Opinion ID: 223099
Heading Depth: 2
Heading Rank: 2

Heading: Standing to Sue as Third-Party Beneficiary

Text: In this case, we must decide whether Aurora has standing as a third-party beneficiary to enforce the subdivision bonds at issue. In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or particular issues. Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 444-45 (7th Cir.2009) (affirming dismissal of plaintiff's case under Rule 12(b)(1) upon finding that plaintiff did not have standing to sue on state law contract theory). The parties do not dispute that Illinois law applies. See Davis v. G.N. Mortg. Corp., 396 F.3d 869, 879 (7th Cir. 2005) (In a case where subject matter jurisdiction in federal court is premised on diversity jurisdiction under 28 U.S.C. § 1332, the court applies the substantive law of the forum state.). A contract of a surety involves a direct promise to perform the obligations of another person in the event such person fails to perform as required by his contract. Vee See Constr. Co., Inc. v. Luckett, 102 Ill.App.3d 444, 58 Ill.Dec. 149, 430 N.E.2d 91, 93 (1981). Aurora is not a party to the subdivision bonds (the surety agreement) since American Southern issued the bonds to Ocean Atlantic in favor of the City of Yorkville. But Aurora claims that it is an intended beneficiary and may therefore sue on the bonds. In Illinois, if a contract is entered into for the direct benefit of a third person who is not a party to the contract, that person may sue on the contract as a third-party beneficiary. Carson Pirie Scott & Co. v. Parrett, 346 Ill. 252, 178 N.E. 498, 501 (1931). The test is whether the benefit is direct, in which case the person may sue, or incidental, in which case the person may not. Id. The intent to benefit the third party must affirmatively appear from the language of the contract. Carson, 178 N.E. at 501. If the intent to benefit others is not explicitly provided for in the contract, its implication at least `must be so strong as to be practically an express declaration.' Barney v. Unity Paving, Inc., 266 Ill.App.3d 13, 203 Ill.Dec. 272, 639 N.E.2d 592, 596 (1994). The parties' intent is to be gleaned from a consideration of all of the contract and the circumstances surrounding the parties at the time of its execution. Id. The Restatement (Third) of Suretyship and Guaranty provides some helpful guidance in determining whether a subcontractor is a third-party beneficiary to a suretyship agreement. The Restatement distinguishes between payment bonds and performance bonds. See RESTATEMENT (THIRD) OF SURETYSHIP AND GUARANTEE § 69(a) (1996). When a payment bond is involved, the contractor typically promises the owner of the project to pay for all labor and materials, and the surety agrees to be liable with respect to that promise. Id. The laborers and suppliers therefore have rights as third-party beneficiaries against the surety. See id. In contrast, when a performance bond is involved, there is no promise to pay laborers and suppliers of materials. Id. The surety promises to be liable only for the fulfillment of the contractor's duty. Id. The laborers and suppliers have no rights against the surety because the surety has not promised to fulfill the contractor's duty to them. [1] Id. In accordance with these general principles, Illinois courts tend to find third-party beneficiary status where an agreement contains language to the effect that the surety will be responsible to third parties if the contractor is unable to fulfill its obligation to them. In Carson Pirie Scott & Co. v. Parrett , for example, the Supreme Court of Illinois found that a supplier of hotel linens could sue as a third-party beneficiary on a contract between the hotel owners and a surety because the contract provided that the surety would pay for the goods if the hotel owners could not. 178 N.E. at 502-03. Likewise, in Neenah Foundry Co. v. National Surety Corp., although the bond was labeled a performance bond, the surety had agreed to provide coverage for the work performed and for the payment of claims for labor performed and materials furnished. 47 Ill.App.2d 427, 197 N.E.2d 744, 747 (1964). The court gleaned from that language an intent to protect the subcontractors, and noted that if the surety wanted to limit its liability it could have done so expressly. Id. at 748-49; see also East Peoria Cmty. High Sch. Dist. No. 309 v. Grand Stage Lighting Co., 235 Ill. App.3d 756, 176 Ill.Dec. 274, 601 N.E.2d 972, 975 (1992) (contractor's promise to submit satisfactory evidence [to the school] that all indebtedness had been paid was intended to protect subcontractor who could not have obtained a mechanic's lien on a public project); Avco Delta Corp. Canada Ltd. v. United States, 484 F.2d 692, 702-05 (7th Cir.1973) (subcontractors were entitled to sue on an agreement between a contractor and an owner because the contract provided for the creation of a retainage account that would be paid to the contractor only after the contractor provided an affidavit that stated that all bills for materials, labor, and supplies had been paid in full); Phillips Co. v. Constitution Indem. Co. of Philadelphia, 68 F.2d 304, 306 (7th Cir.1933) (promise to completely pay for said building was intended to protect subcontractors). Conversely, subcontractors are generally not accorded third-party beneficiary status where the surety agreement does not contain language suggesting that the surety's obligation to pay runs to third parties. In Searles v. City of Flora, the bond at issue simply stated that the surety would hold the city harmless and pay any loss and damage to the city occasioned by the failure or default of the contractor. 225 Ill. 167, 80 N.E. 98, 99-100 (1906). The bond did not include any language concerning payment to third parties for labor or materials, and therefore the court concluded that unpaid subcontractors could not sue on the bond. Id.; see also Young v. Gen. Ins. Co. of Am., 33 Ill.App.3d 119, 337 N.E.2d 739, 740-41 (1975) (bond stated that no right of action shall accrue on this bond for the use of any person other than the Owner named herein and therefore limited the liability of the surety to the owner); In re T. Brady Mech. Servs. Inc., 129 B.R. 559, 561-62 (Bankr.N.D.Ill.1991) (bond obliged surety to pay claimants, defined as those having a direct contract with the principal for labor or material, and because the subcontractors did not have a direct contract with the principal they were not third-party beneficiaries). The subdivision bonds at issue here do not contain any language suggesting that Ocean Atlantic's obligation runs to anyone other than the City of Yorkville. The bonds state that they are for the purpose of guaranteeing the installation of various public improvements. There is no language, for example, to the effect that American Southern is guaranteeing payment for labor and materials. Cf. Carson, 178 N.E. at 502-03. There is also no language requiring that anyone other than the City of Yorkville be paid. Cf. East Peoria, 176 Ill.Dec. 274, 601 N.E.2d at 975 (clause required proof that subcontractor had been paid); Avco, 484 F.2d at 702-05 (contract required affidavit that materials and labor were paid for). In fact, the only reference to the subcontractors in the subdivision bonds is in a provision that states that the City of Yorkville may demand payment when it determines that the improvements covered by the bond have been or are likely to be the subject of liens or other claims by contractors, subcontractors, and third parties. This language, however, only specifies the circumstances in which the City of Yorkville can make a demand on the bonds; it imposes no obligation on American Southern with respect to the subcontractors. Aurora urges us to look to Ocean Atlantic's letter recommending that the City of Yorkville redeem the bonds, as well as to the City of Yorkville's demand letter, in determining whether the contracting parties intended to benefit the subcontractors. But Illinois law provides that the intent of the parties must be gleaned from the circumstances surrounding the parties at the time the contract is executed. Bates & Rogers Constr. Corp. v. Greeley & Hansen, 109 Ill.2d 225, 93 Ill.Dec. 369, 486 N.E.2d 902, 906 (1985). The two letters were prepared between two and three years after the bonds were issued, and therefore shed little, if any, light on the intent of the parties at the time of contracting. Further, the bonds provide that [t]he Surety's obligation to the City is based solely on this Subdivision Bond engagement between this Surety and the City and is not subject to instruction from our customer [Ocean Atlantic]. This language, which Aurora does not otherwise challenge, precludes consideration of Ocean Atlantic's letter. Aurora also contends that the entire point of requiring a contractor to obtain a bond is to ensure that subcontractors are paid. But while the bonds may have been procured to ensure that the City of Yorkville eventually gets its public improvements clear of liens, this does not mean that American Southern's obligation under the bonds runs to the subcontractors. Liability to a third-party must affirmatively appear from the contract's language and from the circumstances surrounding the parties at the time of its execution.... Ball Corp. v. Bohlin Bldg. Corp., 187 Ill.App.3d 175, 134 Ill.Dec. 823, 543 N.E.2d 106, 107 (1989). Here, it does not. And we cannot expand or enlarge American Southern's liability simply because the situation and circumstances justify or demand further or other liability. Id. Moreover, it is not as if Aurora does not have a remedy if it cannot sue to enforce the bonds. Unlike in East Peoria, where the subcontractor could not have obtained a mechanic's lien, Aurora recorded a mechanic's lien on the subdivision property in the amount Ocean Atlantic owes to it. Cf. 176 Ill.Dec. 274, 601 N.E.2d at 975. In sum, because the subdivision bonds do not contain any language suggesting that American Southern will assume Ocean Atlantic's liability to the subcontractors in the event of Ocean Atlantic's default, the decision of the district court must be affirmed.