On Appeal from the United States District Court for the District of New Jersey
In this diversity action we must predict whether, under New Jersey law, a surety which guaranteed the performance of a seller of goods by issuing a bond for the benefit of the buyer remains liable when the parties to the underlying action substitute a different buyer. The district court entered summary judgment in favor of the buyer on the issue of liability.
On August 5, 1980, Bonanza Refining International Company (Brico) a Texas corporation, contracted to sell to Societe Choron Internationale (Choron), a French corporation, 20,000 boxes (20 million packs) of Benson & Hedges cigarettes, with delivery to a bonded warehouse Southampton, England. The contract required that Brico, the seller, would supply Choron, the buyer, with a performance bond and Choron would give Brico a check for $40,000 as a contract guaranty and open a letter of credit for $6,720,000 in favor of Brico to cover the purchase price of the cigarettes. Brico, the seller, purchased the required performance bond guaranteeing delivery of the cigarettes from First Indemnity of America Insurance Company (F.I.A), the defendant in this action. This bond, No. 1296, was in the sum of $201,600 and expressly covered ICL Contract No. 3, the Brico/Choron contract.
Choron issued the $40,000 check to Brico but was unable to secure the letter of credibility. Ultimately, through arrangements not relevant to the issue before us, Choron interested Mitacon Anstalt (Mitacon), a Liechtenstein corporation, in participating in the transaction as buyer. These arrangements were made with the active participation of Brico. Choron and Mitacon executed a contract in September, 1980 for Choron to sell to Mitacon the 20,000 boxes of cigarettes it was obliged to buy from Brico, which paralleled the terms of the August contract between Brico and Choron. The written Choron/Mitacon contract provided that before the letter of credit for Mitacon would issue, Choron would transfer the performance bond to Mitacon. The contract stated, "Said Bond has already been prepared by FIA Insc. Co, Has received No. 1296 and approved by FIA". [sic] App. at 285a.
Thereafter, on September 17, 1980, the original Brico/Choron contract was modified to substitute Mitacon for Choron as the purchaser, but otherwise carried the same terms as the original Brico/Choron contract. Brico's obligation to sell the cigarettes did not change in any respect, except as to the identity of the buyer. The contract expressly "incorporated here in by reference . . . original Insurance Company F.I.A. performance Bond No: 1296 dated August 5th, 1980 issued in favor of CHORON INTERNATIONAL . . ." and provided that ICL 3 (the original Brico/Choron contract) should be amended as follows: "It is further agreed that at the request of buyer [Mitacon] BRICO HAS OFFERED SAID F.I.A. BOND NO: 1296 AND BUYER HAS ACCEPTED THE SAME, AMENDED AS SHOWN IN F.I.A. letterhead." [sic] App. at 308a. Brico returned Choron's $40,000 check after receiving a similar payment from Mitacon. Mitacon's representative then proceeded to obtain customers for the cigarettes and to obtain the necessary letter of credit in favor of Brico.
After Mitacon had performed all its obligations under the contract, Brico failed to deliver the cigarettes, and Mitacon was unable to obtain cigarettes either from Brico or another supplier. Mitacon then demanded payment from F.I.A. on the performance bond it had issued guaranteeing Brico's delivery of the cigarettes. F.I.A. refused, taking the position that its obligation to Choron had terminated and that it had undertaken no obligation to Mitacon. Mitacon and Choron filed suit against F.I.A., a New Jersey corporation with its principal place of business in that state, alleging breach of F.I.A.'s obligation on the bond. F.I.A. filed a third party claim against Brico, which has not been located and was not served.*fn1
The district court entered partial summary judgment on the issue of liability in favor of plaintiffs Mitacon and Choron against F.I.A. and held a bench trial on the issue of damages. Thereafter, the court reaffirmed its judgment on liability and entered judgment in favor of plaintiffs in the amount of the bond, $201,600. F.I.A. appeals.
On appeal, F.I.A. does not challenge the amount of the damages but argues that the district court erred on the liability question. F.I.A. views as three separate and unrelated contracts the Choron/Brico agreement, the Choron/Mitacon agreement, and the Mitacon/Brico agreement. It argues that its bond pertained only to the Choron/Brico agreement, and that when Choron was unable to produce the letter of credit, Brico abandoned the contract with Choron and, as a consequence, F.I.A.'s obligation as surety ended.
The district court considered the contract naming Mitacon as the buyer as "the same contract of sale" as the one naming Choron as the buyer, App. at 8a, and that the transaction was one in which Choron "the purchaser [was] bringing in an additional purchaser of cigarettes [Mitacon] to take some of the product." App. at 9a-10a.
The parties agree that a surety's obligation is no greater than that of its principal, see Painter's Local Union 171 v. Williams & Kelly, Inc., 605 F.2d 535, 539 (10th Cir. 1979), and that, if Brico has abandoned the contract, F.I.A.'s obligation under the performance bond would have terminated. When rescission or abandonment of a contract is to be implied from the conduct of the parties, the actions must be ...