Kammer Asphalt Paving Co. v. East China Township Schools

504 N.W.2d 635, 443 Mich. 176

• Court: Michigan Supreme Court
• Decided: August 3, 1993
• Docket: 93937, (Calendar No. 3)
• Status: Published

Opinions

Riley, J.

Because we find that MCL 129.201 et seq.; MSA 5.2321(1) et seq. imposes upon a governmental unit¹ the duty to verify the validity of a payment bond furnished by a general contractor of a public works project, we reverse the Court of Appeals affirmance of summary disposition with regard to plaintiff’s negligence count. Similarly, because we find that defendant may have inequitably received the benefit of plaintiff’s labor and materials, we reverse the Court of Appeals affirmance of summary disposition with regard to plaintiff’s unjust enrichment and constructive trust counts. Finally, we affirm the Court of Appeals affirmance of summary disposition with regard to the third-party beneficiary count because plaintiff is not a third party within the meaning of MCL 600.1405; MSA 27A.1405._

I

Because plaintiff’s complaint was dismissed on summary disposition, we view the facts in the light most favorable to plaintiff. Stevens v McLouth Steel Products Corp, 433 Mich 365, 370; 446 NW2d 95 (1989).

On April 23, 1987, defendant, East China Township Schools, entered into a general construction contract with a general contractor, Dougherty Construction, Inc., for the construction and renovation of athletic facilities in the district.² As required by the public works act,³ Dougherty furnished defendant a performance bond⁴ and a payment bond.⁵ The bonds were standard, preprinted, American Institute of Architects forms, with the name of the surety, American Seaboard Indemnity & Insurance Company of Peachtree City, Georgia, printed across the top of each bond.

Dougherty entered into a contract with plaintiff, subcontractor Kammer Asphalt Paving Co, for certain base and paving work. In consideration of plaintiff’s services, Dougherty agreed to pay Kammer $217,906. In October of 1987, plaintiff notified Dougherty, as well as the school district, of its intended performance and its reliance upon the payment bond.

In accordance with the general contract, the project’s architect, DiGeronimo Associates, disbursed progress payments to Dougherty as the project advanced. Dougherty, however, was not as consistent in paying the project’s subcontractors. When various subcontractors, including plaintiff, repeatedly expressed concern over Dougherty’s failure to compensate them, defendant, DiGeronimo, and Dougherty all indicated that they need not worry because the payment bond protected the subcontractors’ interest.

On August 15, 1988, defendant discovered that the furnished bonds were invalid and unenforceable — American Seaboard Indemnity & Insurance Company did not exist. Dougherty ignored defendant’s subsequent demands for valid bonds. On October 21, 1988, defendant issued a notice of termination to Dougherty because of its failure to furnish the required bonds, at which time plaintiff first became aware of the fraudulent nature of the bonds.

Defendant then filed suit in St. Clair Circuit Court against Dougherty Contractors and William Dougherty. In a separate action, plaintiff filed suit against Dougherty, DiGeronimo, defendant, and various members of the East China School Board. Four other subcontractors separately filed similar actions. In response to defendant’s motion, the trial court consolidated the subcontractors’ five separate suits with defendant’s action against Dougherty.

Following consolidation of the lawsuits, defendant filed a countercomplaint and third-party complaint for interpleader, naming all of Dougherty’s subcontractors as parties. Defendant sought to deposit the remaining contract funds⁶ with the trial court for a determination regarding its proper distribution. Defendant proposed that the fund first be applied to pay for completion of the project, with any remaining funds to be distributed to the unpaid subcontractors on a pro-rata basis.⁷

On March 16, 1989, defendant filed a motion for summary disposition pursuant to MCR 2.116(C)(8) and (10) with regard to the subcontractors’ claims against the school district. The circuit court granted defendant’s motion, finding no legal duty for governmental units to ensure the validity of the bonds, which foreclosed the subcontractors’ negligence claim.⁸ Furthermore, the court found that the subcontractors’ unjust enrichment, constructive trust, and breach of contract to a third-party beneficiary claims were unsupportable. The Court of Appeals affirmed in an unpublished per curiam opinion. This Court granted plaintiff’s application for leave to appeal on December 8, 1992.⁹ 441 Mich 894.

II

Because materialmen and contractors may not obtain a mechanics’ lien on a public building,¹⁰ the Legislature requires the posting of performance and payment bonds by a general contractor before construction on a public building may commence. MCL 129.201 et seq.; MSA 5.2321(1) et seq.11 Payment bonds are "solely for the protection of claimants . . . supplying labor or materials to the principal contractor or his subcontractors in the prosecution of the work provided for in the contract.” MCL 129.203; MSA 5.2321(3).¹² The bond, therefore, must be "executed by a surety company authorized to do business in the state.” MCL 129.204; MSA 5.2321(4). The Legislature further protects subcontractors by mandating that public units provide subcontractors a certified copy of a submitted bond if they submit an affidavit that they are unpaid for services or materials. MCL 129.208; MSA 5.2321(8). Furthermore, such a certified copy "shall be prima facie evidence of the contents, execution, and delivery of the original.” Id.13

The Court of Appeals, relying on prior authority,¹⁴ held that "[t]here is no duty imposed on the contracting governmental unit to insure that payment bonds are kept current or to warn subcontractors or material suppliers of the expiration of a bond.”¹⁵ The Court, therefore, granted defendant’s motion for summary disposition with regard to the negligence count.¹⁶

The dissent, however, fails to examine the current statute as a whole. "In every exposition of a statute, the intention of the Legislature is undoubtedly the end to be sought . . . .” Leoni Twp v Taylor, 20 Mich 148, 154-155 (1870). Thus, when legislative intent is clearly revealed in an unambiguous statute, the plain language of the statute must be enforced. Farm Products Co v Jordan, 229 Mich 235, 239; 201 NW 198 (1924). Nevertheless, because "a clause which, standing by itself, might seem of doubtful import, may yet be made plain by comparison with other clauses or portions of the same law,” a fundamental principle of statutory interpretation is that "the whole is to be examined with a view to arriving at the true intention of each part . ...” 1 Cooley, Constitutional Limitations (8th ed), p 127.¹⁷ If judicial construction is necessary, the Court must discern the Legislature’s intent by examining "the object of the statute, the harm which it is designed to remedy, and apply a reasonable construction which best accomplishes the statute’s purpose.” In re Forfeiture of $5,264, 432 Mich 242, 248; 439 NW2d 246 (1989).

Utilizing these principles, an examination of MCL 129.208; MSA 5.2321(8) reveals that it unambiguously provides that a government entity verifies the validity of a payment bond when it provides a certified copy of the bond at the request of a subcontractor.¹⁸ In the instant case, therefore, the statute imposes the risk of the invalidity of such bonds upon the government entity.¹⁹ This interpretation of the statute is aligned with its avowed purpose to protect subcontractors in the absence of mechanics’ liens for public works. Furthermore, the statute’s requirements that the bond be submitted to the government entity,²⁰ the bond be executed by a validly licensed company,²¹ and filed in the office of the government entity,²² all strongly confirm that the statute imposes upon the government entity the duty to verify the validity of such bonds.²³ To hold otherwise would be to render the statutory requirement of payment bonds meaningless.

In the instant case, plaintiff requested and was provided copies of the bonds nearly a year before the termination of the project, at which time defendant certified that the bonds were properly executed. Plaintiff, therefore, is entitled to proceed on the negligence count because defendant’s provision of the certified copies was prima facie evidence that the bonds were valid, and defendant is liable for the resulting damages stemming from its failure to verify the bonds’ validity.²⁴

III

Even though no contract may exist between two parties, under the equitable doctrine of unjust enrichment, "[a] person who has been unjustly enriched at the expense of another is required to make restitution to the other.” Restatement Restitution, § 1, p 12. The remedy is one by which "the law sometimes indulges in the fiction of a quasi or constructive contract, with an implied obligation to pay for benefits received” to ensure that " ’exact justice’ ” is obtained. Detroit v Highland Park, 326 Mich 78, 100; 39 NW2d 325 (1949), quoting Cascaden v Magryta, 247 Mich 267, 270; 225 NW 511 (1929). Because this doctrine vitiates normal contract principles, the courts "employ the fiction with caution, and will never permit it in cases where contracts, implied in fact, must be established, or substitute one promisor or debtor for another.” In the instant case, the Court of Appeals held that summary disposition was correct with regard to this count because "even though the School District received a benefit from the subcontractors, it is not unjust under the circumstances that the benefit be retained.”²⁵ Viewing the facts in the light most favorable to plaintiff, if reasonable minds could differ over the legal conclusion of the instant case, summary disposition was inappropriate. DiFranco v Pickard, 427 Mich 32, 54; 398 NW2d 896 (1986).

A

The Court of Appeals analysis must be rejected because defendant failed to notify plaintiff of the fraudulent nature of the bonds after it had assured plaintiff the bonds would secure its interests. Defendant was aware over a year before the termination of the contract that Dougherty was failing to compensate plaintiff and other subcontractors, and plaintiff repeatedly informed defendant of its reliance upon the bonds to secure compensation. Indeed, defendant indicated that there was no need to worry because the payment bond protected the subcontractors’ interest. However, defendant knew for approximately seventy-five days that the bonds were fraudulent, and never notified plaintiff until after it terminated its contract with Dougherty. Standing alone, these facts sufficiently support a claim of unjust enrichment. Furthermore, as soon as difficulties arose — nearly a year before the termination of the contract — defendant verified the validity of the bonds by supplying plaintiff with certified copies of the bonds. In these circumstances, regardless of its fulfillment of the contract to the general contractor, once defendant possessed actual knowledge of the invalidity of the bonds and failed to inform plaintiff, reasonable minds could find that defendant was unjustly enriched. Cf. City of Ingleside v Stewart, 554 SW2d 939, 945 (Tex Civ App, 1977).²⁶

B

Whether defendant was unjustly enriched before actual knowledge of the invalidity of the bonds is a closer issue. Although plaintiff indirectly provided defendant a benefit, its contract was with Dougherty, and the benefit it provided was in exchange for compensation. The risk of nonpayment could be understood to rest with plaintiff.²⁷ Moreover, defendant paid the general contractor $1,3 million for the work performed. Plaintiff, however, was permitted to assume the submitted bonds were valid once it received copies of the bonds, and defendant repeatedly assured plaintiff of payment because of the bonds. Hence, equity demands plaintiff be permitted to go forward with this count for those damages that arose after certification of the bonds and verbal assurances of protection by the bonds were given by defendant.

IV

A constructive trust may be imposed "where such trust is necessary to do equity or to prevent unjust enrichment . . . .” Ooley v Collins, 344 Mich 148, 158; 73 NW2d 464 (1955). Hence, such a trust may be imposed when property " 'has been obtained through fraud, misrepresentation, concealment, undue influence, duress, taking advantage of one’s weakness, or necessities, or any other similar circumstances which render it unconscionable for the holder of the legal title to retain and enjoy the property ....’” Potter v Lindsay, 337 Mich 404, 411; 60 NW2d 133 (1953), quoting Racho v Beach, 254 Mich 600, 606-607; 236 NW 875 (1931).²⁸ Accordingly, it may not be imposed upon parties "who have in no way contributed to the reasons for imposing a constructive trust.” Ooley, supra at 158. The burden of proof is upon the person seeking the imposition of such a trust. MacKenzie v Fritzinger, 370 Mich 284; 121 NW2d 410 (1963). The Court of Appeals held that plaintiff failed to allege sufficient facts necessary to establish such a cause of action.²⁹

Plaintiff alleges that defendant " 'misrepresented’ the existence of a payment bond to satisfy subcontractor claims.” Examining the evidence in the light most favorable to plaintiff, defendant verbally assured plaintiff that it was protected by the bonds and certified their validity when it provided certified copies of them. Plaintiff may prove at trial that it would not have continued construction without relying upon this representation. If so, defendant received the benefit of plaintiff’s labor, and a constructive trust could have been established. Hence, the Court of Appeals decision is reversed with regard to this count.

V

Plaintiff further suggests that the Court of Appeals erred in denying its third-party beneficiary claim. MCL 600.1405; MSA 27A.1405 defines third-party beneficiaries and the rights they possess:

Any person for whose benefit a promise is made by way of contract, as hereinafter defined, has the same right to enforce said promise that he would have had if the said promise had been made directly to him as the promisee.

(1) A promise shall be construed to have been made for the benefit of a person whenever the promisor of said promise has undertaken to give or to do or refrain from doing something directly to or for said person.

The Court must objectively determine "from the form and meaning of the contract itself” whether a party is a third-party beneficiary as defined in MCL 600.1405; MSA 27A.1405. Guardian Depositors Corp v Brown, 290 Mich 433, 437; 287 NW 798 (1939).

In the instant case, plaintiff may not recover as a third-party beneficiary because defendant was the promisee of the bonds, not the promisor. The contract between Dougherty and defendant did not contain promises on behalf of plaintiff. In fact, contract provision 1.1.2 explicitly states that "[n]othing contained in the Contract Documents shall create any contractual relationship between the Owner or the Architect and any Subcontractor or Sub-subcontractor.” Quite simply, "plaintiff is asserting the claim against the wrong party.” Reed & Noyce, Inc v Muni Contractors, Inc, 106 Mich App 113, 119; 308 NW2d 445 (1981).

At best, plaintiff is an incidental beneficiary of the general contract. As noted by this Court in Greenlees v Owen Ames Kimball Co, 340 Mich 670, 676; 66 NW2d 227 (1954), plaintiff has no remedy under the contract between Dougherty and defendant:

"An incidental beneficiary has no rights under the contract. A third person cannot maintain an action upon a simple contract merely because he would receive a benefit from its performance or because he is injured by the breach thereof. Where the contract is primarily for the benefit of the parties thereto, the mere fact that a third person would be incidentally benefited does not give him a right to sue for its breach.”

The Court of Appeals dismissal of the third-party beneficiary claim, therefore, is affirmed.

VI

Because we find that MCL 129.201 et seq.; MSA 5.2321(1) et seq. imposes upon a governmental unit the duty to verify the validity of a payment bond furnished by a general contractor of a public works project, we reverse the Court of Appeals affirmance of summary disposition with regard to plaintiff’s negligence count. Similarly, because we find that defendant may have inequitably received the benefit of plaintiff’s labor and materials, we reverse the Court of Appeals affirmance of summary disposition with regard to plaintiff’s unjust enrichment and constructive trust counts. Finally, we affirm the Court of Appeals affirmance of summary disposition with regard to the third-party beneficiary count because plaintiff is not a third party within the meaning of MCL 600.1405; MSA 27A.1405.

Levin, Brickley, Boyle, and Mallett, JJ., concurred with Riley, J.

1 To avoid confusion, this opinion will utilize the terms governmental unit or entity to encompass not only the contracting governmental unit but also its representatives.

2 The contract price, adjusted for additional work and change orders, was $1,504,195.36.

3 MCL 129.201 et seq.; MSA 5.2321(1) et seq.

4 A performance bond assures completion of a project in the event of default by the general contractor. This type of bond protects the owner of the property.

5 A payment bond assures payment to subcontractors who furnish supplies, labor, or equipment.

6 The total general contract price was $1,504,195.36. Before terminating the general contract, defendant disbursed $1,224,370.80 to Dougherty, leaving $279,824.56 remaining.

7 In a separate proceeding, the trial court implemented defendant’s proposed plan. As a result of the interpleader action, plaintiff received $37,923.64, reducing the amount owed it to $140,000.

8 The plaintiff’s challenge, regarding its negligence claim, focuses solely on the potential statutory duty delegated by the public works act. Plaintiff has not alleged that defendant acted in a manner that would require application of an exception to the doctrine of governmental immunity. See Richardson v Jackson Co, 432 Mich 377, 387, n 11; 443 NW2d 105 (1989); Ross v Consumers Power Co (On Rehearing), 420 Mich 567; 363 NW2d 641 (1984). We will not address this issue because it is not properly before the Court.

9 The other subcontractors did not appeal the Court of Appeals holding, therefore, they are not parties to the instant appeal.

10 See Knapp v Swaney, 56 Mich 345, 347; 23 NW 162 (1885); Ford v State Bd of Ed, 166 Mich 658, 660; 132 NW 467 (1911).

11 The Court of Appeals has explained:

The necessity for providing some means of protecting contractors, subcontractors, laborers, or materialmen, who perform labor or furnish materials for improvement of real property has • been recognized in this state prior to the time that it was a state. See 2 Territorial Laws 331 (1827). . . .

To [fulfill] the state’s basic policy to protect laborers and materialmen in construction work contracts . . , the Legislature adopted the forerunner of [MCL 129.201 et seq.; MSA 5.2321(1) et seq.]. The purpose of that statute was to provide protection in the construction of public buildings where protection is not afforded by the mechanics’ lien law .... [Milbrand Co v Dep’t of Social Services, 117 Mich App 437, 440; 324 NW2d 41 (1982).]

See also Adamo Equipment Rental Co v Mack Development Co, Inc, 122 Mich App 233, 236; 333 NW2d 40 (1982).

12 MCL 129.206; MSA 5.2321(6) defines "claimant” to include subcontractors such as plaintiff. MCL 129.207; MSA 5.2321(7) outlines the procedure by which a claimant may recover funds under a payment bond.

13 MCL 129.203; MSA 5.2321(3), however, mandates that payment bonds need only be posted "in an amount fixed by the governmental unit but not less than twenty-five percent of the contract amount . . . .”

14 Fischer v City of Negaunee, unpublished opinion per curiam of the Court of Appeals, decided June 9, 1989 (Docket No. 109102).

15 Unpublished opinion per curiam of the Court of Appeals, decided April 28, 1992 (Docket No. 126596), p 2.

16 Id.

17 See also Collins v Secretary of State, 384 Mich 656, 666; 187 NW2d 423 (1971); Joslin v Campbell, Wyant & Cannon Foundry Co, 359 Mich 420, 426; 102 NW2d 584 (1960).

18 The dissent suggests that the language simply permits a subcontractor to "verify the validity of the payment bond furnished,” post at 201, but MCL 129.208; MSA 5.2321(8) provides that the certified copy is "prima facie evidence of the contents, execution, and delivery of the original.” If the statute was simply furnishing a mechanism for verification of the existence of a bond, it would not mandate that the certified copy was prima facie evidence of its execution and delivery, but would merely ensure that a copy be provided.

19 On the other hand, if plaintiff had never requested the copies, then it would possess no recourse because the risk of the invalidity would not have been imposed upon defendant. This is a sensible reading of the statute. After nonpayment by a general contractor, if subcontractors are willing to work without at least requesting copies of the bonds, then they assume the risk that no bonds (or invalid bonds) exist. If, however, subcontractors do take steps to ensure a bond exists, MCL 129.208; MSA 5.2321(8) permits subcontractors to presume that the bonds are filed and validly executed.

20 MCL 129.201; MSA 5.2321(1).

21 MCL 129.204; MSA 5.2321(4).

22 MCL 129.205; MSA 5.2321(5).

23 After noting that MCL 129.201 et seq.; MSA 5.2321(1) et seq. fails to include language from its predecessor, enacted by 1905 PA 187 and codified at MCL 570.101 et seq.; MSA 26.321 et seq., that explicitly provided that "it shall be the duty of the board of officers or agents, contracting on behalf of the [governmental unit], to require sufficient security by bond,” the dissent concludes that the current statute does not impose a statutory duty "to verify the validity of the payment bond furnished by a general contractor of a public works project.” Post at 201. Not only does the dissent fail to examine the current statute as a whole, its heavy reliance upon legislative history is misguided. The Legislature’s failure to provide explicitly for a duty to ensure the validity of the bonds is not controlling. First, the predecessor statute was entirely replaced by the current act. Contrary to the assertions of the dissent, the Legislature did not "remove the words imposing such a duty,” post at 193, but enacted a wholly different statutory framework to supersede the predecessor statute. As acknowledged by the dissent, "the former statute was repealed and 1963 PA 213 [was] enacted in its place . . . .” Post at 194, n 4. Second, the reforms appear to be focused upon eliminating individual liability for the breach of the duty in question. Third, the language, purpose, and structure of the statute reveal that such a duty was intended to exist.

24 In the instant case, the extent of damages is limited to the facial value of the invalid bond. If no bond existed, then damages would be limited to "25% of the contract amount . . . .” MCL 129.203; MSA 5.2321(3).

25 Slip op, p 2.

26 [T]he record clearly reflects that the City was aware that contractor Smith did not have a bond and chose to allow him to continue under his contract. It is entirely reasonable for a subcontractor to assume that the governmental agency, in executing a construction contract . . . will follow the law and require the general contractor to provide a bond. However, if such governmental agency should choose not to require the bond, then it should also not be heard to claim that a subcontractor’s only remedy for nonpayment is against the general contractor on the bond it did not require and that it knew he did not have.

Contrary to the assertions of the dissent, this analysis is independent of the status of the governmental entity, i.e., the city need not step into the shoes of the general contractor ,to be held liable for its failure to ensure a validly executed bond protects the subcontractors.

27 See Michigan Ass’n of Psychotherapy Clinics v Blue Cross & Blue Shield of Michigan (After Remand), 118 Mich App 505, 518; 325 NW2d 471 (1982).

28 See also Grasman v Jelsema, 70 Mich App 745, 752; 246 NW2d 322 (1976) ("[a] constructive trust may be based upon a breach of fiduciary or confidential relationship, misrepresentation, concealment, mistake, undue influence, duress or fraud”).

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