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United States District Court, Northern District of Illinois, E.D

March 24, 1964


The opinion of the court was delivered by: Robson, District Judge.

Defendant Firemen's Insurance Company of Newark, New Jersey's Motion to Dismiss Count II of the Complaint of James Woodson, et al., is predicated on the assertion that recovery is sought on a "performance" bond to the United States, whereas recovery for compensation may be had solely from the "payment" bond to the United States, irrespective of the fact that the fund provided for the payment of wages by the "payment" bond is insufficient to meet the obligations incurred.

Movant's brief cites the fact that the obligee in the "performance" bond is solely the United States, to which plaintiffs respond, so also is the obligee in the "payment" bond. This reply is answered with the showing that the "payment" bond specifically is conditioned to cover compensation of workers. Legislative history is cited for the enactment, 40 U.S.C. § 270a, 270b, which made provision of the two bonds in place of the one bond theretofore required, as indicative of the Congressional desire to separate the rights of the United States and the rights of the materialmen and laborers. The decisions cited in support of the motion would seem to uphold that construction of the respective sections.

On the other hand, the annotations to the statutes reveal a uniform intention of the courts to grant a liberal construction to the statutes.

By the circuitous route of "reference by incorporation" the "performance bond" could be deemed to cover the obligation to pay salaries. The performance bond provided:

    "The Condition of this obligation is such, that
  whereas the principal [Kalady Construction Co.]
  entered into a certain contract with the Government *
  * * if the principal shall well and truly perform
  and fulfill all the undertakings, covenants, terms,
  conditions, and agreements of said contract * * *
  this obligation * * * [shall] be void." (Emphasis

The "construction contract" provided, inter alia, that the United States and the contractor "mutually agree to perform this contract in strict accordance with the General Provisions (Standard Form 23-A), Labor Standards Provisions Applicable to Contracts in Excess of $2,000. * * *"

The "Labor Standards Provisions" provides in part, pursuant to statute, that:

    "All mechanics and laborers employed or working
  directly upon the site of the work will be paid
  unconditionally and not less often than once a week
  * * * the full

  amounts due at time of payment, computed at wage
  rates not less than those contained in the wage
  determination decision of the Secretary of Labor
  which is attached hereto and made a part hereof,
  regardless of any contractual relationship which may
  be alleged to exist between the Contractor or
  subcontractor and such laborers and mechanics; and a
  copy of the wage determination decision shall be kept
  posted by the Contractor at the site of the work in a
  prominent place where it can be easily seen by the

    "In the event it is found by the Contracting
  Officer that any laborer or mechanic employed by the
  Contractor or any subcontractor directly on the site
  of the work covered by this contract has been or is
  being paid at a rate of wages less than the rate of
  wages required by paragraph (a) of this clause, the
  Contracting Officer may * * * (b) by written notice
  to the Government Prime Contractor terminate his
  right to proceed with the work, or such part of the
  work as to which there has been a failure to pay said
  required wages. * * *

    "There may be withheld from the Contractor so much
  of the accrued payments or advances as may be
  considered necessary to pay laborers and mechanics
  employed by the Contractor or any subcontractor the
  full amount of wages required by this contract. In
  the event of failure to pay any laborer or mechanic
  all or part of the wages required by this contract,
  the Contracting Officer may take such action as may
  be necessary to cause the suspension, until such
  violations have ceased, of any further payment,
  advance, or guarantee of funds to or for the
  Government Prime Contractor. * * *

    "The Contractor agrees to insert [above provisions]
  * * * in all subcontracts. * * *" (Emphasis ours.)

Letters from the District Public Works Office, Ninth Naval District appended to the complaint, to the respective plaintiffs state, in part:

    "A review of the contractor's compliance with the
  Federal labor standards provisions of his contract
  appears to indicate that restitution wages are due
  you for work. * *" (Emphasis ours.)

The complaint states that the right to restitution arises because of violations of the Fair Labor Standards Act. The letters from the Naval District Office indicate these sums due the respective plaintiffs:

      Woodson   - $1,961.00
      Koban     -  1,111.69
      Krug      -    685.00
      Kariofili -  2,922.00

The Kalady Construction Company, Inc., the prime contractor, in 1961, entered into a contract with the Government to enlarge the Enlisted Men's Club Facilities at Great Lakes, and furnished a Miller Act Performance Bond in the amount of $20,902.92 and a Miller Act Payment Bond in the amount of $10,451.46, on both of which bonds the Firemen's Insurance Company of Newark, New Jersey, was the surety. The work was completed but the contractor was in financial difficulties and failed to pay the subcontractors and suppliers.

The briefs of the parties have correctly indicated the Congressional intent, in the enactment of the Miller Act, as to the splitting of the single bond theretofore given on Government contracts into two bonds, such as given here, one for payment, and one for performance. The reason for the splitting was to enable laborers and materialmen to secure immediate relief where there was nonpayment for labor and materials and overcome their having to be postponed in their remedy as theretofore until after the United States was made whole.

The instant situation is not expressly covered in the statute or decisions so that it is necessary to surmise what Congressional intention would be, in view of Supreme Court decisions. In Pearlman v. Reliance Ins. Co., 371 U.S. 132, at 139, 83 S.Ct. 232, at 236, 9 L.Ed.2d 190, the Supreme Court said:

    "It is argued that the Miller Act changed the law
  as declared in the Prairie Bank [Prairie State Bank
  v. United States, 164 U.S. 227, 17 S.Ct. 142, 41
  L.Ed. 412] and Henningsen [Henningsen v. United
  States F. & G. Co., 208 U.S. 404, 28 S.Ct. 389, 52
  L.Ed. 547] cases. We think not. Certainly no language
  of the Act does, and we have been pointed to no
  legislative history that indicates such a purpose.
  The suggestion is, however, that a congressional
  purpose to repudiate the equitable doctrine of the
  two cases should be implied from the fact that the
  Miller Act required a public contract surety to
  execute two bonds instead of the one formerly
  required. It is true that the Miller Act did require
  both a performance bond and an additional payment
  bond, that is, one to assure completion of the
  contract and one to assure payments by the contractor
  for materials and labor. But the prior Acts on this
  subject, while requiring only one bond, made it cover
  both performance and payment. Neither this slight
  difference in the new and the old Acts nor any other
  argument presented persuades us that Congress in
  passing the Miller Act intended to repudiate
  equitable principles so deeply inbedded in our
  commercial practices, our economy, and our law as
  those spelled out in the Prairie Bank and Henningsen

In MacEvoy Co. v. United States, etc., 322 U.S. 102, at 107, 64 S.Ct. 890, at 893, 88 L.Ed. 1163, the Supreme Court said:

    "The Miller Act, like the Heard Act, is highly
  remedial in nature. It is entitled to a liberal
  construction and application in order properly to
  effectuate the Congressional intent to protect those
  whose labor and materials go in to public projects. *
  * *" (Emphasis ours.)

There are two enlightening decisions (cited by neither side) on suits on these respective bonds. In American Casualty Co. of Reading, Pa. v. Brezina Construction Co., 295 F.2d 603 (8th Cir. 1961), there was an action under the Miller Act by a supplier of material to a subcontractor against sureties to recover for materials furnished. The Court of Appeals held that the subcontractor, by undertaking to "furnish all material" implicitly agreed, thereby, to pay for such material. Therefore, the subcontractor's surety was required to indemnify the prime contractor for the subcontractor's defalcation in failing to pay third-party supplier of materials used by the subcontractor, as against the contention of the subcontractor's surety that its bond was merely a "performance" bond, imposing no obligation for subcontractor's failure to pay for material used. The Court said:

  "* * * [T]he conclusion is impelled that liability
  attached under the bond because A & A, the principal,
  failed to `conform and comply with the terms and
  conditions of the contract.'" (Emphasis ours.)

In Glens Falls Indemnity Company v. United States of America, etc., 229 F.2d 370 (9th Cir. 1955), an action was brought by an electrical supplier against the prime contractor and subcontractor and their sureties to recover the unpaid balance due from the subcontractor for materials furnished. The Court there held that the failure promptly to pay for materials furnished was just as much a breach of the performance of the contract as if the work specified in the contract had not been completed, and that the surety was liable for the failure to pay for the materials under "the performance bond as well as under the payment bond." (Emphasis ours.)

Inasmuch as Count II on the "performance" bond raises a violation of the contract it was given to secure, albeit in respect to the payment of compensation, which is also covered by the "payment" bond, and since there has been an exhaustion of resources under the payment bond, these claimants should have recourse against the performance bond. Their claims fall within the obligations specified in the contract covered by the performance bond. Any other conclusion would not be granting the bonds given under the Act, and the Act the "highly remedial" interpretation Congress is said to have intended. It would be making the "two-halves" — the two bonds — less than the whole bond it had been under the Heard Act.

The motion to dismiss Count II of the complaint is denied.


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