Introduction

 

In June 2018, the Third District Appellate Court of Illinois issued an opinion which provides cause for uncertainty and a substantial increased risk for sureties doing business in Illinois.  The appellate court found that an unpaid wage and welfare fund for union laborers had the right to assert a claim for non-payment against a performance bond.

 

In Valley View School District 365-U for the use of IBEW Local 176 Health, Welfare, Pension, Vacation and Training Trust Fund Trustees v. Hartford Fire Insurance Company, the trustees of union benefit funds brought claims for non-payment of wage and welfare contributions against the surety’s AIA A312 performance bond notwithstanding the existence of a companion AIA A312 payment bond.  The claims were made after the expiration of the one-year limitation provision in the payment bond, but before the expiration of the two-year limitation period in the performance bond.  The surety denied the union benefit funds’ claims as time-barred under the payment bond.  When the trial court ruled in favor of the union benefit funds, finding that the union benefit funds had properly and timely asserted a claim against the performance bond, the surety appealed. The appellate court affirmed the trial court’s ruling.

 

As discussed below, three noteworthy factors weighed upon the appellate court’s ruling in Valley View: the exacting language of the Illinois Bond Act and the Illinois Supreme Court’s 2014 opinion in Lake County Grading Co., LLC v. Village of Antioch, and the Illinois Prevailing Wage Act.

 

The Illinois Bond Act And The Lake County Grading Decision

 

The Illinois Bond Act requires a surety bond to secure both performance of a contract and payment for the material and labor performed in furtherance of a contract for public projects in excess of $50,000 for state-owned projects and $5,000 for political subdivision-owned projects.  The Bond Act provides, in part, as follows:

 

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 costing 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 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.

 

* * *

 

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 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.

 

30 ILCS 550/1 (emphasis added).

 

In Lake County Grading Co., LLC v. Village of Antioch, the Illinois Supreme Court considered the import of the above-quoted language in determining whether an unpaid vendor had standing to assert a claim against a performance bond when the surety did not also issue a payment bond.  The Supreme Court concluded that “[e]ach such bond is ‘deemed’ to contain” both the completion and payment provisions of the Bond Act, even if such provisions are not expressly inserted in the bond.  In short, the Supreme Court held that the statutory payment provision would be implied in a performance bond even though the bond was silent as to any payment guaranty.

 

In reaching this conclusion, the Supreme Court emphasized the policy behind the payment and completion provisions of the Bond Act.  It noted that 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 by the surety if the contractor does not complete the project.”  As such, the court found that its interpretation of the Bond Act to be consistent with the overarching policy behind the enactment of the Bond Act.

 

The Valley View Arguments And Decision

 

Notwithstanding the precedent set by the Illinois Supreme Court in Lake County Grading, the surety in Valley View attempted to distinguish the two cases.  The surety emphasized that it, unlike the surety in Lake County Grading, issued a statutorily compliant bond, providing for both performance and payment guarantees as required by the Bond Act.  Specifically, the AIA A312 performance and payment bonds in Valley View contained both performance and payment guarantees that collectively complied with the requirements of the Bond Act.  The surety noted that the performance and payment bonds were contained within one instrument, on sequentially numbered pages, and, thus, should be read in conjunction with one another.  The surety argued that to permit payment claims against the performance bond even though the claims were untimely under the payment bond, would render the payment bond a superfluous nullity, contravening all canons of contractual interpretation.

 

The surety further argued that the policy implications were different in Valley View than in Lake County Grading.  The trustees of the union benefit funds in Valley View had admitted that the claim was a claim for payment and not performance because the benefits were a component of labor performed on the bonded projects that was to be paid.  As such, the surety maintained that it would potentially increase the exposure of all public project sureties within Illinois for claims sounding in non-payment.  The surety contended that such an outcome would have the opposite effect desired by the Supreme Court in Lake County Grading, namely that by permitting the payment claims to be applied against the performance bond, the penal sum of the performance bonds would be reduced upon payment of such claims, which in turn would reduce the penal sum of the performance bond and associated funds available to public owners for completion of the bonded project.

 

The surety also attacked the standing of the union benefit funds trustees to maintain an action against the performance bond because the trustees were not named obligees under the performance bond.  The fund trustees argued in response that wage and welfare contributions were a component of labor to be paid under the Illinois’ Prevailing Wage Act.  The Prevailing Wage Act mandates that all public entities “require in all contractor’s and subcontractor’s bonds that the contractor or subcontractor include such provision as will guarantee the faithful performance of such prevailing wage clause as provided by contract or other written instrument.” 820 ILCS 130/4(c).  As such, the trustees asserted that they had standing to bring a claim for non-payment on behalf of the union laborers as part of their obligation to enforce compliance of the Prevailing Wage Act.

 

In addition, the surety argued that the different time limitations in the performance bond (two years) and payment bond (one year) were appropriate under Illinois law because the time periods were reasonable. The appellate court acknowledged that this was a correct statement of law insofar as parties may reasonably limit the time for assertion of a claim under a contract, and the surety’s position likely would have been successful had the appellate court not concluded that the union benefit funds trustees’ claims could not be asserted against the performance bond.

 

Ultimately, the appellate court ruled that the union benefit funds trustees’ claim against the performance bond was proper because the payment of wage and welfare contributions was a requirement under the Prevailing Wage Act and a component of completion of the principal’s bonded contract.  Because payment of these funds was a component of the principal’s performance obligations owed to the owner, the appellate court concluded that the union benefit funds could assert its claim against the performance bond.  In interpreting the Bond Act in conjunction with the facts of the case, the appellate court seized upon specific language in the Bond Act -“the bond” and “[e]ach such bond is deemed”- to rule that the performance bond was deemed to impliedly include a payment protection for claimants, finding persuasive the reasoning in Lake County Grading.

 

Conclusion

 

The question of how the Valley View opinion will be interpreted and applied in lower courts remains unclear.  It would be dangerous to apply Valley View broadly to all payment bond claims, permitting all payment bond claims to be asserted against either the performance or payment bond or to conflate notions of non-payment with non-performance.

 

It would be similarly imprudent to overlook the key and distinctive facts of Valley View when presented with similar claims.  The Valley View fact pattern has many distinctions from the run-of-the-mill subcontractor payment bond claim.  Valley View involved the payment of wage and welfare contributions required under the Illinois Prevailing Wage Act.  In addition, the specific terms of the principal’s contract with the owner led the appellate court to the conclusion that payment of those contributions was a component of “performance.”  Consequently, non-payment provided standing under the performance bond, but it does not necessarily follow that all claims for non-payment can be claims for non-performance when convenient to serve the needs of a claimant.

 

Ultimately, the appellate court’s expansive reading of the Illinois Bond Act in Valley View and disregard of the existence of a statutorily-compliant payment bond presents a precarious and potentially perilous situation for sureties that could greatly expand the extent of their bonded risk for payment claims beyond the penal sum of the payment bonds.  The quandary in the wake of Valley View for both underwriters and claims professionals lies in the uncertainty of how it will be applied.  What is certain is that Valley View results in potentially negative business and public policy outcomes, and it clearly reveals the need for clarification of the Illinois Bond Act.  From both a business perspective and a legal perspective, it is an illogical absurdity to apply the Illinois Bond Act in such a manner as to render a perfectly valid payment bond a superfluous nullity.  Unfortunately, until such time as the legislature provides clarification, sureties operating in Illinois will be navigating murky waters in terms of both underwriting projects and analyzing claims.