Appeal from the Circuit Court of Madison County; the Hon.
Jonathan Isbell, Judge, presiding.
JUSTICE KARNS DELIVERED THE OPINION OF THE COURT:
Fidelity and Deposit Company of Maryland (Fidelity), a surety, appeals from the judgment of the circuit court of Madison County which, following a bench trial, found Fidelity liable to Edward and Christina Fisher, d/b/a C&E Productions (Fisher), for damages arising from the breach by Fidelity's principal, Mid-Central Asphalt Company (Mid-Central), of a construction contract to build a recording studio for Fisher.
On December 2, 1973, Fisher and Mid-Central entered into a contract for the construction of a recording studio and office, 30 feet by 50 feet. Fisher provided sketches which indicated that the building was to be 35 feet by 50 feet and that a large interior window was to be built between the studio and control room. On two diagrams the window was shown as 10 feet wide, but on a third it was originally marked as "Approx 8' x 4'" and then changed to "10' x 4'." The change was not initialed or dated. The contract price was $14,589.55.
All funding for the construction came from a Small Business Administration (SBA) loan of $50,000 to Fisher and C&E Productions. Only $14,600 of the loan was authorized for construction. The SBA required Mid-Central to secure bonding. In completing the application for a bond from Fidelity, Mid-Central wrote in "Performance" above the word "Contract" and indicated that the amount of the bond was $14,595.55, the full contract price for a 50 feet by 35 feet block building. Mid-Central was to begin immediately and complete the work in 90 days, receiving a 20% advance payment of $2,918 and other payments on a "progressive" basis. The application form supplied by Fidelity stated that Fidelity was "authorized but not required" to take possession of the work, contract for its completion, or settle any claim upon the bond in the event its principal abandoned or breached its contract. On January 18, 1974, Fidelity executed its bond in the amount of $14,595.55, with Mid-Central as principal and the SBA as the owner.
The face of the bond stated:
"WHEREAS, the Principal has entered into a certain written agreement, dated the 18th day of January 1974, with the Owner for Construction of 50' X 35' Block Building, consisting of an office, recording studio, rehearsal room, bath and toilet, Located at 6330 Church Road, Centreville, Illinois which agreement is or may be attached hereto for reference.
NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, That, if the Principal shall well and truly perform and carry out the covenants, terms and conditions of said agreement, then this obligation to be void; otherwise to remain in full force and effect."
The agreement between Fisher and Mid-Central provided that changes could be effected only upon "prior written approval and acceptance of Mr. Eddie Fisher." No such written approval of any change was ever made. Mid-Central agreed to pay all bills prior to delinquency, to bear the cost of work which exceeded the contract price for any reason, to claim no payment for extras unless specified in a written order executed by both Fisher and Mid-Central. In the event of default by Mid-Central, Fisher had the option upon 48 hours' written notice of taking over part or all of the work in "whatever method it deems expedient." The contract then stated that Mid-Central "shall than [sic] not be entitled to receive any further payment until the work is finished, and if the unpaid balance of the contract price exceeds * * * [Fisher's] expenses of completion of the work such excess shall be paid to the sub-contractor. If expenses exceeds [sic] the unpaid balance, sub-contractor shall pay the difference to the contractor within 60 days after request by contractor."
The SBA set up an escrow account at Edgemont Bank where funds were held until SBA authorized their transfer to Fisher's business account. Checks from that account were made jointly to C&E Productions and Mid-Central but were to be issued only in exchange for receipts and lien waivers. On January 4, 1974, a check for $2,920 was authorized. This was the first payment to Mid-Central. Mid-Central began work on concrete footings but stopped in February 1974 because it had no money. On February 28, 1974, SBA authorized a check for $1,178.77 payable to C&E and Mid-Central. No other checks were issued jointly to C&E and Mid-Central because SBA authorized Fisher to make direct payments to suppliers. In March 1974, Fisher paid F.G. McGraw for work done on Mid-Central's order in February but not paid for. Work continued until April 1974 with both Fisher and Quinn, Mid-Central's president, on the site, but McGraw said he was on the site 80% of the time in February and March and saw Quinn only once. Fisher testified that he did not order materials or supervise the work but only paid for the work as Quinn directed.
When work stopped altogether in April 1974, Fisher had spent more than $13,000 on the job, with $4,098 going to Mid-Central. After work stopped, Fisher went to Quinn's office but it was closed. Fisher next contacted the SBA, which advised him to contact Fidelity. Fidelity refused to undertake completion of the building as Fisher asked, pointing out that Fisher was not shown as owner on the bond contract. On April 17, 1974, the SBA demanded payment of the face value of the bond. Fidelity advised the SBA it was making a prompt inquiry of its principal. On April 29, 1974, Fidelity wrote to Quinn and other indemnitors that it had "been advised of a claim of default under the contract and the bond." Another letter of the same date to Quinn as president of Mid-Central requested a statement of Quinn's position with "regard to the allegations of default * * *" so that Fidelity could respond to the SBA. Business records from Fidelity's files show that the inquiry continued through December 1974.
Although Fisher's attorney recognized in 1974 that "unless something is done quickly, the damages may become very large," the case moved slowly. On June 18, 1974, Fisher filed suit in Federal Court against Mid-Central, Fidelity, and the SBA alleging default by Mid-Central and Fidelity. He asked that Mid-Central and Fidelity be ordered to complete the work and supply funds or that the SBA be required to fund the work. In December 1975, the Federal Court reformed the bond to substitute Fisher for the SBA as owner. In April 1976, upon Fisher's motion, the Federal Court dismissed the cause without prejudice. The complaint filed in State court on February 1, 1976, prayed that Fidelity be required to complete the work or pay for the completion up to the amount of the bond. In count II Fisher alleged Fidelity's bad faith in issuing the bond, Fidelity's delay and denial of amounts due under the bond as the proximate cause of "physical, mental, emotional distress and discomfort * * *," and Fidelity's intent to cause emotional distress as justifying punitive damages. Fidelity answered Fisher and cross-claimed against Mid-Central in April 1976. A year later Fisher was granted leave to file a reply to Fidelity's answer. Fisher denied that the work was substantially completed or that he had blocked Mid-Central's completion of the work. This was Fisher's last filing until 1981, when he sought reinstatement after the cause had been dismissed for want of prosecution. In the interim Fidelity filed a third-party complaint against Quinn and other individual indemnitors. In 1979 Fidelity moved for a default against the indemnitors because they had failed to appear.
In 1981 Fisher's cause was reinstated and set for trial on October 7. On October 22 the complaint was amended to include count III alleging that Fidelity's failure to act had caused the loss of contracts and "large sums of money" as well as preventing Fisher from repaying the SBA interest. On Fidelity's motion, all of count III and paragraph 33 of count II seeking damages for emotional distress were dismissed because loss of profits from a new business was not recoverable and damages for emotional stress were contrary to law. On January 31, 1983, Fisher amended the complaint to add count IV, which realleged count III and added two paragraphs seeking fees, costs, and damages allowed under the Illinois Insurance Code (Ill. Rev. Stat. 1983, ch. 73, par. 767) for vexatious and unreasonable delay. Fisher also specifically sought damages for interest due on the SBA loan, taxes paid on the property, and lost profits. Fidelity moved for summary judgment on the issue of vexatious delay, alleging that Fidelity had made a settlement offer of $15,000 on February 24, 1982. The motion was taken under advisement.
Over continuing objections of Fidelity's attorney, the court heard evidence that Fisher owed the SBA $50,000 principal and more than $31,000 in interest but that his loan was at that time considered uncollectible; that it would cost $44,175 to complete the building in 1983 if certain necessary additions to the original plan were made; and that Fisher had lost $16,700 in net rental income between 1974 and 1983. No evidence was produced to show that taxes on the property had been paid. No evidence of emotional distress was offered.
Fidelity contended that Fisher had made changes in the building design which materially altered its risk, so that it should be discharged from its bond obligation. It appeared that an exterior window had been omitted and that a proposed interior window had been enlarged. A contract between F.G. McGraw and Fisher stated the height of the building to be ...