CONTRACTOR'S BOND ‑- HIGHWAY CONSTRUCTION ‑- LEGALITY OF BLANKET BOND

CONTRACTOR'S BOND ‑- HIGHWAY CONSTRUCTION ‑- LEGALITY OF BLANKET BOND

Blanket contractor's bond for highway construction contracts under $15,000, as detailed in opinion, would satisfy statutory requirements.

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                                                               November 10, 1953

Washington State Administrative Board
c/o Governor's Office
Legislative Building
Olympia, Washington                                                                                                              Cite as:  AGO 53-55 No. 168

Gentlemen:

            By letter as previously acknowledged you have requested the opinion of this office upon a proposal for blanket performance bond coverage on highway construction contracts awarded in amounts of $15,000. or less.  Upon inquiry, we have been informed that coverage of this type is available under the following arrangement.  At the beginning of each month a bonding company would deliver a bond to the highway department.  The bond would include, as principal, each person awarded a contract for an amount within the coverage during the month if such person applied therefor to the bonding company.  The bond would run to the state in a sum equal to the full contract price in each particular contract, conditioned upon faithful performance of the contract and upon payment by the contractor of the persons designated by RCW 39.08.010.  Upon the award of a contract, the contractor could, at his option, either procure a bond in the customary manner or apply to the bonding company for coverage under the blanket bond.  At the end of the month the department would compute the premium due upon the total coverage of the bond at a fixed rate per $100., with a certain minimum per contract.  The department itself would pay the premium to the bonding company.

            You ask if such an arrangement would be lawful, in view of the requirements of RCW 39.08.010.

             [[Orig. Op. Page 2]]

            It is our opinion that the proposed arrangement would satisfy the statutory requirements.

                                                                     ANALYSIS

            The question presented is apparently unique.  We have found no judicial precedent.  Consequently, we shall examine the various specific requirements as to such bonds in the light of the purpose for which they are to be exacted.

            RCW 39.08.010 provides in relevant part:

            "Whenever any board, council, commission, or body acting for the state * * * shall contract with any person to do any work for the state, * * * such board, council, commission or body shall require the person with whom such contract is made to make, execute and deliver to it a good and sufficient bond, with two or more sureties, or with a surety company as surety, conditioned that such person will faithfully perform all the provisions of the contract and pay all laborers, mechanics, subcontractors, and materialmen * * *.  The bond shall be filed with the county auditor of the county where the work is performed or improvement made, * * *."

            RCW 39.08.030 provides in part:

            "The bond shall be in an amount equal to the full contract price agreed to be paid for the work or improvement, and shall run to the state:  * * *."

            A supplementary provision is found in RCW 47.28.100, as amended by section 1, chapter 53, Laws of 1953, which provides a penalty for failure to "furnish" such a bond within a specified period of time in the case of public highway construction contracts.

            These statutes disclose the following requirements, which will be discussed seriatim:

             [[Orig. Op. Page 3]]

            1. The contractor is to "make, execute and deliver" and "furnish" the bond.  The sum of the quoted words is that the contractor is to provide the security demanded by the statute.

            For example, inGerlach v. Spokane, 68 Wash. 589, 124 Pac. 121, it was contended that an appeal bond was insufficient where not signed by the appellant, since the statute required the appellant to "execute" the bond.  The court held otherwise, and said:

            "* * * But in this case our attention is not directed to any statute in terms requiring a bond of this character to be signed, and we think the word'execute' should be given a broader meaning.  The city was not misled.  The notice of appeal was properly given and signed by the proper parties.  The city's only interest in the bond is to see that it is in form to assure a right of recovery.  * * * We prefer to hold that a bond is 'executed' under the statute cited, when it is filed and where, without reference to its form, it will save the city harmless if it prevails in the end."  (pp 591, 592 of 68 Wash; Italics supplied)

            InEureka Sandstone Co. v. Long, 11 Wash. 161, 39 Pac. 446, a bond given under what is now RCW 39.08.010 was not signed by the principal.  The court held that the surety could not escape liability upon this ground, and that a materialman had a cause of action on the bond, he being unpaid.  Because the court examined the question carefully, we deem it appropriate to set forth some of the language used in that decision.

            "* * * A bond is nothing more nor less than a contract, and the sureties to a bond are simply parties to a contract; and we know of no reason why the same rules of construction should not be applied to a bond as to any other contract.  It is true that the sureties may not be beneficiaries in any respect, and that it may be purely a matter of accommodation with them; but the bond was made to effect a certain purpose; that purpose was to secure the obligees from loss in case of its violation;  [[Orig. Op. Page 4]] and there is no reason why the law should make it more difficult for the obligee to obtain redress in case of a violation of a bond than a party to any other contract.

            "The true inquiry should be, what was the meaning and intent of the contract; and when that meaning and intent can be ascertained, the contract ought to be enforced.  While, as insisted by respondents, courts should not presume to make contracts for individuals, neither should they allow them to escape responsibilities which they have voluntarily assumed, by too strained a construction of technical law."  (11 Wash. at p. 164).

            Quoting from an Ohio decision, the court said:

            "The bond may be procured:  may, in the words of the act, be given by the principal, although he did not sign or seal it * * *" (11 Wash. at p. 167; Italics supplied)

            The court followedIhrig v. Scott, 5 Wash. 584, 32 Pac. 466, in which a bond was furnished in accordance with what is now RCW 39.08.010 and failed to name the correct obligee.  The court held nonetheless that the bond was valid.  Of theIhrig case the Eureka court says:

            "* * * as with the case discussed, it takes but a superficial examination of the case at bar to lead one to the conclusion that in the execution of the bond in question by the sureties, and the acceptance thereof by the county commissioners,there was an intention on the part of all to provide the security required by the statute in the interests of such as might thereafter, by virtue thereof, become entitled to protection.  The appellant in this case, relying upon this bond, furnished this material to the contractor under the rule laid down in Ihrig v. Scott,supra, and certainly ought to be protected."  (11 Wash. at p. 166; italics supplied)

            Both theIhrig and Eureka cases quote Hill's Code (Proc.) section 800:

             [[Orig. Op. Page 5]]

            "No bond required by law, and intended as such bond, shall be void for want of form or substance, recital, or condition; nor shall the principal or surety on such account be discharged, but all the parties thereto shall be held and bound to the full extent contemplated by the law requiring the same, to the amount specified in such bond."

            In theIhrig case the court states that this would be true under the common law, even without the aid of this statute.  The statute was originally enacted as part of the civil practice act of 1854, Article 53, section 489.  It was carried into Rem. Rev. Stat. section 777 as applicable only to bail bonds; and has been rendered virtually unidentifiable in RCW 10.19.120, except for the note of derivation.  In the absence of statutory amendment, however, it remains the law.  See RCW 1.04.020 andPetsch v. Willman, 29 Wn. (2d) 136, 185 P. (2d) 992.  It has nonetheless been construed by the courts in aid of various types of statutory bonds:  Dossett v. St. Paul and Tacoma Lumber Co., 31 Wash. 489, 72 Pac. 116, andRupe v. Kemp, 99 Wash. 371, 169 Pac. 855; appeal bonds;Duke v. National Surety Co., 130 Wash. 276, 227 Pac. 2; bank employee's bond;Zagar v. Columbia Casualty Co., 181 Wash. 487, 43 P. (2d) 949; commission merchant's bond.

            As to the word "deliver," the courts have not objected to delivery by the surety company.  See, for example,Northern Pacific Bank v. Pierce County, 24 Wn. (2d) 843, 845, 167 P. (2d) 454, where it is said:

            "Pursuant to Nees' written request, the bonding company, as surety, on April 24th, executed and caused to be delivered to Pierce county its bond, signed by Nees as principal, in the sum of ninety-four hundred dollars, in accordance with the requirements of Rem. Rev. Stat., § 1159 * * *"

            We see no objection to any particular order of procedure as to the drafting of a bond (normally the filling in of a form in any event), its "execution" or its "delivery," so long as the bond is sufficient to afford the protection prescribed by the statute.  As indicated above, defects of form do not render a statutory bond unenforceable.

             [[Orig. Op. Page 6]]

            2. The bond must run to the state.  We must assume that the bonds contemplated, which must be approved by this office and by the insurance commissioner, will satisfy this requirement.  If some mischance resulted in a different wording the rule of Ihrig v. Scott, supra, would apply.

            3. The bond must be conditioned upon the faithful performance of the contract and upon payment of persons designated in RCW 39.08.010.  We again must assume that the bond would be properly worded, as stated in (2.),supra.  If the bond were not so worded, a serious problem might arise; for instance, if its terms explicitly excluded liability to laborers, mechanics, materialmen, and subcontractors.  SeeWallace Equipment Co. v. Graves, 132 Wash. 141, 231 Pac. 458, and cases cited therein.

            4. The bond must be filed with the county auditor in the county where the work is to be performed.  A letter from this office to the State Highway Engineer, dated 22 December 1923, expresses the belief that this should be the original bond.  But this filing, as stated in Wadsworth v. School District No. 1 of Whatcom County, 7 Wash. 485, 486, 35 Pac. 372.

            "* * * is not to give them (the bonds) validity, but simply for the purpose of giving notice to all persons interested; and if the appellant had notice of the fact of the giving of the bond in question, at the time he desired to go into court for the purpose of enforcing rights growing out of the furnishing of said material, the whole purpose of such requirement was subserved."

            If this requirement affected the enforceability of a bond, a great number of bonds given for work conducted in two or more counties would have been invalid, it being impossible to file an "original" in two places at once.  The practice, apparently unquestioned for many years, has been to file copies sufficiently authenticated in such cases.  We see no good reason why this could not be done in the present situation.

            5. The bond must be in a sum equal to the contract price.  What has been said in regard to (2.) and (3.) above is equally applicable to this requirement.  So long as the surety may be held for the full amount there can be no practical objection upon this ground.

             [[Orig. Op. Page 7]]

            6. The bond must be "good and sufficient" with "two or more sureties" or a surety company as surety.  This goes only to the financial responsibility of the bondsmen.  Extra protection in this area is provided by RCW 47.28.110, permitting the director of highways to withhold payments until further security is supplied, if he deems the bond originally given insufficient.

            From what is set out above, it appears that the courts have construed bonds very liberally with regard to their purpose, casting aside technical defenses and considerations insofar as possible.  As pointed out, the courts have never passed upon the proposed arrangement; and we shall therefore explore possible objections of a more general nature.

            It may be said that the state itself is undertaking to do what is the statutory duty of the contractor, where it takes an active part in arranging for coverage.  But the contractor himself has a choice between the blanket coverage and independent procurement of a bond.  He accepts what is, in effect, an offer from the bonding company when he requests coverage.  This is essential to the bonding company, which would not give the bond otherwise; because the surety's right of reimbursement against the principal arises from a promise of the principal implied by the law to repay the surety should he be called upon to satisfy the beneficiaries of the bond.  Simpson on Suretyship (1950), pp. 225, 6, section 48.  In the same place it is said:

            "So a non-consensual [[nonconsensual]]surety, that is, one who became bound to the creditor but not at the principal's request express or implied, would not be entitled to reimbursement, and a number of cases have so held."  (citations in footnote)

            The contractor thus makes the bond possible, and in this very real sense he furnishes it within contemplation of the statute.

            It may also be objected that the state pays the premium for the bond, where the law seems to make this the responsibility of the contractor.  But it should be pointed out that when a contractor secures a compensated surety it is a matter of common knowledge that he adds the premium to his bid, so that it is paid by the state indirectly.  The contractor has no duty to pay premiums; the statute does not preclude bonds given by accommodation sureties so long as they are  [[Orig. Op. Page 8]] sufficient.  Nor is there anything inherently vicious or illegal in payment of premiums by the state.  Statutes which require various public officials to give bond are analogous; but RCW 48.28.040 directs the state to pay premiums for those bonds.

            We think the essential question must be whether the purpose of the statute will be fulfilled.  That purpose is to protect persons who would be lien claimants in a private transaction, since no lien is possible against property of the state.  Hall & Olswang v. Aetna Casualty Co., 161 Wash. 38, 296 Pac. 162, and cases cited.  If the bond satisfies the 6 particulars examined above, the only problem would be whether or not the surety is bound.  Considered in terms of contract, by which any suretyship agreement is to be analyzed (See Arant on Suretyship (1931), p. 36, section 19; Eureka Sandstone Co. v. Long, supra), the surety agrees to be responsible to the state and beneficiaries named; the state agrees to grant the principal or contractor the benefit of the contract for construction.  11 C.J.S. 409, Bonds, section 22.  The validity of the bond is supported by this basic consideration.  An accommodation surety would also be bound, for the same reason.  Principal, surety, and obligee (the state) will have concurred in intent and agreement; and the obligation will be valid, under the general principles expressed in theIhrig and Eureka cases, supra.

            The administrative problem of attaching names and contract or specification identification to the bond would seem to present little difficulty.  Cf. the attached opinion to the governor, on 5 December, 1941, on blanket bonding of state employees.

            We of course express no opinion upon the economic feasibility of blanket bond coverage as described, which is apparently a matter to be determined by the Board.

            You are advised that the proposed bonding arrangement is, in our opinion, permissible under the law.

Very truly yours,

DON EASTVOLD
Attorney General

A. J. HUTTON, JR.
Assistant Attorney General