The courts have held that the obligation of performance and the obligation of payment of labor and material claims are separate and distinct. (U. S. use of Anniston Pipe & Foundry Co. v. National Surety Co., 92 Fed. 549.) Hence the amendments suggested do not enlarge upon the rights of the parties. They propose a convenient method for enabling an unpaid creditor to sue a reasonably short time after he furnishes his labor or material, and, if enacted in the law, will eliminate the practical necessity for accepting an amount less than the reasonable value of labor and material furnished in order to obtain prompt payment.

THE PROVISION THAT ALL PARTIES MUST INTERVENE IN THE SUIT FIRST BROUGHT IS UNFAIR AND UNNECESSARY

This requirement frequently subjects an innocent labor and materialman to the necessity of compromising an admitted claim at a substantial discount rather than run the risk of being prejudiced by a premature or defective suit instituted by another creditor. In U. S. v. McCord (233 U. S. 17) the suit was instituted prematurely. The court held that a claimant who followed the mandatory language of the statute and intervened in the suit first brought could not recover, even though his intervention did take place 6 months after final settlement, since the suit first brought was premature.

In U. S. to use v. Bradley (37 Fed. (2d) 347), being of the opinion that the first suit brought was premature and therefore a nullity, another subcontractor instituted a second suit 6 months after the date which he considered the true date of final settlement. The court held that the innocent subconractor did not have the right so to do and, while sympathizing with the subcontractor in his dilemma, reached the conclusion that the subcontractor was precluded from maintaining the second suit by the one first instituted.

The obvious remedy is to permit each subcontractor to maintain a separate, independent suit in the district court of the district in which the public improvement is to be erected. When causes of a like nature and relative to the same question are pending before any court of the United States, the court may consolidate the causes when it appears reasonable so to do (U. S. C. A., title 28, see. 734). Since all the suits would continue to be in the same form, no one could be prejudiced by the change in procedure suggested.

If the change suggested be adopted, a creditor who institutes an improper action will only injure himself. His unfortunate act will not defeat the claims of innocent labor and materialmen or subject them to the necessity of settling a bona fide claim at a substantial discount rather than hazard their rights upon the determination of a technical issue which they did not create.

THE PROVISIONS OF THE PRESENT LAW ARE MOST PREJUDICIAL WHERE THE SURETY BECOMES INSOLVENT

The present insurance laws of the State of New York (ch. 28, Consolidated Laws, secs. 424 and 425) provide that, upon declaring a domestic insurer insolvent, the superintendent of insurance shall notify all creditors to present claims to him at a place specified in such notice within 4 months or some longer time in the discrétion of the court, if the superintendent shall certify that it is necessary, and not otherwise, from the date of the entry of such order. Further, that no contingent claimant shall share in a distribution of the assets of the insurer which has been adjudicated to be insolvent, except that such claims shall be considered if properly presented and may be allowed to share where such claim becomes absolute against the insurer on or before the last day fixed for the filing of proofs of claim against the assets of such insurer.

In New York, where the surety becomes insolvent, the claims of unpaid labor and materialmen under a surety bond do not mature until that claimant has the right to maintain an action on the bond. In re: People v. Metropolitan Casualty Co., 211 N. Y. 107.)

The hardship resulting from this ruling is set forth in footnote below.

2 The last day for filing claims against a surety which was recently taken over for liquidation by the Insurance Commissioner of the State of New York was Dec. 1, 1934. The right of the contractor to proceed with the work had been terminated by the United States on July 2, 1934. New specifications were prepared and a contract to complete for a sum less than the unpaid balance in the hands of the United States awarded on Oct. 22, 1934. The public building involved has just been substantially completed.

The additional balance due to subcontractors and materialmen for labor and material furnished to the original contractor is at least $100,000. It is the contention of the

MISAPPLICATION STATUTES NO CURE-ALL

It is sometimes urged that there would be no need for a better bond law if it were made a crime for a contractor or subcontractor to receive construction funds and fail to use the same in payment of labor and material bills. Such a statute, if properly drawn, would probably be constitutional. (See the writer's article in 80 U. of P. Law Review, 1083 (1932); Credit Manual of Commercial Laws, 1935, pp. 195 to 207.)

However, it is frequently difficult to get a prosecuting officer to devote to such a case the time required to master its details. It is even more difficult to get a jury to convict a man for what seen's to many a juror to be merely failure to pay a debt. Such statutes are helpful as a deterrent. They should supplement and not replace provisions for corporate surety bonds in connection with public works. Misapplication statutes are of little or no avail where a contractor overextends himself by reason of a rising market or otherwise. Furthermore, the conviction of a contractor does not necessarily mean that labor and materialmen will be paid.

Bonds for the protection of labor and material men are not required in New York, Vermont, or Maine. They are required in other States. New York, however, has had a misapplication statute since 1931. The records of the department of audit and control show conclusively that the misapplication statute is not an efficient substitute for bond legislation. Losses to laborers from 1931 to 1933 total at least $138,791.27. Losses to materialmen for the same period total at least $2,067,895.81.

These figures answer the contention sometimes made that, if it were not for a bond statute, an irresponsible contractor could not get labor or material. They illustrate the known fact that any person to whom a public-works contract is awarded can get someone to furnish him with labor or material. If there be a bond, the public body gets the advantage of a better grade of subcontractors and, in normal times, of reduced prices.

The United States obtains the advantage of the labor and material furnished to public-works contractors. To the extent of the value of the material or labor which he furnishes, he adds to the value of the completed work or structure. (Maryland Casualty Co. v. Ohio River Gravel Co., 20 Fed. (2d) 514.) The United States should, therefore, give to labor and materialmen not only the right which they have had since 1894 but the improved remedy which experience has shown will render the bond statute more equitable to all parties involved. If a surety company knows that its liability under the bond is certain and swift, it will hesitate to bond a contractor of doubtful financial responsibility.

PENDING AMENDMENTS ANALYZED

Penal sum of additional bond.-A minor question is whether the statute shall prescribe the minimum penal sum to be inserted in the additional bond. It is the opinion of many public officials that the statute should so specify.

The premium for the bond does not depend upon the penal sum thereof. The premium is either 1 percent (highway work) or 11⁄2 percent (public buildings) of the gross contract price, irrespective of the penal sum of either or both bonds. These rates are fixed by the Towner Rating Bureau, 60 John Street, New York.

H. R. 2068 and H. R. 6018 leave the amount of each bond to the discretion of the awarding officer. H. R. 5054 and H. R. 6115 require a penal bond for at least 50 percent of the contract price.

The objection has been made that, to require a bond for 50 percent of the contract price in connection with all public work would subject the parties to a hardship in connection with public-works contracts running into many

superintendent of insurance of the State of New York that, under the decision above cited, he has no discretion but must deny these unfortunate subcontractors and materialmen a right to share even in the meager dividends which some day will be declared by the defunct surety company.

If, at the time of this default, there had been required a separate bond for the payment of labor and material claims upon which each claimant had a right of action 90 days after he furnished the last of his labor and material for which claim has been made (as, for example, is sought to be conferred by H. R. 2068), the claim of each such subcontractor would have matured and ceased to be contingent within the purview of the New York decisions prior to the last day for filing proofs of claim. Hence there would have been no question but that these unpaid subcontractors and materialmen have the right to share equally with other creditors of the insolvent surety.

millions of dollars. The language set forth in H. R. 4461 in this connection is therefore urged. This proposed amendment requires, in addition to a performance bond, a surety bond "in the sum not less than one-half of the total amount payable by the terms of the contract: Provided, That whenever the total amount, payable by the terms of such contract shall be not less than $5,000,000 nor more than $10,000,000, a bond in a sum not less than one-fourth of the amount payable under the terms of the contract may be accepted, and if the amount payable under any such contract exceeds the sum of $10,000,000, a bond' in the sum of $2,500,000 shall be sufficient; * *

Separate suits versus joint suits.-Several of the bils now pending before the Committee on the Judiciary of the House of Representatives require all persons to intervene in the suit first brought (H. R. 5054, H. R. 6018, H. R. 6115).

For the reasons above stated, such a procedure is prejudicial to unpaid labor and materialmen and not necessary to preserve the rights of the contractor or surety company, since the district court of the judicial district in which all the suits must be filed may consolidate these suits.

H. R. 2068 clearly indicates that each subcontractor may maintain his own separate independent suit. H. R. 6018 provides, by section 2 (a), that any person who has supplied labor or material shall be entitled to sue on the bond', but does not contain the clause "and prosecute said action to final judgment for such sum as may be due him."

Section 2 (b) of H. R. 6018 provides that, in case any person institutes suit on any payment bond, any other person entited to sue on the bond may intervene therein. It is respectfully submitted that this latter proviso may be eliminated. It is unnecessary, since each person has a right to maintain a separate action. A claimant will not be prejudiced unduly by the requirement to issue a separate summons.

H. R. 6018 makes the right to sue conditional on claimant having given written notice. While this proposed amendment uses the word "may " rather than the word "shall" with reference to intervention, nevertheless it is possible that intervention in a pending suit may prejudice one of the claimants therein. The right of an instituting creditor to summary judgment may be prejudiced if the defendants have a defense to a claim of an intervening creditor. An intervening creditor may be prejudiced if the instituting creditor failed to give the written notice required by this proposed amendment. The plain, simple rule is to require each claimant to stand or fall by a separate action in the forum in which the public improvement is situated.

H. R. 5054 and H. R. 6115 require a caimants to intervene in the suit first brought. Hence they contain the language of the present Heard Act requiring the instituting creditor to give such personal notice of the pendency of the suit as the court may order and, in addition thereto, notice by publication.

The Supreme Court has held that such provisions are merely directory, so that the first suit is valid, although notice was not given to other creditors (U. S. to Use Bryant v. N. Y. Steamfitting Co., 235 U. S. 327).

A subcontractor may not assign the failure of the instituting creditor to give such notice as a legal excuse for his failure to intervene in the suit first brought (U.S. to Use Pen Mar Co. v. Robinson Construction Co., 8 Fed. Supp. 620).

Place for suit.-Most of the proposed amendments to the Heard Act repeat the requirement of the present statute, i. e., that suit must be brought in the district court of the district in which the contract is to be performed and executed, irrespective of the amount in controversy, and not elsewhere.

H. R. 6115 permits the claimant to maintain an action in his own name. It will make the consolidation of these suits more convenient if the present practice of requiring all suits to be brought in the name of the United States, i. e., the obligee named in the bond, for the use of the respective claimant, be continued. H. R. 4461 permits the action to be instituted in any court of competent jurisdiction in the State where the contract was to be performed. In the States where there are several district courts, this proviso would make consolidation of suits difficult and perhaps impossible.

"Claimant" defined.-Certain of the proposed amendments specify the character of the labor and material for which recovery may be had under the additional bond (H. R. 4461, H. R. 4231, H. R. 5054, H. R. 6115). In view of the liberal construction given to the words "labor and "material" as used under the present statute, there would seem to be no need to enlarge upon the same (Hill v. American Surety Co., 200 U. S. 197; Brogan v. National Surety Co., 246 U. S. 257; U. S. to Use v. Mittry Bros., 4 Fed. Supp. 216).

Time for suit.-H. R. 4461 permits a claimant on the additional bond to institute suit at any time after claimant has ceased to perform labor or furnish material or both until the expiration of 6 months after the period in which verified claims must be filed.

H. R. 5054 and H. R. 6115 provide that suit on the bond shall not be commenced until 90 days after complete performance of the contract under which said creditor furnished such labor and material and under which he claims payment has not been made. It is respectfully submitted that H. R. 4461 is unfair to the contractor and the surety in that it may subject them to the publicity of a suit before they have had a reasonable time to investigate the claim. On the other hand, a requirement for delay until 90 days after complete performance of the subcontract would prejudice a claimant in the usual case where there is a formal written agreement to supply labor or material, but, by reason of the contractor's default, the subcontractor never furnishes all the labor and material required under his subcontract. A strict construction of the provisions in H. R. 5054 and H. R. 6115 may result in such case in a conclusion that the subcontractor at no time has the right to sue, although it is believed that the court, if at all possible so to do, would not adopt such a harsh construction (6 Ruling Case Law, sec. 235; Williston on Contracts, vol. 2, sec. 677).

H. R. 2068 and H. R. 6018 provide that no suit shall be commenced prior to 90 days from the date claimant furnished, supplied, or performed the last of his labor or material for which the said claim is made. Such a provision is the law in Pennsylvania. It requires claimants to wait a reasonable period, but, on the other hand, does not subject them to the necessity of extended delay. H. R. 2068 and H. R. 6018 permit suit to be brought by unpaid labor and materialmen not later than 12 months from the date of final settlement under the contract. The meaning of the term "final settlement" is now reasonably clear, Globe Indemnity Co. v. U. S. to use Steacy-Schmidt (291 U. S. 476), notwithstanding the position sometimes taken by the Office of the Comptroller General.

H. R. 5054 and H. R. 6115 require the action to be commenced not more than 1 year after the "completion of the said work and/or improvement as a whole." The question of what constitutes "completion and acceptance of a building is one which has resulted in considerable litigation. U. S. for use Lancaster Iron Works v. Hampton Roads Shipbuilding Co. (72 Fed. (2d) 943); Metropolitan Cas. Ins. Co. v. Dolese Bros. Co. (20 Pac. (2d) 569, Okla.); Pezenik v. Massachusetts Bonding & Ins. Co. (250 N. Y. Supp. 456); Moose Lake Sand & Gravel Co. v. American Surety Co. (220 N. W. 958, Minn.); Kimball v. Parks (268 S. W. 117, Tenn.) ; U. S. F. & G. Co. v. California-Arizona Constr. Co. (186 Pac. 502, Ariz.).

In the interest of certainty, the phrase "final settlement" now clarified by the Supreme Court may well be substituted for the word completion."

66

Under the present law, such uncertainty as exists in the date upon which a subcontractor may start suit is a serious detriment to bona fide labor and material claimants. Under the proposed amendments permitting labor or materialmen to institute suit a reasonable time after they furnished the labor or material for which they claim payment, by requiring all such suits to be brought within 1 year from final settlement, a claimant has a reasonably speedy remedy and, unless he waits until the last day for suit, there will be no need to determine whether his suit was brought too late.

Notice to contractor or surety.-Surety executives contend that all claimants should be required to give notice to the contractor and the surety within a short period after they furnish the balance of their labor or material. H. R. 6018, section 2, requires persons who contract with the principal contractor, as well as persons who furnish labor and material to a subcontractor, to give written notice to the contractor within 90 days after claimant has furnished the last of his labor or material. The statutes in eight States require notice either to the contractor or surety, or both. Notice to the contractor is not required by the statutes of 36 States. Notice to the surety is not required by the statutes of 38 States.

Subcontractors contend that the requirement for notice by any claimant is undesirable since many creditors do not desire to embarrass a contractor prior to the time when he receives his retained percentage from the United States. Five years ago the Interdepartmental Board reached the conclusion that a requirement for notice should not be inserted in the statute. (See hearings on

the proposed uniform Government contract bill, H. R. 5568, 71st Cong., 2d sess., p. 25.)

Many individuals believe that a provision for notice will be prejudicial to small claimants. The more experienced claimants with legal staffs will continue to give notice and demand payment from the surety, irrespective of the absence of such a requirement in the statute, in order to make certain claimant's right to interest. The smaller inexperienced labor and materialmen may remain ignorant of a requirement for notice and thereby fail to give the notice within the statutory period. Most of the proposed bills omit a requirement for notice.

In Pennsylvania the legislature sought to adopt a happy medium between these views. It does not require any notice to be given by a person who contracts directly with the principal contractor, since the principal contractor obviously knows the persons with whom he deals, and the surety company, which has access to the records of the principal contractor, can speedily ascertain the names of all subcontractors if it so desires.

On the other hand, to prevent stale, remote claims, the legislature in Pennsylvania has enacted a provision substantially similar to that which appears in H. R. 2068, which reads:

"Any such person * * * who has no contractual relationship, express or implied, with the contractor furnishing the said additional bond, shall not have a right of action upon the said additional bond unless the said person * * * shall have given written notice to the contractor or his surety within ninety days after such labor and/or material has been supplied, stating with substantial accuracy the amount claimed and the name of the party with whom the said person * * contracted." Respectfully submitted.

*

EDWARD H. CUSHMAN.

Mr. MILLER. What is the pleasure of the committee_about_the 'continuation of the hearing? We will have to be on the floor today. Mr. HAINES. Mr. Chairman

Mr. MILLER. I owe you an apology, Mr. Haines; I did not know you were present. We will hear Mr. Haines at this time, and then we will have to go to the House.

Does anyone wish to speak against the bill?

[After a pause.]

Mr. Haines, you may proceed.

STATEMENT OF HON. HARRY L. HAINES, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. HAINES. Mr. Chairman, about 10:30 this morning Mr. Mead asked me to come over here and represent him in regard to his bill, H. R. 6018, which was referred to.

I have had no opportunity to study it, and Mr. Mead handed me some material, and with the permission of the chairman I will have it inserted in the record.

The purpose of Mr. Mead's bill is to protect subcontractors engaged in public Federal building construction. The bill amends the Heard Law by requiring the furnishing of two bonds, one directed to the United States and guaranteeing the performance of the work and the other also to the United States for the use of persons supplying material and labor, with the provision that suit may be brought at any time after the expiration of 90 days after material and labor have been furnished. The general results desired are that the United States Government would eventually obtain a better class of bidders on Government work and better construction. It would also have the effect of obtaining better and lower prices from