Third-Party Beneficiary Claims in Public Construction Contracts – Illinois Law

Lake County Grading Company, LLC v. The Village of Antioch, 2013 IL App (2d) 120474, 985 N.E.2d 638 (2nd Dist. 2013), illustrates the importance of joining an alternative common law claim with a statutory one when the statutory claim  is time-barred.

The plaintiff subcontractor sued a public entity under a third-party beneficiary theory for improvements plaintiff made to two residential subdivisions.  After the general contractor who hired plaintiff defaulted and filed for bankruptcy, the plaintiff sued the public entity under the Public Construction Bond Act, 30 ILCS 550/1 and the Mechanics’ Lien Act, 770 ILCS 60/23 and also brought claims for third-party beneficiary breach of contract. 

The lien and Bond Act claims were dismissed and the trial court granted summary judgment for the plaintiff on its third-party beneficiary claims.

Affirming the trial court, the First District rejected the Village defendant’s argument that plaintiff’s sole remedy was under the Bond Act.  The Bond Act requires a subcontractor like plaintiff to serve a verified notice within 180 days of the completion of its work and to file suit within one year after the public entity accepts the project.  30 ILCS 550/1, 2; Lake County, ¶¶ 17-19. 

Siding with the plaintiff, the Court noted that Bond Act states that the Act’s statutory remedy is “in addition to and independent of any other rights and remedies provided at law or in equity”.  Id., ¶ 20.  The Court then stated some key third-party beneficiary rules:

a person’s status as a third-party beneficiary turns on whether the contract language shows that the parties’ intent was to directly benefit the supposed third-party plaintiff;

– the contract language must show that the contract was made for the direct, not merely incidental benefit of the third party;

– the intent to directly benefit a third party must be shown by express provision in the contract identifying the third-party beneficiary by name or description of a class to which the third party belongs;

– if a contract makes no mention of the plaintiff or a class to which he belongs, he is not a third-party beneficiary of the contract;

– the plaintiff bears the burden of showing that the contracting parties intended to confer a benefit on him.

( ¶ 24)

Applying these rules, the Second District found that the plaintiff was a direct third-party beneficiary under both the Bond Act – which is “read into” the prime contract and the prime contract itself. Read together, the two documents clearly conferred third-party beneficiary status on plaintiff. (¶¶ 26-27).

Once the Court found that plaintiff was a third-party beneficiary of the prime contract, the Court applied Illinois’ four-year limitations period for construction-related claims (see 735 ILCS 5/13-214) instead of the Bond Act’s shortened 180 day/one-year limitations period. (¶ 31). 

The Court also declined to apply the Bond Act’s 180-day notice period was because the Village failed to require the general contractor to tender a payment bond as required by the Bond Act.  (¶ 25)  Since the Village failed to require a payment bond of the general contractor, there was no bond for the plaintiff to sue on.  This rendered the 180-day rule inapplicable.

Take-aways

The case illustrates that where a subcontractor blows the 180-day Bond Act notice rule, he can still sue as a third-party beneficiary of the prime contract.  

This case also makes clear that the party suing as a third-party beneficiary must demonstrate that the contract language clearly shows that the plaintiff is an intended, direct contract beneficiary.  Finally, the case provides an interesting contrast to the Mechanics’ Lien Act cases that hold that a subcontractor’s exclusive remedy against an owner is a statutory mechanics’ lien foreclosure suit. 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.

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