Board of Educ. of Community High School Dist. No. 99, DuPage County v. Hartford Acc. and Indem. Co.

• Decision Date: 23 February 1987
• Docket Number: No. 2-86-0102,2-86-0102
• Citation: 504 N.E.2d 1000,105 Ill.Dec. 715,152 Ill.App.3d 745
• Parties: , 105 Ill.Dec. 715, 38 Ed. Law Rep. 674 BOARD OF EDUCATION OF COMMUNITY HIGH SCHOOL DISTRICT NO. 99, DuPAGE COUNTY, Illinois, Plaintiff-Appellant, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 1000

504 N.E.2d 1000

152 Ill.App.3d 745, 105 Ill.Dec. 715,

38 Ed. Law Rep. 674

BOARD OF EDUCATION OF COMMUNITY HIGH SCHOOL DISTRICT NO. 99 DuPAGE COUNTY, Illinois, Plaintiff-Appellant, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY, Defendant-Appellee.

No. 2-86-0102.

Appellate Court of Illinois, Second District.

Feb. 23, 1987.

Fawell James & Brooks, Heidi H. Katz, Naperville, Concannon Dillon & Morton, Richard A. Greig, Chicago, for plaintiff-appellant.

Pretzel & Stouffer, Chtd., Robert Marc Chemers, Richard S. Wisner, Michael J. Weber, Chicago, for defendant-appellee.

Justice REINHARD delivered the opinion of the court:

Plaintiff, Board of Education of Community High School District No. 99, appeals from the order of the circuit court of DuPage County which granted defendant's, Hartford Accident and Indemnity Company, motion for summary judgment as to count I of plaintiff's amended complaint, and dismissed count II of the amended complaint for failure to state a cause of action.

Plaintiff raises the following issues for our review: (1) whether a surety of a performance bond issued to comply with the statutory bond requirements of public works contracts can impose a two-year time limit for suit on its obligation under the bond where the applicable statute of limitations on written contracts is 10 years; and (2) whether the statutory language required to be included in every bond issued to comply with the statutory bond requirements transforms a labor and material payment bond guaranteeing the payment for labor and material costs into a performance bond guaranteeing the contractor's performance.

The record discloses that on June 20, 1973, Kiendl Construction Co. (Kiendl) entered into a contract with plaintiff to construct both the Downers Grove North and Downers Grove South high school pool facilities. In accordance with statutory requirements pursuant to the provisions of section 1 of "An Act in relation to bonds of contractors entering into contracts for public construction" (Ill.Rev.Stat.1973, ch. 29, par. 15) (Bond for Public Works Act), Kiendl, as principal, and defendant, as surety, executed and delivered to plaintiff both a performance bond in the amount of $1,801,261 guaranteeing Kiendl's complete performance of the construction contract and a labor and material payment bond in the amount of $1,801,261 guaranteeing Kiendl's payment of all subcontractors and materialmen. The work was substantially completed on August 4, 1975, as indicated by a certificate of completion issued by the architect. According to the contract, final payment came due when the certificate of completion was issued.

On April 19, 1985, plaintiff filed a two-count complaint against defendant alleging in count I that Kiendl failed to properly construct the pool facilities and that Kiendl no longer existed as a legal entity, and prayed for the damages it sustained from the improper construction of the pool facilities to be assessed from the performance bond. Plaintiff alleged in count II the same actions and injuries as in count I, but prayed to recover its damages from the labor and material payment bond. It later filed an amended complaint which identified in greater detail the problems with the facilities and set forth its total damages at $381,252.

Defendant filed an answer to count I and a motion to strike and dismiss count II for failure to state a cause of action because plaintiff was not the party for whose benefit the labor and material payment bond was obtained. It also asserted as an affirmative defense to count I that as the performance bond contained a provision which required that any suit on the performance bond must be brought within two years of the final payment, the action alleged in count I is time-barred. The provision in the performance bond stated: "[a]ny suit under this bond must be instituted before the expiration of two (2) years from the date on which final payment under the CONTRACT falls due." Defendant later filed a motion for summary judgment as to count I alleging that as this lawsuit was not filed within two years of the substantial completion of the project, as evidenced by the affidavits, certificates, and requests to admit submitted to the trial court, the cause is time-barred as a matter of law.

On January 8, 1986, the trial court entered its order granting both the motion to strike and dismiss and the motion for summary judgment. In a letter of opinion, the trial court ruled that the provision was clear that an action on the performance bond must be brought within two years of the completion of the project and that the provision was not shown to be against public policy; therefore, there was no legal reason not to enforce the two-year limitation provision. The trial court also ruled that the motion to strike and dismiss must be construed as a section 2-619 motion (Ill.Rev.Stat.1985, ch. 110, par. 2-619) as it raises new matters alleged to be a complete defense to the relief sought, and that the labor and material payment bond was not entered into on behalf of plaintiff but for the benefit of those who furnished materials and labor to the project such as materialmen and subcontractors; therefore, plaintiff had no standing to bring a cause of action on the labor and material payment bond. Additionally, the court found that the conditions precedent to bringing a suit on this labor and material payment bond were not against public policy and were not complied with by plaintiff.

Plaintiff's first contention is that the trial court improperly granted defendant's motion for summary judgment because a surety cannot devise a briefer period of liability than that which is required to be fulfilled by the principal. In particular, plaintiff argues that the minimum liability of a surety on a bond given to secure the performance of a public works contract includes the statutory duty of fulfilling all the terms and conditions of the contractor's/principal's contract, that the performance bond incorporates all common law remedies available to the owner including the right to bring a breach of written contract action within 10 years, not two years, of the completion of the contract, that defendant cannot contract for a shorter period of time allotted by a statutory limitation period where the contract involves work for a public entity as the result would be harsh and unfair, and that as the statute requires a performance bond, the acceptance of the bond is merely ministerial and any negotiations over the terms is not intended under the statute. As a result, the two-year limitation period should be held to be void and inapplicable as plaintiff had no discretion in accepting the terms of the bond, making the two-year limitation period against public policy.

It is required in Illinois that every contractor who enters into a contract with a public entity to do public construction work must furnish a bond to the public entity assuring that the work will be completed and all obligations will be fulfilled. (Ill.Rev.Stat.1973, ch. 29, par. 15.) In addition, section 1 of the Bond for Public Works Act also requires that the following language be incorporated into every bond secured for public construction work whether the provisions are inserted in such bond or not:

"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 or 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." (Ill.Rev.Stat.1973, ch. 29, par. 15.)

While the performance bond at issue here could be interpreted as providing security to plaintiff, the contracting public entity, from loss caused by defaults only in the performance and completion of the contract by the contractor, it is clear that the language of section 1 of the Bond for Public Works Act imposes a statutory obligation on a surety of a construction bond to insure or guarantee that all the terms, conditions, covenants, undertakings, and agreements of the construction contract will be performed and completed and to satisfy all just claims due under the construction contract. (Ill.Rev.Stat.1973, ch. 29, par. 15.) In essence, the law requires that all the obligations placed on the contractor by the terms of the contract must be undertaken and completed by the surety of the bond in the event that the contractor cannot or does not complete its obligations under the contract. Cf. People ex rel. Skinner v. Hellmuth, Obata & Kassabaum, Inc. (1986), 114 Ill.2d 252, 264-65, 102 Ill.Dec. 412, 500 N.E.2d 34.

An examination of the construction contract in this case reveals that the relevant duty on Kiendl expressed under the terms of the construction contract was to correct any work found to be defective and not in accordance with the contract within one year of the substantial completion date. Thus, under the statutory language of section 1 of the Bond for Public Works Act, defendant was also responsible for the correction of any work found to be defective for a period of one year if Kiendl was unable to complete this duty. As there was no other contractual provision providing some type of warranty or guarantee of the construction work, the one-year period to correct any defective work was the only relevant contractual obligation undertaken by Kiendl and transferred to defendan...