Our reports on the oral arguments from the May term of the Illinois Supreme Court continue with Lake County Grading Company, LLC v. The Village of Antioch. Lake County – which comes to the Court from the Second District – poses the question of whether subcontractors can look to local governments for payment when the general contractor on a public works project goes bankrupt. Our detailed look at the facts and lower court holdings in Lake County is here.

Lake County revolves around building projects in two residential subdivisions. The general contractor provided surety bonds based on the cost of the improvements, as required by the Public Construction Bond Act:

[Any political subdivision of the State] . . . in making contracts for public work of any kind costing over $50,000 to be performed for . . . any political subdivision thereof, shall require every contractor for the work to furnish, supply and deliver a bond 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 . . . 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 .l . .

Each such bond is deemed to contain the following provisions whether such provisions are inserted in such bond or not:  "The principal and sureties on this bond agree that all the . . . terms, conditions and agreements of the contract or contracts entered into between the principal and . . . any political subdivision . . . 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 . . .

The GC provided the Village with bonds, but they were performance bonds only: they said nothing about payment.

Even after the GC stopped work on the project (ultimately it declared bankruptcy), the subcontractor delayed sending out lien notices, hoping to protect its working relationship with the GC. More than 180 days after its last completed work, it finally got the liens filed. Sometime later, it sued the Village. Lake County came to the Court on two counts of the sub’s complaint – for third party beneficiary breach of contract, based on the Village’s failure to require payment bonds from the GC.

One of the central questions in Lake County turns on whether the language above automatically incorporates a payment obligation into bonds provided pursuant to the Act whether or not it’s stated.  If so, then the sub had a remedy under the Act, and since it waited more than 180 days to file its lien, its claim against the Village is barred. The Second District affirmed judgment for the sub on different grounds, holding that language in the basic contract between the GC and the Village empowering the GC to hire subcontractors was sufficient to make the sub a third-party beneficiary of the contract with standing to sue for breach.

Counsel for the Village began the argument, noting that the Court has not addressed the Act in fifty years. Counsel pointed out that although lower courts had suggested that the Act requires a payment bond, but in fact the statute never uses the term. Nevertheless, the terms of the Act are automatically read into any bond obtained pursuant to the Act. Justice Burke asked whether the plaintiff was suing to enforce the Bond Act. Counsel responded that the cause of action was based on the Act. Justice Burke asked whether there was evidence in the agreement between the GC and the Village that the sub was an intended third party beneficiary. Counsel said no, the Appellate Court had relied on a fragment of one sentence to find such an intent. In fact, the contract merely says that the GC can retain subs without competitive bidding – it says nothing about who pays. Justice Burke asked why a subcontractors term would be in the contract at all if there weren’t some sort of agreement that subcontractors would be involved. Counsel answered that nevertheless, there was no provision in the contract for the public entity which owned the property to assure payment to subcontractors. Moreover, even if the sub was a third-party beneficiary of the contract, any claim for breach was barred by failure of notice. Justice Karmeier asked whether the subcontractor could proceed against the bond, or against the Village. Counsel answered the bond only. He argued that the plaintiff had failed to comply with the conditions precedent for making a claim under the bond – specifically, making a claim within 180 days of stopping work. Having failed to do so, all rights under the Act were lost.

Justice Thomas asked whether the Village’s position was that since a payment provision was incorporated into the bond, there was no separate action under the contract. Counsel agreed that was so; the Village had satisfied its only obligations by requiring the bond. Chief Justice Garman pointed out that there is a provision in the Bond Act stating that remedies under the Act are cumulative – what impact did that have? Counsel argued that there were no other remedies against the Village for the plaintiff to rely upon – the Village’s only obligation was to require the bond from the GC, and a payment guarantee was written into that bond by operation of law. Justice Karmeier pointed out that the Appellate Court had found that the statute of limitations for a third party beneficiary claim was four years, not 180 days. Counsel again asserted that the Court had focused on part of one sentence – taken in context, the contract does not support a finding that any sub was a third party beneficiary of the contract with the GC. Justice Karmeier asked whether the Village’s position was that the plaintiff was not a third party beneficiary, but even if they were, the bond protected the Village from the suit. Counsel agreed that it was, and the plaintiff’s claim on the bond was barred by its delay.

Counsel for the subcontractor followed. The 1500 unit single family development was not a traditional public works project, counsel noted. There was no public bidding or money involved; financial bonds were created to pay for the project. Justice Thomas asked why a payment obligation wasn’t written into the bond by operation of law through the Act. Counsel responded that it simply was not; the Act says nothing about payment.   Justice Theis pointed out that the Act requires a bond of fixed amount. If either of the two conditions set forth in the statute aren’t expressed in the bond, they’re automatically incorporated. Why didn’t that mean that a payment obligation was there? Counsel answered that the Act requires that the bond be conditioned on two things: one, protecting the taxpayer (a performance guarantee), and two, protecting the sub. But it says nothing about payment. Justice Theis again asked why that language wasn’t incorporated automatically. Counsel explained that a bond would only qualify as “each such bond” under the statute if it had a provision for payment.   Justice Thomas noted that the Act states that “such bond shall be conditioned on completion of the work.” Didn’t “completion of the work” sound like performance? Counsel agreed that it did, but that wasn’t a payment guarantee. Justice Thomas asked if a bond spelled out a performance requirement, why did the Act need a further provision saying that provisions not in the bond are incorporated – why wasn’t payment part and parcel of a performance bond? Counsel answered that there was no basis for concluding that the legislature had intended to create a payment bond with a performance bond. Justice Thomas followed up on counsel’s argument, asking why, if a bond expressly stating “you have to pay,” it would be necessary to further state that anything omitted is automatically incorporated? Why wouldn’t payment be incorporated from an express requirement of performance? Counsel answered that the reason was to cover any shortcomings of performance or payment bonds – but it was still necessary for the bond to expressly require payment. Chief Justice Garman asked whether counsel was arguing that the legislature contemplated multiple bonds for each project. Counsel answered no – two separate bonds could be written, or both obligations could be covered in one – but the payment obligation had to be express. Justice Theis pointed out that the surety who issued the bond had agreed that the bond was sufficient for performance and payment. Counsel disagreed; the bond must expressly be conditioned on payment to trigger the statute. Justice Theis asked if counsel was arguing that even a surety issuing a performance bond hasn’t guaranteed payment. Counsel agreed that was so. Justice Karmeier concluded by asking whether, if the Court disagrees with counsel’s interpretation of the bond and the Act, the subcontractor has any other avenue of the recovery. Counsel answered no.

In rebuttal, counsel for the Village argued that the key language was the first sentence of Section 550/1 of the Act. The Act only deals with contracts for public works. Once those bonds are issued, performance and payment guarantees are incorporated automatically. The Village fully complied with its obligations by obtaining the bond. The sub had 180 days to pursue payment under the bond. They deliberately chose not to do so, and their rights were now forfeited.

We expect Lake County to be decided in four to six months.

Image courtesy of Flickr by Salim Virji.

 

 

Topics:  Commercial Bankruptcy, Construction Contracts, Construction Liens, General Contractors, Governmental Liability, Liens, Municipalities, Performance Bonds, Public Projects, Subcontractors, Surety & Fidelity

Published In: Bankruptcy Updates, Construction Updates, Government Contracting Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sedgwick LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »