bond are clear and express that such an extension between the obligee and principal will release the surety, the construction will not be different from that given the bond of the gratuitous surety.55

Statutes requiring a bond to be given to the government for the benefit of materialmen and subcontractors, and authorizing them to sue in the name of the government for the default of the contractor, have been enacted.56 Such undertakings are for the benefit of third parties, and the government being without authority to change the original contract of the principal, any alteration in the provisions concurred in by it would not affect the surety's liability.57 Without a statute, such a bond may be entered into for the benefit of a third person; but to entitle a beneficiary to recover thereon, it must be clear that the contract was made for his benefit.58 A valid extension of time between the third person and his debtor, without the knowledge of the corporate surety, does not discharge the latter. It is immaterial to the surety by whom the materials will be supplied, and he is ignorant of the identity of the person for whose benefit such contract was made. Obviously, the situation of the corporate surety differs from the gratuitous one. The latter acts for the

55 Bench Canal Drainage District v. Maryland Casualty Co. (1921) 278 Fed. 67, 80.

56 The Act of Congress of August 13, 1894, c. 280, 28 Stat. 278 as amended by the Act of February 24, 1905, c. 778, 33 Stat. 811, U. S. Comp. Stat. (1916) § 6923, requires a bond to be given the United States by contractors of any public works guaranteeing that "such contractor or contractors shall promptly make payments to all persons supplying him or them with labor and materials in the prosecution of the work provided for in such contract.' This act has been held to protect not only immediate subcontractors, but a bond given in accord with it protects all unpaid persons who have supplied material or labor en

tering into the work. United States v. American Surety Co. (1905) 200 U. S. 197, 26 Sup. Ct. 168, 50 L. Ed. 437.

57 United States to the Use of Anniston Pipe & Foundry Co. v. National Surety Co. (1899) 92 Fed. 549, 34 C. C. A. 526; Victoria Lumber Co. v. Wells et al. (1916) 139 La. 500, 71 So. 781, L. R. A. 1916-E, 1110.

58 Searles v. City of Flora (1907) 225 Ill. 167, 80 N. E. 98; M. H. Walker Realty Co. V. American Surety Co. (1922) 60 Utah 435, 211 Pac. 998. See General Bonding & Casualty Insurance Co. v. Waples Lumber Co. (1915) Texas Civ. App. 176 S. W. 651, 655.

accommodation of the principal, on a certain undertaking, aware of the terms of the agreement between the principal and obligee, which are certain. But this kind of an undertaking is not entered into for the benefit of the obligee; the compensated guarantor does not know the parties with whom the obligee may deal or the character of the contract which will be made. The undertaking being uncertain, it is immaterial to the surety whether the time be extended reasonably or not.59 While the courts distinguish between the gratuitous and corporate surety in such cases, it is believed there is a substantial difference between any suretyship undertaking which guarantees the performance of a particular contract, and one for the benefit of persons furnishing labor or materials, the contract for which is not in esse when the bond is executed, and not specifying its terms.60

§ 237. Right of compensated surety to subrogation and contribution. It is thus seen that after the instrument has been interpreted, ambiguities as well as alterations in the original contract are presumed to bind the compensated surety to the full extent of his undertaking. He must establish the departure from that contract, and the materiality of any alteration made by agreement between the principal and obligee. The difference in the application of the doctrine of strictissimi juris between gratuitous and paid sureties seems limited in application to cases arising between the obligee and the surety. There is no difference between them in the rights to subrogation or contribution. After the corporate surety has paid the principal's obligation, it may be subrogated to the rights of the obligee against the payee just the same as a gratuitous surety. As one opinion expressed the principle applicable:

"The fact that the Insurance Company is a compensated surety does not affect its right to claim the benefits of subrogation. A court of equity grants the right of

59 Guaranty Co. v. Pressed Brick Co. (1903) 191 U. S. 416, 24 Sup. Ct. 142, 48 L. Ed. 242; United States to the Use of Delaware Hardware Co. v. Lynch et al. (1912) 192 Fed. 364.

60 City of Philadelphia, to the Use of Thompson v. Fidelity & Deposit Co. (1911) 231 Pa. St. 208, 80 Atl. 62, Ann. Cas. 1912-B, 1085. See Smith v. Molleson (1896) 148 N. Y. 241, 42 N. E. 669.

subrogation because the surety has paid the debt of the principal, and the right of subrogation is not dependent upon whether the surety was or was not paid to sign the bond. It is enough that the surety was obliged to pay and did pay the debt." 61

Here it is necessary to notice that the rule as to subrogation is not the same under all kinds of insurance contracts. Although, in some kinds of insurance contracts, no subrogation is permitted the law of subrogation is extended to the corporate surety, whose undertaking, we have seen, is one of insurance. For example, under a Workmen's Compensation Act providing that "the employer, having paid the compensation or having become liable therefor, shall have the right to recover in his own name," an indemnity insurance company is not entitled to recover against one who negligently injured an insured employee, for whose injury it paid compensation.62 Neither is a life insurance company subrogated to the rights of the insured against one who wrongfully killed him.88 But a fire insurance company, after paying a loss, is entitled to subrogation against the one

61 Wasco County v. New England Equitable Insurance Co. (1918) 88 Oregon 465, 172 Pac. 126, 128. Accord: Fidelity & Deposit Co. of Maryland v. State Bank of Portland et al. (1926) 117 Oregon 1, 242 Pac. 823, 825; Lewis, Adm 'r et al. v. United States Fidelity & Guaranty Co. (1911) 144 Ky. 425, 138 S. W. 305, Ann. Cases 1913-A, 564. As to the insurer's right to subrogation generally, see Travelers' Insurance Co. v. Great Lakes Engineering Works Co. (1911) 184 Fed. 426, 107 C. C. A. 20, 36 L. R. A. (N. S.) 60. That there is no difference in the right to contribution between gratuitous and compensated sureties, see United States Fidelity & Guaranty Co. v. Naylor et al. (1916) 237 Fed. 314, 321, 151 C. C. A. 20.

62 Henderson Telephone & Telegraph Co. et al. v. Owensboro Home Telephone & Telegraph Co. et al. (1921) 192 Ky. 322, 233 S. W. 743. Subrogation was allowed against the wrongdoer where the policy specifically agreed to it in Travelers' Insurance Co. v. Great Lakes Engineering Works Co. (1911) 184 Fed. 426, 107 C. C. A. 20, 36 L. R. A. (N. S.) 60.

63 Insurance Co. v. Brame (1877) 95 U. S. 754, distinguished in Travelers' Insurance Co. v. Great Lakes Engineering Works Co. (1911) 184 Fed. 426, 430; Connecticut Mutual Life Insurance Co. v. New York & New Haven R. R. Co. (1856) 25 Conn. 265, 65 Am. Dec. 571.

causing the injury, because of the nature of its contract,64 as is the indemnitor of the purchaser of an elevator.6

65

Whenever a creditor has the right to apply property of the principal to the satisfaction or security of his debt, he owes the corporate surety the duty to do so; and a failure to perform that duty to the surety's prejudice, and without its consent, discharges it pro tanto.66

§ 238. Surety company's right to retain profits from performance of the principal's contract. If the surety, for a premium, guarantees the performance of the principal's contract, no question can be raised as to its liability to the obligee. But suppose the surety company upon the principal's default, in accord with its agreement, performs for the principal, using his equipment which is assigned in such a contingency as indemnity, and receives from the obligee the balance due the principal, which is more than the cost of completing the work. Should the defaulting principal be permitted to recover from the performing surety company? In a very recent case, the Circuit Court of Appeals held that the corporate surety must pay to the defaulting principal the profit realized in completing the principal's contract, which was to construct for the State a concrete highway, for the reason that the surety

"did not receive the plaintiff's property and money in full ownership to be retained at all events. It received them to indemnify itself against loss, and, that being accomplished, there remained the duty to plaintiff to refund the difference, if any, and there was an implied promise to that effect." 67

The conclusion is not free from criticism. The defaulting principal is seeking to recover money had and received, which

64 St. Louis, Iron Mountain & Southern Ry. Co. V. Commercial Union Insurance Co. (1891) 139 U. S. 223, 11 Sup. Ct. 554, 35 L. Ed. 154.

65 John Wanamaker, New York, Inc. v. Otis Elevator Co. (1920) 228 N. Y. 192, 126 N. E. 718.

66 Joint School District No. 4, etc. v. Bailey Marsh Co. et al. (1923) 181 Wis. 202, 194 N. W. 171. 171.

67 United States Fidelity & Guaranty Co. V. Worthington & Co. (1925) 6 Fed. (2nd Ser.) 502, 503.

in the jurisdiction in which the action was brought, the court said, "will lie wherever the circumstances are such that the law, ex debito justitiae, will imply a promise." Equitable considerations are involved. The plaintiff by defaulting has not done equity. Again, the conclusion will encourage principals to default, leaving to the surety the trouble of completing the contract, and if a profit is realized, compel an accounting. The case seems to be the only one deciding the point raised.68

§ 239. Effect of legislative provisions upon the corporate surety. Without consideration of the effect of certain constitutional and statutory provisions affecting the corporate surety, this chapter would be incomplete. Although insurance contracts in the United States antedated those of the compensated guarantor many decades, a surety company cannot receive its charter under the general incorporation statute.69 It must incorporate under the statute governing insurance companies, though enacted prior to the existence of guaranty companies, or it may be chartered under a special act governing surety companies when it proposes "to guarantee the performance, by persons, firms and corporations, of all other contracts, bonds, recognizances and undertakings of every kind." 70 A general revenue law of a state imposing a privilege tax of two and one half per cent on gross premiums paid to "fire and all other insurance corporations or companies of other states . by or for policy holders residing in this state," includes a company "guaranteeing the fidelity of persons holding places of public and private trust, and executing or guaranteeing bonds and undertakings required or permitted in all actions or proceedings." Such company must pay the tax imposed by this statute.71 Under a statute adopting the ordinary definition of insurance, a contract, in consideration of a sum paid, to purchase for a fixed price accounts against insolvent debtors or judgment debtors against whom execution should be returned

68 See note in (1926) 35 Yale Law Journal 484, 486.

69 People ex rel. Kasson v. Rose (1898) 174 Ill. 310, 51 N. E. 246. 70 People ex rel. Goaling et al. v.

Potts (1914) 264 Ill. 522, 106 N.
E. 524.

71 American Surety Co. of N. Y. v. Folk (1911) 124 Tenn. 129, 135 S. W. 778.