Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 22

FACTS Neumann Homes, Inc., entered into a contract to make public improvements for the Village of Antioch, Illinois. Neumann subcontracted the grading work required by the contract to Lake County Grading Company. Lake County completed the work but was not paid in full. When Neumann declared bankruptcy, Lake County was unable to obtain further payment from the general contractor.
Lake County then filed a suit in an Illinois state court against the Village of Antioch to recover. Lake County contended that a state statute, and the contract between Neumann and the city, conferred third party beneficiary status on Lake County, thus permitting it to sue the city for breach by not requiring Neumann to post a payment bond in its benefit. (A payment bond guarantees that a contractor will pay what is owed for completion of a project.) The court agreed and issued a summary judgment in Lake County's favor. The city appealed.
ISSUE Was Lake County an intended third party beneficiary of the contract between the Village of Antioch and Neumann and thus able to pursue a claim of breach against the city?
DECISION Yes. A state intermediate appellate court affirmed the summary judgment in Lake County's favor.
REASON The reviewing court concluded that Lake County was an intended third party beneficiary of the contract between Neumann and the city. As a third party beneficiary, Lake County had the right to bring an action for breach of the contract. A person's status as a third party beneficiary depends on the contract language. "The contract language must show that the contract was made for the direct, not merely incidental, benefit of the third party. Such an intention must be shown by an expressed provision in the contract identifying the third-party beneficiary by name or by description of a class to which the third party belongs."
Additionally, Illinois law requires that as part of its agreement with a general contractor, any public entity, such as a city or town, "shall require every contractor for the work to furnish, supply, and deliver a bond." The bond shall be conditioned for the completion of the contract, for the payment of material used in the work, and for all labor performed in the work, including work completed by subcontractors. The city had agreed that Neumann was to construct the public improvements using subcontractors that Neumann had selected. Therefore, the city had breached its contract when it failed to require Neumann to furnish a payment bond for the benefit of subcontractors.
For critical analysis-Economic Consideration Did the plaintiff obtain the remedy that it sought in this case? Explain.