First Department, June, 1909. [Vol. 132. for $22,553.36, which was subsequently compromised by the city by payment of $17,500. The city then sued on the $10,000 bond alluded to and has finally obtained a judgment. This suit is on the original bond, given upon execution of the contract to insure due performance thereof, to recover the amount paid in compromise of the Kelly judgment. The city having recovered on the $10,000 bond, of course the amount here in issue is $7,500, the balance of the amount paid. A verdict was directed for that amount against the contractor under his contractual obligation to hold the city harmless. In the case at bar the liability to Kelly was established by original proof precisely as if Kelly was suing. The respondents claimed that as the city was entitled to retain from the contractor moneys due to him sufficient to meet a claim founded upon negligence, and as matter of fact when Kelly's claim was filed the city had retained $25,000, and thereafter had paid that $25,000 to the contractor upon taking a bond of indemnity for a less sum, to wit, $10,000, by such conduct upon the city's part, they, as sureties, were released from the obligation upon their bond, because security in the possession of the obligee applicable to the payment of the debt guaranteed, which was within the contemplation of the parties and entered into the bond and upon which they had a right to rely, had been given up. The learned trial court took this view of the case and dismissed the complaint as to the sureties. The question involved centers upon the proper construction of clause P of the contract heretofore quoted. In clause Q there is another provision, that if a mechanic's lien should be filed, "then and in every such case the said parties of the first part shall retain, anything herein contained to the contrary thereof notwithstanding, from the moneys under their control and due or to grow due under this agreement, so much of such moneys as shall be sufficient to pay off, satisfy and discharge the amount" of such lien. "The moneys so retained shall be retained by the said parties of the first part until the lien thereon created by the said act and the filing of the said notice shall be discharged pursuant to the provisions of the said act." If this cause of action was based upon a violation of the duty of the contractor to pay his materialmen and the city had been com App. Div.] First Department, June, 1909. pelled to pay them and had not retained money sufficient to meet the liens and had then sought to recover over against these bondsmen, I agree that it could not recover, for the positive provision of clause Q that the city shall retain a sufficient amount to meet such liens until finally disposed of, was a part of the contract, within the contemplation of the parties when the bond was given upon which the sureties were entitled to rely. But the provisions of paragraph P are quite different. This is not an agreement made by the city. A previous clause of the contract had required the city to pay ninety per cent of the amount due for work done as shown by the progress certificates. This clause P does not begin as does clause Q:"And it is further agreed by and between the parties," but it begins, "And the said party of the second part," to wit, the contractor, agrees to properly guard and light and hold the city harmless, and then, " And the said party of the second part hereby further agrees" that so much of the moneys due to him "as shall or may be considered necessary by the Commissioner of Public Works, shall and may be retained by the said parties of the first part until all such suits or claims for damages as aforesaid shall have been settled." That is a provision for the benefit of the city and it puts the determination of the amount, or of any amount, to be retained within the discretion of the commissioner of public works, and when the discretion of the commissioner has been exercised as to the amount, within the further discretion of the city whether it shall order the amount to be retained. Said provision did not create such a security as comes within the cases relied on by the respondents. The strongest case is Antisdel v. Williamson (165 N. Y. 372). What was there before the court was an extension of time for the payment of a mortgage for three years after the time due, without notice to or consent from the guarantors for the payment of the amount secured thereby. This was held to be a change which discharged the sureties. In Mayor, etc., of N. Y. v. Brady (70 Hun, 250), Mr. Justice FOLLETT said: "The fact that the city made payments to the contractors after Cruikshank was injured and presented his claim, is no defense to this action, for the contract provides: The said party of the second part (contractors) hereby further agrees that the whole or so much of the moneys due to him (them) under and by virtue of this First Department, June, 1909. [Vol. 132. agreement, as shall or may be considered necessary by the Commissioner of Public Works, shall or may be retained by the said parties of the first part (city) at their sole and exclusive option, until all such suits or claims for damages aforesaid shall have been settled, and evidence to that effect furnished to the satisfaction of the said Commissioner."" The only difference between the language of the contract there construed and the one at bar is the addition after "shall or may be retained by the said parties of the first part" of these words, "at their sole and exclusive option." This adds nothing to the legal effect of the language used in paragraph P of the contract at bar, as I look at it. The words "shall or may be " upon which respondents lay such stress are the same in both contracts. cases. In Mayor, etc., v. Brady (151 N. Y. 611) the court said: “The only other question in the case that requires any notice arises upon the defendants' contention that they were discharged from the obligation by the act of the city in paying over to the contractors the balance of the contract price in its hands after the action by Cruikshank against it had been commenced, and when it knew that an outstanding claim for damages for the injury existed. The stipulations of the contract on this point covered two distinct classes of One where the claim was brought to the attention of the city by notice, in writing, to the commissioner, before the contract was completed, or within ten days thereafter. In such a case the obligation on the part of the city to retain the fund was absolute unless the claim had been shown to be discharged. There was no notice under this provision given by the defendants or any one, and hence it has no application to the facts of the case." This is the case here. There were, as pointed out, absolute obligations, but they do not apply. The opinion proceeded: "The claim upon which this action was based does not fall within that provision of the contract. The other provision of the contract left it optional with the city, in cases where notice was not served upon the commissioner, either to retain the fund or to pay it to the contractor, and it could do either without any breach of the contract. The stipulations of the contract in this respect were a part of the defendants' undertaking. They became bound as sureties for the faithful performance by the contractors of their contract, with full knowledge that the city could, at its option, in such a case, pay the bal App. Div.] First Department, June, 1909. ance of the contract price to the contractors, and they cannot complain if the city exercised that option in the manner stipulated. The defendants, when they guaranteed performance, with knowledge of this provision, virtually consented that the city might do what it did, and hence they have not been prejudiced. The contract was not changed in any of its terms, nor was there any departure from it in the performance. The city did nothing that it had not the right to do by the contract, or that the defendants had not consented in advance that it might do. The claim proved by the plaintiff fell directly within the conditions of the bond, and the defendants were not in any manner released or discharged from their obligation of indemnity against it," and so the judgment, which was upon a direction of a verdict in favor of the plaintiff, was affirmed, all concurring. One of the grounds stated in the motion for the dismissal of the complaint was "because the city having elected to retain from the amount due the contractor the sum of $25,000, which was more than sufficient to pay and discharge the claim filed against it, it became a trustee of that fund not only for itself but for the sureties as well, and the city having released and surrendered the amount so retained, thereby released and discharged these sureties from liability." This claim is disposed of by Mansfield v. Mayor (15 App. Div. 316; affd., 165 N. Y. 208). It was there held that this provision was for the benefit of the city and indemnity against claims, and that "it certainly is a novel proposition that, where a party takes an indemnity against claims which might be urged against it by reason of the acts of another, it becomes a trustee in respect to the indemnity fund, and that such fund is security for the claimant, and is not solely an indemnity to the party to whom it was given.” That case made the distinction between the clause in regard to liens and the clause in regard to retaining amounts by way of indemnity. In the Court of Appeals, LANDON, J., said: "The city is not the trustee of a fund in dispute." The dismissal of the complaint was error. The judgment, so far as the sureties are concerned, should be reversed and a new trial ordered, with costs to the appellant to abide the event. INGRAHAM, MCLAUGHLIN and LAUGHLIN, JJ., concurred; HOUGHTON, J., dissented. First Department, June, 1909. HOUGHTON, J. (dissenting): [Vol. 132. I think the judgment dismissing the complaint was right and should be affirmed. There is no dispute that the city had $25,000 in cash which belonged to Baird when the Kelly claim for damages was filed, and that it proposed to keep the money to meet that claim. Nor is there any dispute that negotiations were had by Baird with the city for payment to him of the $25,000, which negotiations resulted in the city consenting to pay the sum over to him upon his giving a new bond in the sum of $10,000 to meet whatever damages Kelly might establish. I concede that the defendant sureties could not complain if the city had not retained in its hands any moneys due Baird on his contract, and that the city was under no legal obligation to do so for the purpose of reducing or guarding against the sureties' liability. But the city had retained the money and had it ir its hands, and the Kelly claim had been presented and the liability of his recovering a judgment was under discussion, and the city was advised by its counsel to retain the money for the purpose of meeting any judgment which Kelly might obtain. Such condition of affairs is not only shown by the evidence and stipulations made on the trial of this action, but is fully illustrated in City of New York v. Baird (74 App. Div. 241; 176 N. Y. 273), the records of which case appear to have been embraced in the stipulations. With all this situation confronting it, the city voluntarily entered into a new contract with the principal, Baird, whereby it agreed to pay him the $25,000 and take from him a new and independent bond conditioned for the payment of any judgment which Kelly might obtain to the extent of $10,000. This was a new and independent contract between the obligee of the original bond given by these respondents and their principal, Baird, and it seems to me that the new bond and agreement took the place of the original bond so far as the Kelly claim was concerned, and released the sureties from any obligation to pay any sum because of that claim. That the city did not exact a bond sufficient to pay the claim as ultimately established was its own fault. It was not a case of taking additional security from the principal, but was the taking of a substituted security. While the city was not obliged to retain any moneys, it did actually have in hand a sum more than sufficient to satisfy the Kelly claim. Having the money in hand |