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March 29, 2016

On public jobs the government entity i.e. IDOT, Village, School District, or Park District is required by law to obtain from the general contractor not only a performance bond but also a payment bond. These requirements are set forth in the Illinois Bond Act. The performance bond protects the government entity and the payment bond protects both the government entity as well as subcontractors providing materials and labor. The Bond Act does require a claimant to file a verified notice of its claim within 180 days after the date of the last item of work or the furnishing of the last item of materials.

What happens if the government obtains a performance bond but fails to get a payment bond, the general contractor goes bankrupt and the subcontractor does not give the required notice within 180 days of the last date worked? Is the subcontractor out in the cold? A recent Illinois Appellate Court decision out of the 2nd District Appellate Court addressed this situation.

The facts showed a Village did not require a house builder who was developing two subdivisions to provide payment bonds. The Village obtained performance bonds but not payment bonds. A subcontractor who did work did not file a claim within 180 days of its last date worked. Its excuse was that it wanted to maintain its relationship with the builder and not risk the loss of future work. As a result of the downturn in the economy the builder/developer filed bankruptcy. The subcontractor filed a lawsuit against the Village and maintained it was what the law calls a third-party beneficiary of the contract between the Village and the builder and could hold the Village liable for the amount due the subcontractor. The Appellate Court agreed. It found that the provisions of Section 1 of the Bond Act that require the furnishing of a payment bond are read into the provisions of every construction contract for public work. In order to be a third-party beneficiary of a contract you have to show that the contract at issue was entered into for your direct benefit. The Appellate Court held this requirement was satisfied since Section 1 of the Bond Act was incorporated into the contract at issue. The contract also had a provision in which the Village acknowledged that in constructing the public improvements the general contractor would be using subs and material suppliers. The Second District Appellate Court held that the 180 day requirement to file a claim did not apply since no bond had been obtained. A similar case out of the First District Appellate Court (Cook County) holds just the opposite.

The subcontractor’s decision not to timely perfect its claim was a risky decision. I fully understand the “business decision”. It’s the usual sales vs collections dichotomy. The situation would have been different had the job occurred in Cook County since an Appellate Court decision already existed finding that even though a payment bond had not been posted it was still necessary to give the required notice in order to make a third-party beneficiary claim. The moral of the story is that it’s always better to follow the requirements of the law regarding perfecting a claim. But if you don’t all may not be lost except in Cook County.