Michael J. Smoron

Wednesday, November 5th, 2014

Supreme Court Decision Restores Municipal Protections under Bond Act

On October 17, 2014, in a case entitled Lake County Grading Company v. The Village of Antioch, the Illinois Supreme Court reversed the appellate and circuit court rulings and restored protections against subcontractor construction claims for municipalities and taxpayers.

In this case, the Village of Antioch entered into two infrastructure agreements with a developer acting as the general contractor. For section 1 of the Illinois Construction Bond Act (the “Bond Act”), the contract required the developer to provide four surety bonds based on the total cost of the improvements. The text of section 1 of the Bond Act provides that each such bond is “deemed” to contain certain provisions, even if they are not expressly included in the bond, and that it must provide for the completion of the contract, the payment of the materials used in the work and all labor performed in the work, including the work completed by subcontractors.   The bonds provided by the developer to the Village did not contain specific “payment bond” language that expressly guaranteed payment to subcontractors or for labor and materials.

A payment bond generally provides that if the contractor has not paid its subcontractors and material suppliers, the surety will pay them.

On the other hand, a “completion bond,” also known as a performance bond, provides that if a contractor does not complete a project, the surety will pay for its completion. The bonds came in play when the developer later declared bankruptcy.

After performing work, the plaintiff subcontractor served the developer and the Village with a notice of a lien claim for work it had completed on the subdivision project. However, such notice was defective, insofar as the notice of its claims was more than 180 days after its last work on the project, and thus was barred by the limitations period found in section 2 of the Bond Act. Left with no recourse, the plaintiff subcontractor alleged a different theory, maintaining that the Village breached the contracts because the surety bonds provided by the developer did not contain actual language guaranteeing payment to subcontractors as mandated by section 1 of the Bond Act, and that by virtue of such section, the subcontractor was a third party beneficiary of such contract. Such a theory, if accepted, would allow the subcontractor to sue the Village directly. Thus, the issue focused on whether the surety bonds provided by the developer to the Village conformed to the relevant requirements of section 1 of the Bond Act.

The Appellate Court bought the plaintiff subcontractor’s theory. It found that the Village breached its contractual obligation by not requiring the developer to furnish a bond with an express, specific payment provision for subcontractors. By virtue of such statute, the subcontractor was a direct third party beneficiary with a right to sue on the contract in the eyes of the Appellate Court. Curiously, the Appellate Court held that the language found in section 1, which provides that payment provisions are deemed to be included in the bond, applies only after the public entity satisfies the predicate condition of requiring the contractor to procure a bond with a payment guarantee. The Supreme Court focused on the text of section 1 of the Bond Act, which in relevant part is as follows:

§1 Except as otherwise provided by this Act, all officials, boards, commissions, or agents of this State in making contracts for public work of any kind costing over $50,000 to be performed for the State, and all officials, boards, commissions, or agents of any political subdivision of this State in making contracts for public work of any kind consisting of over $5,000 to be performed for the political subdivision, shall require every contractor for the work to furnish, supply and deliver a bond to the State, or to the political subdivision thereof entering into the contract, as the case may be, with good and sufficient sureties. The amount of the bond shall be fixed by the officials, boards, commissions, commissioners or agents, and the bond, among other conditions, shall be conditioned for the completion of the contract, for the payment of material used in the work and for all labor performed in the work, whether by subcontractor or otherwise.

***

The principal and sureties on this bond agree that all the undertakings, covenants, terms, conditions and agreements of the contract or contracts entered into between the principal and the State of any political subdivision thereof will be performed and fulfilled and to pay all persons, firms and corporations having contracts with the principal or with subcontractors, all just claims due them under the provisions of such contracts for labor performed or materials furnished in the performance of the contract on account of which this bond is given, when such claims are not satisfied out of the contract price of the contract on account of which this bond is given, after final settlement between the officer, board, commission or agent of the State or of any political subdivision thereof and the principal has been made.

In turn, section 2 requires that any party seeking to enforce a claim for labor or material has no cause of action under the Bond Act unless the party files a verified notice of the claim with the notice of the claim within 180 days after the date that the last item of work or the last furnishing of the materials. The Supreme Court determined that section 1 does not require the furnishing of a “completion bond” and a “payment bond,” but rather, the procurement of “a bond” for the public work. It focused on the language providing that “each such bond is deemed to contain the following provisions, whether such provisions are inserted in such bond or not.” Regardless of the actual language contained in a public construction bond, the Supreme Court ruled that the legislature unambiguously provided that all such bonds are deemed to contain both completion and payment provisions as a matter of law. In terms of public policy, the Supreme Court maintained that this provision of the Bond Act guards the tax money allotted for public works by assuring that the terms, conditions and agreements of the contract will be fulfilled and paid for by the surety if the contractor does not complete the project. As a matter of policy the Court maintained that section 1 of the Bond Act guarantees completion and its payment provisions are deemed to be in every bond procured for a public project to ensure that sufficient funds are available to pay both subcontractors and material suppliers and to complete the project if the contractor does not.

The Supreme Court also dismissed the subcontractor’s argument that the Village is only protected if it obtains a specific payment bond. The Supreme Court maintained that such an interpretation would render the language in the Bond Act that “each such bond is deemed to contain the following provisions: whether such [payment or completion] provisions are inserted in such bond or not,” meaningless or redundant.

The Supreme Court looked at other states which required specifically that a performance bond and a payment bond be in place whereas the Bond Act did not. Accordingly, it determined that the surety bonds furnished by the developer contained both completion and payment provisions as a matter of law.

The Supreme Court decision is a victory for municipalities. While the Supreme Court is not obligated to review decisions of Appellate Courts, one of the facts that might have gotten the Supreme Court’s attention was that the four surety bonds in question totaled $18 million. While the Supreme Court decision does not articulate what portion may have been due and owing due to subcontractors on the project, it surely would have been in the millions of dollars. While the Supreme Court maintains that its decision was based on a “plain reading” of the statute, interestingly, it had to reverse the Circuit Court, the Appellate Court and that the Village of Antioch was assisted by an amicus curie brief by the Illinois Municipal League. Hopefully, the precedent setting decision will help municipalities from becoming embroiled in such bond disputes in the future.


Michael J. Smoron

Author: Michael J. Smoron

Wednesday, September 25th, 2013

ZRFM’s Illinois State Bar Association Articles Now Available

More than 20 articles published in Illinois State Bar Association newsletters and authored by Zukowski, Rogers, Flood & McArdle lawyers can be viewed now on zrfmlaw.com. ZRFM is the largest law firm in McHenry County, Illinois.

The articles address topics involving labor and employment, local government, administrative law, and antitrust and unfair competition. Individual newsletter articles can be located by linking from the titles listed in the publications section of each attorney’s Web site biography. They also appear below chronologically:

Monday, November 14th, 2011

Smoron, Cooney Quoted on Adult Business Land Use, Zoning

Partners Michael J. Smoron and Melissa J. Cooney were quoted in a Nov. 8, 2011, article in the Northwest Herald titled “Johnsburg revamps adult entertainment ordinance.” The story, written by Hilary Gowins, explains that Zukowski, Rogers, Flood & McArdle advises the municipalities it represents to update adult business ordinances to prevent unnecessary and potentially costly lawsuits.

Although a variety of adult businesses and adult entertainment establishments are permitted under such ordinances, as the First Amendment requires, they are granted only conditional use in industrial zoning areas. For more information, please link to the Northwest Herald article.

Smoron is corporate counsel to the McHenry County villages of Hebron and Johnsburg. He has served as special counsel to the village of West Dundee in Kane County and to other units of local government in Cook, Lake, Warren and Henry counties. For more of his professional credentials, please read Michael Smoron’s biography. Cooney also practices land use law, with a special focus on conservation easements. For more details about her legal practice, please view Melissa Cooney’s biography.

Zukowski, Rogers, Flood & McArdle, the largest law firm in McHenry County, Illinois, has an extensive practice in municipal law and local government law. Two of the firm’s attorneys co-authored the book Congratulations! You’ve Been Elected: Now What Do You Do? A Practical Guide to Local Government. The guide, published by the Illinois Municipal League, offers local public officials advice to help them “hit the ground running” and succeed in new leadership positions.

Monday, September 12th, 2011

Bull Valley Annexes Loyola’s Retreat and Ecology Campus

A group of residents of a formerly unincorporated area of Bull Valley and Loyola University Chicago recently entered into an agreement with the village of Bull Valley. The resulting order annexes what now is known as the Loyola University Chicago Retreat and Ecology Campus into the village.

The residents had filed a petition in the Circuit Court of McHenry County in 2009 before Loyola bought the 98-acre property in 2010. The village approached Loyola outside the courtroom and suggested entering into the voluntary annexation agreement. The pact ended the litigation and allowed the residents who initially filed the petition to become residents of Bull Valley as well.

Zukowski, Rogers, Flood & McArdle partner Michael J. Smoron is corporate counsel to the village of Bull Valley. His practice focuses primarily on land use and local government law.

Aside from the property’s use as a retreat, the campus boasts prairie, woodlands, oak savannah and wetlands that serve the university’s ecology and biology curricula. The school held summer sessions at the campus after reaching the agreement.

Bull Valley has publicly expressed its appreciation toward Loyola for its commitment to preserving the village’s environment. Loyola pledged to help neighbors maintain ecologically sensitive lands and to assist McHenry County and various agencies in similar efforts.

Smoron also is corporate counsel to the McHenry County villages of Hebron and Johnsburg. He has served as special counsel to the village of West Dundee in Kane County and to other units of local government in Cook, Lake, Warren and Henry counties. Zukowski, Rogers, Flood & McArdle, the largest law firm in McHenry County, Illinois, has an extensive practice in local government law. For more of Smoron’s professional credentials, please link to Michael Smoron’s biography.