Opinion
November 30, 1966 —
January 3, 1967.
APPEAL from a judgment of the circuit court for Rock county: EDWIN C. DAHLBERG, County Judge of Rock county, Presiding. Reversed.
For the appellant there were briefs by Geffs, Geffs, Block Geffs of Janesville, and oral argument by Jacob Geffs.
For the respondent there was a brief by Arthur, Tomlinson Gillman and Thomas W. Bertz, all of Madison, and oral argument by Mr. Bertz.
Center Drainage District is a drainage district, organized pursuant to ch. 89, Stats. and within the jurisdiction of the circuit court for Rock county. On June 7, 1961, an order was entered by the circuit court to clean out drainage ditches within the district and preliminary matters necessary to drawing up a contract were performed by the commissioners of the district. In March of 1962 the district advertised the project for bids. Nine bids were received and the commissioners accepted the low bid of Donald R. Cacic. On May 15, 1962, the contract between the district and Cacic was signed by the parties and a bond in the amount of $5,500 was furnished by Capitol Indemnity Corporation to insure contract performance on the part of Cacic.
Cacic commenced work on June 2, 1962, and was delayed for various reasons. Attorneys for the district notified Capitol that Cacic's work was unsatisfactory in November of 1962. Capitol was again notified of the unsatisfactory nature of the work on April 16, 1963, and the district terminated the contract on May 7, 1963, requesting that Capitol provide another contractor. A formal notice of termination was sent to the contractor and the surety on May 13, 1963.
Capitol refused to come in and take over the contract. The district then moved for an order in circuit court to complete the work remaining under the contract on time and material basis. The order was issued on August 19, 1963, and a new contractor was hired on this basis and paid $13,624.30. No competitive bids were asked by the commissioners in hiring the contractor to complete the work on the original contract.
On November 12, 1963, the district commenced an action against Capitol asking for forfeiture of the performance bond. Cacic, the contractor, was impleaded in the action. The trial court found that Cacic had not substantially performed the contract, and the trial court also found that Cacic had abandoned the contract. This finding of breach of contract by Cacic was held to warrant termination of his contract by the commissioners.
The surety interposed several defenses to relieve it from any obligation upon the bond. The trial court rejected all of these defenses except the defense that the district had failed to relet work done under the contract by competitive bidding as required by sec. 89.48, Stats. The trial court held that the failure to let the remaining work out to bids served to release the surety because it insured a performance pursuant to ch. 89. The trial court also held that Cacic, the contractor, was not liable for the same reason. Plaintiff district appeals.
The sole issue presented by this appeal is: Did the failure of the district to finish the work by asking for bids under sec. 89.48, Stats., excuse the bonding company and the contractor from all liability resulting from breach of contract and abandonment of the work?
Sec. 89.48, Stats. provides as follows:
"(1) In all cases where the work to be done at any time under the direction of the commissioners shall in their opinion cost to exceed two thousand dollars unless the court has authorized the district itself to do the work the commissioners shall advertise for bids on such work in some newspaper published in the county in which the petition is filed . . . .
"(2) Such work shall be let to the lowest responsible bidder . . . ."
Sec. 89.48 (1) and (2), Stats., has become embodied in sec. 88.62 (1). This change was made by ch. 252, sec. 158, Laws of 1965.
The trial judge found that the district had not complied with this statute in reletting the remaining work under the original contract with Cacic. It also found that this failure excused the liability of the contractor and the surety although all other findings made by the trial judge indicated that liability should have been imposed.
The basic purpose of the statute is not to protect sureties. Rather, it is to protect the public from paying what may be uncompetitive prices for public work.
Capitol seeks to avoid all liability by failure of the district to comply with the bidding statute. Thus, it seeks to void its obligation under the first contract by illegal procedure alleged to void the second. The general rule is that
". . . where the contract in question is ultra vires merely in the secondary sense of the term, namely, not expressly prohibited to it, but beyond the scope of the general powers conferred upon it, or, at least, while within the general powers of the municipality, is not entered into in strict compliance with the conditions prescribed by the charter or statute for its validity, the other party to the contract who has received its benefits cannot defeat its enforcement by the municipality by pleading the defense of ultra vires."
Anno. 122 A.L.R. 1370, 1372. See also 38 Am. Jur., Municipal Corporations, p. 281, sec. 505.
The rationale behind this rule is that the defense of ultra vires in the secondary sense is created for the benefit of the municipality which has suffered an injury by reason of such unauthorized contract in order to protect the taxpayers and the municipality from the effects of such a contract. Only the municipality or taxpayers representing the municipality may, therefore, invoke the defense. Thus, in Madison v. American Sanitary Engineering Co. this court rejected an attempt by the contractor to void his contract because the city failed to comply with a requirement of competitive bidding. This court said that this contention is available only to taxpayers or landowners, and once a surety has entered into a contract, the surety cannot challenge the contract because it was not made in the required manner.
(1903), 118 Wis. 480, 95 N.W. 1097.
In Baumann v. West Allis a claim of illegality as to a contract was rejected, the court stating:
(1925), 187 Wis. 506, 204 N.W. 907.
"Those cases lay down the principle that contracts binding a municipality can be culminated only in the manner prescribed by the charter, and municipal officers must follow the prescribed procedure step by step. This doctrine has been applied, however, only for the protection of taxpayers whose money is about to be spent, or property owners whose land is about to be charged, by reason of the illegal contract. It is just as clearly established by the decisions of this court that persons who enter into a contract with the city stand in a different position. Such persons `cannot even make the defense of ultra vires or total lack of power on the part of the corporation to make the contract. If the defense of ultra vires cannot be made, it is very evident that the lesser claim . . . must also be ineffective.' Ricketson v. Milwaukee, 105 Wis. 591, 81 N.W. 864. See, also, Beloit v. Heineman, 128 Wis. 398, 107 N.W. 334; Price Co. v. Northwestern C. S. Co., 184 Wis. 279, 199 N.W. 60. The limitations upon the authority of municipal officers to enter into contracts, and prescribed methods for the exercise of such power, are for the protection of the public, and such provisions will not be permitted to be invoked to the harm of the public by those who, having capacity to contract for themselves, have in form entered into contractual relations with a municipality. In other words, a law intended as a shield for the public will not be permitted to be used as an instrument for its destruction." (Emphasis added.)
Id. at page 521.
Since neither the surety nor the contractor could make such a contention as to the original contract, there should be no reason why they should have the authority to challenge the reletting contract on this basis. This is particularly true in view of the fact that the purpose of the statute is to protect the taxpayers. Application of the statute to protect the surety in the case at bar would only hurt the taxpayers because the surety escapes liability.
Respondent cites several cases for the proposition that failure of the drainage district to comply with the competitive bidding statutes in reletting the contract work relieves the surety of liability. None of these cases sustain this proposition. The major reason is that in none of the cases is the surety or contractor arguing the wrongful reletting as a defense to all liability.
In Trustees of Sanitary District of Chicago v. Poe (1921), 138 Md. 541, 114 A. 714, the sanitary district completed the work itself and there was no reletting. In Wykoff v. Stewart (1917), 180 Iowa 949, 164 N.W. 122, the contract was relet by advertisement. The work was also properly relet in Board of Drainage Commissioners v. H.J. Peterson Co. (1922), 196 Ky. 130, 244 S.W. 322. Respondent completely misses the point in citing Central Lime Cement Co. v. Leyden-Ortseifen Co. (1927), 245 Ill. App. 48. In this case the district breached the contract by a wrongful termination. The court held that any reletting of the work was also wrongful and the cost of this reletting could not be charged against money owed to the contractor. In conclusion, in none of these cases was the surety using wrongful reletting as an absolute defense to liability under the original contract.
The general rule is that a compensated surety is an insurer and its obligation is to be strictly construed. The surety in the case at bar executed a performance bond; it had an opportunity to take over the work in an attempt to minimize its damages but refused to do so, letting the matter drag for some time; if the surety believes the costs incurred by improperly reletting the work are excessive, its remedy is to attempt to reduce its liability by proving excessive completion costs; it cannot be permitted to escape any liability by virtue of the district failing to follow the competitive bidding procedure when the first contract was in trouble.
72 C. J. S., Principal and Surety, p. 583, sec. 102; 94 A.L.R. 876.
By the Court. — Judgment reversed.