Illinois Legal Update Patrick M. Miller, Partner
ILLINOIS Legal Update Case Law Update: Limitations periods applicable to construction related and indemnification claims Strict application of affidavit requirements in Mechanic s Lien Act Legislative Update: Dispute resolution in condo association vs developer claims Mechanic s lien subordination 2
Case Law Update 3
Fireman s Fund Ins. Co. v. Rockford Heating & Air Conditioning, Inc., 2014 IL App (2d) 130566 Project: New commercial building Developer/Builder installed temporary hanging furnaces to allow floor installation work to proceed during winter Developer/Builder hired HVAC trade contractor to install ventilation system for furnaces Problem: Ventilation system failed causing fire loss Lawsuit: Insurer for Developer/Builder paid loss and sued HVAC trade contractor for negligence as subrogee 4
Fireman s Fund Ins. Co. v. Rockford Heating & Air Conditioning, Inc., 2014 IL App (2d) 130566 Relevant limitations periods: 4 year statute of limitations (735 ILCS 5/13-214(a)) on construction related claims (a) Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. 5 year statute of limitations (735 ILCS 5/13-205) on generic injuries to real property 5
Fireman s Fund Ins. Co. v. Rockford Heating & Air Conditioning, Inc., 2014 IL App (2d) 130566 HVAC trade moved to dismiss because negligence claim was filed 4 years and 3 months after fire, relying on 4 year limitations period as a complete defense Insurer for Developer/Builder argued 5 year statute of limitations applied because ventilation system for the furnaces was only temporary and was not the design, planning, supervision, observation or management of construction, or construction of an improvement to real property 6
Fireman s Fund Ins. Co. v. Rockford Heating & Air Conditioning, Inc., 2014 IL App (2d) 130566 Trial court s ruling: 4 year limitations period applied HVAC trade s motion to dismiss granted Appellate court affirmed: Decision turned on definition of improvement and whether the ventilation system was an integral part of the entire operation. Temporary nature of an improvement makes no difference the ventilation system, although a temporary installation, was an essential step in the installation of an improvement to the property and that, under the language in section 13-214(a), Rockford Heating s activities fall under its purview. The legislature intended to have the 4 year statute apply to anyone who is involved in the construction of an improvement 7
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) Project: New elementary school in Benld, Illinois (Macoupin County), completed in 2002 Problem: Mine subsidence beneath school in 2009 caused extensive structural damage and building was condemned 8
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) Lawsuit: School District sued Architect for: professional negligence, breach of implied warranty, and fraudulent misrepresentation 9
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) What happened? Architect was hired to provide pre-design and construction services, which included a charge to investigate and examine the extent of mining in the Gillespie/Benld region. Architect hired Engineer to investigate risk of mine subsidence Engineer provided Architect a detailed Letter specifically explaining the relatively high risk of subsidence in the area with maps and historical examples of subsidence events Engineer later provided a Subsurface Investigation Report, vaguely discussing the risk without also attaching the detailed Letter Architect provided the Engineer s Report to the School District, but not the detailed Letter School District decided to proceed with construction at the site 10
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) Architect s contract (AIA) contained a claim accrual provision (Article 1.3.7.3) establishing all causes of action accrued on date of substantial completion Relevant limitations periods: 4 year statute of limitations (735 ILCS 5/13-214(a)) on construction related claims (e) The limitations of this Section shall not apply to causes of action arising out of fraudulent misrepresentations or to fraudulent concealment of causes of action. 5 year statute of limitations (735 ILCS 5/13-205) on fraudulent misrepresentation claims 11
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) School District s 2009 lawsuit alleged Architect s failure to include the Engineer s Letter specifically outlining the subsidence risks induced a false belief by the School District concerning the likelihood of a problem Architect moved for summary judgment, arguing: The contractual claim accrual provision started the clock on the School District s claims in 2002 (date of substantial completion), and therefore: 4 year limitations period barred professional negligence and implied warranty claims 5 year limitations period barred fraud claim 12
Gillespie Comm. Unit School Dist. No. 7 v. Wight & Co., 2014 IL 115330 (2014) Trial and Appellate Courts agreed School District did not challenge contractual claim accrual provision or application of 4 year limitations period Instead argued the fraud claim survived because no limitations period applied based on language in 5/13-214(e) Supreme Court made clear that: 5/13-214(e) does not mean a fraud-based construction claim may be brought at any time It merely means the 4 year construction limitations provision does not apply to fraud-based construction claims, which are subject to the 5 year period in 5/13-205 Court specifically withheld ruling on whether contractual claim accrual provisions apply to fraud claims 13
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Project: Twin condominium towers in University Village, approx. 900 units, constructed in 2003-04 Problem: Water infiltration due to improperly sloped balconies, poor flashing, etc.
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Lawsuit: Construction defect action brought against Developer by condo association in 2008 Developer filed third party claims against Architect and GC seeking, among other things, implied and contractual indemnification against the underlying defect claims Tolling agreement signed in 2009, third-party complaint filed in 2011 15
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Key contract provisions: Claim accrual provision establishing all causes of action accrued on date of substantial completion Express contractual indemnification provision in GC s contract favoring Developer 16
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Relevant limitations periods: 2 year statute of limitations (735 ILCS 5/13-204(b)) on implied indemnity claims 4 year statute of limitations (735 ILCS 5/13-214(a)) on construction related claims 10 year statute of limitations (735 ILCS 5/13-206) on generic written contract claims 17
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Architect and GC moved to dismiss the indemnification claims arguing: The contractual claim accrual provision applied to third party indemnification claims The 2 year limitations period barred implied indemnity against Architect The 4 year limitations period barred express indemnity against GC since this is a construction contract Developer argued: Claim accrual provision did not apply to third party indemnification claims because if it did those claims would expire before the Developer may be sued Therefore, claim did not accrue until Developer was served with lawsuit 10 year limitations period applied to express indemnity claim 18
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 Trial court ruling: Claim accrual provision enforceable and applied, even to third party indemnification claims that did not materialize before limitation period expired 2 year limitations period barred implied indemnity against Architect 4 year limitations period barred express indemnity against GC Court of Appeals affirmed in part and reversed in part: Affirmed contractual claim accrual provisions enforceable in IL, even for third party indemnification claims, where contracting parties are sophisticated entities Affirmed 2 year limitations provision barred implied indemnity claim against Architect 19
15th Place Condominium Ass n v. South Campus Development Team, LLC, 2014 IL App (1st) 122292 But Court reversed on the express indemnity claim against GC: Even though this is a construction contract, nature of the express indemnity claim is failure to provide the agreed upon indemnification 10 year limitations period therefore applied Because the nature of the claim was Linn-Mathes refusal to indemnify, any potential liability arises out of Linn-Mathes failure to indemnify SCDT rather than any acts or omissions relating to construction-related activity. 20
Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014) Project: $400,000+ residential rehab following fire loss (no written contract) Problem: Owner refused to pay, Contractor timely filed mechanic s lien. 21
Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014) Lawsuit: Contractor sued to enforce lien, breach of contract, and quantum meruit Issue: Contractor did not strictly comply with 5 of the Mechanic s Lien Act (770 ILCS 60/5) 22
Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014) 23
Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014) It was undisputed Owner requested the 5 affidavit, but Contractor never provided one. Owner moved for summary judgment to invalidate the Contractor s lien. Contractor argued failure to provide the Section 5 affidavit should not invalidate its lien because Owner suffered no prejudice since all subcontractors were paid and work was completed. Trial court granted Owner s motion for summary judgment 24
Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014) Appellate Court affirmed: Strict compliance with the Mechanic s Lien Act is required in all respects Equitable considerations are irrelevant Fact that all subcontractors were paid did not excuse Contractor s failure to provide the 5 affidavit upon request by the Owner Breach of contract and quantum meruit claims are unaffected 25
Legislative Update 26
Condominium Property Act Amendment Public Act 098-1068 (HB 4783) Every condominium is formed by the filing of a declaration of covenants by the declarant (i.e. developer) in accordance with the Illinois Condominium Property Act (765 ILCS 605/1 et. seq.) Declaration contains numerous covenants and restrictions that run with the land and govern the community Condominium declarations typically provide: Certain percentage (i.e. 75%) of unit owners must approve special actions like a lawsuit (i.e. construction defect) against condominium developer before it can be filed Mandatory mediation, then arbitration, to resolve all disputes (i.e no court proceedings) But if somehow a case is heard in court, complete waiver of right to jury trial 27
Condominium Property Act Amendment Public Act 098-1068 (HB 4783) 28
Condominium Property Act Amendment Public Act 098-1068 (HB 4783) Changes to 18.8 of the ICPA declare void as against public policy : Unit owner approvals to take any action including: Filing lawsuits in court; and Making a jury demand Requiring mediation or arbitration in claims against declarants or developers Demanding a jury trial in any action 29
Condominium Property Act Amendment Public Act 098-1068 (HB 4783) Potential challenges: Retroactive effect? Contrary to the same public policy supporting Illinois Arbitration Act (710 ILCS 5/1 et. seq.) and/or Federal Arbitration Act (9 U.S.C.A. 1 et. seq.)? Appears to conflict with other requirements for obtaining unit owner approvals (i.e. amending declaration, consolidating common areas, etc) Implications for the construction industry: Past work on condominiums may not be subject to alternative dispute resolution despite prior agreements Increased exposure to costly court process, jury trials moving forward rather than typically cost efficient alternative dispute resolution 30
Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023) Existing language of 770 ILCS 60/1(d) declared unenforceable and against public policy : an agreement to waive any right to enforce or claim any lien under the Act where: the agreement is in anticipation of and in consideration for the awarding of a contract to perform work or supply materials for an improvement upon real property Did not prohibit agreements to subordinate such a lien to construction loans 31
Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023) 32
Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023) The Act now also prohibits agreements to subordinate mechanic s liens to liens securing construction loans but not if those agreements are made after more than 50% of the loan has been disbursed to fund improvements to the property Allows construction lender to achieve the protection offered by subordination of mechanics lien rights, but it must wait until half or more of its construction loan proceeds have been disbursed 33
Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023) Additional amendment to 21(b) provides that subcontractors may be subject to the subordination agreement if the contract between the contractor and subcontractor expressly provides for such subordination 34
Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023) Potential challenge: Does an increase or change in the amount of a construction loan after 50% distribution of the initial loan amount (i.e. due to changes, etc) invalidate existing agreements to subordinate? 35