Case Law Note: When Interest and Attorney’s Fees are Due
October 15, 2024
In this Surety Today: The Blog post we discuss a case dealing with claims for interest and attorneys’ fees against a surety. The case is:
Concrete Structures/Sachi, J.V. v. Clark/Bulley/OVC/Power, 2024 IL App (1st) 240082, ¶¶ 1-32
2024 IL App (1st) 240082, September 3, 2024
This construction dispute arises from a general contractor’s failure to pay a subcontractor for concrete work that the subcontractor performed during the construction of a large hotel connected to Chicago’s McCormick Place convention center. The dispute went to arbitration and the panel awarded the subcontractor the amount outstanding on the invoice along with other compensation and found that the subcontractor was the prevailing party. The circuit court affirmed the award. Subsequently, the subcontractor requested the circuit court to grant it additional prejudgment interest and attorney fees under various theories including under the Illinois Mechanics Lien Act, Section 2 of the Illinois Interest Act, Section 2 of the Illinois Public Construction Bond Act and under the language of the bond at issue. The circuit court denied these requests, and on appeal, the appellate court affirmed.
Prior to the litigation and arbitration, the subcontractor submitted a claim against the payment bond. The surety responded stating “[t]he information you have provided to date is not sufficient to establish liability under the bond. Therefore, we must inform you that at this time we consider no portion of the amount claimed to be undisputed. The basis for challenging the disputed amount is lack of substantiation. Therefore, to facilitate our independent investigation of the claim, we request that you fill out and return the enclosed claim form, attaching copies of all documents requested in the claim form.”
The subcontractor was seeking more than $28 million in damages, which included the outstanding balance, plus approximately $10 million in labor productivity damages and increased subcontractor costs, among others. On June 19, 2019, the arbitration panel issued an interim award in favor of the subcontractor in the amount of $10,629,741, which included the outstanding balance, $6,448,344 in labor productivity damages, and compensatory damages for extended project hours and other delays. In its final arbitration decision on September 20, 2019, the panel reiterated its prior interim award and further awarded the subcontractor $27,026.75 in attorney fees, which was only a fraction of what was requested and it also awarded 5% prejudgment interest for the period of time between the issuance of the interim award and the final award. Thus, the final award amounted to $10,656,767.75 plus 5% interest.
The circuit court affirmed the arbitration award in full. On appeal, the subcontractor argued that the circuit court erred in refusing to award additional prejudgment interest and attorney fees.
Prejudgment Interest
With respect to the prejudgment interest claim, the subcontractor argued that Section 2 of the Interest Act allows it to recover prejudgment interest from when it filed this lawsuit on October 13, 2017, to when the circuit court confirmed the arbitration panel’s final award on December 20, 2019 (rather than just the period between the panel’s interim and final awards). The sureties argued that prejudgment interest did not begin to accrue until the money becomes due under a bond, which did not occur, at the earliest, until the panel’s interim award on June 19, 2019.
Under the Illinois Bond Act regardless of the specific language of a bond, each bond is deemed to provide that payment is owed “after final settlement between the officer, board, commission or agent of the State or of any political subdivision thereof and the principal has been made.” The Illinois Interest Act provides, in relevant part, as follows: “Creditors shall be allowed to receive [interest] at the rate of five (5) per centum per annum for all moneys after they become due on any bond ***.” The language of the bond at issue provided that the sureties must “[p]ay or arrange for payment of any undisputed amounts.”
The court stated that reading the Interest Act in conjunction with the language of the bond, “we find that prejudgment interest began accruing when the bond became ‘due,’ which was when the amount owed became undisputed. That occurred when the arbitration panel issued its interim award, which resolved the dispute as to how much defendants owed [the subcontractor]. Accordingly, prejudgment interest began to accrue on June 19, 2019 (the day of the interim award).”
The determinative issue was when the “money was due.” The parties vehemently disputed whether the subcontractor was owed anything, indeed, the general contractor believed it owed nothing and instead that the subcontractor owed it $3.5 million. The dispute continued until the arbitration panel entered an interim award on June 19, 2019. The court stated, “[h]ere, under the terms of the bond, payment was not due until the amount owed was reduced to an undisputed amount. Again, this amount was determined by the arbitration panel on June 19, 2019.” The court pointed to the bond language providing in Section 7.1 in which the surety must respond to the claim identifying the amounts that are undisputed and the basis for challenging any amounts that are disputed; and 7.2 in which the surety must “pay or arrange for payment of any undisputed amounts.” The court noted that “the plain language of section 7.2 of the bond conditions the payment for labor, materials, and equipment on the existence of an undisputed amount, . . .” Because the plain language of the bond states that the sureties’ payment obligations are limited to undisputed amounts. The existence of undisputed amounts triggers the sureties’ obligations, and that is the appropriate time for prejudgment interest to begin accruing.
Attorney Fees
With respect to attorneys’ fees the subcontractor argued that the plain language of the bond at issue required an award of additional attorney fees, but the sureties contended that the bond allows attorney fees only if the sureties violated the bond’s terms, which did not occur. The court observed that contractual provisions that allow the recovery of attorney fees should be strictly construed. Helland v. Helland, 214 Ill. App. 3d 275, 277-78, 157 Ill.Dec. 939, 573 N.E.2d 357 (1991). The bond provision on attorney fees at § 7.3 was conditioned on the surety’s failure to discharge its obligations under §§ 7.1 and 7.2. Section 7.1 required the surety to “send an answer to the Claimant, with a copy to the Owner, within sixty (60) days after receipt of the Claim, stating the amounts that are undisputed and the basis for challenging any amounts that are disputed.” Section 7.2 of the bond required defendants to “pay or arrange for payment of any undisputed amounts.” The record revealed that the surety responded to the subcontractor’s claim within the requirements of the bond and the court so held. Further, once the arbitration panel resolved the dispute as to the amount owed, the surety promptly paid the subcontractor.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.
Upcoming Events
PSCA Luncheon, Philadelphia, PANovember 20, 2024
PSCA Annual Holiday Cocktail EventDecember 2024
More Upcoming EventsFull list of 2024 Surety Events
Accolades
About the WCS Surety Today TeamSurety Today: The Blog is brought to you by your friends and counsel at the Surety and Fidelity Law Group at Wright, Constable & Skeen, LLP.
AccoladesThe WCS Surety Law Group’s drive for excellence has secured our firm and surety team a variety of awards and recognitions on the media.
Where We AreThe WCS Surety Group is very active in the surety industry. In this section you can see where we are, where we’ve been and where we’re going.
Recent SuccessesIt might be a judgment won, case won, motion won, favorable settlement, or something else the Surety Law Group is proud of. Be sure to check back frequently to see how we are doing.