all hereinafter all ants as directly indirectly employed by sons or reasonably required used and material or defaults, Contract, is for them as it ne- for use its own void; glects, acts and then this other- omissions and those shall officers, employees. it shall remain in force and ef- wise full own servants and fect____” A in the claimant was defined The Subcontractor shall each of its bind person as a permitted with a direct contract to all sub-subcontractors terms, of this Knecht’s. The order also provisions and covenants recited “that judgment is entered in favor Agreement plain- and the other Contract Doc- tiff and respect permitted subcon- defendant.” uments with 59(e) then moved Fed.R.Civ.P. portions of the Work. The Con- al- tracted judgment ter amend the or but this any subcontracting motion tractor’s consent order of was denied November shall not be deemed to create con- provided which also that United was to party beneficiary third rela- tractual or $134,784 with interest and that a tionship the Contractor between hearing would be later held to assess attor- Work, to whom the sub-subcontractor ney’s fees.2 On December 1987 the thereof, subcontracted, any portion judge testimony took on the issue of attor- any right and shall not vest ney’s judge fees. On March 1988 the action in such sub-subcontractor $48,432.84 entered an order for for attor- the or the Owner Contractor [Knoll]. fees, ney’s the reciting that it was 18, entered On October Ambrose predicated of the bond per- Knecht to into a sub-subcontract with allowing recovery for all “sums ... on the Knoll form sheet metal work justly Thus, judge’s due.” in the view un- in- contract project. The Ambrose-Knecht less Knecht’s fees were allowed Knecht corporated the Sordoni-Ambrose “would not be made whole” and would not “principal referred to as which was all appeal recover sums due. This provided that Knecht was contract” and followed. by provisions bound Leaving aside award of contract.1 fees, might it be wondered on the basis of agree parties that work went for- our recitation issue by what could raised project payments and ward on the were is, all, appeal. on this United after clear by Knoll which in turn made to Sordoni agreed that and in the Ambrose, however, de- Ambrose. bring Knoll that a claimant with could obligations in its to Knecht fail- faulted against jointly them severally action or $134,784 pay due Knecht even to supplied the bond for labor and materials though requested and Ambrose received project. There is no doubt that Ultimately, for Knecht’s work. performed sup- Knecht the services and Knecht and three other creditors of Amb- plied the materials for which it seeks recov- involuntary petition in rose filed an bank- ery claimant and is a as defined ruptcy against Ambrose. bond, as it had a sub-subcontract with 1,May brought On 1986 Knecht this which was a subcontractor of Sor- Ambrose diversity action under law doni. United does not contend otherwise against United on the bond. The challenge computation nor does it Knecht’s summary judgment filed cross-motions for suggest pro- Knecht of its claim is judge, cedurally bringing and on October 1987 the district from this barred case. apparently opinion, without entered an or- it is true that Knecht as a While sub-sub- denying granting precluded by motion and contractor the contract der United’s was dispute print- undoubtedly 1. The Ambrose-Knecht contract was on a While there is a of fact on provided ed Ambrose form and that Ambrose point, purposes appeal accept this of this we materials, entering equipment its was order for United’s contention which seems to be accurate performed pursuant services to be and/or interpretation Knecht’s the Ambrose- as under prepared by contract documents the architect Thus, incorporated Knecht contract itself. engineer part of the as “contract between result, dispute of our of fact is not view AMBROSE, Knecht, (herein- WJ. INC. and Inc. material. CONTRACT) referred to as PRINCIPAL hereby part become a of the Contract as if judge hearing also ordered that a 2. The length set at attached hereto.” United forth damages punitive on Knecht’s claim for be held notwithstanding contends that this reference to but this claim was later dismissed on United’s contract, the Ambrose-Knecht it was the Sordo- cross-appealed motion. Knecht has not from incorporated. ni-Ambrose contract which was denying damages. punitive the order this, disputes contending that the Amb- says. contract means what it rose-Knecht Here, however, asserting against a lien claimants. documents and, along possible though incorporating property Knoll-Sordoni claimants, contract, filing a matter of law did condition against pro- surety liens in the either the to stipulation satisfaction office, obligations thonotary's nothing the bond under the Knoll-Sordoni con- tract, right way right to nor was the of a conditioned claimant’s claimant right to way ability under it on its to assert lien.3 related its claim Rather, Finally, agree- undertaking lien. while the Sordoni-Ambrose assert a right ment limited the a sub-subcontrac- Sordoni, for labor to make a claim claimants and material. also

tor See Security, made reference bond Restatement prejudiced express terms never under established law bring an United should be of a sub-subcontractor liable on bond. action United. plainly United seeks to avoid its

Accordingly, point obligation by advancing the facts seem stated what reached in its princi same result Penn characterizes brief as basic law, ple of Casualty sylvania Supply Co. National where joint Pa.Super. and several with the greater Superior There the Court of will be no than principal. that that of observes that bring held a materialman could general rule, against surety surety a action a a “[a]s a bond which extinguishment ends of the building obli a contractor was the gation Therefore, principal.” of his obligee, United inasmuch the owner was as the “a contends that determination as to building incorporated contract and damages whether United liable required contract contractor- requires an examination as to used pay for materials right any whether Knecht has of action “[wjhat project. The court observed that against points Sordoni.” It then that out may prompted obligee require have quoted under the above Article of the 19.1 protection parties, also is unimpor for third contract, Sordoni-Ambrose a sub-subcon stipulation protected by tant. She was party tractor is not a contractual or third against her liens and motives have beneficiary relationship with Sordoni and sentimental, altruistic even been without against can have no of action either affecting obligation surety.” Accordingly, Sordoni or Knoll.4 as Knecht at Pa.Super. 152 at 31 A.2d against Sordoni, can no assert claim Unit Here, owner, Knoll, too, the for reasons ed, surety, cannot Sordoni’s be liable to protec not our concern obtained support contention, In Knecht. Similarly, tion for sub-subcontractors. primarily United relies on Dravo-Doyle Supreme Pennsylvania in Court of Dravo- Royal Indemnity Co. v. 92 Pa. Doyle Royal Indemnity Co. v. 372 Pa. above, A.2d discussed and McShain v. (1952), 92 A.2d 554 made it clear that if America, Indemnity Ins. Co. North specifically requires a subcontract sub Pa. materialmen, surety contractor will be liable an un subcontract We do not doubt that correct United has Dravo-Doyle, materialman. ly how general surety example, stated For law. ever, promise Drive-In, no there was such as the in Exton Home Indemni obligation under the ty (1969), subcontractor’s sub 436 Pa. A.2d denied, limited to satisfaction of was lien cert. U.S. S.Ct. We also note that Me- does not in its contend brief on this appeal that did not consent to the Amb- chanic’s Lien Law of 1963 Knecht did not have event, rose-Knecht sub-subcontract. it is standing to file a lien. See Pa.Stat.Ann. tit. clear that Sordoni was aware of the Ambrose- 1201(6), 1303(a) (Purdon 1965). §§ Knecht sub-subcontract it does assert in not objected its brief that it to it. under the bond Sordoni became liable to a Supreme Court of L.Ed.2d though as a con- even as a matter that inasmuch sub-subcontractor Pennsylvania held complet- otherwise delay ordinary contract law it would not liable tractor was contract, per- surety on a his have had no sub-subcon- ing paving not liable to the owner bond was tractor. formance surety was either as Further, nothing expressly set forth principal. 436 Pa. greater than that quoted Article in the above 19.1 489-91, at 325. 261 A.2d McShain at any way contract in re Sordoni-Ambrose contractor, who termi- in which a an action extinguished rights leased or of a sub- of the sub- by reason nated a subcontract such as Knecht under the subcontractor agreement, of his violation contractor’s Indeed, the Article mentioned bond. never surety on a bond subcontractor’s sued the points in its to no the bond. United brief performance of the faithful conditioned for provision of the Sordoni-Ambrose surety joined the subcontract. or the Ambrose-Knecht sub- subcontract defendant. as an additional subcontractor which released or terminated subcontract was returned jury At a trial a verdict rights of a sub-subcontractor as a but not the contractor though the claimant under the bond even The trial the subcontractor. precluded Sordoni-Ambrose subcontract trial was affirmed. order for a new

judge’s filing Ambrose’s sub-subcontractors Pennsylvania found Supreme project. lien claims on the We mechanic’s receipt of error in evi- there was an emphasize the Sordoni-Ambrose pointed out against the dence agreement incorporated into the which was axiomatic that “the event it was provid Ambrose-Knecht greater than that liability of a is not ed that sub-subcontractors would judgment in favor and that a of a party beneficiary or third re a contractual upon the merits of the case lationship and would have no with Sordoni by sure- as a defense can be asserted against right of action it. 118, 12 A.2d at 61. See ty.” 338 Pa. at that could have We also observe Sordoni Center, Mel- East Crossroads also agreement with Ambrose provided its Pa. 416 lon-Stuart any right waive that sub-subcontractor (1965). against either the on the bond Exton Drive-In and is clear from regard point out surety. In this we that obligation if the of the sure- that McShain place as the bond was when inasmuch perform- guarantee to a ty is limited was exe- the Sordoni-Ambrose subcontract of a contract ance seek such a had reason to cuted Sordoni against to recover obligee will be unable aforesaid, provision. In view of all obligee has no cause of surety if the affirm the order of November we will the con- on action principle of law is not But this tract.5 result, reaching we have not asserting our Knecht is not controlling here as United, fact, Rather, emphasized by overlooked the claim on its sub-subcontract. executed January 1982 under- that on Sordoni suing which was an is on bond that, contem indemnity an taking to Knoll United might time plated from time to provisions of later that United regard to the without of Sordoni which subcontracts, issue on behalf independent liabil- bonds created indemnify United broadly agreed to and turn as defined the bond ity to claimants prac While allowed for losses on bonds. language possible in the clearest agreement may Thus, of that consequence tical on the bond. the claimants to sue be available Contracting provision in a subcontract should Co. v. relies on Central 5. United also (W.D. Casualty in a situa- Maryland sued a subcontractor to a (3d Cir.1966), 1965), aff’d, but expressly 367 F.2d 341 Pa. mentioned tion which the tangential as it find that case somewhat we in the subcontract. a forum selection deals with whether provides every claim loss Knecht’s claim bond place for be to who not been for work or ant has We regard as immaterial. Sordoni we performed labor done or or material fur rights why Knecht’s see no reason may sum nished sue such by a negated collateral United can be Thus, may justly sums be due.” “as understanding United and Sordo- between specifically recovery does not allow ni.6 Further, attorney’s fees. inasmuch as may recover Our conclusion United’s cannot be extended be does deter- not on the bond yond need we attorney’s fees. mine United’s attorney’s only resolve whether the fees considering scope our issue may regarded “justly as a be sum due.” Universal, plenary.7 is Inc. v. Ernest view See Reliance Contracting Co., Pa.Super. Renda accord that in this are in 454 A.2d attorney’s we resolve diversity action judge The district noted that unless the law, see fee issue under paid, Knecht not fees were would be made In- Montgomery & Co. Ward Pacific undoubtedly correct whole. This but (3d Cir.1977), demnity much, judge’s holding proved it is too as only are recoverable and that counsel fees always plaintiff true that when a must statute, agreement of permitted by clear expenditures attorney’s make fees ex- parties, other established or some recover debt it will not be made whole Ibid.; Balint, Pa. ception. Corace unless its fees are Fur- also recovered. 262, 271-73, We A.2d ther, person whenever a is indebted to an- Further, does agree. as Knecht inasmuch regarded may other the owed sum support the award rely on a statute to example, patron’s due. For obli- facts case attorney’s fees and the of this gation open on an account for merchandise excep- do not conform established purchased may from a merchant be said to tion, only predict need whether Su- we “justly be for debt due.” seewe con- preme significance respect attorney’s so to include strue the bond fees the fact that Knecht for a sue fact, “justly hardly due.” In can fees.8 sum we Judge in labor and 6. We note that his dissent Cowen material which allows for recov lies, alia, Dravo-Doyle Royal ery justly inter on Co. of all ‘sums ... due.’ Under 64, Co., Indemnity Van 372 Pa. 92 A.2d 554 and presented, circumstances the Court finds that Co., 408, Cor, Casualty 417 Pa. Inc. v. American whole, plaintiff would not be made nor (1965). We 208 dissent at 82-83. A.2d 267 See due,’ all ‘sums recover unless already explained why Dravo-Doyle have is not required Court the defendant to reimburse above, See at 78. inconsistent with our result. attorney's plaintiff it for the fees incurred on simply also not as it VanCor is inconsistent prosecution litigation." regard of this We holds, here, germane that a insofar legal holding essentially a conclusion as guaranteeing performance a under a bond litigant expends money it is obvious that who bond, part became of the will which recover is a debt not made whole absent entity making a not be liable to an claim under recovery attorney's of its fees. our review delay damages entity when is the bond for Adams, plenary. is United States v. 759 F.2d against the not entitled to make a direct claim 1099, denied, 906, (3d Cir.), 1106 cert. 474 U.S. damages. principal for such 971, 275, 336, 106 S.Ct. L.Ed.2d 88 321 A held trial was on December 1987 Further, this is case in not a which the should awarded issue of whether Knecht attorney’s interpreted ambiguous language court to arrive The evi- fees if so amount. meaning. at a See Ram Construction Co. v. dence, however, seems to have been directed Co., (3d American Ins. States 749 F.2d 1052 primarily quantum of fees rather than Cir.1984). But even we reviewed the matter Following for the trial United’s them. standard, clearly under a erroneous our result findings proposed submitted would not be different. findings conclusions law. awarding the set in its court fees were forth appeal not'rely 8.Knecht on this does on 42 recited of March 1988 (Purdon 1981). § Pa.Cons.Stat. Ann. attorneys' fees Court’s decision to award ‘‘[t]he is predicated subject

«1 plaintiff written to was entitled to of how a bond could be recover such conceive anything “justly sum claimant to sue for as was due.” U.S.C. authorize 270b(a). justly due. We also ob- The court noted contrary than a sum that a less express provi- result in the everyday that in some contracts context of commer- serve litigation fees recovery attorney’s for cial would have sion is made obviated the litigant for a Yet American rule that in the event of an action breach. each must bear was made to the cost of legal representation. in no reference its own United’s bond circumstances, 130-31, we In the U.S. at attorney’s fees. S.Ct. at 2165-66. While Rich is recov- attorney’s binding fees are not conclude that not on us as we law, decide this case Pennsylvania in this action. erable it extremely nevertheless is instructive. Cer- Supreme While we are directed to tainly the reasoning in Rich directly con- controlling our Court of case trary to that of the judge. district We also result, supports our conclusion. precedent point out that previously predicted we have Industries v. Ins. Can-Tex Safeco in another context Supreme Court (W.D.Pa.1978), an action Pennsylvania in announcing Pennsylva- law, the court decided under nia Supreme law would follow the Court of on a bond on a held that a the United States. Aloe Coal v.Co. Clark construction contract conditioned on the Equipment (3d 117-19 money due payment by the of all — denied, Cir.), cert. U.S. -, 108 S.Ct. any claimant for labor or materials 98 L.Ed.2d 111 think We it project, fees liable would here as well. defaulted as the fees when materials. While The order were not due for labor or of November 1987 will be Can-Tec part statutory was in based on affirmed and the order of March Re- interpretation, supports our result. will be reversed. The matter is remanded Ohio Dean proceedings cently Supreme district court further Electric opinion. consistent Seco Ohio St.3d with the a case in N.E.2d 837 considered COWEN, Judge, concurring Circuit which a contractor had delivered part dissenting part: language authoriz- and material bond with an action identical to I. Dean in the in this action. underpaid employees agree my colleagues I that the dis had wage awarding attorneys’ prevailing statute. trict court erred violation exists, however, fees. There an additional The court held that under the statu- grant tory penalties underpayment independent and attor- basis to reverse the fees, ney’s employees attorneys’ even if we had deter fees incurred regarded The dis bringing the action could not be mined fees were allowable. Thus, clearly the find justly due. the trict court failed to make sums not liable for them. Dean is a compelling ings required by this Court’s deci Builders, Lindy Bros. sion in precedent.9 Corp., Sanitary American Radiator & Further, our result is consistent with Cir.1973) I). (3d (Lindy 487 F.2d 161 States, F.D. Rich Co. United 417 U.S. I, Lindy 2157, we stated that “the first 94 S.Ct. 40 L.Ed.2d 703 be into ... how Supreme inquiry the Court determined that of the Court should which spent posted many Act hours were what manner under federal law a Miller bond determining persons supply- attorneys____ After protect a contractor to which performed by the attor- and did not authorize an ... the services labor material attempt neys, court must attorney’s fees when the contrac- the district award [then] 167; Id. at see though services.” payment failed to make even to value those tor statutory obligation penalties, sharply the divided but the eluded an 9. The Dean court was dissenters, though contending fees. that the bond in- never mentioned Greenawalt, Maj.Op. to the at claimants sue on bond.” also Pawlak denied, Cir.1983), 464 U.S. (3d cert. 79. (1984); L.Ed.2d 172 104 S.Ct. conclusion, however, flies This Radia v. American Bros. Lindy Builders Pennsylvania Supreme Court’s face of F.2d Sanitary Corp., 540 tor & Standard Dravo-Doyle Royal In decision Co. v. II). majority (3d Cir.1976)(Lindy Pa. dem. findings of the court that “the states Supreme de There set in its forth awarding the fees were question of termined Maj.Op. at 1988....” of March order only ascertaining whether the However, merely states this 80 n. 7. general con terms between the contractual part: in relevant and the subcontractor contained tractor attorneys’ to award decision The Court’s any regarding limitation language of predicated fees is pay unpaid the subcontractor to material- payment bond material subject labor and making In the determi men. course of recovery all ‘sums allows for nation, question the court stated that “[t]he the circumstanc- justly due.’ Under ... interpreting here involved is one of finds presented, the Court es general contract contractor [between whole, nor not made plaintiff would de and the with a view to subcontractor] due,’ ‘sums ... recover all (a) termining parties intended whether required the defendant unless the Court (b) so, parties, to benefit third the attor- plaintiff for to reimburse the parties they what intended to benefit.” prosecution fees it incurred neys’ Pa. at at 92 A.2d court litigation. of this gener found the contract between This does App. at 859-60. con al contractor and the subcontractor finding Lindy as a I. qualify specific promise by the subcon tained to Addition tractor the materialmen. II. ally, the court determined that the contract colleagues my part company I with payment restricted subcontractor to sharply respect to the issue of Unit- obligations liens estab for which had been I, there- ed’s under the bond and lished. Pa. at A.2d at 556. fore, respectfully dissent. light findings, court these held argues provisions in the plain unambiguous “in words le- Knecht-Ambrose sub-subcontract parties to the contract have shown their incorporate into that gally insufficient to third-party intention limit the benefi- Ambrose-Sordoni subcontract viz., specific persons, to a class of ciaries that, event, indepen- an has 69-70, liens.” 372 Pa. at those who have as an dent under the bond recover clearly A.2d at indi- Dravo third-party beneficiary. The ma- intended cates that the terms of the bond and the holding adopts position jority’s together construed to de- indepen- Knecht that contract must be the bond “created party claimants and in the termine who can claim a third dent ... language possible beneficiary.1 clearest allowed distinguish attempts Dravo on the what the contract- 1. Knecht it was intention of ing parties basis that Dravo involved benefit.” 372 Pa. at 92 A.2d at Annotation, also, (not material bond as in See Labor or material case). public Knecht’s Brief at 21. The for im- the instant See furnished subcontractor works coverage Supreme provement princi- in Dravo did state as within of bond of that, bond, course, 1250, only contractor, (1963) pal "The insured 92 A.L.R.2d 2§ Contracting (stating Company respect particularly subcon- Industrial that to [the a "[w]ith bond, nonstatutory carry out the terms of the con- it has held that tractor] been the Therefore, together, decision involves an inter- to be tract. the contract bond are read parties pretation 372 Pa. at the the contract.” that intention of the is the However, interpretation the that A.2d at 556. court also noted consideration in the of the con- that, coverage respect the distinction was irrelevant and stated tract and the with the bond to thereunder.”) (footnotes omitted). question type majori- "the is not the of bond but here

«3 case, Despite only apparently increasing one the majority has cited liberal policy respect, though and even v. National a Pennsylvania Supply Co. corporate surety in profit business for 31 A.2d Pa.Super. Casualty law,’ a ‘favorite position that support of its Supply Casualty Co. v. National liability independent is an basis there supra, bring myself I cannot to the con However, this interme the bond. clusion that the to the contract court case has distin appellate diate been and bond suit intended to make Van[ repeatedly and cannot withstand guished third-party beneficiary entitled Cor ] See, strong language e.g., of Dravo. delay damages recover for such as here Cor, Casualty Inc. v. American Van involved. (1965) (per cu 417 Pa. 417 Pa. riam). Cor, (quoting at. at 208 A.2d at 270 a subcontractor ob Van opinion Judge lower court Charles Wa- and a performance tained a bond ters). payment in the course of a material bond au project for a local school construction determining who intended benefi- required, among other

thority. The bond suretyship ciaries are under the bond which cooperate things, the subcontractor (as gave to Knoll Dravo and Van do), contractors. When sub Cor indicate we must it is clear that Cor, bankrupt, contractor became Van Sordoni did not intend Knecht to be a bene- contractor, ficiary, equally sued the general clear that Knecht did resulting beneficiary damages delay not consider itself a until Amb- caused subsequently example, In hold rose defaulted. For default. from the subcontractor’s Knecht, Knecht, Harry president C. tes- not an intended bene that Van Cor was rely tified that he did not bond, bond. Pennsylvania Su ficiary of the original While Knecht’s sub-subcontract underlying preme Court first examined signed with Ambrose was October documents.2 The court stated 1985), (and February, later amended in that, considering possible are now “We he had Knecht stated that never seen aris liability of one contractor another April, App. 1985.3 at 343. It bond before provisions, ing out of such contract be only after one of Knecht’s material- may safely cause I think it be said that requested copy men principal] were not liable at suit [the App. it. at 344.4 Knecht even looked at Cor], futile to assert liabil it would be [Van ity against surety.” 417 Pa. at A. opinion (quoting at 269 court A.2d lower Waters). finally fundamentally, majority Judge Charles The court More explain this case falls has failed to how concluded that: Cor, surety”, notwithstanding disap- Pa. at ty, issued Van in Dravo though apparent- the bond proving labor and ma- 208 A.2d at even of a distinction between bonds, incorporate ly explicitly contract as did not terial bonds and attempts distinguish it did in Dravo. it is clear that the court Van Cor on such Additionally, documents grounds. Maj.Op. in Van Cor believed that the contract n. 6. determining who the majority position must be considered adheres to the that Dravo is was intended to benefit. with their result. Id. Because not inconsistent bond, majority's misplaced focus on the June, they willing only began working project to look to the bond 3. Knecht App. to consider con- determine and refuse at 351-52. provisions tractual limit un- provisions part Ambrose, those have become less at the time of 4. The record shows Ambrose, bond. Since Dravo makes clear that the con- negotiations with Knecht’s contract $40,000.00 examined to determine whether tract must be approximately owed majority’s Knecht, light exists under previous project. construction result is inconsistent with Dravo. pay, prior could have of Ambrose’s failure protected Amb- itself another default rose. Now Knecht seeks to make Sordoni 2.In fact the court noted that "the terms of the appropri- specifications when Knecht could have taken contract and between the authori- twice part protect ty principal] ate measures to itself. and became of the bond [the 84 indirectly what it could ting Knecht to do suretyship

outside the realm of black-letter directly namely, recover from Sor- surety- of general principles do law. Under — surety can demonstrate law, of the be of this case ship liability The facts doni. liability princip its greater of defies nor- majority’s no than the conclusion that the Co., Sur. keeping v. Seaboard United States with practice. mal commercial al.5 956, (2d Cir.1987), cert. de 817 F.2d 962 let- practice, obtained a commercial United — 161, nied, U.S. -, 98 L.Ed. 108 S.Ct. indemnification from Sordoni which ter of (1987); Lining Alger 115 v. 2d Co. following provisions: contained Pacific 237, 241 812 F.2d non-Blair Constr. indemnify, keep and in- To SECOND: denied, (5th Cir.1987), 506 So. certification demnified, and hold and save harmless (La.1987), opinion 2d 505 certifica demands, claims, Surety against all Cir.1987); (5th denied, 602 tion costs, loss, damages, and attor- expenses v. No. 171 Williams Painters Local Union whatever, any all neys’ fees and (10th Inc., F.2d 539 Kelley, & 605 therefor, or sustained incurred Sinclair, 424 Cir.1979); Smith by executing Surety by reason of or (D.C.Okla.1976); 1115 Diversified any procuring the execution of said Bond Sales, v. Monte Fusco Exca Utilities Inc. Bonds, Bonds, or or which vating 71 F.R.D. 664 Contracting already or hereafter executed on be- Drive-In, (E.D.Pa.1976); Exton Contractor, or half of the or renewal 489-90, Pa. 261 Home Indem. thereof; or sustained or in- continuation denied, (1969), A.2d cert. U.S. by making investiga- of an curred reason L.Ed.2d 46 91 S.Ct. thereof, prosecuting tion on account or long has been rule defending brought in any action connec- surety liability of with the ends therewith, obtaining release tion there- princi extinguishment of the from, recovering attempting or recov- pal. Metropolitan Nat’l Bank Mer any salvage er or connection therewith Bank, 155 Pa. chants & Mfrs.’Nat’l enforcing by litigation or otherwise (1893); Brock, Pa. A. 764 re agreements herein contained. clearly provides A. 778 The bond Surety Payment of amounts due hereun- jointly together legal der interest shall be severally for the benefit of the claim liable upon payable demand. successfully ants. Because Sordoni extin To money THIRD: furnish to the Con- i.e., guished liability, Ambrose Surety or to tractor as needed for the full, part there can be no labor, materials, prompt payment of Moreover, Knecht’s counsel con United.6 expenses or in connection any other costs during argument ceded oral cause with the of contracts when could lie Sordoni. Such action requested Surety. to do and as so astonishing highlights concession major of Knecht’s case. Yet the App. weakness at 625.

ity ignore this critical conces chooses indemnity This between sion. merely and Sordoni United affirms

Instead, permitting majority, by common law of indemnification in fa- United, permit- Knecht to recover from is vor of United and Sordoni.7 The majority does not contest the REIMBURSEMENT BY PRINCIPAL: IN post- Sordoni is whom GENERAL. ed the bond. (1) Where the makes performs princi- otherwise default See, e.g., § Restatement Contracts surety’s pal, property is or where the used to provides: duty, satisfy principal’s duty it is the DISCHARGEBY EXACTPERFORMANCEOF to reimburse to the extent DUTY. outlay his reasonable duty discharged A the exact contractual (a) surety’s has been in- performance thereof. curred, subjected property or his been has See, e.g., Security, Restatement charge, with the consent (1941): indemnification, however, Security, including of statement of surety’s section 110 upon surety’s the assertion which states: is conditioned principal. available to the of those defenses SURETY’S RIGHT OF REIMBURSE- 108(5) provides: of the Restatement Section MENT AFTER DISCHARGE OF PRIN- principal has a defense which Where the CIPAL OBLIGATION. surety available to a who

is known to and principal’s obligation Where the has of surety with the consent has become discharged by payment been or re- surety does not principal, the and the lease reserving from the creditor not it, in an action with- assert or asserts it rights against surety, prin- his principal notice of the giving out cipal duty has no to reimburse the it, opportunity to defend action and an surety. surety principal well as the where the Security By Restatement of § defense, principal duty has no has a holding liable, Sordoni will bear the surety unless to reimburse the business burden under its of indemnifica- requires performance by compulsion precisely tion with United. This is the re- surety. sult provisions which the above-cited prevent.9 Restatement seek to (5): Commentary on Subsection B. surety principal j. Where both have contrary eq- Finally, defenses it would be I majority’s take issue with the of uitable basis of the rule reimburse- holding proper interpretation of surety by paying the creditor ment “Principal Contract” not a material compel principal to could reimburse dispute. argument United’s it—that him____ gen- It should be observed that Sordoni, is not liable because erally surety is under no business is not liable—rests on its assertion that compulsion perform princi- where the provisions in certain the Ambrose-Sordoni defense. pal has a substantial disclaiming liability possible subcontract third-party incorpo- beneficiaries have been 108(5) (1941). Security Restatement § rated into the Knecht-Ambrose sub-sub- Therefore, United must assert the defense Specifically, argued contract. United has that Knecht has no cause of action any liability pos- disclaimed that Sordoni Ignoring Sordoni. the bald concession that party sible third beneficiaries virtue of defeats Knecht cannot hold Sordoni liable Article 19.1 in the Sordoni-Ambrose sub- purpose of these Restatement the essential contract, Paragraph 2 majority’s holding also and that provisions.8 The Re- Terms and Conditions of the Knecht-Amb- undercuts several other sections (b) surety princi- principal obligation placing has assumed an once a obligation primary pal which was once the released: has been surety. surety principal are bound Where the jointly, addition, of one is the release of the release numerous courts have acknowl rights obligee edged suretyship law that a both unless the the basic rule of other____ See, principal. surety principal can assert a defense of its served If the e.g., Hosp. v. Ohio Rhode Island Trust Nat'l Bank longer duty as a result of the credi- has Cir.1986) (stat (1st Co. Ins. act, surety tor’s should not be held to ing basic rule on the "[t]he duty. of that to answer for a default surety sureties is that ‘the is not liable to the Furthermore, compelled could be if the liable’[;] unless his thus he creditor release, principal’s he would after the may plead which are available to the defenses if he had be- be entitled to reimbursement U.S.A., principal____”); his Siata Int'l request principal’s at the come Am., Insurance Co. No. Such an outcome would be with his consent. (E.D.Pa.1973) (noting is true that "[i]t a release because unfair it [payment by principal] is a valid de attack- would the creditor a means afford obligee, fense for a in a suit surety. indirectly through tanto."), discharge surety pro rev’d on (1941) (emphasis Security Restatement (3d Cir.1974). grounds, 498 F.2d 817 added). commentary following Section “Re- 9. The Principal”, lease of states a similar rationale for days payment three incorporate be made all of rose sub-subcontract Further, the Knecht-Ambrose contract. subcon- of the Sordoni-Ambrose provisions early an conceded in tract, including 19.1.10 United then Knecht’s counsel Article can a construc- briefing of the ease that such since its argues that Sordoni, liability of Terms might render sections of the higher than the tion rise no judg- unnecessary” to enter “legally it error principal, was Conditions App. verbiage.” United. “excess ment would constitute accepts majority at 445. The apparently acknowledged United’s majority has The logical argu- inconsistency Knecht’s inis “Principal Contract” position that regarding point. Maj.Op. ment at 77 the contract between majority, however, 1. n. dismisses Reference to Maj.Op. at Ambrose. point upon immaterial the belief based Terms and in the paragraphs several independent right that there is an to sue sub- of the Knecht-Ambrose Conditions If, however, incorpo- under the bond. apparent that readily makes subcontract rated of the contract must be the intended (even is uncertain who if it determining considered who the intended “Principal are) parties I beneficiaries are—as believe it must be not be Ambrose logically could Contract” rulings considered under the the Penn- example, Paragraph For and Knecht.11 sylvania Supreme Court in Dravo Van Terms and Conditions dispute regarding Cor—then the factual provides: Knecht-Ambrose sub-subcontract interpretation is material. only logical dispute resolution of the will be made Payments to Subcontractor demonstrates that such sub-subcontractors payment receipt of days after our third- as Knecht were never intended to be Subcontrac- PRINCIPAL CONTRACT. party beneficiaries. tor, precedent as a condition hereunder, necessary all shall furnish respect- I foregoing, On the basis leases, waivers, lien affidavits and other fully dissent. required by CONTRACTOR documents free liens keep premises Owner’s material-men, for liens of all or claims Acceptance or laborers.

subcontractors payment by

of final Subcontractor shall discharge complete a full and of W.J.

be

Ambrose, payment, including Inc. No payment,

final shall be construed to be work im- acceptance of defective

proper materials.

App. at 250. makes no sense construe this

provision payments to mean Paragraph provides: of the PRINCIPAL CONTRACTto which the performed by bound, Work Subcontractor shall be in CONTRACTOR and to the same ex- strict accordance with CONTRACT DOC- tent. applicable UMENTS per- work App. to be at 250. materials, formed and articles equip- and/or ment to be Harry furnished hereunder. Subcontrac- Knecht testified that he understood tor provisions shall bound all the “Principal of these Contract” to refer to the contract by applicable documents and provisions also between Knoll App. and Sordoni. at 320.

Case Details

Case Name: Knecht, Inc. v. United Pacific Insurance Company

Court Name: Court of Appeals for the Third Circuit

Date Published: Nov 17, 1988

Citation: 860 F.2d 74

Docket Number: 88-1280

Court Abbreviation: 3rd Cir.