Illinois Legal Update Patrick M. Miller, Partner ILLINOIS Legal - - PowerPoint PPT Presentation

Patrick M. Miller, Partner

Illinois Legal Update

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

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Case Law Update

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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

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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,

• bservation 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

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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

• f construction , or construction of an improvement to real property”

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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

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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

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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

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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

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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
• ut of fraudulent misrepresentations or to fraudulent concealment of causes
• f action.”

– 5 year statute of limitations (735 ILCS 5/13-205) on fraudulent misrepresentation claims

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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

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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

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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

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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

• f substantial completion

– Express contractual indemnification provision in GC’s contract favoring Developer

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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

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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

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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

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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.”

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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.

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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)

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Cityline Construction Fire and Water Restoration, Inc. v. Roberts, 2014 IL App (1st) 130730 (1st Dist. 2014)

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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

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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

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Legislative Update

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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

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Condominium Property Act Amendment Public Act 098-1068 (HB 4783)

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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”

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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

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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

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Mechanics Lien Act Amendment Public Act 098-0764 (SB 3023)

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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

• f its construction loan proceeds have been disbursed

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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

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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?

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