Notes - Socony-Vacuum Oil Co., Inc. v. Continental Casualty Co. | Kessler, Gilmore & Kronman | October 31, 2012


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by Kessler, Gilmore & Kronman



1. In his Opinion in the Socony-Vacuum case, Judge Hincks concluded that McGrath v. American Surety Co., 307 N.Y. 552,122 N.E.2d 906 (1954), was "legally indistinguishable" from the case at bar, but evidently was not impressed by the reasoning of the New York court in McGrath.


Shortly after the Second Circuit's Socony-Vacuum decision had been handed down, the New York Court of Appeals decided Daniel-Morris Co., Inc. v. Glens Falls Indemnity Co., 308 N.Y. 464, 126 N.E.2d 750 (1955). The general contractor on a housing project, which was, apparently, privately financed, had required his subcontractors to furnish both performance and payment bonds. Plaintiff had furnished materials to a subcontractor and, remaining unpaid, brought an action against the surety company on the payment bond. Without overruling McGrath, the Court held for plaintiff. Dye, J., wrote:


. . . The underlying contract, as we have pointed out, required the furnishing of work and materials "free of the lien of any third party" and indemnity for nonperformance. To meet this underlying obligation two separate and distinct bonds were given. Suit by this plaintiff to enforce the payment bond is an entirely different situation than that existing where the obligations of the surety are combined in a single payment-performance bond. In such a situation a materialman may not maintain a separate suit as a third-party beneficiary because the primary or dominant purpose of the combined bond is regarded as "performance" which should not be dissipated or defeated by the neglect of the subcontractor to meet his obligation (Fosmire v. National Sur. Co., 229 N.Y. 44).

Here we are not confronted with the problem of ascertaining the dominant purpose of a bond having a twofold function, but simply whether the primary, paramount purpose of this bond — payment of materialmen — may be enforced by a materialman. On this record it is clear that he may. This introduces no new principle — a materialman is allowed to sue as a third-party beneficiary whenever "the primary purpose of [the] bond but . . . also [its] paramount purpose" is to benefit creditors (d. McClare v. Massachusetts Bonding & Ins. Co., 266 N.Y. 371, 377). The language of the within bond specifically provides that the materials furnished are to be "free of the lien of any third party." When this is read in conjunction with the underlying contract, the inference is irresistible that the parties intended to benefit unpaid materialmen. The intention to benefit is pointed up by the fact that the separate performance bond given to the prime contractor afforded it protection for noncompletion of the work, which necessarily included the contingencies within the indemnification of the payment bond. The materialman, on the other hand, had no recourse against the performance bond.

The intention to benefit the materialmen must not be confused with the motive of the parties in entering into the bond. Big-W's demand for indemnification, as pointed out in the opinion below, "supplies the motive in [1371] securing the undertaking rather than the intent as to who shall be benefited." Once the right is created the law furnishes a remedy irrespective of the motivation of the parties (Seaver v. Ransom, 224 N.Y. 233; Lawrence v. Fox, 20 N.Y. 268; 2 Williston on Contracts, §§372-402; Corbin, Third Parties as Beneficiaries of Contractors' Surety Bonds, 38 Yale L.J. 1).

McGrath v. American Sur. Co. (283 App. Div. 693, 698, revd. 307 N.Y. 552) is not authority to the contrary. There it clearly appeared that the bond sought to be enforced was not intended to supersede or supplement the right of action given materialmen under the Miller Act (U.S. Code, tit. 40, §§270a, 270b; cf. Socony-Vacuum Oil Co. v. Continental Cas. Co., 219 F.2d 645 [U.S. Court of Appeals, 2d Cir.]).


Id. at 468-469, 126 N.E.2d at 752-753.


2. A Note in 41 Cornell L.Q. 482 (1956) reviews the New York cases and concludes that the court reached a proper result in both the McGrath and Daniel-Morris cases, albeit on faulty reasoning. The author remarks that the "vexing problem" of the materialman's right to sue on the contractor's surety bond "has already caused an immense amount of unnecessary litigation, and court decisions, many hamstrung by outworn dogma, leave the law in this area conflicting and uncertain." The author proposes that the "intent-to-benefit" test be discarded and suggests that "a test eliminating ambiguity and furnishing a sound basis would be: Was it a distinct objective of the exact performance specified in the condition of the bond that the surety assumes a direct obligation to materialmen." This test, the author concludes, would result in payment to materialmen, but without possible confusion with claims of incidental beneficiaries. Do you agree?


3. In the principal case and the other cases referred to in this Note the surety company writes its bond on account of its principal, the subcontractor, undertaking in favor of the general contractor (obligee of the bond) that the subcontractor's debts for labor and materials will be paid. In contract terminology, the surety company is the promisor and the general contractor is the promisee. The plaintiff has furnished materials (or labor) to the subcontractor. Under the definitions in Restatement First §133, is the plaintiff (in states that allow him to recover) a creditor beneficiary or a donee beneficiary? For contradictory answers to the question see 4 Corbin §802; 2 Williston §372.


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June 02, 2014 Notes - Socony-Vacuum Oil Co., Inc. v. Continental Casualty Co. Notes - Socony-Vacuum Oil Co., Inc. v. Continental Casualty Co.

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