Guaranty Co. v. Pressed Brick Co.

Background

A contractor named McIntyre entered into a federal contract to build a public structure and, as required by an 1894 law, gave a penal bond that also promised to pay all persons supplying labor and materials. A guaranty company signed as surety, and material suppliers (including a brick company) were given the right to sue in the name of the United States for their benefit. The dispute arose after ordinary credit was allowed for bills and the question reached the Court about the surety’s liability.

Reasoning

The main question was whether the familiar rule that a guarantor is discharged when a contract’s time is changed without the guarantor’s consent applies to this federal bond that separately guarantees payment to suppliers. The Court explained that the payment covenant was made solely for the benefit of material suppliers, and that a corporate surety could not reasonably be expected to know the exact amounts, suppliers, or timing of all future bills. The Court rejected the argument that the word “promptly” required immediate cash payment on due dates. It held that ordinary, customary extensions of credit do not, by themselves, discharge the surety when there is no evidence the surety was harmed, while leaving open exceptions for fraud, unusual credit arrangements, or prejudice to the surety.

Real world impact

Material suppliers on federal public-works projects keep the added protection the statute intended: routine credit terms will not normally let a surety escape responsibility. The ruling preserves suppliers’ ability to recover from the bond unless the delay expressly causes loss or involves extraordinary changes or fraud.