Brief Fact Summary. Two subcontractors were hired by a general contractor to work on a federally funded construction project. The general contractor was retained by a housing authority. The housing authority was supposed to obtain a bond from the general contractor, but it never did. The two subcontractors were never paid and they sued the housing authority arguing they were third party beneficiaries to a contract between the general contractor and the housing authority.
Synopsis of Rule of Law. "[A] subcontractor [is] a third party beneficiary of a contract provision to procure a payment bond since a payment bond is, by definition, for the protection of subcontractors."
If direct he may sue on the contract; if incidental he has no right of recovery thereon.View Full Point of Law
Issue. "Whether a third party beneficiary contract action may be asserted by an unpaid subcontractor against a public entity where such entity has failed to procure from a general contractor a payment bond as required by the Illinois Bond Act?
Held. The court was first concerned with the type of bond that was involved. The court quoted [Taylor Woodrow Blitman Const. Corp. v. Southfield Gardens Co.] and observed “There are two kinds of surety bonds, performance bonds and payment bonds. A performance bond simply insures that the contractor will perform the work as contracted•••• A payment bond, on the other hand, requires that the contractor pay all subcontractors and materialmen before the owner will make final payment.” The court then set forth two reasons why the bond in question was not simply a performance bond, but also a payment bond.
• The court then addressed whether the Plaintiffs were third party beneficiaries under the contract, and accordingly could assert the bond provision. The court recognized that if the bond was procured, the Plaintiffs would be the third party beneficiaries. However, it is important to note that no bond was procured. The general rule for third party beneficiaries is that "[i]f the contract is entered into for a direct benefit of a third person, not party to the contract, such third person may sue for breach thereof. The test is whether the benefit to the third person is direct or incidental. If direct, he may sue on the contract; if incidental, there is no right of recovery." The court quoted [Avco Delta Corp. Canada Ltd. v. United States] which stated "[a] materialman may be a third party beneficiary of a promise by a general contractor to obtain a surety bond for the prompt payment of all laborers and materialmen, and, in the context of a government contract, an unpaid materialman of a subcontractor was allowed to sue the general contractor who had failed to provide such a bond as he had covenanted in the construction contract." As such, the court concluded the Plaintiffs were third party beneficiaries to the contract between the Defendant and Bildoc.
Discussion. This case offers an interesting discussion about the rights of third party beneficiaries.