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Lake View T. & Sav. Bk. v. Filmore Constr.

OPINION FILED AUGUST 6, 1979.

LAKE VIEW TRUST AND SAVINGS BANK, TRUSTEE, PLAINTIFF-APPELLANT,

v.

FILMORE CONSTRUCTION COMPANY, INC., ET AL., DEFENDANTS. — (THE AETNA CASUALTY AND SURETY COMPANY, DEFENDANT-APPELLEE.)



APPEAL from the Circuit Court of Cook County; the Hon. RAYMOND S. SARNOW, Judge, presiding.

MR. PRESIDING JUSTICE GOLDBERG DELIVERED THE OPINION OF THE COURT:

On December 19, 1973, Lake View Trust & Savings Bank (plaintiff), as trustee under a land trust, entered into a construction contract for a three-story nursing home with Filmore Construction Company, Inc. (defendant). Defendant furnished a bond with Aetna Casualty & Surety Company (Aetna) as surety and plaintiff as an obligee. Plaintiff filed suit against Aetna, defendant and Arnold Aaron Weiner Associates, Inc., and Arnold Aaron Weiner, individually (architects for plaintiff), to recover damages for alleged faulty materials and workmanship. The trial court dismissed count II of the action which was against Aetna. Plaintiff appeals.

The contract provided:

(1) "The Contractor shall correct any defects due to faulty materials or workmanship which appear within one year from the date of substantial completion." (Article 2B.)

(2) "The Contractor shall furnish to the Owner assurance of completion of the work in the form of bonds for performance and payment in the amount of $603,892 each." Article 6.

On March 8, 1974, Aetna, as surety, issued a bond in the above amount. The bond was entitled "Performance Bond — Dual Obligee." The bond referred to the December 19, 1973, construction contract. The bond provided "which Construction Contract is by reference made a part hereof." The bond also provided in relevant part:

"NOW, THEREFORE, the condition of this obligation is such that, if Principal [defendant-contractor] shall well and truly perform all the undertakings, covenants, terms, conditions and agreements of said Contract on its part, and fully indemnify and save harmless Obligees [plaintiff and its mortgagee] from all cost and damage which they may suffer by reason of failure so to do, and fully reimburse and repay Obligees all outlay and expense which Obligees may incur in making good any such default, then this obligation shall be null and void; otherwise it should remain in full force and effect."

On March 21, 1977, plaintiff sent defendant and Aetna written notice of defects in construction of the building and demanded corrections. Failure of defendant and Aetna to comply resulted in the institution of this action.

The sole issue on appeal is whether this action was prematurely brought against Aetna. Plaintiff contends the bond and the contract it secures must be read as one instrument so that plaintiff may proceed against defendant and Aetna. Accordingly, it is argued, the obligation of defendant as the contractor becomes the obligation of Aetna as the surety and the right to recover damages from both attaches at the time of the breach of contract even though plaintiff never performed corrective work.

Aetna contends its dismissal was proper as the only obligation Aetna has under the bond is fully to reimburse plaintiff for outlay and expense. Plaintiff has not sought to correct the alleged deficiencies and has incurred no such expense.

• 1, 2 It is incumbent upon this court to note that "[a] cause of action should not be dismissed on the pleadings unless it clearly appears that no set of facts can be proved which will entitle the plaintiff to recover." (Walker v. Rumer (1978), 72 Ill.2d 495, 502, 381 N.E.2d 689.) In addition, as the judgment in the instant case "was entered upon allowance of defendant's motion to dismiss, all facts properly pleaded in the complaint must be taken as true." Fitzgerald v. Chicago Title & Trust Co. (1978), 72 Ill.2d 179, 187, 380 N.E.2d 790; Kendall v. Kendall (1978), 71 Ill.2d 374, 375, 375 N.E.2d 1280.

• 3 Strong authority supports the proposition that a construction bond and the contract it secures must be read as one instrument. When the bond incorporates the contract by reference, as in the instant case, the provisions of the contract become the provisions of the bond. (See Board of Education v. Barracks (1924), 235 Ill. App. 35, 46.) In Board of Local Improvements v. St. Paul Fire & Marine Insurance (1976), 39 Ill. App.3d 255, 350 N.E.2d 36, in ascertaining the true meaning of a contractor's bond, this court referred to the construction contract. The same principle has been stated by numerous reviewing courts> in other jurisdictions. Dealers Electrical Supply v. United States Fidelity & Guaranty Co. (1977), 199 Neb. 269, 275-76, 258 N.W.2d 131, 134; Riley Construction Co. v. Schillmoeller & Krofl Co. (1975), 70 Wis.2d 900, 905, 236 N.W.2d 195, 198; Amelco Window Corp. v. Federal Insurance Co. (1974), 127 N.J. Super. 342, 347, 317 A.2d 398, 401; West Durham Lumber Co. v. Aetna Casualty & Surety Co. (1971), 12 N.C. App. 641, 644, 184 S.E.2d 399, 402; Acoustics, Inc. v. Hanover Insurance Co. (1971), 118 N.J. Super. 361, 364, 287 A.2d 482, 484; Gordy v. United Pacific Insurance Group (1966), 243 Cal.App.2d 445, 448, 52 Cal.Rptr. 438, 439; Continental Casualty Co. v. Hartford Accident & Indemnity Co. (1966), 243 Cal.App.2d 565, 568, 52 Cal.Rptr. 533, 535; Paisner v. Renaud (1959), 102 N.H. 27, 29, 149 A.2d 867, 870.

The difference between the legal positions of the litigants here may shortly be stated. Plaintiff takes the position that the bond and the contract before us, construed together, constitute an agreement for completion of the work by defendant which is guaranteed by Aetna. Aetna urges that the bond is simply an indemnity bond so that plaintiff must actually incur outlays and expense before action may be brought on the bond by plaintiff.

• 4 In our opinion, the logic of plaintiff's position appears from the instruments themselves and from a large number of decided cases. To begin with Article 2B of the contract requires defendant to "correct any defects due to faulty materials or workmanship * * *." Article 6 of the contract provides that defendant as contractor should furnish plaintiff "assurance of completion of the work in the form of bonds for performance and payment in the amount of $603,892." The bond itself is entitled "Performance Bond — Dual Obligee." The bond and the contract each refers directly to the other. The condition of the bond is that Aetna as surety agrees to "fully indemnify and save harmless" plaintiff in connection with performance of the contract by the defendant-contractor. It is correct, as Aetna points out, that the bond also provides that Aetna would "fully reimburse and repay Obligees all outlay ...


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