A.E.I. Music Network v. Business Computers ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-1650
A.E.I. Music Network, Inc.,
Plaintiff-Appellant,
v.
Business Computers, Inc., et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 CV 6097--George M. Marovich, Judge.
Argued November 7, 2001--Decided May 22, 2002
Before Flaum, Chief Judge, and Posner and
Kanne, Circuit Judges.
Posner, Circuit Judge. This appeal by
A.E.I. Music Network, Inc., a
subcontractor, from the dismissal of its
diversity suit against the Chicago Board
of Education (the other defendants having
dropped out of the case) presents
questions of Illinois contract and
construction law. The Board had hired
Business Computers, Inc. (BCI) to install
an audio-visual system in a high school,
and BCI had subcontracted a part of the
job to A.E.I. A.E.I. did the work called
for in the subcontract but was not paid
by BCI, which is broke. The Illinois Bond
Act requires a public entity such as the
Chicago Board of Education to require its
contractors to post bonds to assure the
payment of any money owed by the
contractors to their subcontractors. 30
ILCS 550/0.01 et seq.; MQ Construction
Co. v. Intercargo Ins. Co., 742 N.E.2d
820, 825 (Ill. App. 2000); Shaw
Industries, Inc. v. Community College
Dist. No. 515, 741 N.E.2d 642, 645, 647
(Ill. App. 2000); Aluma Systems, Inc. v.
Frederick Quinn Corp., 564 N.E.2d 1280,
1297 (Ill. App. 1990). The Board, in
violation of the Act, failed to require
BCI to post a bond; no bond was posted;
and as a result A.E.I. could not turn to
a surety when it was stiffed by BCI. Out
$159,000, it brought this suit, charging
that the statutory requirement of a bond
was an implied-by-law term of the
contract between the Board and BCI that
it can enforce as a third-party
beneficiary, and also seeking to impress
a mechanic’s lien, 770 ILCS 60/23; R.W.
Dunteman Co. v. C/G Enterprises, Inc.,
692 N.E.2d 306, 313 (Ill. 1998); MQ
Construction Co. v. Intercargo Ins. Co.,
supra, 742 N.E.2d at 825, on any funds
that the Board has set aside to pay BCI
on the contract. The district judge
dismissed the breach of contract claim as
barred by the 180-day statute of
limitations in the Bond Act and dismissed
the mechanic’s lien claim as barred by an
admission by A.E.I. that the Board had
paid BCI all that was owing it before
A.E.I. filed the notice of lien.
The applicability of the 180-day statute
of limitations to a suit by a
subcontractor complaining about a public
agency’s having failed to require the
contractor to post a bond has divided
Illinois’s intermediate appellate court.
Shaw Industries, Inc. v. Community
College Dist. No. 515, supra, 741 N.E.2d
at 648, holds that the 180-day
limitation, though found in the Bond Act
rather than in the common law of
contract, is applicable to such a suit
because the suit however captioned is
necessarily a suit to enforce the Act.
Id. at 649. East Peoria Community High
School Dist. No. 309 v. Grand Stage
Lighting Co., 601 N.E.2d 972, 975 (Ill.
App. 1992), implies that the 180-day
period is inapplicable, because the court
described the subcontractor’s suit
against the agency as a third-party-
beneficiary suit for breach of contract
rather than as a suit under the Bond Act.
We think this is clearly right and that
the Supreme Court of Illinois would so
hold if presented with the issue.
The requirement of posting a bond is
found in section 1 of the Bond Act, 30
ILCS 550/1. The 180-day statute of
limitations is found in section 2. Id.,550/2. That statute of limitations is
applicable, however, by the very terms of
section 2, only to "a claim for labor,
and material[,] as aforesaid"--and the
claim to which "aforesaid" refers,
further up in the section, is "the right
to sue on such bond," that is, the bond
required by section 1. Section 2 couldn’t
be clearer: "every person furnishing
material or performing labor, either as
an individual or as a sub-contractor for
any contractor, with the State, or a
political subdivision thereof where bond
or letter of credit shall be executed as
provided in this Act, shall have the
right to sue on such bond or letter of
credit in the name of the State." 30 ILCS
550/2 (emphasis added).
In short, the 180-day statute of
limitations is applicable only to a suit
on the bond. A.E.I.’s suit against the
Board of Education is not a suit on the
bond. There is no bond, and so the
statute is inapplicable. Cf. Arvanis v.
Noslo Engineering Consultants, Inc., 739
F.2d 1287, 1290 (7th Cir. 1984) (per
curiam). It is doubly inapplicable,
because section 2 requires suits under it
to be brought in the name of the public
entity that let the contract, so that if
A.E.I. had to sue the Board under the
Bond Act to obtain a remedy for the
Board’s violation of the Act, it would be
suing the Board in the name of the Board.
The suit would be styled Chicago Board of
Education ex rel. A.E.I. Music Network,
Inc. v. Chicago Board of Education.
Absurd.
The Board concedes that violations of
section 1 of the Bond Act were not
intended to be remediless. But it rightly
insists that the remedy cannot be a suit
on a nonexistent bond. Nor is there any
indication of a statutory remedy except
under the mechanic’s lien statute, and
the remedy under that statute is
unavailable if the public entity that
should have required a bond for the
protection of subcontractors has already
paid the contractor, at least if the
subcontractor failed, as A.E.I. did, to
notify the public entity before it paid
the contractor. See 770 ILCS 60/23(b);
Walker Process Equipment v. Advance
Mechanical Systems, Inc., 668 N.E.2d 132,
134 (Ill. App. 1996); Board of Library
Trustees v. Cinco Construction, Inc., 658
N.E.2d 473, 477, 480-81 (Ill. App. 1995).
The natural remedy in such a case is a
suit for breach of contract by the
subcontractor against the public entity.
The requirement of posting a bond found
in section 1 of the Bond Act is read into
every construction contract of a public
entity, Shaw Industries, Inc. v.
Community College Dist. No. 515, supra,741 N.E.2d at 645; East Peoria Community
High School Dist. No. 309 v. Grand Stage
Lighting Co., supra, 601 N.E.2d at 975,
precisely to give the subcontractor a
remedy; and thus it became a term of the
contract between the Chicago Board of
Education and BCI. Because the term
isintended for the benefit of the prime
contractor’s subcontractors, the doctrine
of third-party beneficiaries entitled
A.E.I. to sue to enforce it in a suit for
breach of contract. And as a suit for
breach of a construction contract,
A.E.I.’s suit against the Board was
governed by a 4-year, not the 180-day,
statute of limitations. 735 ILCS sec.
5/13-214(a); Litchfield Community Unit
School Dist. No. 12 v. Speciality Waste
Services, Inc., 757 N.E.2d 641, 643-44
(Ill. App. 2001); Blinderman Construction
Co. v. Metropolitan Water Reclamation
Dist. of Greater Chicago, 757 N.E.2d 931,
934 (Ill. App. 2001). So the suit was not
time-barred.
Against this conclusion the Board argues
that A.E.I. was merely an "incidental"
and not a "direct" beneficiary of the
Board’s contract with BCI. Third parties,
that is, persons who are not parties to a
contract, are permitted to enforce the
contract if and only if the parties made
clear in the contract an intention that
they be permitted to do so. XL Disposal
Corp. v. John Sexton Contractors Co., 659
N.E.2d 1312, 1316 (Ill. 1995); A.J.
Maggio Co. v. Willis, 738 N.E.2d 592, 599
(Ill. App. 2000); Swavely v. Freeway Ford
Truck Sales, Inc., 700 N.E.2d 181, 185
(Ill. App. 1998); Sufrin v. Hosier, 128
F.3d 594, 598 (7th Cir. 1997) (Illinois
law). When that condition is fulfilled,
permitting third-party-beneficiary suits
is consistent with freedom of contract,
and also reduces transaction costs by
conferring rights (though of course not
liabilities) on persons without requiring
the persons to become involved in the
contractual negotiations. Others may
benefit if the contract is performed--
that is common enough-- but they cannot
sue to enforce it just by virtue of
benefiting from it. That would take
contractual enforcement right out of the
hands of the parties. Those other
beneficiaries, who have no rights, are
called "incidental" beneficiaries, the
"direct" ones being those who are
permitted to enforce the contract because
the contract authorized them to do so.
See, e.g., Altevogt v. Brinkoetter, 421
N.E.2d 182, 187-88 (Ill. 1981); Nikolic
v. Seidenberg, 610 N.E.2d 177, 180 (Ill.
App. 1993); Ball Corp. v. Bohlin Bldg.
Corp., 543 N.E.2d 106, 107 (Ill. App.
1989); Golden v. Barenborg, 53 F.3d 866,
870 (7th Cir. 1995) (Illinois law);
Hunter v. Old Ben Coal Co., 844 F.2d 428,
432 (7th Cir. 1988) (ditto); Vidimos,
Inc. v. Laser Lab Ltd., 99 F.3d 217, 220
(7th Cir. 1996).
In a case such as this, in which the
legislature interpolates a contractual
term that the parties are not free to
vary, the relevant intentions are no
longer those of the parties but those of
the legislature. The Illinois legislature
wants construction contracts made by
public entities to protect the
subcontractors. It must have realized
that the only persons who would have a
financial interest in enforcing a term
forced on the contracting parties for the
protection of the subcontractors would
be--the subcontractors. So the carrying
out of the purposes of the contract, one
purpose being that of the legislature to
protect subcontractors, requires that the
subcontractors be able to enforce the
contract. Nothing more is required to
make them "direct" third-party
beneficiaries, entitled to sue.
The fact that A.E.I. was not named in
the contract is thus irrelevant. E.g.,
Altevogt v. Brinkoetter, supra, 421
N.E.2d at 187; LaGrange Memorial Hospital
v. St. Paul Ins. Co., 740 N.E.2d 21, 27-
28 (Ill. App. 2000); Hunter v. Old Ben
Coal Co., supra, 844 F.2d at 432(Illinois law). It was not named simply
because the relevant term is a product of
legislation rather than of contractual
negotiation and so designates a class
rather than named members of the class--
all subcontractors, not named
subcontractors, which would be a very
questionable form of legislation. The
class indisputably includes A.E.I.
Might there be some basis for subjecting
the implied provision of the contract
requiring the posting of a bond to the
180-day statute of limitations in the
Bond Act, when the rest of the contract
is subject to a 4-year statute of
limitations? None is suggested, and we
cannot think of any ourselves. The reason
for the short statute of limitations in
the Bond Act may be that the public
entity which let the contract and
required the contractor to post a bond
has an interest in minimizing the cost of
the bond (which is likely to be passed on
to the public entity in the form of a
higher contract price) by protecting
sureties against late claims. That
interest falls away when there is no bond
and so no surety in the picture. Or the
reason for the short statute of
limitations may be to enable the prime
contractor to get paid sooner, since
until the bond expires the public agency
may be reluctant to pay him lest the
subcontractors seek a remedy against the
agency. That interest also is not engaged
when there is no bond.
At the oral argument of the appeal the
Board’s lawyer surprised us by arguing
that A.E.I.’s suit is barred by the
principle that contracts implied in fact
cannot be enforced against public
entities. The argument was waived by not
being made in the Board’s brief, but is
in any event without merit because the
contract between the Board and BCI was
not one implied in fact; it was an
express contract with an implied term. A
contract implied in fact is not an
express contract that may have, as most
contracts do, implied terms, such as the
duty of good faith, which is read into
every contract governed by Illinois law,
e.g., J & B Steel Contractors, Inc. v. C.
Iber & Sons, Inc., 642 N.E.2d 1215, 1222
(Ill. 1994); Martindell v. Lake Shore
National Bank, 154 N.E.2d 683, 690 (Ill.
1958). Instead, "an implied-in-fact
contract is a true contract, containing
all necessary elements of a binding
agreement; it differs from other
contracts only in that it has not been
committed to writing or stated orally in
express terms, but rather is inferred
from the conduct of the parties in the
milieu in which they dealt." Overseas
Development Disc Corp. v. Sangamo
Construction Co., 840 F.2d 1319, 1330
(7th Cir. 1988) (Illinois law). Suppose a
person walks into a store and takes a
newspaper that is for sale there,
intending to pay for it. The
circumstances would create a contract
implied in fact. See People v. Dummer,
113 N.E. 934, 935 (Ill. 1916);
Restatement (Second) of Contracts sec. 4,
comment a, illustration 2 (1979). Were
there no basis for inferring an intention
to pay, there would be no contract,
though the store owner would have a
remedy in restitution, also though
confusingly called in this context
"quasi-contract" or "contract implied in
law." See, e.g., In re De Laurentiis
Entertainment Group Inc., 963 F.2d 1269,
1272 (9th Cir. 1992); Bloomgarden v.
Coyer, 479 F.2d 201, 210 (D.C. Cir.
1973).
The reluctance to enforce contracts
implied in fact against public agencies,
like the parallel reluctance to apply
notions of estoppel against such
agencies, Cities Service Oil Co. v. City
of Des Plaines, 171 N.E.2d 605, 607 (Ill.
1961); Monat v. County of Cook, 750
N.E.2d 260, 270 (Ill. App. 2001), is
motivated by concern with, and is limited
to, situations in which the application
of the doctrine might permit a public
employee to bind his employer contrary to
a statute or regulation governing public
contracts. See, e.g., Stone v. City of
Arcola, 536 N.E.2d 1329, 1339-40 (Ill.
App. 1989); South Suburban Safeway Lines,
Inc. v. Regional Transportation
Authority, 519 N.E.2d 1005, 1008-09 (Ill.
App. 1988). That is not what happened
here.
So A.E.I.’s contract claim was
incorrectly rejected on statute of
limitations grounds and we turn now to
its mechanics-lien claim. A lien is a
method of attaching, in effect freezing,
some designated property or fund, and so
if there is no property or fund for the
lien to seize hold of, there can’t be a
lien. Hence the requirement that we
mentioned at the outset that notice of a
lien be filed while the person against
whom it is filed still has the property
or fund in his possession. See also
People ex rel. Anderson v. Village of
Bradley, 11 N.E.2d 415, 418 (Ill. 1937);
Wilbur Waggoner Equipment Rental &
Excavating Co. v. Johnson, 342 N.E.2d
266, 269 (Ill. App. 1975). The district
court read A.E.I.’s complaint to admit
that when it filed its lien against the
Board the Board had already paid BCI in
full. Well, the complaint says that, all
right, but then goes on to contradict
itself by stating that "upon information
and belief, AEI believes that at the time
of service of its Subcontractor’s Claims
for Lien there may have been monies,
bonds or warrants due or to become due to
BCI from [the Board]." But in its briefs
in this court A.E.I. does not dispute the
Board’s assertion that the money had
indeed been paid in full, and so we shall
assume, which nixes the mechanics’ lien
claim. A.E.I. did not assert a mechanics’
lien against the audio-visual system
itself, which does of course remain in
the Board’s possession; we need not
consider whether it could have done so.
The judgment is affirmed in part,
reversed in part, and remanded for
further proceedings consistent with this
opinion.