DO SCHOOL DISTRICTS REALLY HAVE TO OBTAIN A PERFORMANCE BOND AND A PAYMENT BOND FROM CONTRACTORS?

November 18, 2014

By Alan M. Mullins

School districts routinely require contractors to provide both performance bonds and payment bonds for school construction projects.   But are both necessary?   Can school districts be liable to subcontractors if they only obtain a performance bond?  The Illinois Supreme Court recently ruled that school districts would not be liable if they only received a performance bond and you may be surprised why.

In Lake County Grading Company, LLC v. Village of Antioch, a village obtained performance bonds from a contractor but did not obtain a separate payment bond.  The contractor went bankrupt and the sub-contractor sued the village for not obtaining a payment bond from the contractor. The village argued that it was not liable because the performance bond would have covered the subcontractor’s claim had it been filed within the required 180 days.  The Illinois Supreme Court agreed with the village.

The Bond Act provides that when contracts are for $50,000 or more, local governmental entities such as school districts must require contractors to furnish “a bond” and “the bond” shall cover the completion of the contract andpaymentfor materialsandsubcontractors.   The  BondAct  further providesthatallsuch bondsshall guarantee: 1) the performance of the contract, and 2) that all people or entities that have contracts with the contractor or subcontractors will be paid, whether or not provisions to that effect are included in the bonds. Last, anybody who has a claim under a bond must file it within 180 days of the date the last item of work was completed or last item of material was finished.

It has been the general belief that contractors must provide two bonds, a performance bond and a payment bond. That view no longer prevails.  The Illinois Supreme Court ruled that the language described above requires only one bond from contractors and that bond will cover the completion of the contract and payment of materialmen and subcontractors even if it does not specifically say so.   In the case before the Supreme Court, the subcontractor did not have a claim against the village because filing a claim against the bond was its only remedy.  However, it could not file a claim against the bond because the 180 days for doing so had expired.

There are two practical effects to the decision.  Other than a bid bond, school districts can be safe in requiring only a performance bond when contracting for a construction project.  With this legal development, it may be appropriate for public bodies to reconsider the bond requirements typically included in their bid solicitations since it could mean lower construction costs.  We are prepared to assist you with your next RFP and contract drafting.  Furthermore, materialmen and subcontractors have to realize that if a contractor provides only one bond and that bond does not contain specific payment provisions they still have to file claims on that bond within 180 days.