the withholding and social security taxes attributable to the construction of the Mt. Pleasant and Connellsville service stations which the Contractor failed to pay.
In my opinion the claim should be denied.
It seems to be established that withholding and social security taxes due to the government from the Contractor are owing as taxes and not as wages. United States v. Crosland Const. Co., 4 Cir., 1954, 217 F.2d 275; Westover v. William Simpson Const. Co., 9 Cir., 1954, 209 F.2d 908; United States v. Zschach Const. Co., 10 Cir., 1954, 209 F.2d 347.
The pertinent portion of both contracts is as follows:
'With respect to all persons at any time employed by or on the payroll of the Contractor or performing any work for or on behalf or in connection with or arising out of his business, the Contractor shall indemnify the Owner against, and hereby accepts full and exclusive liability for the payment of, any and all contributions or taxes for unemployment insurance or old age retirement benefits, pensions or annuities or wage or income taxes, now or hereafter imposed by the Government of the United States, any State or political sub-division thereof, whether measured by the wages, salaries or other remuneration paid to such persons or the number of such persons or otherwise.'
The pertinent condition of the bonds is that the Contractor
'(1) shall faithfully observe, perform and keep the said contract on the Principal's part to be observed, performed and kept, according to all its terms, covenants and conditions * * *.'
The problem is one of interpreting the foregoing contractual provisions in order to determine whether the parties intended to benefit the United States and other taxing bodies by creating securities and remedies additional to their right to tax liens and the ordinary statutory methods of collection.
With respect to interpreting construction contracts and bonds, the law of Pennsylvania is laid down as follows in Commonwealth v. Fidelity & Deposit Co., 1947, 355 Pa. 434, 50 A.2d 211, 212:
"A bond given pursuant to a contract incorporated in the bond, will be construed in the light of the terms of the contract and the attendant circumstances but 'the obligation of a bond cannot be extended beyond the plan import of the words used'. (City of) Lancaster v. Frescoln, 192 Pa. 452, 457, 43 A. 961, 962; (City of) Erie v. Diefendorf, 278 Pa. 31, 122 A. 159.' Fleck-Atlantic Co. v. Indemnity Insurance Co. of North America, 326 Pa. 15, 19, 191 A. 51, 53. Obligations not imposed by the terms of the bond cannot be created by judicial construction or interpretation which extends the terms beyond their normal meaning.'
In the foregoing case, very like the case at bar, the bonds were conditioned on the contractor performing 'the terms and conditions of said contract and his * * * obligations thereunder.' There the contract provided that workmen's compensation insurance should be furnished by the contractor, but it did not in express terms require that the contractor pay the premiums thereon. The claim against the surety by the third party to recover for the unpaid premiums was denied. See also, Dravo-Doyle Co. v. Royal Indemnity Co., 1952, 372 Pa. 64, 92 A.2d 554; Fleck-Atlantic Co. v. Indemnity Insurance Co. of North America, 1937, 326 Pa. 15, 191 A. 51.
With the foregoing principles and cases in mind, it seems plain that the contracts under consideration do not in express terms require that the Contractor shall pay the specified contributions and taxes as they do expressly require that he shall pay laborers and materialmen. Instead, the contracts provide that the Contractor shall indemnify the Owner against contributions or taxes, for the payment of which the Contractor 'accepts full and exclusive liability'. Similar language used in a contract construed in United States Fidelity & Guaranty Co. v. United States, 10 Cir., 1952, 201 F.2d 118, 119, was held to be 'merely declaratory of (the contractor's) existing liability under the federal tax laws' and 'did not create the liability on (the contractor's) part for the payment of these taxes.'
There are no other parts of the contracts from which a promise by the Contractor to Owner to pay the former's taxes can be implied; indeed, the implications are to the contrary. Whereas the contracts are quite specific in providing that the Owner could withhold unpaid balances until Contractor furnished releases of liens, nothing is said about withholding said balances until proofs were furnished that the contributions or taxes mentioned were paid; and whereas the bonds are conditioned specifically upon the Contractor's paying for labor and material, they nowhere mention taxes. In addition, the Contractor's promise to pay laborers and materialmen is clearly for the benefit of such third parties, but neither in the stipulation of facts or in the contracts is there any indication that the parties intended to benefit the United States or any other taxing body. The only obvious purpose and intention of the Owner 'both in spirit and letter' was to protect itself and provide for indemnity.
Exceedingly great care and caution were used to make it plain that the Contractor recognized his sole liability to pay contributions or taxes arising out of his business, including the withholding and social security taxes in suit, but he did not expressly agree to pay them.
Construing the contracts, as I do, as undertakings to indemnify the Owner against loss, there is, of course, no liability on the Surety unless actual loss is suffered by the Owner, and 'ordinarily a third person has no right to sue upon an indemnity agreement. * * *' Burke v. North Huntingdon Twp. Municipal Authority, 1957, 390 Pa. 588, 136 A.2d 310, 315; Williston on Contracts, rev. ed., vol. 2, § 403, p. 1159. Even if a promise to pay taxes could be implied, the government is simply an incidental beneficiary, the contracts and bonds not having been made for its benefit, and it cannot recover. Burke v. North Huntingdon Twp. Municipal Authority, supra; Williston on Contracts, rev. ed., vol. 2, § 402, p. 1157.
If the parties intended to include taxing bodies as entities to be benefited, a few additional words would have expressed the agreement, as was done in the sections of the contracts and bonds providing that the Contractor shall pay laborers and materialmen.
The government relies on United States v. Phoenix Indemnity Co., 4 Cir., 1956, 231 F.2d 573, 574, but in that case the contract specifically and clearly provided that the contractor should 'pay * * * taxes legally collectible because of the work * * *.' Obviously, that contract was made for the benefit of the taxing bodies.
Since no express or implied promise to pay the mentioned taxes for the benefit of the government can be found, in the light of the terms of the contracts and attendant circumstances, the government is not a donee beneficiary entitled to recover the Contractor's withholding and social security taxes from the Surety. The obligation of the bonds cannot be extended beyond the plain import of the words used in the contract. Dravo-Doyle Co. v. Royal Indemnity Co., supra; Commonwealth v. Fidelity & Deposit Co., supra; Fleck-Atlantic Co. v. Indemnity Insurance Co. of North America, supra.