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Chicago Ex Rel. Charles Eq. v. U.s. Fidelity





Appeal from the Circuit Court of Cook County; the Hon. Myron T. Gomberg, Judge, presiding.


This appeal is from certain orders of the trial court in an action to recover upon bonds given in connection with contracts for the construction of a public works project.

The record discloses that on August 12, 1982, Klein Construction Company (Klein) entered into a general contract with the city of Chicago (city) for the construction of a police station and, pursuant to the provisions of section 1 of "An Act in relation to bonds of contractors entering into contracts for public construction" (Ill. Rev. Stat. 1981, ch. 29, par. 15) (the Bond for Public Works Act), and the terms of the general contract itself, delivered to the city a performance and payment bond issued by United States Fidelity & Guaranty Company (defendant) as surety thereon.

Subsequently, Cresent Electric Company (Cresent) *fn1 subcontracted with Klein to provide certain materials and labor for the project, including the furnishing and installation of an emergency generator. In accordance with the terms of the subcontract, Cresent delivered a subcontractor's bond issued by defendant Statewide Insurance Company (Statewide) naming Klein as obligee thereunder. On October 18, 1982, Cresent executed a written order for the purchase of the generator from Charles Equipment Company (plaintiff). The generator was delivered to Cresent in late May 1983, together with an invoice requesting payment of the agreed-upon price of $138,620.

Upon receipt from Cresent of (1) a payment request for $219,546 which included the cost of the generator, (2) a written waiver of lien rights for that amount, and (3) a sworn statement that "all Labor has been Paid in full. Materials from paid up stock delivered to the job site in our own trucks," on July 28, 1983, Klein paid Cresent the amount requested.

On September 2, 1983, plaintiff filed its verified notice of claim with the city under the Mechanics' Liens Act (Ill. Rev. Stat. 1981, ch. 82, par. 23), and the Bond for Public Works Act against monies due from the city to Klein as general contractor and/or to Cresent as Klein's subcontractor in the amount of $138,620, and on November 18, filed a two-count complaint seeking judgment against defendant and Statewide as sureties on their respective bonds. The complaint alleged in, in essence, that it had performed its subcontract with Cresent by supplying the generator; that it had not been paid therefor; and that under the terms of their respective bonds, defendant and Statewide were liable for the amount due.

Defendant's amended answer raised as affirmative defenses that (1) in accordance with the subcontract, Klein had paid Cresent for the generator furnished by plaintiff; (2) plaintiff had breached the no-lien provision of the Klein-Cresent contract by filing its lien claim; (3) as third-party beneficiary of the bond given by Statewide as surety for Cresent, it (defendant) was entitled to indemnification by Statewide for any unsatisfied claims by plaintiff against Cresent; and (4) the generator did not conform to the general contract specifications.

In its answer, Statewide maintained that only Klein, the named obligee on the bond, could assert the rights thereunder and also asserted as affirmative defenses that (1) Klein had breached the terms of its subcontract with Cresent; (2) its bond was not governed by the provisions of the Bond for Public Works Act; and (3) the generator did not comply with city specifications.

On April 27, 1984, plaintiff moved for summary judgment against defendant, and on May 23, defendant filed a counterclaim against Statewide alleging, inter alia, that (1) as surety for the obligee (Klein) of Statewide's bond, it was a third-party beneficiary thereunder and, thus, entitled under the terms of the bond to indemnification from Statewide "against any and all loss or damage directly arising by reason of the failure of Cresent to (a) faithfully perform the subcontract, and (b) pay all just claims for labor and materials furnished in the completion of said subcontract by persons, firms or corporations having direct contracts with Cresent," and also (2) that Statewide's refusal to pay plaintiff constituted a breach of that contract which exposed it (defendant) to potential liability to Cresent's suppliers.

On August 15, 1984, after argument by counsel, the trial court granted plaintiff's motion for summary judgment against defendant, and on December 14, amended the order to include prejudgment interest of $4,872.87. Following a hearing on April 3, 1985, the court (1) reduced the amount of prejudgment interest to reflect a prior payment by defendant to plaintiff; (2) granted plaintiff's motion (a) for a finding that the August 15 order of summary judgment as modified by the December order was final and appealable under Supreme Court Rule 304(a) (103 Ill.2d R. 304(a)); (b) to voluntarily dismiss its complaint against Statewide; and (3) denied defendant's motion for summary judgment against Statewide. This appeal followed.


Defendant first contends that summary judgment for plaintiff was improper, arguing that under the well-settled maxim of surety law — that the liability of the surety cannot exceed that of its principal — its obligation to plaintiff was discharged when Klein, its principal, disbursed funds to Cresent to pay for the generator in reliance on Cresent's sworn statement that all charges for labor and materials listed on its payment request had been paid; and that, therefore, while plaintiff might have a valid claim against Cresent or its surety, Statewide, no right of action exists against it, as surety for the general contractor. We disagree.

Although we do not dispute the basic common law tenet that payment and performance by the principal extinguishes the liability of the surety, the instant action was predicated upon and is governed exclusively by the Bond for Public Works Act, which provides:

"Sec. 1. All officials, boards, commissions or agents of this State, or of any political subdivision thereof in making contracts for public work of any kind to be performed for the State, or a political subdivision thereof shall require every contractor for such work to furnish, supply and deliver a bond to the State, or to the political subdivision thereof entering into such contract, * * * with good and sufficient sureties. * * * [S]uch bond, among other conditions, shall be conditioned for the completion of the ...

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