Scottish Court of Session Decisions

On 23rd February 1912 the Clydebank and District Water Trustees, pursuers, brought an action against the Fidelity and Deposit Company of Maryland, defenders, concluding for payment of £5000, the sum guaranteed in a policy or contract bond of insurance by which the defenders had become sureties for the due and timeous completion by the Columbian Fireproofing Company, Limited, of an engineering contract made between them and the pursuers.

The defenders pleaded, inter alia—“(2) The pursuers having failed to fulfil the conditions

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incumbent upon them under the said contract bond, the defenders should be assoilzied. (3) The pursuers having varied the terms of their agreement with the contractors without the consent of the defenders, the defenders should be assoilzied.”

The facts are given in the opinion ( infra) of the Lord Ordinary ( Dewar), who on 8th September 1913 assoilzied the defenders.

Opinion.—“The pursuers in this action are the Clydebank and District Water Trustees, and the defenders—the Fidelity and Deposit Company of Maryland—are an American Insurance Company.

In the month of March 1909 the defenders issued an insurance policy or contract bond in favour of the pursuers, guaranteeing them against any loss to the extent of £5900 which they might sustain through the failure of a firm of contractors—The Columbian Fireproofing Company, Limited—who contracted with the pursuers to construct certain works in connection with a new water supply for Clydebank and district. The contractors failed to complete the work in terms of their contract, and the pursuers now sue the defenders under their policy or contract bond for loss which they allege they have sustained. The defence is that the pursuers failed to implement the conditions incumbent on them under said contract bond, and the defenders are accordingly freed from their obligations thereunder.

After careful consideration of the evidence, I have reached the conclusion that this defence is well-founded, and that the defenders are entitled to be assoilzied from the conclusions of the summons.

The pursuers' contract with the Columbian Fireproofing Company, Limited, was for the construction of a line of pipes, about nine and a half miles in length, upon the Bonna system of re-inforced steel and cement pipes, to be laid and jointed in sections under the supervision of Messrs Warren & Stuart, civil engineers, Glasgow. The contractors bound and obliged themselves to provide the whole material and plant required to execute the work and to carry it on without cessation to the entire satisfaction of the pursuers' engineers, and to complete it within eleven months from the date of acceptance of the contract, viz., 1st December 1908. To ensure its completion within this time the contractors agreed to commence various portions of the work on certain specified dates, and to lay not less than 470 yards of pipe in each consecutive week. They did not implement these conditions, and they never completed the work. They carried on operations during the spring and summer of 1909, but the work fell greatly in arrear, and when the eleven months specified in the contract had expired it was not nearly completed. The contractors struggled on until the month of December 1909, when by arrangement with the pursuers, the work was suspended until the spring of the following year. But in January 1910 the contractors became bankrupt and were unable to resume the work, and the pursuers were obliged to complete it themselves at considerable additional cost, and they now sue the defenders under their contract bond for the loss they have sustained through the contractors' default.

The contract bond provides that if the contractors shall fulfil their obligations under the contract, or if on default of the contractors the defenders shall satisfy and discharge the damage sustained by the pursuers up to the sum of £5000, the bond shall be null and void—otherwise it shall remain in full force. But it contains the following clause on which the defenders found, viz.—‘This bond is executed by the surety upon the following express conditions, which shall be the conditions precedent to the right of the employer to recover hereunder: The surety shall be notified in writing of any non-performance or non-observance on the part of the contractors of any of the stipulations or provisions contained in the said contract, and on their part to be performed and observed, which may involve a loss for which the surety is responsible hereunder, within one month after such non-performance or non-observance shall have come to the knowledge of the employer, or his representative or representatives, having supervision of the said contract, and a registered letter posted to the resident manager in London of the Fidelity and Deposit Company of Maryland at its London office … shall be the notice required within the meaning of this bond, and the employer shall in so far as it may be lawful permit the surety to perform the stipulations or provisions of the said contract which the contractors shall have failed to perform or observe.’

Now it is proved in evidence that the contractors failed to perform many of the stipulations contained in their contract, and although the pursuers were well aware of this they did not send notice to the defenders as required by the terms of the contract bond. For example, it was stipulated in the contract—(1) That the contractors should commence to lay and joint the pipes in the trenches in the first week of February 1909. They did not in point of fact commence until the 13th of May. (2) The work of laying the pipes in a moor through which the works ran was to commence not later than the first week in March. It was not commenced until the first week in July. (3) The work of laying the pipes along the public roads was to be carried on at a number of points simultaneonsly so as to insure the completion of the whole work within eleven months. This was not done. (4) Not less than a total of 470 yards of pipe were to be laid and jointed by the contractors in each consecutive week, and the pipe-laying and jointing was to be carried on at a uniform rate so as to insure the completion of the work as provided for. This provision appears to have been totally disregarded. Not only were the contractors three and a half months late in beginning the pipe-laying, but after they did begin they did not make up for lost time. On the contrary they permitted the work to fall more and more into arrear. The diagram shows the actual progress made from

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month to month, and the net result was that on 30th October, when the whole work ought to have been completed, it was still less than half finished. The defenders knew nothing of all this, and they now plead that the pursuers' failure to send them notice in terms of their contract bond seriously affected their position, and that they are therefore freed from the obligations which they undertook.

The pursuers do not dispute that the contractors did not observe the stipulations in the contract, and that the work fell seriously into arrear. But they maintain that this was not through any fault or neglect on the part of the contractors, but was entirely due to frost in the spring and wet and stormy weather during summer and autumn, which delayed the commencing, carrying on, and completion of the work in terms of the contract. And they plead that as they were entitled by the terms of the contract to grant an extension of time when bad and frosty weather interfered with the work, they were under no obligation to inform the defenders that the work was in arrear.

The pursuers did not in my opinion offer any satisfactory proof of their averment that the delay was caused by bad and frosty weather, and I am satisfied on the evidence that it is not true in fact. [ His Lordship reviewed the evidence.] There were, no doubt, days when the weather did interfere with the progress of the work—that is to be expected in all work of this kind—and that is why the contract provided that the work should begin early in spring and be carried on with regularity so that it might be completed before November, when unsuitable weather might be expected. But it is tolerably clear from the pursuers' own evidence, that is to say, from the letters which their engineers wrote to the contractors, and from their weather chart, read along with the evidence of the actual progress of the work, that the prolonged and continuous delay was due to causes other than the weather. And the evidence of Mackerron and Mr Kinniburgh, who both struck me as careful and reliable witnesses, shows what these causes actually were. Mackerron had been a foreman with the Columbian Fireproofing Company, and was in charge of the pipe-casting department of the works for some months. He kept a diary in which he noted the weather conditions and the number of pipes cast from day to day. This diary shows that Mr Martin's recollection that pipe-laying was quite impossible owing to frost in February and March is wrong. The fact is that they lost only from three to four days in February and fewer still in March. The delay arose from want of material and plant and men, and in the early stages of the work from bad management. Thus there was an unexplained delay in erecting sheds and other preparations, and the material for making pipes did not arrive on the ground until the month of February. Pipes should have been ready to lay in the beginning of that month, but they did not begin to cast pipes till February 17th. And they had not even then sufficient pipe-moulds and consequently could not turn out anything like a sufficient supply. For some weeks they manufactured at the rate of one and occasionally two pipes a day, while if they had had proper plant the output should have been from 16 to 20. Mackerron repeatedly asked for more moulds, but was told by the manager that he could not have them as they were very expensive. Then there was a general lack of supervision, with the result that there was delay in getting cement, steel-sheets, and spirals forward. This appears to have continued throughout the spring and early summer, and the work fell steadily into arrear until there was a change of management, and then more satisfactory progress was made. Mr Kinniburgh, who did the cutting and excavating work on the contract, corroborates this evidence, and he had not only opportunities of observing the progress of the work, but he had reason to remember the delay because he suffered from it. He states that the delay was caused, not by the weather, but by want of plant and men and through bad management until August, when the manager was dismissed. And the correspondence shows that Mr Kinniburgh complained of the delay at the time, and on 3rd July the engineers—Messrs Warren & Stuart—wrote to the contractors referring to these complaints, and stating that ‘we have seen for ourselves that you have nothing like a sufficient number of moulds for carrying on the work expeditiously.’ At this time the contractors had persistently failed to observe the conditions in the contract, and had permitted the work to fall more than four months into arrear, and I think the engineers must have known that it could not have been completed by the 30th of October. In any case they were well aware that the conditions were not being implemented, and that this was not due, as the pursuers now maintain, to the weather conditions.

But the pursuers further maintained that even if the delay were due to the fault and neglect of the contractors, it was not such failure to observe the stipulations in the contract as required them to send notice to the defenders. They argued that the true meaning of the clause in the contract bond on which the defenders found is that notice only required to be sent of any breach of the stipulations on the part of the contractors as a condition-precedent to recovery of damages under the penalty clause, which provides that the contractors are liable for a penalty of £12 per week for each week that may elapse after the 30th October until the contract was completed, and that they were not under obligation to intimate to the pursuers that the work was in arrear, as they do not claim for delay in completing the contract under the penalty clause. I do not so read the clause in the contract bond. The language used is that the surety shall be notified in writing of any non-observance of the stipulations ‘which may involve a loss for which the surety is responsible.’ I think that the protracted and continued delay in commencing and carrying on the

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work contrary to the provisions of the contract was not only likely to cause a loss but did in point of fact cause the very loss which the pursuers say they have sustained. If the contract had been finished as it ought to have been in October there would have been no loss at all. The loss arose through the neglect and delay during the spring and summer months which necessitated the suspension of the work till the spring of the following year. Conditions in 1910 had evidently changed, because the pursuers state that they found it impossible to get the work done on the same terms. This was a risk which the defenders ought to have had an opportunity of protecting themselves against. They agreed to guarantee a contract with carefully considered stipulations to ensure its completion within eleven months on condition that the pursuers should notify them if the contractors disregarded any of these stipulations. They did not undertake to guarantee a contract under which the contractors were to be permitted to carry on the work when they found it convenient and which might drag on indefinitely. It was what is known as a summer contract—that is to say, it was agreed that all preliminary arrangements should be made, material brought forward, pipes manufactured, &c., in December and January, so that pipe-laying and jointing should commence in early spring, and be carried on continuously so that full advantage might be taken of the summer weather. Any delay in bringing forward material or manufacturing pipes naturally delayed pipe-laying and the benefit of the summer weather was lost. The lost time was never redeemed through want of plant and men—due probably to want of money. If the defenders had been notified of this it is possible that they might have found it to their advantage either to assist the contractors or undertake the work themselves. In any case they ought in my opinion to have had an opportunity of considering their position, and if their interests had been reasonably considered they would have received notice early in the year that the stipulations in the contract were not being adhered to. But it appears to me from the evidence that the pursuers never considered the defenders' position at all. [ His Lordship reviewed the evidence.] It is, I think, clear from this that the real reason why notice was not sent was because the pursuers never considered the defenders' interests at all. I do not see how in these circumstances they can insist in their claim. It is, I think, settled by authority that even when the creditor in such circumstances has acted in good faith and without any intention of neglecting the surety's interests, and although it cannot be shown that the surety has sustained loss by the non-observance of the condition, still such non-observance liberates him from his obligations— Grieve, 1 D. 738; Haworth, 18 R. 563; Moor, 1858, 3 C.B. (N.S.) 830—and it does not appear to be relevant to inquire whether the condition was material— Anderson, 1853, 4 (H.L.) Cas. 484. But in this case I think the condition was material, and in some ways the pursuers do not appear to have treated the defenders quite fairly. Thus Mr Stuart admits that in August, when the pipes were tested and found to be unsatisfactory, he was aware that there was likely to be a loss for which the defenders were responsible. One would have thought that this very important fact would have been communicated to the defenders. But that did not occur to the pursuers, although they took prompt action to safeguard their own interests. They intimated to the contractors that they would not make further payments for the work done until they furnished additional security for the proper fulfilment of their contract. The contractors thereupon approached the defenders with a view to getting an additional guarantee. The defenders suspected that something was seriously wrong, and wrote to the pursuers on 16th September asking for particulars and confidence. The pursuers replied by letter of 18th September, but, instead of frankly stating, as was the fact, that the contractors by persistent non-observance of the stipulations in the contract had permitted the work to fall more than four months into arrear, and that it could not possibly be completed in contract time, and would very likely require to be suspended until the following year, they stated that the reason why they desired a further guarantee for £5000 was ‘because it is apparent they are two months behind with their work, the delay being caused by defective workmanship in making several joints in one section of their contract. The workmen responsible for these defects have been removed from their work and replaced by thoroughly competent men who are repairing the defective joints with all despatch and to the thorough satisfaction of the trustees, sufficient to restore their confidence in the system.’ If it were true that the whole delay was caused by defective workmanship in one section of the contract, and that the work was being repaired to the satisfaction of the trustees, and in such a manner as to restore their confidence, it is difficult to understand why the large additional guarantee of £5000 should be required. It appears to me that the pursuers' insistence in this guarantee shows that they had lost confidence in the contractors, and were well aware that there was likely to be a loss of a reater amount than that which the defeners had already undertaken; and if they had given the slightest consideration to the defenders' interests they would have told them so frankly and at once. It was argued on behalf of the pursuers that this letter was sufficient notice under the contract bond. I do not think so. It was not written spontaneously with a view to putting the defenders on their guard against loss, but in reply to a request for particulars, and was framed in such a manner as to induce the defenders to undertake an additional guarantee. Mr Guarina, the resident secretary of the defenders' company, stated that it removed any suspicion he had, and I am not surprised. It appears to have been written for that purpose. It does not, in my opinion, set forth the facts accurately

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or fairly. It places them in such a light as to lead the defenders to believe that there was nothing seriously wrong. The delay was represented as being two months, caused by defective workmanship in one section. Whereas the pursuers were aware that the delay was much greater, and was caused by neglect and mismanagement and persistent disregard of the stipulations from beginning to end of the contract, and there was in consequence likely to be a large loss for which the defenders were responsible. I do not think that such a letter can reasonably be regarded as notice within the meaning of the contract bond.

Finally the pursuers argued that as the defenders did not take any exception when they received this letter and the letters of 10th and 13th December 1909 and 25th January 1910, they must now be held to have waived any right to resist liability open to them. But the defenders were not aware of the true facts until the last of these letters was received. They knew nothing at this time except what the pursuers told them. It was only in the month of March that they came to know of the contractors' breach of stipulations, and the manner in which they had been permitted to carry on the work, and when the facts came to their knowledge they at once founded upon the pursuers' failure to fulfil the conditions incumbent on them. I do not see how, in these circumstances, they can be barred from insisting in this defence to the pursuers' claim.

On the whole matter I am of opinion that the defenders have succeeded in establishing their defence, and that they are entitled to be assoilzied from the conclusions of the summons, with expenses.”

The pursuers reclaimed, and argued—The Lord Ordinary was wrong in holding that was a condition-precedent of the contract of insurance that notice be given of every non-observance of the provisions of the engineering contract— Wade v. Waldon, 1909 SC 571, 46 S.L.R. 359. The claim here was for the loss incurred owing to the contractors' failure to proceed with the work after their bankruptcy. Of this failure and claim timeous notice had been given. The bond contemplated notice of failures which were the ground of a claim against the sureties. It was impossible to give notice of every breach of any stipulation of the contract. The fallacy of the defence lay in saying that the contractors were absolutely bound by the conditions of the contract. Provision was made in the contract for extension of time and relaxation of the other conditions. There was a penalty clause for failure to complete the work within the contract time, but the supervising engineer had power to excuse even such delay. There was no evidence that the pursuers knew of any failure to observe conditions of the contract before the contractors became bankrupt. The defenders did not aver on record that the contractors had been in arrear before their bankruptcy, or that the pursuers knew that they were in arrear.

The defenders argued—The terms of the engineering contract were imported into the bond of insurance and became part of it. A breach of the contract was therefore a breach of the bond. It had also been made a condition-precedent of the bond that notice be given to the defenders of any failure to perform the stipulations of the contract. The failure of the contractors to keep to the scheduled time was a breach of the contract, and the defenders should have been notified of it. The want of such notice freed the sureties— Anderson v. Fitzgerald, 1853, 4 Clark 484, per Lord Cranworth, L.C., at p. 503; Sanderson v. Aston, 1873, L.R., 8 Exch. 73; Bettini v. Gye, 1876, L.R., 1 Q.B.D. 183, per Blackburn, J., at p. 187; M'Elroyl & Sons v. Tharsis Sulphur and Copper Company, June 4, 1878, 5 R. (H.L.) 171, 15 S.L.R. 777; Standard Life Assurance Company v. Weems, August 1, 1884, 11 R. (H.L.) 48, per Lord Blackburn at p. 51, 21 S.L.R. 791, at p. 793; de Colyar, Law of Guarantees and Principal and Surety, p. 396. It was not relevant to say that the pursuers had acted in good faith and that the sureties had not been prejudiced — Haworth & Company v. Sickness and Accident Assurance Association, Limited, February 26, 1891, 18 R. 563, 28 S.L.R. 394. The pursuers had modified their contract with the engineers without obtaining the consent of the surety, by allowing longer time for the completion of the work. This modification freed the surety—Bell's Prin., 259; Bonar v. M'Donald, 1850, 7 Bell's App. 379; Polak v. Everett, 187p, L.R. 1 QBD 669, per Blackburn, J., at p. 673; Gloag on Contract, p. 237; Gloag and Irvine, Law of Rights in Security and Cautionary Obligations, p. 873; de Colyar ( op. cit.), pp. 217 and 395. The defenders' case was sufficiently stated on record, but if not it was stated by pursuers themselves in evidence— Bile Bean Manufacturing Company, Limited v. Davidson July 20, 1906, 8 F. 1181, 43 S.L.R. 827.

At advising—