W.T. Andrew Co. Inc. v. Mid-State Sur. Corp.

• Decision Date: 19 March 1996
• Docket Number: No. 6,MID-STATE,Docket No. 101331,6
• Citation: 545 N.W.2d 351,450 Mich. 655
• Parties: , 108 Ed. Law Rep. 382 W.T. ANDREW COMPANY INC., Plaintiff-Appellant, v.SURETY CORPORATION, Defendant-Appellee. Calendar
• Court: Michigan Supreme Court

Page 351

545 N.W.2d 351

450 Mich. 655, 108 Ed. Law Rep. 382

W.T. ANDREW COMPANY INC., Plaintiff-Appellant, v. MID-STATE SURETY CORPORATION, Defendant-Appellee.

Docket No. 101331.

Calendar No. 6.

Supreme Court of Michigan.

Argued Jan. 10, 1996.

Decided March 19, 1996.

Sidney L. Frank, Troy, MI, for plaintiff.

Wayne G. Wegner and Shane F. Diehl, Grosse Pointe Woods, MI, for defendant.

RILEY, Justice.

In this case, we are called upon to determine if a sub-subcontractor is entitled to relief under the public works bond statute, M.C.L. § 129.201 et seq.; M.S.A. § 5.2321(1) et seq. Specifically, we must decide whether plaintiff, the sub-subcontractor who supplied plumbing materials to another subcontractor on a renovation project at the University of Michigan Dearborn campus can collect as a claimant under the public works bond statute. We conclude that although the University of Michigan is a constitutionally created entity, plaintiff is entitled to relief.

I

In May of 1989, the University of Michigan decided to renovate buildings at its Dearborn campus. In order to facilitate this project, it hired A.Z. Shmina & Sons, a general contracting firm. Shmina secured its work by providing a labor and materials payment bond which it obtained through Cadillac Insurance Company. Cadillac, however, went into receivership in January of 1990. The Michigan Commissioner of Insurance responded by assigning the bond to defendant Mid-State Surety Corporation. Defendant assumed all the rightful liabilities that Cadillac had under the bond. Specifically, the bond provided that Shmina and Cadillac were liable only to the parties who contracted directly with Shmina.

Shmina retained several different subcontractors to perform the renovations. One of the subcontractors was the Marino Mechanical Contractor Company. ¹ Marino in turn contracted with plaintiff, the W.T. Andrew Company, to provide plumbing, heating, and air conditioning materials. During the construction period, Marino experienced financial difficulties. Consequently, it defaulted on its obligations to Shmina and plaintiff. Shmina was able to recover the amount of credit Marino had posted. However, plaintiff, as a supplier of materials to Marino, remained unpaid.

On March 24, 1992, plaintiff brought this action against defendant and Marino in Wayne Circuit Court, claiming approximately $70,000 as the unpaid balance. ² Although admitting that it had no direct contact with Shmina, plaintiff argued that it was entitled to recover from defendant under the public works bond statute, M.C.L. § 129.201 et seq.; M.S.A. § 5.2321(1) et seq. The Wayne Circuit Court granted summary disposition for plaintiff and a judgment was entered against defendant in the amount of $78,645.63. Defendant subsequently appealed, and, on October 20, 1994, the Court of Appeals reversed and remanded. ³ The Court of Appeals directed the trial court to enter an order of summary disposition on behalf of Mid-State. Plaintiff petitioned this Court for leave to appeal, and leave was granted on September 20, 1995. ⁴

II

M.C.L. § 129.201; M.S.A. § 5.2321(1) states that a performance and payment bond must be provided by a principal contractor before construction can begin on any public building project exceeding $50,000 in value.

Before any contract, exceeding $50,000.00 for the construction, alteration, or repair of any public building or public work or improvement of the state or a county, city, village, township, school district, public educational institution, other political subdivision, public authority, or public agency hereinafter referred to as the "governmental unit," is awarded, the proposed contractor, hereinafter referred to as the "principal contractor," shall furnish at his or her own cost to the governmental unit a performance bond and a payment bond which shall become binding upon the award of the contract to the principal contractor. [Emphasis added.]

M.C.L. § 129.202; M.S.A. § 5.2321(2) and M.C.L. § 129.203; M.S.A. § 5.2321(3) go on to enumerate the purpose behind the performance and payment bonds:

The performance bond shall be in an amount fixed by the governmental unit but not less than 25% of the contract amount, conditioned upon the faithful performance of the contract in accordance with the plans, specifications and terms thereof. The bond shall be solely for the protection of the governmental unit awarding the contract. [M.C.L. § 129.202; M.S.A. § 5.2321(2).]

The payment bond shall be in an amount fixed by the governmental unit but not less than 25% of the contract amount solely for the protection of claimants, as defined in section 6, supplying labor or materials to the principal contractor or his subcontractors in the prosecution of the work provided for in the contract. [ ⁵] [M.C.L. § 129.203; M.S.A. § 5.2321(3). Emphasis added.]

M.C.L. § 129.201; M.S.A. § 5.2321(1) is designed to be "remedial in nature and, therefore, should be liberally construed." Adamo Equipment Rental Co. v. Mack Development Co., Inc., 122 Mich.App. 233, 236, 333 N.W.2d 40 (1982), citing Wallich Lumber Co. v. Golds, 375 Mich. 323, 134 N.W.2d 722 (1965). The Legislature adopted M.C.L. § 129.201; M.S.A. § 5.2321(1) to protect contractors and materialmen in the public sector to ensure that they do not suffer injury when other contractors default on their obligations. Without this legislation the contractors and materialmen "were denied the security afforded when the identical work or materials were provided to the private sector." Adamo Equipment, supra at 236, 333 N.W.2d 40.

In the present case, Shmina, as the principal contractor, provided a bond that defined a "claimant" as an individual or entity having a direct contract with the principal contractor.

A claimant is defined as one having a direct contract with the Principal, for labor, material, or both, used in the performance of the Contract; labor and material does not include water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment directly applicable to the Contract.

Under the language of this bond, plaintiff could not meet the definition of a claimant because it never entered into a direct contract with the principal, Shmina. The only contract that plaintiff had was with Marino, a subcontractor. Plaintiff, however, maintains that it is entitled to recovery because it meets the definition of a claimant under M.C.L. § 129.206; M.S.A. § 5.2321(6) of the public works bond statute. (See n 5.) This entire argument hinges on whether M.C.L. § 129.201; M.S.A. § 5.2321(1), which sets out the bond requirement under the public works bond statute, is applicable.

The Court of Appeals examined this issue and found that M.C.L. § 129.201; M.S.A. § 5.2321(1) was not applicable. In order to support this conclusion the Court of Appeals relied on Weinberg v. Univ. of Michigan Regents, 97 Mich. 246, 56 N.W. 605 (1893). In Weinberg, the plaintiff brought suit against the Regents of the University of Michigan in order to recover the value of materials furnished to one of the subcontractors during the construction of the university's hospital. The basis of plaintiff's claim was that the regents were negligent in not requiring a bond for the project. This Court found that the University of Michigan was a constitutionally created entity and, as such, could not have its property affected without the consent of the regents. Hence, the action could not be maintained.

The Court of Appeals analysis also relied on The William C Reichenbach Co. v. Michigan, 94 Mich.App. 323, 288 N.W.2d 622 (1979), for support. In Reichenbach, Michigan State University entered into a construction contract with the Ackerman Construction Company, who subcontracted a portion of the project to Reichenbach. Reichenbach, however, was never fully compensated for its services. Consequently, Reichenbach brought an action against the State of Michigan and the Michigan State University Board of Trustees, seeking recovery of the amount owed. Reichenbach alleged that Michigan State University's failure to compel Ackerman to provide a performance and payment bond constituted negligence. Defendant argued that even though 1963 PA 213 required that a performance and payment bond be obtained before construction, the act was not applicable to it. The Court found:

Thus we hold that the term "public educational institution," as that term is used in the performance bonding statute, applies to only those colleges and universities whose governing boards are not created in the constitution. Hence, the lower court erred in holding the performance bonding statute applicable to defendants. The defendant board of trustees had no obligation to secure a performance bond from the principal contractor and, thus, plaintiff cannot maintain this action in negligence for their failure to do so. [Id. at 336, 288 N.W.2d 622.]

This decision was based on the fact that the Michigan Constitution, under article 8, § 5, gave complete control and management ability over the university's affairs to the trustees.

These constitutional provisions have been interpreted by Michigan appellate courts to give to the trustees entire control and management over University affairs; including the management of property and expenditure of funds to the exclusion of all other departments of the state. [Reichenbach, supra at 335, 288 N.W.2d 622.]

III

The University of Michigan is constitutionally created and its board of regents possesses complete power over financial decisions affecting the university. ⁶ However, we conclude that M.C.L. § 129.201; M.S.A. § 5.2321(1) does not affect the University of Michigan financially, nor does it interfere with its educational autonomy. Instead, it serves as an exercise of the Legislature's police power to protect the interests of contractors and materialmen in the public sector. See Adamo Equipment, supra at 236, 333 N.W.2d 40. Consequently, the statute and its...