Hardaway v. National Surety Co.

Background

This dispute involves a government contract to build Lock and Dam No. 4 and a bond requiring contractors to pay those who supplied labor or materials. Willard & Cornwell were the original contractors; Joseph Coyne later carried on the work. Coyne signed a June 2, 1903 written agreement with B. H. Hardaway and R. P. Prowell to supervise completion and to provide funds, promising them a percentage of costs and an assignment of about $8,300 the Government was holding in reserve. Hardaway and Prowell later claimed payment for work and costs, and the surety company that backed the original contract sued and held money in court. A special master allowed Hardaway and Prowell’s claim, but the lower federal courts disallowed it and the case was appealed here.

Reasoning

The key question was whether Hardaway and Prowell qualified as people protected by the bond—that is, suppliers of labor or materials to the original contractor. The Court read the June 2 contract and found that Hardaway and Prowell agreed to supervise and to advance money, and to be paid from assigned government checks and the reserve fund. They did not agree to supply labor or materials as subcontractors. Coyne’s personal liability was limited and arose only if government checks could not be collected. Because there was no liability from the original contractors or from Coyne to Hardaway and Prowell in the sense the bond protects, the surety was not liable to them. The Court also agreed the surety’s right to the reserved government fund outranked the assignees’ claim.

Real world impact

The ruling makes clear that payment bonds protect actual laborers and material suppliers, not parties who merely finance or supervise completion and expect payment by assignment. People relying on assigned government payments or commission arrangements cannot use the bond unless they actually furnished labor or materials, and sureties can be subrogated to reserved government funds to satisfy supplier claims.