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.

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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