Last month, a divided Supreme Court held that a subcontractor on a public works program should have timely proceeded against the project bond, and had no remedy against the Village after the general contractor went bankrupt before paying the sub’s bill. In an opinion by Justice Theis, the Court held in Lake County Grading Company, LLC v. The Village of Antioch that the Village could not be held liable for third-party breach of contract for failure to obtain a project bond from the general contractor which included an explicit guarantee of payment. Our detailed summary of the facts and lower court opinions in Lake County is here. Our report on the oral argument is here.

Lake County arises from two construction projects in residential subdivisions in Antioch. The Village entered into contracts with a general contractor. Pursuant to the Public Construction Bond Act, 30 ILCS 550/1, the Village was required to obtain “a bond to the [Village] . . . Each such bond is deemed to contain the following provisions whether such provisions are inserted in such bond or not.” The Act then goes on to describe a payment guarantee. The general contractor provided four bonds to the Village. However, none contained express payment bond language.

The general contractor contracted with plaintiff to provide certain labor and materials. Before fully paying the plaintiff, the general contractor defaulted on its contract and declared bankruptcy. The plaintiff served notices of lien claims with respect to both projects in February 2008 – fourteen months after its last work on one subdivision and ten months after its last work on the other project.

Plaintiff ultimately filed suit against the Village. The two counts at issue in Lake County purported to state third-party breach of contract claims on the theory that the Village had failed to obtain payment bonds – as opposed to mere completion bonds – from the general contractor. On cross-motions for summary judgment, the trial court held that it could not read payment language into the bonds obtained by the general contractor. The trial court entered judgment for the subcontractor. The Appellate Court affirmed.

The Supreme Court reversed. The fundamental issue, the Court found, was whether or not the bonds filed by the general contractor were deficient within the meaning of Section 1 of the Bond Act. The Court held that the plain language of the Act required the public entity contracting for public works to mandate delivery of “a bond” – not a completion bond and a payment bond. That single bond was deemed to include a payment obligation within it whether such language was expressly set forth or not. The majority found that its interpretation of Section 1 effectuated two of the purposes of the Act – to protect subcontractors who would otherwise have no right of mechanics’ lien against a public entity, and to prevent public money from being at risk when general contractors fail to pay their subs. The Court pointed out that it would hardly be necessary for the statute to provide that a payment obligation was automatically deemed part of the bond if the public entity was required to obtain an actual payment bond. The Court noted that other state statutes required the procurement of separate payment and completion bonds, further supporting its conclusion that the legislature intended to require only one bond.

Since the bonds filed by the general contractor were automatically deemed to include payment language in them, the plaintiff’s remedy was to proceed within 180 days against one or more of the bonds. The plaintiff failed to do so, and had no remedy against the Village.

Justice Freeman dissented, joined by Justice Burke. According to Justice Freeman, the majority’s conclusion that Section 1 of the Bond Act mandated that both completion and payment were guaranteed by any bond obtained by a public entity was contrary to the plain language, the purpose and history of the statute. “I . . . agree that two, separate bonds are not required,” Justice Freeman wrote. “However, where a single bond is obtained, that bond must reflect that it secures two distinct obligation: completion . . . and payment for labor and materials . . .” Justice Freeman concluded that the “deemed to contain” language was not intended to impute a payment obligation into a completion bond, but merely to clarify ambiguous bond language. According to Justice Freeman, subcontractors should be permitted to sue public entities whenever they failed to obtain the mandatory bonds.

Image courtesy of Flickr by kalmyket (no changes).