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A WIN FOR THE LITTLE GUY

Introduction:
This month’s edition of my newsletter provides a “war story” of a zoning matter with a successful result at the trial court level. It’s been awhile since I’ve sent out this newsletter. I’ll try to be more diligent in 2017 and trust you’ll find my articles of interest and of use. Remember I am here to provide the best legal advice and service that I can. If I can be of assistance I am only a phone call or email away. Also if you know of anyone who can use my services or those of our law firm I’d appreciate the referral.

A WIN FOR THE LITTLE GUY

My client is a hard working and honest man. He’s Mexican-American and English is not his first language. In 1982 he and his wife bought a parcel of property in unincorporated Cook County with a small house on it. My client and his wife took up residence on the property and he began his landscape business. Over the next three years my client acquired three adjacent properties; two of which had small houses on them. Eventually his sons moved into the houses and worked with their father and helped him make the business a success.

In 1988 an adjacent municipality approached my client and asked him to voluntarily annex two of his properties. This municipality was in a boundary war with another Village and wanted my client’s property so they could control the area. My client asked what was he going to get in return and was told he could “keep staying there and working there.” My client trusted the municipal officials who approached him and he and his wife signed a voluntary petition to annex two of their properties. Once these properties were annexed the other properties were surrounded and were forced annexed. Upon annexation as is customary the properties were zoned residential.

For the next twenty-seven years my client and his sons continued to reside on the properties and operated their landscape business. During this period numerous building permits were issued for improvements and one was for an eight foot fence along the west boundary of the properties that needed an exception because the height limit was six feet. Also during this twenty-seven year period violation notices were issued from time to time. Each time a violation was brought to my client’s attention he and his sons promptly corrected the problem.

In May of 2015 the Village issued a complaint for operating a landscape business in a residential district and operating a contractor’s yard without a special use permit. Obviously my client was surprised and shocked at the Village’s actions. He felt they had gone back on their promise that he would be able to stay at his property and continue to work there. Once I was retained I endeavored to settle the matter but the Village Board had directed staff to “shut down” any businesses that were operating in residential zoning districts regardless of the circumstances.

A zoning complaint such as the one issued to my client is first heard by an Administrative Hearing Officer. They are referred to as Administrative Law Judges. Generally they are attorneys hired by the municipality to conduct hearings and issue decisions. Their decisions are subject to what is called “Administrative Review” by the circuit court.

An administrative hearing was held in May of 2016. The Village put on its evidence and in defense I had my client testify as well as one of his sons. In addition I had a well regarded land planner testify. My client testified through an interpreter as to how he acquired the properties and started his landscape business. He testified as to how the Village asked him to annex and what they told him about being able to continue to operate. My client’s son testified as to how the business operates with trucks going out early in the morning and coming back late afternoon or early evening. There’s little activity during the day. Landscape materials are stored on the property but there are no high stockpiles and landscape waste is removed every few days. I had my client’s son go through each of the building permits that were issued and how one of the violation notices was because they were expanding the business from what it was when the property was annexed. My client’s son testified that the Village did not require him to remove the additional storage containers that had been brought onto the property but told him “just to keep it as it was.” A new house is being built just a lot or two away to the north and my client’s son estimated its cost of construction at five hundred to six hundred thousand dollars. Our expert in land planning testified that in his opinion there has been no adverse impact from the landscape business on the normal and orderly development of the area.

When I cross examined the Village’s Director of Community Development he admitted that he had been employed by the Village for twelve years and he always knew how my client’s property was being used. I got him to admit that he granted the exception that allowed the eight foot high fence because the Village wanted my client’s trucks and landscape operation screened from the adjoining residential street.

In closing argument I argued my client’s use of the property was a legal non-conforming use and that he had acquired a vested right to continue to operate as he had been for twenty-seven years. I also argued the legal theories of equitable estoppel and laches. Equitable estoppel can be applied to a municipality when a person’s action was induced by the conduct of municipal officers and where in the absence of relief the property owner will suffer a substantial loss and “the municipality would be permitted to stultify itself by retracting what its agents have done”. Laches is a doctrine that bars a plaintiff relief where because of the delay in the plaintiff asserting a right the defendant is misled or prejudiced.

I had warned my client that most likely we would lose before the Administrative Law Judge. Not because our case was weak or my legal arguments were not well founded. It’s just how the system works. Sure enough I was right and the Administrative Hearing Officer ruled against my client and found that his business was not a permitted “home occupation” and there was no basis to find a vested right had been acquired or that the doctrines of equitable estoppel or laches should apply. In addition he found my client’s use of the property was not a legal non-conforming use. My client authorized filing a lawsuit in the Circuit Court of Cook County for Administrative Review.

When a complaint for Administrative Review is filed the municipality is required to answer by filing the record that was made at the administrative hearing. This includes the transcript of the testimony and any exhibits that were introduced into evidence. On Administrative Review the trial court is not allowed to consider any additional evidence. The Judge is limited to reviewing the record that was made at the administrative hearing. This is why it is critical to get into the record anything you think is needed to succeed. You do not have an opportunity to add anything before the trial court.

Fortunately the trial judge was a former City of Chicago alderman and very familiar with zoning and its legal nuances. Once the Village filed the record I made a Motion for Judgment on the Pleadings. The Village filed a response and I filed a reply.

At the hearing the Judge directed his questions mainly to the Village attorney. The Judge started with questions regarding why my client’s business should not be considered a legal non-conforming use. It appeared the Judge was leaning in my client’s favor. I have done this long enough to know that when this occurs the best thing to do is say as little as possible. That’s what I did and before I knew it the Judge shifted gears and focused on our legal defense of “laches”. The Judge went through each and every time the Village issued a permit or inspected the property. He found especially compelling the inspection where the inspector noted on his report that my client was expanding the non-conforming use from what it had been at the time of annexation. The Judge also noted how the Village had issued an exception for the height limit of the fence because it wanted the commercial vehicles and landscape operation screened from the adjacent residential street.

The Judge stated that my client’s case was the “poster child” for the equitable defense of laches. I knew this was our strongest defense and emphasized the doctrine of laches in my initial brief and the reply I filed. Also I concentrated on this defense in the oral argument I made and specifically referred to the Illinois Appellate Court decision in Du Page County vs K-Five Construction. In K-Five, Du Page County was prevented from enforcing its zoning ordinance against a concrete batching plant that was an illegal use because the County waited five years from the time it knew of the illegal use. Obviously I argued that if five years was enough in K-Five then waiting twenty-seven years was far more egregious. Also in K-Five the Appellate Court noted that the County had failed to prove harm to the general public if its zoning ordinance was not enforced. I argued the same situation existed in my client’s case and this was borne out by the fact a house worth half a million dollars was being built two lots away.

The Judge ruled in my client’s favor and held that the Village cannot enforce its zoning ordinance against my client’s property and business. He’s allowed to continue to operate as he has been all these years. The Judge ruled that my client can’t expand his use but that’s fine and as it should be.

My client will have to wait and see if the Village appeals the trial court’s ruling. If it does I think we have a good chance of success at the Appellate Court level due to the manner in which the trial court went through each and every time a building permit was issued or a violation notice issued and nothing was done for over twenty-seven years to stop my client from doing what he had been told from the beginning he’d be allowed to do if he cooperated with the Village and annexed his property. My client always acted in good faith.

In my opinion justice has prevailed and a win obtained for the “little guy.” Hopefully the Village will see fit to leave my client and his business alone. If not we’ll move up to the Appellate Court and I trust the Appeals Court will agree with the trial court. In the meantime my client can continue to cut grass, prune bushes and plant flowers. However, this time of the year its snow plowing.

Subcontractor Contract Review; Subcontractor Pre-Qualification Requests; Developers Beware-You May Have to Live with What You Agree To

Subcontractor Contract Review

I am often asked to review subcontract agreements between those of you who are subcontractors and the general contractor you are going to work for. In a project like this I advise my clients that I will take a practical approach to the contract review. I don’t nitpick the contract. If I did the process of obtaining work would be severely hampered. This is not what my clients need or want. I focus on what I view as the most important issues from a legal standpoint and business perspective. On business issues I point them out and ask that the client make a sound business decision as to how to approach the issue. On legal issues I may suggest modifications to the contract language or in certain instances suggest an entirely revised provision. The following are the usual issues that arise and the advice I give.

Notice provisions. A 24 hour time limit is too short and I recommend at least 72 hours. If there is a breach of contract on your part are you liable for consequential damages? Does anyone else besides the contractor you are working for have the right to reject your work? Permits: who is responsible for obtaining and who pays for them. If hazardous materials are encountered whose responsibility is it and are you compensated for demobilization and remobilization if the job is shut down. When does the warranty period for your work begin, one year from the time your work is completed or completion of the entire project. This can make a difference.

The indemnity provisions are a significant issue. Generally they are too broad and need modification. Under Illinois law you cannot indemnify another party for that person’s negligence.
What are the limitations on making claims for additional expenses, time limit and method for making the claim. Are there provisions for dispute resolution by mediation and arbitration? If so what is your position on this process and do you have to keep working while the mediation and arbitration takes place. If dispute resolution is by litigation are there any restrictions such as where a lawsuit has to be filed and/or waiver of the right to a jury trial.

Does the contract have a pay if paid clause. Most general contractor form contracts provide for this. Under Illinois law this provision is enforceable and you need to be aware of the risk it poses. What are the rights and responsibilities of each party under the termination for cause and termination for convenience provisions? If there is a suspension of work are you compensated for increased costs and demobilization and remobilization.

Retainage: What is the amount held back and when is it to be released. Is there a provision for reduction when the job reaches a certain level of completion? What are the insurance requirements? With regard to insurance I advise that you consult your broker as to what is being required and can you comply. Does the contract call for payment and/or performance bonds. If so, can you obtain them and who pays for them.

If your work is dependent on the work of others, what does the contract provide for detecting deficiencies. Generally the contract provides for you to report them otherwise you are deemed to have accepted the work and are responsible for how it affects your work. If payments to you are overdue is there an interest provision and when does it kick in? If you have a dispute with a sub-subcontractor or material supplier and they assert a lien on the project what are your responsibilities to resolve the issue, for example bond over.

Another issue of concern is what documents are incorporated by reference into the subcontract and what impact they have on the subcontract provisions. For example is the Owner-General Contractor contract made a part of your agreement. Are the Owner-General Contractor general conditions of the contract made a part of the subcontract. If there is a default or dispute on this job does the contract allow the general contractor to withhold payments from other jobs you are doing for him. Does the agreement prohibit subcontracting out portions of it or does it only allow you to do so with the general contractor’s permission?

These are the usual types of issues that arise in reviewing a subcontract agreement. I recommend to my clients who have me do this type of contract review that they maintain a library of these reviews. In this way if they work for the same general contractor on subsequent occasions they can use the prior review as a reference. In addition since most of these issues reoccur they can use a prior review to go over a new contract that they are asked to sign. This can make the process run more smoothly and contain legal expense.

Subcontractor Pre-Qualification Requests

Many general contractors have started to request that potential subcontractors submit pre-qualification statements before they are allowed to bid on projects or before a subcontract is awarded. Obviously the general contractors are trying to determine the financial strength and integrity of a subcontractor to avoid potential problems. I have seen a few of these forms and while for the most part they ask legitimate questions and want a subcontractor to submit basic operating information there are a few issues of concern. While asking about the structure of your company i.e. are you a corporation, partnership or limited liability company is proper, I see no reason to disclose who the shareholders or members are and their percentage ownership interest. Also these pre-qualification requests want your financial statements and information usually for the past three years. This is confidential information and I would advise furnishing this information only if the request provides at the very least that this information will be held in confidence. To be safe I would submit financial statements only if a confidentiality agreement is executed by the general contractor that gives you some relief should the sensitivity of this information be compromised. If you want a short and basic agreement for the general to sign please contact me and I can furnish one for you. Also perhaps you as a subcontractor should ask the general contractor for the same type of financial information especially in these difficult economic times. One form I have seen requires the subcontractor to sign the pre-qualification statement under oath and affirmatively state that none of the information provided is misleading. Obviously you should never provide inaccurate information but signing under oath raises significant issues not the least of which is liability for any misstatement even should it be non-intentional.

Developers Beware-You May Have to Live with What You Agree To

In a recent Illinois Appellate Court opinion a developer’s predecessor in interest sought and was granted a special use permit for a residential development that required 96 acres of the property be maintained as a golf course or other open space. The ordinance granting the zoning required execution of a restrictive covenant that required maintenance of the open space for 35 years unless the covenant was released by vote of five of the seven members of the Village’s board of trustees. Several years later the developer’s successor in interest approached the Village and requested that it be allowed to amend the zoning to permit the closing of the golf course, reduction of the open space from 96 acres to 51 acres and construction of approximately 350 new residential units on the once golf course land. The Village declined to release the covenant and refused to refer the rezoning request to its planning and zoning commission.

The developer’s successor in interest brought a lawsuit seeking to void the restrictive covenant and disconnect the property from the Village or in the alternative to force the Village to allow it to apply for the rezoning. The trial court held the restrictive covenant was valid but allowed the request for disconnection.

On appeal the Appellate Court upheld the trial court’s decision. The Appellate Court reasoned that one cannot agree to conditions in order to obtain a special use permit, take advantage of the special use in developing a portion of the land and then dispute the validity of the conditions. According to the Appellate Court, development of the land by the successor in interest’s predecessor was an acceptance of the benefits of the covenant along with the agreement to be bound for 35 years unless five of the Village’s trustees voted to release the covenant. The Appellate Court held that the trial court was correct in holding that acceptance of the covenant’s benefits prevents the successor in interest from seeking a release from the burdens of the covenant more that a decade later.

While the covenant regarding the open space was upheld, the Appellate Court also affirmed the trial court’s decision that the covenant did not prohibit the disconnection of the property from the Village. The covenant made no reference to any obligation to keep the property within the Village’s jurisdiction. Since the statutory conditions for disconnection were proven, disconnection of the property from the Village was allowed.

In this case, it appears that the original developer’s successor in interest may have won the battle but lost the war One has to wonder what good disconnection from the Village has if the covenant has to be followed in any future development of the land. Further development of the land as unincorporated property will still have to comply with the restrictive covenant and may not be as advantageous without certain municipal services. I wonder if a changed conditions argument may have helped the successor’s cause since it does not appear from the Appellate Court decision that this argument was made. The morale of the story is be careful as to what you agree to since you and your successors in interest may be bound to your agreement for some time to come.

General Contractor Contract Review; Amendment to Mechanic’s Lien Act; Zoning in a Home Rule Municipality – Rules and Procedures Need Not be Followed

General Contractor Contract Review

In the last issue of this newsletter I provided comments concerning issues that arise when I am asked to review for subcontractor clients a general contractor’s form contract. When doing this work for a general contractor in regard to an owner agreement many of the same issues arise. Provisions that deal with notice, consequential damages for breach, permits, hazardous materials, retainage (amount and reduction), indemnity and insurance are for the most part the same. However, there are certain issues that those of you who are general contractors confront when negotiating a contract with an owner that are different from those a sub encounters when dealing with you. The following are some of the owner/contractor issues I have seen and the advice I give when reviewing a contract or rider to a contract between the owner and general contractor

  • What is the effective date of the contract and how does this effect commencement of performance? Beginning construction should be related to when the building permit is issued and not just the signing of the contract.
  • When is substantial completion accomplished? It should not be dependent upon a final certificate of occupancy?. A temporary occupancy certificate should be sufficient along with minor punchlist items to complete. Also important is how long do you have to obtain substantial completion. This should be so many days from the effective date of the contract which again should be related to when the building permit is issued.
  • Is there a liquidated damages provision for not achieving substantial completion by the required date? If the owner wants this he should agree that if the project is completed early a bonus of a set amount per day is paid to you. A cap on these sums is something that is usually requested and is subject to negotiation.
  • Is there a limitation on the amount you are entitled to recover should you default on the contract? Are there any special requirements to obtain payment based upon the owner’s agreement with his lender? If the owner terminates the contract for no reason what are you entitled to recover? Payment only for work done and retention or also for loss of profit on the remainder of the work.
  • If a default occurs either by you or the owner is mediation and arbitration the required means of dispute resolution or is litigation permitted? In any event is the prevailing party entitled to recover attorney fees and costs. Any such provisions should be reciprocal.
  • Is there any special representations or warranty required regarding the work complying with local laws and ordinances? I have seen very broad provisions to this effect which need to be curtailed.
  • How are your subcontractors to be paid? Some contract provisions provide for direct payment by the owner which limits your control of the subcontractors.
  • Is there a provision that defines abandonment of the project on your part? I have encountered a provision that if work was not performed for ten consecutive days this constituted abandonment. In my opinion this was too short a period and I recommended it be changed to thirty days.
  • Is there a limitation on the amount you can charge for overhead and profit on extras? If so make sure the amount is sufficient to justify doing the work. Is there a provision for the owner’s architect to review and provide comments/approval of product data, samples and shop drawings within a reasonable time i.e. five to seven days from receipt.

These are some of the issues I have encountered in reviewing an owner/general contractor agreement. Resolving these types of issues at the beginning is important to a successful project. As I mentioned in last month’s issue when I review contracts for both subcontractor’s and general contractor’s I do not nitpick the contract or rider. I address the significant issues that can affect job performance and try to recommend language that is fair to both sides. If you encounter a particular problem I suggest that having me review the contract or particular provision at issue may be worth the cost to avoid future conflict.

Amendment to Mechanic’s Lien Act

Effective as of January 1, 2010 an amendment to the Illinois Mechanic’s Lien Act went into effect that pertains to an original contractor who works on an owner occupied single family residence. You are an original contractor if you contract with the owner of the property or one who the owner has authorized or knowingly permitted to contract for the improvement of the property. If you are going to work on an owner occupied single family residence then if you lien the property you now have to give written notice of the lien to the owner within 10 days after recording of the lien claim. If you do not give notice and as a result the owner is damaged before notice is given your lien is extinguished to the extent of the damages. This new provision now requires a second step that you did not have to do before if you fall into the category of an original contractor working on an owner occupied single family residence. The amendment does not apply to subcontractors and only applies to contracts that are made on or after its effective date, January 1, 2010.

Zoning in a Home Rule Municipality-Rules and Procedures Need Not Be Followed

A line of cases has developed that gives me concern as an attorney who does zoning and land development work. When I am representing a developer who seeks a zoning approval or someone who wants to challenge a municipal zoning decision, I look to the City’s or Village’s zoning ordinance to see what rules and provisions apply and what they state. However, if the City or Village is a home rule municipality, Illinois Supreme Court and Appellate Court decisions have held that a failure of the home rule City or Village to comply with its own self imposed regulations is insufficient to challenge the municipality’s zoning decision. A home rule municipality is any City or Village with a population over 25,000 or one that by referendum has chosen to be home rule. A County is home rule if its chief executive officer is elected by the electors of the County. The reason these decisions raise concern for me is if I am dealing with a home rule municipality what are the rules that apply?

In making these decisions the Illinois Supreme Court and Appellate Courts have emphasized that a municipal zoning decision is a legislative function. As such a home rule municipality has broad powers under the home rule provisions of the Illinois Constitution. Only when the zoning decision of a home rule municipality violates a provision of the Federal or State constitutions or violates the mandates of an applicable Federal or State statute will the courts intervene.

These decisions emanate from what I believe is a somewhat circumspect decision from a case that challenged a City of Chicago fuel tax ordinance. In that case the fuel tax ordinance was challenged on the grounds that it had been improperly removed from committee and therefore improperly adopted. The Appellate Court declined to review this assertion since there was no claim that the failure of the City Council to follow one of its own rules amounted to a violation of any constitutional or statutory provision. In my opinion this is far different than a home rule City or Village failing to follow the criteria or standards set forth in its own zoning ordinance.

The difficulty with these cases is clearly shown in an Appellate Court decision that dealt with the grant of a variance by the Village of Schaumburg for a room addition that was beyond the applicable rear yard setback. An abutting property owner challenged the grant of the variance. As is the case with almost all municipalities the Village’s ordinance set forth criteria for granting a variance. The Village’s zoning code provided that an applicant had to show there are practical difficulties or particular hardship in the way of carrying out the strict letter of the regulations of the ordinance. The Appellate Court held that since the granting of a variance was a legislative decision the Village did not have to follow its own standards as set forth in its zoning code and as long as the ordinance granting the variance was a rational means to accomplish a legitimate purpose it would be upheld. Failure to show what the Village’s zoning code provided as required for obtaining a variance was of no consequence.

Based on this line of cases, what they mean to me as a zoning attorney is that when dealing with a home rule municipality I do not need to be concerned with what the municipal zoning code provides with regard to standards for zoning relief. The mere failure of a home rule municipality to follow its own self imposed regulations in making a zoning decision is not in and of itself a constitutional violation. In order to challenge a home rule municipality’s zoning decision you need to make an independent claim of a constitutional violation such as procedural or substantive due process.

Procedural would be lack of notice or an opportunity to be heard. In order to claim a substantive due process violation it needs to be shown that the ordinance fails to pass a rational basis review under which legislative action will be upheld as long as it bears a rational relationship to a legitimate legislative purpose and is not arbitrary or unreasonable.

Dealing with a home rule municipality versus a non-home rule city or village with regard to zoning issues is different. The same rules do not apply.

Good Corporate Governance; Liability to your Surety – How Long?

Good Corporate Governance

If you are in business either as a Contractor, Subcontractor or Developer you most likely do so as a Corporation or more recently a Limited Liability Company. The reason for doing so is to insulate yourself from personal liability for the acts and/or omissions of the business. However, merely forming the business entity is not enough. You need to make sure that you are following legal formalities to maintain the protection the law provides for corporations and limited liability companies.

Many times a creditor of a business entity will try and pierce the corporate veil in order to impose personal liability on the shareholders and directors. This can be done if the corporation fails to hold appropriate annual meetings and keep minutes of them, commingles corporate and personal funds, fails to properly document transactions between shareholders and the corporation i.e. loans or does not issue proper stock certificates.

As business owners you are busy running your day to day operations and in the current economy just surviving is a major challenge. However, this seemingly mundane issue of keeping good corporate records is important. It can become even more so if your business encounters problems and you need to deal with creditors who will be looking to pierce the corporate veil and impose personal liability if they can. Some questions to ask and be prepared for are the following:

  1. Are you keeping minutes of meetings and properly documenting transactions that are not routine?
  2. Have you issued proper stock certificates and any new ones if the need arises, i.e. a new shareholder buys in or you gift stock to a child?
  3. Has the company been properly capitalized?
  4. Do not commingle personal and corporate funds. if shareholders make loans properly document them.
  5. Are all directors and officers taking an active part in the business operations?
  6. If transactions occur between the business and its owners i.e. you lease property to the business is it at market rates and properly papered with a lease that has all the usual terms and provisions?

The above list is not exhaustive but should give you an idea as to the types of issues that need to be addressed. Those of you who consult with me know that I strongly recommend that you let us provide corporate/limited liability company maintenance for you on an annual basis. You are busy with other business issues and usually don’t have time for this and may not think it important. However, this is what we do as lawyers and advisers to you. We charge a nominal fee for this service but I believe it is well worth the cost to make sure the insulation from personal liability is maintained. Those of you who have asked me about this issue know that I advise the nominal fee you pay us is “cheap insurance” to maintain proper corporate governance that can protect your personal assets should a business calamity occur. If we are not already doing this for you give me a call and I can give you more information about this service we provide.

Liability To Your Surety—How Long?

General Contractors that do public work are familiar with having to post payment and/or performance bonds. Sometimes the obligation for doing so is also placed on subcontractors for their part of the work. There are also private jobs where an owner will require a bond. In any event when you have to post a surety bond. the bonding company is going to require your personal guaranty to indemnify against any loss it sustains. When you give the guaranty and the indemnification your personal assets are liable to satisfy any judgment that is obtained against you. If your company defaults on the underlying construction contract and the surety has to come in and complete performance or pay creditors it will make a demand against you to indemnify for the losses it sustained. In a recent Illinois Supreme Court case the issue was how long does the bonding company have to file a lawsuit against you after it makes a demand and you fail to pay. Is the statute of limitations the four year statute that applies to construction improvements to real estate or is it the ten year statute of limitations that applies to written contracts?

In Travelers Casualty & Surety Company v Bowman the Illinois Supreme Court stated that in order to answer this question you have to look at the nature of the liability and not the nature of the relief that is sought. The four year statute of limitations applicable to construction improvements applies to the design, planning, supervision, observation or management of construction or construction of an improvement to real property. In order for this statute of limitations to apply, liability must rest on construction related activity. The Supreme Court held that this was not the basis upon which Travelers was seeking to impose liability on the individuals involved. Rather the liability at issue arose from a breach of the contractual duty to indemnify.

The construction company’s breach of the underlying construction contract resulted in the bonding company having to pay claims. Payment of these claims then triggered the individuals obligation to perform under the indemnity provisions of the bond. The individuals liability arose from their breach of their duty to indemnify and not from the construction company’s breach of the construction contract. Accordingly, the Illinois Supreme Court ruled that the bonding company had ten years from the date of the demand to bring an action against the individuals who had given their personal guarantees and agreed to indemnify the bonding company from its losses.

In these difficult economic times the possibility of defaulting on a contract is a real possibility. Things can just happen no matter how hard you try. The Travelers case lets us know how long the bonding company has to come after you. Its ten years which is a long period to have to have potential liability hanging over your head. While posting these bonds is something you cannot avoid if you are doing public work the Travelers decision lets you know for how long your personal assets are at risk should something go wrong.

Dispute Resolution – Litigation v. Mediation/Arbitration

When a construction dispute arises, it becomes necessary to decide whether litigation will be pursued or some other alternative dispute resolution mechanism. In some situations this decision was already made at the time the parties entered their contract. If the ALA form documents were used then a mediation/arbitration procedure will most likely have to be followed. However, even when the AIA documents have been used I will confer with my client and discuss the pros and cons of mediation/arbitration and determine if my client would prefer to litigate the matter or if circumstances exist such as the need to conduct discovery that we should still try to litigate.

It is well settled law that a contractual right to arbitrate can be waived like any other contractual right. Waiver will be deemed to have occurred when a party’s conduct has been inconsistent with the arbitration clause so as to indicate an abandonment of the right to arbitrate. Once a lawsuit has been filed you can claim that you no longer have the right to demand arbitration as you have waived that right and it is up to the other side to demand arbitration if they want it.

In determining whether to pursue alternative dispute resolution procedures it is generally thought they are more expeditious and less costly. My experience with the mediation/arbitration process leads me to advise that while the process is more expeditious, it is not less costly. The filing fees for mediation/arbitration are much more than to file a lawsuit. In addition the mediators/arbitrators charge significant hourly fees generally ranging from $400 to $600 or more. This can add up fast. There are no such hourly fees for a judge or jury in a lawsuit. Also you need to consider if more than one arbitrator is required by contract provision or by the rules of the agency administering the arbitration. Unless a case involves hundreds of thousands of dollars I personally see no reason for more than one arbitrator. I have been confronted with situations where a contract requires arbitration and the clause in the contract calls for multiple arbitrators and the amount in controversy is not that large. In these instances I have approached counsel for the other side and suggested that we agree to use only one arbitrator. In most cases the other side agrees since they realize that the expense of multiple arbitrators is not necessary.

Another possible disadvantage in arbitration is that discovery is not allowed or limited to a great extent. This may not be that much of a problem if the issues are straight forward and based primarily on documents. Also if the dispute has been going on for some time and the parties have been trying to settle then you have a good idea of what the other side is going to say. You also need to consider what agency is administering the arbitration. If it’s the ALA then the rules only allow for exchange of documents before the arbitration hearing. Some other agency’s rules allow for limited depositions. In most cases one for each side. Again the whole concept of mediation/arbitration is to streamline the process so extensive discovery is not going to bemediation/arbitration is to streamline the process so extensive discovery is not going to be allowed. In my experience limiting discovery does not hurt either side and does serve to expedite the process.

In determining whether to mediate and arbitrate a construction dispute I need to consider who the client is and what setting is best for that person. Mediation/arbitration provides for a more informal dispute resolution process. In one case I was involved in which required arbitration it would have been a disaster to litigate the case. My client was very knowledgeable about his construction business but he could not testify without using his hands to gesture and draw. While this was allowed in the arbitration it would not have been in a courtroom. I have had other clients who were extremely good witnesses in a courtroom and did quite well. The bottom line is I need to consider if my client is going to be more comfortable in an informal setting as opposed to a courtroom. In an arbitration proceeding, the rules of evidence are relaxed and the proceeding is private. No public record is made of the dispute nor the award that is made. However, another important consideration is the finality of the award. It is extremely difficult to vacate an arbitration award. Also there is no appeal from an arbitrator’s decision.

If mediation is required before arbitration, my experience is that mediation only has a chance to succeed if the process is treated seriously. It is necessary to be throughly prepared even though the mediation process is informal. Mediation gives an opportunity to determine how a neutral third party will react to the claim you have and the reasonableness of the settlement position you take. If a mediation is going to have a chance of success a well prepared presentation is needed that is well formulated and presented concisely. In a mediation it is necessary for me as the lawyer to not let the adversarial nature of good lawyering overtake the mediation process. The more conciliatory and cooperative the parties and their attorneys are the more likely an amicable resolution will be achieved.

If litigation is possible and determined to be the preferred means of resolving the dispute a determination needs to be made whether to request a jury trial or bench trial. I always confer with my client before making this decision. Some people distrust judges and would rather place their fate in a jury of their peers. In addition a trial by jury is a constitutional right. However, 1 always caution my construction clients regarding the complexities of construction litigation and what the public’s attitude is toward contractors. This is especially true when I represent homebuilders. I would almost never advise a homebuilder to demand a jury trial. ‘[‘his is not so because homebuilders don’t do good work but because the jury pool is most likely going to consist of at least some people who have had a problem with a builder. In such situations it is much better to take your chances with a judge and a bench trial than a jury.

A trial before a judge is much like a proceeding before an arbitrator. Even though the rules of evidence govern, in my experience in most bench trials almost all evidence is admitted. There is one important difference between a bench trial and an arbitration. You can appeal from a judge’s decision.

Regardless of which dispute resolution mechanism is chosen it is important to properly determine the facts and present them clearly and concisely. I always advise my contractor clients that just as they use an architect’s plans for construction of the building the complaint I prepare or the demand for arbitration that I submit is the blueprint for resolution of the dispute. To the greatest extent possible we need to get it right and do so the first time it is submitted so that amendments are not needed.

Regardless of whether the dispute is being litigated or arbitrated it is important to properly frame the claim and present it in the best manner possible. t advise my clients that it is extremely important that we know the facts, marshal the evidence such as job logs, time records etc., to support the claim. We need to present the case clearly, succinctly and be consistent. To the extent this is done and done well the more likely success will be achieved whether it’s in litigation or arbitration.

Lienable Services – Architects and Engineers Dilemma

If you are an architect or engineer and do work for a construction or land development project that does not go forward and your client fails to pay, do you have a mechanics lien that can be enforced to secure payment? In my opinion, the answer is yes but some Illinois Appellate Courts have a different view. I think they are wrong.

The Illinois Mechanics Lien Act (Act) provides that if you “perform any services or incur any expense as an architect, structural engineer, professional engineer…in, for or on a lot or tract of land for any such purpose” you have a lien. The phrase “for any such purpose” refers back to constructing improvements on the property. The Act does not say that if you are an architect or engineer there has to be an actual improvement of the property. However, some Illinois Appellate Court decisions have imposed this requirement.

A recent Appellate Court decision involved a situation where Power Holdings of Illinois LLC was a contract purchaser of property and intended to construct a coal gasification plant on the land it was acquiring. It contracted with an environmental firm to provide “air quality construction permitting and dispersion modeling services.” The environmental firm was to focus its permitting application process and efforts on securing construction permit approval for the property. The environmental firm did its work and was not paid. It recorded a mechanics lien and filed a lawsuit to enforce the lien. A motion to dismiss was filed and granted by the trial court. The environmental firm appealed.

The motion to dismiss argued that the environmental consulting services were performed to aid Power Holdings in determining if the land would meet the requirements of the Illinois Environmental Protection Agency for a coal gasification facility and that the services did not benefit the land directly or indirectly. The motion to dismiss further argued that the environmental firm did not provide any design or construction work. The Illinois Appellate Court upheld the dismissal of the complaint and stated in its decision that “the proper focus in determining the validity of a mechanic’s lien is whether the work actually enhanced the value of the land.” The Appellate Court went on to state in what I would characterize as a play on words “that the services rendered by the plaintiff were not for the purpose of improving the land but were for the purpose of determining whether Power Holdings should exercise its option to purchase the land and thereafter build a coal gasification facility thereon.” The Appellate court held these were not the type of services for which a lien can be filed and enforced under the Act.

In my opinion decisions such as the Appellate Court made in the environmental firm’s case are wrong for several reasons. First the courts are not distinguishing between an architect’s or engineer’s lien and that of a contractor, subcontractor or material supplier. The Act very clearly states that if you perform ANY services or incur ANY expense as an architect or engineer for the purpose of constructing improvements on the lot or tract of land you have a lien. The Act does not state that the improvements actually have to be constructed. In my over 30 years of experience architects and engineers usually have mechanic’s lien problems when the project does not go forward. It’s when the developer doesn’t succeed that he feels no one should get paid if he has not made a profit. This is not the risk that the architect or engineer has agreed to take.

An Appellate Court decision such as in the environmental firm case imposes a judicial requirement of adding value to the property for an architect or engineer to have a mechanics lien. This is improper and in my opinion not the law.
I also think the Appellate Court is wrong when it states the focus should be on whether the work actually enhanced the value of the land. Enhancement is only an issue in a mechanics lien case when a mechanics lien competes for priority with a prior recorded mortgage. As between the owner and mechanics lien claimant there is no issue of enhancement.

By their very nature, architectural and engineering plans and studies do not constitute a physical improvement to real estate. However, the Act recognizes this and states explicitly that all that is required for an architect or engineer to have a lien is that he provide services or incur expenses for the purpose of improving the real estate. A trial court’s ruling requiring that the services furnished “add value” will mean that in most situations an architect or engineer will be precluded from asserting a mechanic’s lien claim. As mentioned above most architect or engineer lien claims arise when a proposed development does not proceed. The Act takes this into account and explicitly provides that all that is required is that the services be rendered for the purpose of improving the property and not that an actual physical improvement be made.

A few years ago I encountered the same type of situation for a civil engineering firm that I represent. Civil engineering was done for a proposed development for the contract purchaser. The development did not proceed and my client was not paid for its work. We recorded a lien and filed suit to enforce it. A motion to dismiss was granted by Judge Clifford Meacham of the Circuit Court of Cook County. He made a ruling that the work had to “add value” to the land. I took his ruling up on appeal.

While the appeal was pending we settled the case and did not get an Appellate Court decision on my argument that an architect’s or engineer’s lien is different from that of a contractor. Judge Meacham retired about a year ago. I had many cases before him during the years he served as a judge. On the day he retired I went to his court room to say good bye and wish him the best in retirement. He saw me sitting in the back of his court room waiting for his call to conclude. He stopped what he was doing and called me up to the bench. He had surmised why I was there.

We exchanged best wishes and as I was ready to leave he said you remember that engineer’s case you took me up on, I’ve been thinking about it for a long time and on that one I got it wrong. He said “Al you were right.” While that is not much consolation for my client it made me feel good and convinced that my analysis is correct. Hopefully I will have another similar case and if I get an adverse trial court ruling I can take the issue up again and this time get an Appellate Court decision upholding my position. Stay tuned.

Interest and Attorneys Fees – Settlement Leverage

Those of you who have had me work with you to review and revise your form contracts whether you are a general or sub know that I recommend you include a provision for recovery of interest and attorney’s fees if there is a dispute with your customer. You can have a contract clause that provides for this that is one sided, namely you get interest on any unpaid balance and you recover your attorney fees if there is a dispute and an award is made in your favor. Some of you agree with this but some of you express you do not want the contract to be too harsh so that prospective customers are scared away. When I hear this, I suggest the provision for recovery of attorney’s fees be made reciprocal. I then draft a provision that states if there is a dispute that results in either a lawsuit or arbitration the prevailing party is to recover interest on the award and reasonable attorney’s fees. I can also include language about recovering costs if that is desirable. The interest rate should be set at a rate that makes a difference. Currently the Illinois Mechanic’s Lien Act provides for interest at ten percent so I would not set the rate any lower.

You may be wondering, do provisions for interest and attorney’s fees make any difference and are they of any real value? In my opinion they are. Let me provide an example.

I am in the process of settling a matter for a client where the claim is approximately $257,000. The client is a luxury home builder and was going to build a house that was estimated to cost approximately 12.5 million. The client’s architectural group designed the house but with a project of this magnitude as is usual the customer was working with an interior designer to select finishes, colors etc. The interior design project was dragging on so the client and its customer decided to proceed to start demolition of the existing structures on the property, do the site grading and construct the foundation and swimming pool. A separate contract for this construction was entered. Unfortunately when the work was finished and the third and final draw was to be paid the homeowner refused to pay. This particular homeowner builds a number of clinics throughout the country and has a commercial architect who began to critique the client’s work on the house and interfered to the point that the homeowner lost confidence in the work our client did. Allegations were made that the soils compaction was not proper, the foundation was not reinforced properly, the steel framework was not structurally sound and more.

Per the terms of the contract I filed a demand for arbitration for the money that was owed, $257,000 plus interest and attorney’s fees. The foundation contract provided for the prevailing party to recover not only the amount found due but also attorney’s fees and the costs of the arbitration and any other related expenses. In addition interest at the statutory rate set forth in the Illinois Mechanics Lien Act is to be given on the money awarded which as noted above is currently ten percent.

Within a short period of time after the arbitration demand was made, the homeowner’s attorney contacted me and made an offer of settlement in the amount of $150,000. I inquired why a deduct of over $100,000 should be considered and the response was that there were numerous defects in our client’s work that needed to be corrected. While our client had no intention of considering this offer, I used it to learn what their defense to the claim would be. I contacted the homeowner’s attorney and asked to see any reports they had, test results regarding soils and proposals and paid bills for corrective work. What I received convinced me and our client that the homeowner’s claims were not well founded. Soils analysis was done when the soils were wet which resulted in a few areas where the psi did not conform to contract requirements. My client knew that if they waited for the soil to dry out its strength would come back and once the drainage system was operational there would be no problems. A report that the steel had not been erected properly was also bogus because after the report had been done our steel subcontractor corrected any deficiencies. My client dug in and directed me to reject the settlement proposal which I did without making any counterproposal for settlement.

A few weeks went by and without any contact on my part the homeowner’s attorney made another offer of settlement increasing the offer by $75,000. My client and I found it strange that another offer to settle would be made without us having made any counterproposal. However, this confirmed in our minds that the homeowner’s claims that the work was defective were not well founded. My client and I discussed the matter and decided that we would hold firm with our position that nothing was wrong with the work and full payment of the balance due had to be made. I agreed with the client that if he felt strongly that the work was done properly he should remain steadfast that the full amount due had to be paid. However, I knew that in settlement everyone has to “get something” so I suggested making a counterproposal where the client would waive the claim for attorney’s fees and interest if the full amount due was paid. I calculated the interest that had accrued which at the time was over $13,000 and made a proposal in writing to the homeowner’s attorney that if they agreed to pay the $257,000 our client would waive interest and attorney’s fees. The counterproposal has been accepted, a settlement agreement agreed to and right now we are working with the escrow agent to process payment of the settlement funds to our client and the subcontractors that worked on the project. Everyone is being paid in full.

As you can see, the provision for recovery of attorney’s fees and interest at a significant rate helped make this settlement. This provision in the contract gave us negotiating leverage where we could be adamant on recovery of one hundred percent of the claim and yet give the other side something. I reminded the homeowner’s attorney that if they did not settle now the homeowner would be paying a significantly greater amount if we went through full arbitration with an award being made in our client’s favor. The homeowner would then be subject to paying interest on the award from the last day worked and my attorney’s fees and the expenses of the arbitration.

I think you can see the advantage of having an attorney’s fees and interest provision in your form contracts. This type of provision gives you leverage in settlement. If you do not have this type of provision in your form agreements you can contact me and I can draft provisions that will give you this advantage should a dispute arise on one of your projects. The cost incurred to do so is minimal compared to the long range benefit and leverage obtained. I would be happy to work with any of you to review and revise your form agreements.

The Home Repair and Remodeling Act

Those of you who are engaged in home repair and remodeling have had to contend with the Illinois Home Repair and Remodeling Act (Act) since it went into effect on January 1st, 2000.  As you know the Act requires that before starting home repair or remodeling work for over $1,000 you have to provide the customer for signature a written contract or work order.  Also before the customer signs the contract you have to provide a pamphlet “Home Repair: Know Your Consumer Rights.”  The customer has to sign an acknowledgment form that this has been done.

As we all know “things happen” in life as well as in business.  Even the most organized business may run into a situation where although unintentional an oversight occurs and one of the requirements of the Act is not followed.  Initially the Illinois Appellate Courts took a very rigid stand on violations of the Act.  Basically the Courts position was if there was a failure to comply with the Act a contractor could not recover even under equitable principles such as unjust enrichment or quantum meruit.  For example, in the Appellate Court decision in Smith v Bogard a contractor made a contract with a customer for a room addition to their house but failed to commit the contract to writing and did not give the homeowners the consumer rights brochure. When the work was finished the homeowners refused to pay the balance owed and the contractor sued.  The homeowners raised the contractors violations of the Act as a defense.  The Appellate Court upheld the trial court’s dismissal of the contractor’s lawsuit.  The contractor argued that even if the Act precluded recovery he should still be allowed to recover under equitable principles of law otherwise the homeowners would receive a windfall.  The Appellate Court disagreed and stated, “Allowing a contractor a method of recovery when he has breached certain provisions of the Act would run afoul of the legislature’s intent of protecting consumers, would reward deceptive practices, and would be violative of public policy.”  A pretty harsh result without considering how the violations of the Act may have affected the work done or the fact that the homeowners were getting something for nothing.

Fortunately the Illinois Supreme Court has addressed the issue of violations of the Act in its recent decision in K. Miller Construction v McGinnis.  At issue in McGinnis was whether a home remodeling contractor who violates the Act and enters an oral contract for home remodeling work over $1000 can enforce the oral contract or seek recovery in quantum meruit against the homeowners who refuse to pay for a completed home remodeling project.

The facts showed that the contractor had done work for these homeowners previously and before the litigation the owner of K. Miller Construction and Mr. McGinnis were friends.  The McGinnis’s bought a three flat apartment and wanted to convert the building into a single family residence.  Initially the project was to cost $187,000.  After work began the McGinnis’s informed Miller that they wanted to significantly increase the work and had new plans drawn for the larger project.  The modifications increased the total cost of the project to approximately $500,000.  The homeowners paid the first $65,000 of invoices but after that told Miller they did not want to make further payments until the end of the project.  Miller could not self-finance the work and therefore obtained a bank line of credit.  The homeowners regularly visited the construction project and approved all of the work except certain flooring which was estimated to cost about $300 to repair.  At the close of the project there was a balance due of over $300,000 which the homeowners refused to pay.

The contractor filed a lawsuit seeking in Count I to foreclose a mechanic’s lien, Count II was for breach of contract and Count III sought recovery in quantum meruit.  The homeowners filed a motion to dismiss and raised the violation of the Act, no written contract, as a defense and also the decision in Smith v Bogard as to the contractor’s claim to recover in quantum meruit.  The trial court granted the homeowner’s motion. The Illinois Appellate Court affirmed in part and reversed in part.  The Appellate Court agreed that because there was no written contract recovery on the oral contract and for a mechanic’s lien could not be had.  The Appellate Court reversed on the issue of quantum meruit recovery since there was no clear and plain intent in the Act to do away with this equitable remedy.

The Illinois Supreme Court approached the issue as determining whether or not Illinois public policy precludes recovery under an oral contract that is violative of the provisions of the Act.  In doing so the Court commented that a statutory violation does not automatically render a contract unenforceable if not seriously injurious to the public order.  The Supreme Court also commented that the Illinois legislature is capable of stating when a contract that violates the statute is unenforceable.  No such provision is made in the Home Repair Act.  The Illinois Supreme Court never really addressed the public policy issue because on July 12, 2010 the Act was amended and the provision that previously provided that oral contracts in violation of the Act were unlawful was changed in its entirety to now provide that any person who suffers actual damages as a result of a violation of the Act can bring an action under the Consumer Fraud and Deceptive Business Practices Act.  The Illinois Supreme Court held that this amendment was not a change in Illinois law but a clarification of existing law and made clear that a violation of the Act does not render oral contracts unenforceable or relief in quantum meruit unavailable.  The Supreme Court concluded that there is no public policy requiring oral contracts over $1,000 be held unenforceable or that relief in quantum meruit be denied.

I represent many of you who are home remodeling contractors or do home repair work.  The Illinois Supreme Court’s decision in McGinnis is important for you and a practical approach to what I think was getting out of hand with certain Appellate Court decisions.  In the McGinnis case the contractor and homeowner had done work together before and were friends.  Why wouldn’t the contractor think a written contract was not necessary?  It’s easy in hindsight to criticize but in the real world it’s easy to see how this could happen.  As a result should the McGinnis’s get a windfall and be able to use over $500,000 worth of work without having to pay for it.  Also in this case all of the work was done properly with only a small portion needing to be corrected.  It would be an extreme injustice in a case such as this to say that the contractor loses and the homeowner wins just because of violations of a statute.

I have not had a case yet where home remodeling or repair was done under an oral contract.  However, I have had a case where a claim was made by the homeowners that the required brochure was not timely given.  After the contract was entered the contractor and homeowners communicated regularly and the real issue was timely commencement of the work.  In this case just as McGinnis the homeowners would have been hard pressed to show any actual damages as a result of not getting the “Home Repair: Know Your Consumer Rights” pamphlet even if that allegation had been true. The amendment that was recently made to the Act by our legislature and the Illinois Supreme Court’s decision in McGinnis are important for the home remodeling industry and bring some practicality to situations that could otherwise lead to unjust results.

Home Repair Act-Follow Up

In the October issue I addressed the Illinois Supreme Court’s latest decision on the Illinois Home Repair and Remodeling Act.  I received a very good question from a client who is an architect but also does general contracting and construction management work.  The question was does the Act apply to construction managers as advisors to homeowners?  The Home Repair Act defines home repair and remodeling as “the fixing, replacing, converting, modernizing, improving or making an addition to any real property primarily designated or used as a residence.”  The requirement of a written contract or work order applies to any person engaged in home repair or remodeling.  In my opinion this language is broad enough to encompass a construction manager.  The better practice would always be to have your contract in writing.  As far as the requirement to give the brochure Home Repair Know Your Consumer Rights, I do not think a failure to give this is going to cause a problem in most instances.  The reason for my belief on this point is the amendment to the Act which I referenced in my article which now requires the homeowner to show actual damages as a result of a breach of the Act.  I think a failure to give the brochure is not going to cause actual damages in almost all cases.  One Appellate Court has called this brochure merely a “tip sheet.”  Again the better practice is to comply with the Act.  However, as the Illinois Supreme Court held in McGinnis, all is not lost if a failure to comply occurs.

Vested Rights – A New Test Applies

If you are a developer can you rely upon a zoning classification from a change in zoning by a municipality after you have purchased the property or entered into a contract to purchase.  Under Illinois law a property owner may obtain rights to develop property based upon a prior zoning classification if you in good faith rely upon the probability of a building permit being issued and you sustain a significant change in position based upon making substantial expenditures or incurring substantial obligations.  In a recent Illinois Appellate Court decision the Court clarified the nature of the vested rights doctrine.  In 1350 Lake Shore Associates v Randall the Court applied a totality of the circumstances test to determine whether or not a municipality is estopped from enforcing a zoning change against a developer based upon a vested rights argument.

In Randall the Court held that expenditure of $272,000 were not sufficiently significant to trigger a vesting of development rights.  The Randall Court held that a proportionality test is to be used to determine substantiality.  You are to compare the expenditures made to the total project costs.  In Randall the $272,000 of expenditures amounted to less than one-half of one percent of the total proposed development cost of $72 million.  This was considered insufficient.

The Appellate Court in Randall did not establish any bright-line test for determining substantiality of expenditures.  The Court held that in determining substantiality you are to consider the totality of the circumstances.  One of the factors to consider is the purchase price of the land.  You also make a comparison of the expenditures incurred to the total projected cost of the development.  You also consider the nature or character of the person or entity seeking to develop the property and any other factors that are deemed relevant.  No single factor is controlling and each case presents a different factual setting that has to be assessed base upon its own facts to determine whether substantial expenditures have been made.

The Randall decision may make it more difficult for a developer to succeed on a vested rights claim.  The developer’s expenditures will no longer be considered in a vacuum.  An analysis must now be made of all of the relevant factors to determine if expenditures are substantial.  It does seem appropriate to examine the totality of the circumstances in determining if it is unfair for a municipality to be allowed to change a zoning classification and make it apply to a particular development proposal.  It will be interesting to see how the courts apply this “new test” to various factual situations as they arise.

Bankruptcy Notice – Now What Do You Do

Those of you engaged in construction whether as a general contractor, subcontractor or material supplier know that you have mechanic’s lien rights to secure payment from the owner or contractor for whom you have worked.  On a private job the property stands as security for what is owed.  On a public job the money owed to the general contractor by the governmental entity provides the security for what is owed.  In these difficult economic times questions often arise as to what you should and can do if you receive the dreaded notice that the owner, general contractor or subcontractor with whom you have contracted has filed for bankruptcy.

Once a petition in bankruptcy has been filed an “automatic stay” order is issued by the Bankruptcy Court.  The “automatic stay” is an injunction-like prohibition.  It prohibits a creditor during the pendency of the bankruptcy case from instituting any action against the debtor or against its property on account of a pre-petition debt.  However, the “automatic stay” does not prohibit perfection of your mechanic’s lien rights.  Whether it’s the owner, general contractor or subcontractor that has filed for bankruptcy you can and should proceed to perfect your mechanic’s lien.  If you are a general contractor record your lien within four months of your last day worked.  If you are a subcontractor or material supplier send out the ninety day notice within ninety days of your last date worked or last delivery of material and then proceed to record your lien claim within the four month requirement.

Once your lien claim is recorded you are protected as far as security for the money that is owed.  However, you still need to enforce your lien in order to recover the amount due.  This is done by filing a mechanic’s lien lawsuit.  Under the Illinois Mechanic’s Lien Act a lawsuit to enforce a lien has to be filed within two years from your last date worked.  However, when an owner or general contractor or sub has filed bankruptcy, you cannot file a foreclosure lawsuit without approval of the bankruptcy court.  This is commonly referred to as lifting the stay order.  When the owner is in bankruptcy lifting the stay order can be more difficult than when it’s the general contractor that has filed for bankruptcy protection.  Usually if the owner is in bankruptcy the stay is not going to be lifted unless there is no equity in the property.  If it’s the general contractor or a subcontractor that has filed for bankruptcy you can usually get the stay order lifted so long as you agree not to seek any direct relief against the general or sub.  The reason the Court usually allows the stay to be lifted against the general contractor is because the general is required to be a named defendant in a mechanic’s lien lawsuit and so long as you are not seeking direct relief against the general contractor the bankruptcy proceeding is not affected.

What happens with regard to the two year time limit to file the mechanic’s lien lawsuit when a bankruptcy petition is filed.  The Illinois Supreme Court took care of that issue in its decision in Garbe Iron Works Inc. v Priester and held that the two year limitation is tolled during the pendency of the bankruptcy.  The two year limitation is tolled until the automatic stay order is modified.  The same tolling takes place if an owner serves a Section 34 notice to commence a lawsuit and a bankruptcy occurs.  In Chicago Whirley v Amp Rite Electric a subcontractor perfected a lien. The owner served notice to commence a lawsuit which meant the subcontractor had thirty days to do so.  However, the general contractor filed for bankruptcy.  The Appellate Court held the thirty day requirement was tolled until the stay order was lifted.  You can also encounter bankruptcy issues after the mechanic’s lien lawsuit has been commenced.  If a general contractor or subcontractor files for bankruptcy during the foreclosure proceeding the lawsuit is stayed until either the general or sub is discharged or the stay order is lifted.

As you can see all is not lost if you receive a notice of bankruptcy.  While you cannot proceed on a breach of contract claim, you can perfect and enforce your mechanic’s lien rights.  It is always important to act within the required time limits for sending notice and recording the lien.  It is even more important to do so when an owner, general contractor or subcontractor has filed a bankruptcy petition.  Once you perfect your mechanic’s lien claim you then have plenty of time to try and reach a settlement before having to file a lawsuit to enforce the lien.

What You Sign Does Matter

Over the past two years the construction industry has been hit hard by the downturn in the economy. When I talk with my construction clients, I hear the same complaint. Either there is no work and if there is work it is going so “cheap” many of you do not believe it is worth pursuing. Also there are more companies bidding the same work and driving the price down. In the last year I have lost one client to a bankruptcy, one has decided to shut down completely and liquidate its assets and another closed temporarily waiting for things to get better. These have been difficult situations since the client that was forced out of business I represented for over twenty years and the one that decided to voluntarily shut down I have represented for over thirty years. The ownership of both companies are good upstanding people but the significant downturn in the economy and its dire effects on construction just could not be overcome.

In these difficult times getting paid and managing your cash flow becomes even more difficult and important. Recently, I was asked by a subcontractor client who is owed several hundred thousands of dollars on four or five projects, “Do I have to go back and complete the work on a project when I have not been paid on past draw requests.” Unfortunately, my response had to be “It depends.” The “It depends” refers to what does your contract say. I asked the client to send me the subcontract and I would review its provisions and give an answer.

In reviewing the subcontract I found that while it had provisions for what the general contractor’s rights were for a breach by the sub, it did not provide for similar or any rights of the subcontractor for non-payment or any other breach by the general. Upon seeing that the contract was the general’s form and very one sided, I thought about the concept of an anticipatory breach i.e. the general not paying. However, as is typical the contract provided that the general contractor did not have to pay the subcontractor until the general received payment from the owner. I also looked at the provision of the subcontract dealing with change orders and found that it required a written change order issued by the general contractor and signed by the officer that signed the subcontract or his successor. I knew that my client did not want to go back and finish what was left unless past draws were paid and was looking for me to find some leverage to assert. I asked my client if there was any indication the general had gotten paid from the owner and in turn not paid him. The answer was “no”. I then asked about the change orders and were there any requests for extras that had been made but no change order issued by the necessary officer from the general. My thinking was that if the general contractor had not followed his own procedure my client could use this as the reason for not returning to the job and hopefully buy time that would result in a partial payment that would help his cash flow and prevent him from having to expend more money before receiving a payment. Unfortunately the answer was again “no”. All the required change orders had been issued and executed as necessary. Upon hearing this I had to advise my client that there was no basisfor not returning to the job and finishing what had to be done. Not the answer the client wanted but the correct answer. Otherwise my client would be in breach of contract. The general contractor could then take action against my client and declare a default.

The lesson to be learned is what you sign does matter. If the AIA General Contractor-Subcontractor agreement had been used it provides that the subcontractor can terminate the agreement if nonpayment continues for 60 days or longer. There is no pay if paid clause in the AIA subcontractor form agreement. While it is difficult to avoid using a general’s form agreement, if you are a subcontractor you need to know what it says and try to negotiate some rights for yourself if you can. If not at least you will know what situation you are in and govern your activities and cash flow accordingly. If you are a general contractor you need to be aware of what your rights are if the owner does not make timely progress payments. The same situation could apply to you.

The tough economic climate for the construction industry appears to be continuing for the foreseeable future. As such be careful of what you are signing and know that consequences do exist if the agreement does not protect you. In general the contract’s provisions are going to control your rights and duties. Accordingly, remember WHAT YOU SIGN DOES MATTER.

Shortening a Contract’s Limitations Period A New Concept for Insurance

Shortening a Contract’s Limitations Period

If you have entered into a contract with an owner or a subcontractor for construction work there is usually a provision that states the general contractor or subcontractor warrants its work for one year from the time the job is complete. However, in Illinois the statute of limitations for bringing an action for breach of contract is ten years. Therefore, although the job may be out of warranty a lawsuit can be brought up to ten years from the time there is a breach of contract.

Recently an Illinois Appellate Court issued an opinion that upheld a contract provision that shortened the time for bringing suit to two years. The case arose in the context of a homeowner suing a building inspector who had done a home inspection and failed to note certain defects in the house. The contract provision stated “Any legal action must be brought withing two years from the date of the inspection.” The Appellate Court held that parties to a contract can agree to a shortened contract limitations period to replace a longer statute of limitations so long as the shortened period is reasonable. The homeowners argued that they did not know of the two year limitations period or that it was negotiable. The Appellate Court was not persuaded by this argument. The Court stated that the homeowners argument had to fail because parties to a contract can contract for any lawful purpose on any terms agreeable to them and it is not the duty of one party to a contract to inform another of the duties or obligations assumed under the contract.

I am of the opinion that this decision can be useful to those of you in the construction industry. We need to note the Appellate Court said its alright to shorten a limitations period so long as the shortened period is reasonable. If you are warranting the work for one year from the time of its completion or one year from the time the entire job is complete, I see nothing to prohibit you from then providing that any legal action regarding a breach of contract has to be brought within two years of when your work is complete or when the entire job has been finished.

Based upon this Appellate Court decision, I am going to start recommending that a shortened limitations period be set forth in the form contracts I draft for those of you who have me do this work for you. If you would like me to review your form contract and recommend this and other possible changes or provide you with a paragraph that provides for a shortened limitations period please give me a call or send me an email request.

A New Concept for Insurance

If you are a small to medium sized business owner you know that if you borrow money for working capital or other business needs, your bank is going to want you to sign a personal guarantee. Once you sign a personal guarantee not only are your business’s assets collateral for the loan but your personal assets are now subject to seizure if a business failure occurs.

A new concept for insurance is now being offered called Personal Guarantee Insurance. This insurance is available for loans of $500,000 to $5,000,000. There is a 50% limitation on the amount of the risk. The 50% limit is imposed because these policies are not meant to eliminate an insured’s risk but to share it. If this limit did not exist then upon a default the borrower, guarantor and lender would have no incentive to address the issues that exist and try to come to a resolution. Personal guarantee insurance is intended to provide a safety net without eliminating the motivation to overcome the difficulties that exist and attempt to correct the business’s faults.

These types of policies are annual policies with premiums based upon the size of the loan and the risks characteristic of the underlying business. Not all businesses qualify for coverage by a personal guarantee policy. There are eligibility criteria that have to be met and reviewed by the underwriter.

If a business calamity occurs and you have personally guaranteed your business loan, your personal assets will be on the line and a personal bankruptcy might have to be considered. If your business loans are up for renewal and you are being asked to sign a personal guarantee either for the first time or again in order to renew the loan, this type of insurance may be something to consider. If you are faced with this type of situation, give me a call and we can look into personal guarantee insurance to see if it might be a reasonable solution to a common business problem.

What Is Your Liability If You Follow the Plans and Specs but the Installation Fails?

If you are engaged in construction either as a general contractor or subcontractor and enter a contract to do work, the contract is going to provide that certain plans and specifications are to be followed. These plans and specifications are usually referred to as the “Contract Documents” along with other documents such as general conditions, supplementary general conditions, addenda etc. The plans and specifications are usually prepared by a design professional such as an architect or engineer.

Let’s assume you proceed to do your work and follow the plans and specifications but the installation fails. The owner asserts a claim against you as the general contractor or if you are a subcontractor you are brought into the dispute by the general after he is sued by the owner. What is your liability?

As a contractor you have two obligations under your contract. First you have to follow the plans and specifications and perform your work in strict accordance with them. In addition you have an obligation to perform the work you do in a good and workmanlike manner. If you breach either of these two duties doing so can give rise to a cause of action against you. In addition you have no right to deviate from the plans and specifications unless a deviation was mutually agreed upon.

In an Appellate Court decision in Georgetown High School District No 218 v Hardy certain allegations of a complaint were held not to state a cause of action and others were held to properly assert liability. The School District alleged that the general contractor did not build an addition to withstand certain wind pressures and also that the roof could not withstand outward pressure of 15 lbs. per square foot. The Appellate Court held that there was nothing in the plans and specifications to require the general to build the addition to withstand any given wind pressures. Accordingly these allegations did not state a cause of action.

The School District also alleged that the roof had not been built correctly because certain specified steel or iron bolts were not used to resist the vertical uplift of the roof and the roof anchorage provided on the roof trusses was not of sufficient strength nor properly fastened. These allegations were held to state a cause of action because they indicated the plans and specifications were not followed and the work was not done in a good and workmanlike manner.

The above addresses a contractor’s or subcontractor’s liability to the party with whom you contract. What about a situation where a third party is injured and a cause of action is brought for what is alleged to be faulty construction. Let me give you an example of a case in which I am currently involved.

I represent a contractor that did a road improvement project for a municipality which included new sidewalks in a portion of a residential subdivision.  My client subcontracted out the sidewalk phase of the job. The entire project was completed in December of 2001. No punchlists were issued regarding the sidewalks and the sidewalk subs retention was released by the Village one year after the work was completed. In addition final payment to my client was not made until October of 2003. No complaints were ever received regarding the sidewalks.

At an unknown date but certainly at least after December of 2002 and most likely after October of 2003 when my client received final payment a portion of a sidewalk in front of a house settled and a deviation between the sidewalk and an existing driveway occurred. In July of 2008 almost seven years after the job was completed a bicyclist ran over the deviation, fell off his bicycle and was injured. A lawsuit was filed naming the municipality, the design engineer, my client and the sidewalk subcontractor as defendants.

I have taken the position that my client is not liable because the plans and specifications for the job were followed and the work was done in a good and workmanlike manner. The facts that I am relying upon to support this position are that no punchlists were issued regarding the sidewalks, the subs retention was paid out a year after the job was completed without asking for any repairs and my client’s final payment was not made until almost two years after the job was completed, again without any complaints regarding any of the sidewalks that were installed. I have taken the position that my client is not a guarantor of the sidewalk at issue nor did it have an obligation to maintain the sidewalk once it was constructed in accordance with the plans and specifications for the job.

The law in Illinois supports the position I am taking. A contractor in the position of my client owes no duty to third persons i.e. the bicyclist to judge the adequacy of the plans and specifications which the contractor has merely contracted to follow. Accordingly, if the contractor does the work in accordance with the plans and specifications, the contractor is justified in relying upon their adequacy. The only exception to this rule of law is where the plans and specifications are so obviously dangerous that no competent contractor would follow them. Therefore, unless the plans and specifications are obviously dangerous a contractor cannot be held liable for following them as he has contracted to do.

In the case that I am involved with the injured bicyclist is not making any claim that the plans and specifications were so obviously dangerous that neither my client nor its subcontractor should have followed them. Both myself and the attorney for the subcontractor have filed motions for summary judgment requesting that our clients be held not liable for the plaintiff’s injuries. I’ll let you know how it turns out.

Change Orders – What You Need To Know!

Extras are one of the biggest issues that cause problems in the owner/general contractor relationship or between a contractor and subcontractor. Sometimes an owner gets caught up in the construction process and orders or consents to extras without realizing the ultimate impact on the cost of the project. As a contractor you are not bidding on this work and therefore may charge more than normal for extras. In the contractor/subcontractor relationship the issue is usually whether a particular item is an extra and were the contract requirements for an extra followed.

Almost every construction contract or subcontract that I have reviewed or been at issue in litigation that I have handled has a provision requiring that extra work only be performed if authorized by a written authorization, change order. Many times the contract clause dealing with extras will even state that the authorization has to be signed by a particular individual i.e. the president of the general contractor or perhaps the project manager. When I review an agreement for a client, I always point out such provisions and warn the client that they follow the procedure set forth in the contract for change orders.

While the contract may require set procedures for authorization of extras, we know the real world and especially the world of construction does not always work the way a contract says it should. Construction work moves quickly and many times things come up in the field that are not expected. You are trying to get the work done and don’t always have time to document the request for an extra or a situation just arises that has to be dealt with then and there. You are trying to accommodate your customer be it the owner or general contractor. You go ahead and do the extra work and when it comes time for payment you are then confronted with the contract language that says you were suppose to get a written change order BEFORE doing the work. What are you do?

Fortunately for those in the construction industry and me as your lawyer, the Courts recognize that the real world is different then what parties may state in their contracts. Accordingly, an owner or a general contractor can waive the requirement for a written change order by their words or conduct. The rationale for the Courts taking this position is that the requirement for a written change order is in a contract for the protection of the owner or in the contractor/subcontractor relationship for the gc’s benefit. The owner or general may waive the protection afforded by the requirement of a written change order and become liable for extras ordered verbally or by consenting to the work being done and knowing that it is outside the contracted for work.

While the requirement for a written change order can be waived, you are going to be put to a test when you are claiming an extra was authorized either verbally or by conduct. Illinois Courts consistently hold that a contractor seeking to recover for extras must establish by clear and convincing evidence each of the following:

  1. The extras were outside the scope of your original contract promises.
  2. The owner or general contractor requested the extra.
  3. The owner or general contractor by words or conduct agreed to pay extra.
  4. The contractor or subcontractor did not voluntarily proceed with the extra work.
  5. The extras were not necessitated by reason of some default by the contractor or subcontractor.

While it is always best to follow the contract requirements when dealing with extras (get a written change order signed by the owner or appropriate representative of the general contractor), as you can see all is not lost if you fail to do so. However, the burden of proof is high, clear and convincing evidence. Accordingly, when you do have extras and the required procedures as set forth in your contract were not followed, be prepared to present the requisite evidence on each of the above points. If you do you will recover. If not you have given your customer a gift.

Change Orders – Real Life

In the April issue of this newsletter I addressed the issue of change orders and how extras are one of the biggest problems in the owner/general contractor relationship or between a contractor and subcontractor. I am now involved in a matter for a general contractor client that brings to light that what I addressed in my April newsletter does happen in the real world.

My client is doing a commercial remodeling project that includes floor leveling work. The floor preparation subcontractor submitted a proposal to do the work for $8646 for 2200 square feet or $3.93 psf more or less area. My client was not comfortable with the proposal as it seemed ambiguous and open ended and did not want to take the chance that the “more or less” would occur. Accordingly, my client requested the sub come to the job site and in the presence of our project manager take measurements with a laser of the areas of the floor that needed leveling. The subs project manager did so and confirmed that the work could be done for the lump sum price of $8646.00. My client prepared a subcontract agreement for this price and it was executed by the subcontractor’s owner.

At the end of the subs work a bill was sent for not only the lump sum price but also an extra in the amount of $9169.69 for additional floor leveling. Needless to say my client was shocked. Exactly the problem that had been anticipated might occur unless the sub measured the job in my client’s presence had arisen.

During performance of the job the subcontractor never brought to my client’s attention that additional areas were being leveled and for which extra compensation would be sought. My client’s form subcontractor agreement which I helped draft does provide that before any extra work is done a change order must be approved in writing “by the General Contractor’s accredited representative before proceeding with the work.” In addition the subcontract also provides that if any legal proceedings are instituted and an award is made in favor of my client, regardless of any setoffs to the subcontractor my client as the general contractor will be awarded its reasonable attorney fees and costs of litigation.

If you recall my April newsletter article, you know that in this “real life” situation the sub is going to have a hard time prevailing. First there is no indication my client waived the requirement of a written change order. Also as I discussed in my April article even if the written extra requirement could be considered as waived, the subcontractor in this case is going to have a hard time proving that the extra was outside the scope of its original contract agreement. Further there is no evidence that my client requested the extra or by words or conduct agreed to pay extra. Also remember that the standard of proof in a situation like this is “clear and convincing evidence.”

The general contractor I represent is a very reputable company and treats its subs extremely well. However, in this situation the feeling is that the sub is trying to take advantage of my client which does not sit well with upper management. While the amount in controversy is relatively small my client feels the subcontract was entered into fairly and they insisted on laser measurements being taken so that this type of situation would not occur. While my client is going to try and resolve this matter with the subcontractor’s owner, if litigation does ensue we have a very good position given the contract language and especially the provision that if we prevail the subcontractor is going to have to pay our attorneys fees.

As you can see in “real life” the situation I described in my April newsletter can occur. It is better for you if you have a good contract agreement to rely upon. In this instance my client had me review and update its form contracts a few years ago and this work is helping them with this current situation. If you would like me to review and revise your agreements either as a general or subcontractor I would be happy to work with you. I’ll let you know how this situation works out.

Up Front Waivers – Know The Consequences

If you are asked to give a waiver either by an owner or a general contractor before payment is received there are consequences that you need to be aware of. Most likely the form waiver will state the amount you are receiving and recite that you acknowledge receipt of the same. This is true for either a partial or final waiver. If you are giving the waiver up front you are acknowledging receipt of payment even though you have not received the funds. If the check is received then “no foul, no harm.” But what if you don’t receive payment?

While you can attempt to condition the waiver i.e. state that the waiver is not good unless payment is received, most title companies look for this type of language and will not accept a conditional waiver. If you give the waiver and the owner relies upon it in paying the general contractor and the general does not pay, you have waived out your mechanic’s lien rights. If you are a material supplier and the general pays the subcontractor to whom you have issued the waiver and the sub fails to pay you then your lien rights are waived. In these situations you have no recourse as against the owner or if you are a material supplier as against the general contractor I am told it is becoming commonplace to be required to furnish these up front waivers. If you do and are not paid what do you do?

The Illinois mechanic’s lien act has two provisions that address obtaining a waiver and then not paying. One provision provides that if a general contractor or if the gc is a corporation any officer or employee who with intent to defraud induces a subcontractor to execute and deliver a waiver of lien for the purpose of allowing the general contractor to obtain payment and upon the representation that the gc will from such payment pay the sub the amount owed and who willfully fails to pay the subcontractor in full within 30 days after such payment is received is guilty of a Class A misdemeanor.

In Illinois a Class A misdemeanor can be punishable by a prison sentence of less than one year and a fine not to exceed $2500. While this provision of the Act may sound onerous note what has to exist. There has to be “intent to defraud” and a “representation” of payment and then a “wilful” failure to pay. An action to enforce this provision of the Act would have to be brought by the State’s Attorney of the County where the situation arose. My experience is that State’s Attorneys offices are not inclined to become involved in this type of situation. My opinion is that if all of these elements are present and can be proven you would have a common law action for fraud. Note that if a corporation is involved it is the individual who is liable and the corporate shield from personal liability does not apply. Given that many companies now do business as LLC’s I think the form of that type of entity would also be disregarded by the courts. In addition to the actual damages sustained if you can prove the elements listed in the Act I believe a claim could be made for punitive damages. To date there are no reported cases dealing with this provision of the Act.

Another provision of the Act provides that if a waiver is requested and delivered and used to obtain payment then the moneys that are received are held in trust for the benefit of the entity that gave up the waiver. Commingling of the funds is not a violation of the Act. However, if the moneys are not paid over then any owner, contractor, subcontractor or material supplier who knowingly retains or used the money held in trust for any purpose other than paying is liable for all damages sustained.

There is one reported case out of the Bankruptcy Court that has dealt with this provision of the Act. Let’s say a general contractor requires a waiver from a sub and receives payment. The general puts the money in its bank account but does not pay the sub. The general files bankruptcy. If the sub can trace the funds based upon this case an argument can be made and would most likely succeed that those funds are not the general contractor’s but held in trust for the subcontractor and are not subject to being used to pay other creditors of the general.

While the Act provides for remedies where an up front waiver is given and payment not received as can be seen the road to a recovery is not going to be easy. The better practice is to not provide a waiver until payment has been received or simultaneously for payment. As we all know the “real world” does not operate this way. You are going to encounter situations where you have to give a wavier “up front”. In doing so now you know the consequences.

Mechanic’s Liens: Illinois Supreme Court Cypress Creek Decision

Last year the Illinois Supreme Court issued a decision that is causing a great deal of discussion in the construction industry and legislation has now been introduced to overturn the Court’s decision. The Supreme Court’s opinion was issued in the case of LaSalle Bank, N.A. vs Cypress Creek 1, LP. What was at issue was the competing interests of a prior mortgage and mechanic’s lien claimants when a development project went bust and the mortgage foreclosed.

In situations where you have the competing interests of a prior recorded mortgage and mechanic’s lien claimants you have to deal with the concept of enhancement, the increased value of the property due to the improvements that were made. The value of the land before the improvements were constructed is subtracted from the value as improved. The result is the enhanced value. Section 16 of the Mechanic’s Lien Act provides that prior encumbrancers (the mortgage holder) are preferred to the value of the land at the time of making the contract and the lien creditor (those providing the labor and materials) are preferred to the value of the improvements erected on the property. However, this is not how the Illinois Supreme Court interpreted Section 16 of the Act.

In Cypress Creek, LaSalle Bank paid certain of the contractors that performed work and argued that it should be subrogated to their position and given equal priority to mechanic’s lien claimants asserting their liens for work done and claiming the benefit of the enhanced value of the property. The majority opinion in Cypress Creek sided with the Bank and held that if construction disbursements are used to pay for lienable work the lender is subrogated and has equal priority to an enhancement claim under section 16. The effect of the Court’s decision is that now when you have an enhancement situation the mechanic’s lien claimant’s percentage of any sale proceeds is diluted.

There were two Supreme Court Judges that dissented and stated that the majority of the Court was not following the provisions of Section 16 of the Act and were impermissibly expanding the definition of the word “contractor” to include construction lenders. I happen to agree with the dissenting judges. Having litigated many cases that involved enhancement issues if the decision in Cypress Creek is left intact it will seriously hamper a contractor’s ability to be paid anything but a fraction of the claim. If a project has gone bust and a lender is given equal priority with mechanic’s lien claimants as to the enhanced value of the property the result is a serious dilution of the proceeds of a sale that would otherwise go to the contractors that constructed the improvements.

There is legislation pending in the Illinois legislature to in effect overrule the Illinois Supreme Court’s decision in Cypress Creek. The proposed legislation amends section 16 of the Act to make it clear that a mortgage holder is only preferred as to the value of the land at the time the contract is made and “shall not be preferred to the value of any subsequent improvements.” The proposed amendment further provides that each mechanic’s lien claimant is to be preferred to the value of “all subsequent improvements” whether or not they were provided by the lien claimant. If this legislation is passed, the adverse consequences of the Cypress Creek decision will be avoided.

I will keep you updated on whether this amendment to the Act is passed. I would suggest you may want to contact your State Senator and Representative and urge that they vote in favor of the proposed amendment. Also it would be a good idea to get your trade association behind this legislation. I know the Chicago Plumbing Contractor’s Association and the Illinois Mechanical and Specialty Contractors Association are actively pursuing passage of the proposed amendment to Section 16 of the Act. If you have any questions let me know.

Extras Revisited: Bizarre Trial Court Decision

In the April and June 2011 editions of this newsletter I addressed the issue of extras and provided the rules the Court’s apply in determining a claim for extra compensation. A recent Illinois Appellate Court decision addressed what I think was a bizarre ruling by a trial court on a claim for extras and overturned the trial court’s ruling.

A general contractor was going to expand the warehouse of a Menard’s store. A concrete subcontractor submitted a bid that did not include “winter protection of concrete or subgrade” nor “winter heat.” The project got delayed and revised bids were requested. This time the concrete sub included an up-charge for winter heat but again did not include winter protection. A contract was entered which had the usual provision that no extra work would be paid for unless there was a written change order signed by the gc that specified the amount of additional compensation.

The job got further delayed and in December the concrete sub wrote the general contractor a letter expressing concern regarding the necessity of performing winter protection work. The sub stated that it would move forward with its work to maintain the project schedule and document its additional costs and that upon completion of the disputed work it would resolve its claim under the terms of the contract agreement. The general contractor’s position was that winter protection was included in the agreement and advised the sub that if it did not quickly complete it’s work the sub would be removed from the job. The concrete sub completed it’s work with winter protection which increased it’s cost by $171,262.

When the general contractor refused payment for the winter protection, a lawsuit was instituted. The trial court granted partial summary judgment to the gc on the issue of payment of the extra for winter protection. While the trial court held that winter protection was clearly outside the scope of the contract, it found there was nothing to show the general contractor ordered the work to be done nor did it agree to pay extra for the work. As you will recall from my April 2011 issue of this newsletter, there are five factors the courts look to when considering a claim for extra compensation:

  1. The extras were outside the scope of the contract
  2. The owner or general contractor requested the extra
  3. The owner or general contractor by words or conduct agreed to pay extra
  4. The extra work was not done voluntarily
  5. The extras were not necessitated by reason of some default of the gc or subcontractor

The trial court stated that the subcontractor should have done the work per the terms of the contract even though it knew that in doing so the work would not have been done in a good and workmanlike manner because it was being performed in the winter months and there would be no winter protection. I think the trial court’s ruling is bizarre because it put the subcontractor in an untenable position. If the work was done without the winter protection there are going to be all kinds of claims for defective performance. If the sub goes ahead and does the work with winter protection then the trial court is saying you are doing so for free and in this case the sub would lose $171,000. Certainly not a good position to be put in.

Fortunately, the Appellate Court came to the subcontractor’s rescue and overruled the trial court. The Appellate Court held that the sub could not do it’s work knowing that it would be done in an unworkmanlike manner. The Appellate Court stated, “One who contracts to perform construction work impliedly warrants to do the work in a reasonably workmanlike manner.” In addition the Appellate Court held that the trial court was also wrong that the sub could do the work in an unworkmanlike manner because the Menard’s building is open to the public and to allow work to be done in an unworkmanlike manner would be unrealistic and contrary to public policy. The Appellate Court ordered the case back to the trial court because it could be found that the general contractor impliedly ordered the sub to perform the winter protection work if in fact doing so was necessary to do the work in a workmanlike fashion. The Appellate Court also noted that the general contractor was informed by the concrete subcontractor that it was going to perform the winter protection work and did not tell the sub to stop.

The lesson to be learned is that if you are placed in a position of being forced to do your work in an unworkmanlike manner do not do it. Do what is necessary to perform the work properly. Inform the owner or general contractor you are doing so and properly document the claim you will be making and the additional costs incurred. You simply should not do the work in an improper fashion as the consequences of doing so are too grave.

Pay If Paid Clause – Alive and Well

In the first issue of this newsletter, April 2010, I wrote about subcontractor contracts and provisions that you need to be concerned about. One of those is the pay when paid provision. Most general contractor form contracts have such a provision and under Illinois law it is enforceable.

In essence this provision shifts the risk of an owner’s insolvency to the subcontractor since it provides that the gc only has to pay you if he receives payment from the owner. A recent Seventh Circuit US Court of Appeals decision reaffirms that such a provision is enforceable and can have severe consequences to a subcontractor or material supplier.

The general contractor was under contract with the owner to construct a manufacturing plant near Indianapolis, Indiana. After about a year of construction the owner went bankrupt. There was significant money owed. $40 million to the gc, $11 million to a subcontractor and $1.5 million to a sub-subcontractor. The sub-subcontractor’s contract had a pay if paid clause. The sub-subcontractor perfected it’s mechanic’s lien rights and recovered about half of its money in the owner’s bankruptcy proceedings when the property was sold. A lawsuit was filed by the sub-subcontractor on the payment bond that had been provided by the subcontractor to the general.

The dispute in the lawsuit was whether the clause at issue was a true pay if paid clause or a pay when paid provision. Also at issue was whether the bonding company could assert the pay if paid clause as a defense to the action on the payment bond.

There was little question by the US Court of Appeals that the provision at issue was a pay if paid clause. It provided as follows:

“IT IS EXPRESSLY AGREED THAT OWNER’S ACCEPTANCE OF SUBCONTRACTOR’S WORK AND PAYMENT TO THE CONTRACTOR FOR THE SUBCONTRACTOR’S WORK ARE CONDITIONS PRECEDENT TO THE SUBCONTRACTOR’S RIGHT TO PAYMENTS BY THE CONTRACTOR.”

The Appellate Court held this language was clearly a pay if paid provision and that by agreeing to it the sub-subcontractor assumed the risk of the owner’s insolvency.

The sub-subcontractor argued that because the payment bond did not expressly incorporate the terms of the sub-subcontract that had the pay if paid provision the bonding company could be held liable even though the subcontractor could not be under the contract. The Appellate Court rejected this argument as it contradicts basic principles of surety law. The bonding company is only liable to answer for the debts of its principal and if the principal is not liable then neither is the bonding company. Accordingly, the sub-subcontractor could not recover the balance of its money from either the subcontractor with whom it contracted nor the bonding company.

The decision in this case highlights the importance of perfecting your mechanic’s lien rights. While this case involved Indiana law the law in Illinois is the same. A pay if paid clause in a contract is not a defense to a mechanic’s lien claim. It is a defense to a contract claim. Had the sub-subcontractor not perfected its lien rights that allowed it to recover half of its money in the owner’s bankruptcy it would have lost the entire $1.5 million it was owed. Don’t think that just because a payment bond is in place you are safe. The bonding company has all the defenses that it’s principal has under the contract at issue. Make sure you understand the consequences of a pay if paid clause and always take action soon enough to perfect your lien rights.

An Unsigned Contract – Is It Binding?

If you do not sign a contract but do the work do you have a binding written agreement? As with so many situations in the law, it depends. What it depends on, are the facts.

Our personal and business lives are busy and hectic. We now have voicemail, email, text messages and tweets. It is easy to overlook the details and forget to dot the i’s and cross the t’s. However, failure to do so can have consequences.

Let’s suppose you are a subcontractor and you give a bid to a general contractor who is from out of state for a job here in Illinois. The bid is verbally accepted and the job needs to start right away so you commence work. After the work is started you receive a seven page Purchase Order and then a few days latter you receive a document titled Construction General Notes and Conditions. The Purchase Order contains a description of the work to be done, a schedule for performance, the contract price and payment terms. The General Notes and Conditions document contains provisions regarding risk of loss, change orders, indemnification and insurance, Acts of God, and liens. It also has a jurisdiction provision that says that any disputes will be governed and construed according to the laws of the State where the general is located which is not Illinois and the courts of that State will have exclusive jurisdiction to decide all disputes. You don’t sign any of these documents but continue performance of the work.

As the work progresses you are delayed by causes you believe are not your fault. You give written notice to the general contractor consistent with the provisions in the Purchase Order and General Notes and Conditions that you will not be responsible for these delays or any damages caused by them. You also follow the payment procedures and requirements as set out in the Purchase Order and General Notes and Conditions. You provide the insurance called for under the written documents and tender the required certificate of insurance.

After you complete the work the general files a lawsuit in its home state and maintains you are liable for delay damages. Do you have to defend in the court’s in the general’s home state? An Appellate Court ruled that the subcontractor had consented to the forum selection clause by its conduct in following the terms and provisions of the written contract documents and was bound by all the terms and provisions even though the Purchase Order and General Notes and Conditions were never signed. What the Appellate Court looked to was the subs course of conduct which showed it was aware of the written contract documents and was following them. The Court did not agree with the sub that all it had was an oral contract by virtue of the verbal acceptance of its bid.

What should you do if confronted with this situation? If you are pressed to begin performance before receiving any written contract documents send a letter saying you will do so subject to agreeing in the future to the provisions of the written documents and if not agreed upon then you are entitled to stop work and receive payment for what is done to date. When the documents are received review them and if not acceptable suspend performance until you negotiate and agree upon all terms and provisions. Remember, no matter how busy you are or how much you want to cooperate to get the job started you need to dot the i’s and cross the t’s otherwise you may encounter unintended consequences.

Let’s look at this issue from a general contractor’s perspective. You send your standard subcontract form out to a sub for signature after verbally accepting the sub’s bid and agreeing on the basic terms, regarding scope of work and price. The sub sends the contract back but makes changes. One of those changes is that the subs warranty will apply and the subs warranty provides that if there is a claim for damages the general can only sue for direct damages which would be capped at the greater of $5000 or the contract amount. You don’t respond to these changes. At the end of the job the owner sues the general for delays and you blame the sub and sue to recover these costs. An Appeals Court ruled the general couldn’t sue to recover these costs because by its conduct i.e. letting the sub proceed with the work, it had consented and accepted the counteroffer that the sub made in sending the subcontract back with changes.

How does a general protect himself from this situation? Again, send a letter out with your form subcontract that says any changes have to be accepted in writing. Also provide in the letter that if the subcontractor begins work without a fully signed agreement in final form it has unconditionally accepted your standard form agreement without any changes.

Remember, no matter how many voicemails, emails, text messages or tweets you receive the details of a contract must be followed up on or you could find yourself in an unexpected and unintended situation.

Unions – Contributions for Non-Bargaining Unit Work

While I am not a labor lawyer per se, since I represent general contractors and subcontractors I sometimes get involved with a union issue. With the downturn in the economy and its devastating effect on the construction and development industries causing many contractors to fail, unions are hurting and their pension and health and welfare funds are taking a hit. One of my clients was recently sued by a union trying to collect contributions owed by another company that had gone out of business and was owned and operated by relatives of some of the existing company owners. The union claimed the existing company was a successor in interest of the company that had gone out of business. I had represented the former company and knew its ownership structure and also that of the existing company and how the existing company came to be organized. Fortunately, I was able to put together in a letter an explanation of how the existing company was distinct and separate and not a related or successor entity to the company that had failed. I showed the union’s attorney the lawsuit was without merit and baseless and let it be known albeit politely that if the lawsuit was not dropped we would seek to have the Court impose sanctions for the filing of a frivolous lawsuit. The union’s attorney agreed to dismiss the suit.

Since I do get involved occasionally with a labor issue, a recent United States Court of Appeals decision caught my eye. It involved a union cement mason worker doing non-bargaining unit work and whether the employer had to make contributions for the non-bargaining unit hours worked. The district court said yes and the Appellate Court affirmed.

The employer had entered a Memorandum of Joint Working Agreement with the local of the Cement Masons Union. This MOA adopted by reference all the Collective Bargaining Agreements between the Union and various employer associations in the geographical jurisdiction of the Union. One of the employers union workers had done non-bargaining unit work such as painting, installing hardwood floors and demolition. The employer did not make contributions based on these hours worked. The Union did an audit and then brought suit to collect contributions for the non-bargaining unit work performed.

There were two Collective Bargaining Agreements at issue and both stated that contributions had to be made for “each hour worked by employees covered by the CBA’s.” The employer tried to argue that certain language in the MOA limited the required contributions to only bargaining unit work. The employer pointed to language that stated the MOA only applied to employees doing bargaining unit work. The US Court of Appeals did not agree that this language placed a limitation on the work for which contributions had to be made. The Appellate Court ruled that all this language in the MOA did was establish that for an employee to be covered under the CBA he or she had to be an employee who does bargaining unit work. The MOA’s language did not limit the CBA’s coverage to employees doing only bargaining unit work. The employer was ordered to make contributions for the non-bargaining unit hours worked.

If you have a MOA with a local of a union that adopts a collective bargaining agreement, make sure you have a copy of the CBA and that you understand its provisions. You can rest assured the union will know what it provides and in this economy the unions are going to take action to enforce these agreements and get every dollar they can for their pension and health and welfare funds. There is nothing wrong with this so long as both parties know the rules and play by them.

Perfecting Your Mechanic’s Lien Rights – It’s Important

I recently settled a matter for a client about two weeks before a trial was to begin. The case involved construction work at a northwest suburban shopping center. The settlement I obtained was very good. I negotiated a settlement for 100% of the amount owed plus $50,000 of accrued interest. The situation that existed shows why it’s so important to perfect your mechanic’s lien rights within the time limits provided by Illinois law.

The client is an out of state general contractor. There were two contracts involved. One to build a store in the shopping center and the other for outside work.(sidewalks, landscaping etc.) Both of the contracts were with the owner of the shopping center. As is usual the owner was a limited liability company formed for the purpose of developing the property. In other words a shell entity with no assets other than the shopping center being constructed. A money judgment against an entity such as this is usually uncollectible.

After my client finished building the store the owner did not make the final payment and strung my client along with continued promises of payment. This went on for several months. Unknown to my client, the owner was in financial trouble with its bank and needed to sell the center in order to pay off the construction loan and reduce the loan that had been obtained to purchase the land. While my client was trying to get paid for the work it did to build the store, it began the outside work. Without my client knowing about it the owner sold the shopping center to an investment group who obtained a new mortgage to purchase the property. After months of trying to get paid this general contractor contacted me having gotten my name from one of its subcontractors who I represent.

By the time I got the case work on the store had been completed more than four months before. The last day worked on the outside contract before the contractor pulled off the job was still within the four month period. I took action to prepare and record two mechanic’s liens. One for the work done to build the store and the other for the outside work. The liens were for over two hundred thousand dollars each.

The Illinois Mechanic’s Lien Act provides that in order to perfect a lien as to all parties it has to be recorded within four months of your last day worked. In this case one lien was within the four months and one was outside four months. Unfortunately for my client there is a quirk in the Appellate Court decisions that interpret the mechanic’s lien act that allows a third party to purchase property and ignore a lien if it is recorded outside the four month period. This is the situation my client was in.

I filed a lawsuit and so did a number of other contractors who did other work for the owner at this shopping center. All the cases were consolidated before one Judge. Not long after the lawsuit was filed the owner and its lender brought a motion to dismiss that part of the lawsuit involving the lien claim recorded outside the four month period. They also tried to dismiss the claim in the lawsuit for the amount owed for the outside work.

While I made a sound argument why the lien claim for the work done to build the store which was the lien recorded beyond the four month period should not be dismissed the trial court did not accept the argument and this lien claim was dismissed. The trial court rejected the argument to dismiss the claim for lien involving the outside work. The lien for this work was recorded within four months of the last day worked.

With regard to the lien for the outside work my client was in an excellent position. Since the lien was timely recorded it had an absolute priority over the ownership interest of the new owner and also its lender. A title company had insured the owner’s interest and the first position of its mortgage lender. How the original owner ever got the sale closed without obtaining final waivers from my client and all the other contractors remains a mystery. However, I knew that if I could prove my client’s claim the title company would have no choice but to pay since it had issued a policy of title insurance guaranteeing to the new owner its title and the first position of its mortgage lender. Fortunately my client kept good records on this part of the job and I felt confident that we could prevail. The mechanic’s lien act does provide that interest accrues on the amount owed at ten percent per annum from the last date worked. As I said above this aspect of the case was settled right before trial for the entire amount owed and a significant amount of the interest that had accrued.

The lesson to be learned is how important it is to timely perfect your lien rights. In this case not doing so with regard to the amount owed to build the store was very costly. The contractor failed to timely perfect a $200,000 claim.. While I understand the conflict between sales/customer relations and collections, you need to be aware of what it might cost if you don’t act to perfect your lien rights. In this case with regard to the work done to build the store the client lost over two hundred thousand dollars. On the other hand you can see what leverage we had for the lien claim regarding the outside work. The title company was on the hook and I knew it. The fact the lien had been properly perfected gave me great leverage in negotiating an excellent settlement.. The title company was in a bad situation and I capitalized upon it to the benefit of my client. Remember once you properly perfect your lien rights you don’t have to rush into a lawsuit and have time to negotiate a compromise. However, once you fail to perfect your lien rights you are going to be at the mercy of a third party purchaser and its lender. I think you know what is the better position.

Implied Warranty of Habitability – Expanded Again!

I know there is not much residential development occurring these days. However, this segment of the construction industry will come back (HOPEFULLY). There have been some recent developments with the legal concept of the Implied Warranty of Habitability that those of you who do residential work or are developers need to know since it can affect your exposure to liability.

Two decisions have been rendered by the Illinois Appellate Court First District arising out of one condominium development that expand the Implied Warranty of Habitability and affect a disclaimer of the warranty.

Every sale contract for the construction and conveyance of a single family residence including condominiums includes the implied warranty of habitability. This warranty is well known to builders-vendors or in other words contractors who build and sell houses. The core principle of the implied warranty of habitability is to protect purchasers of residences and hold builders accountable for latent defects in the residences they construct. However, what if your not the seller of the residence but a general contractor who builds for the developer of a project? In the first Appellate Court decision that arose out of this condominium development this issue was addressed.

After the project was completed, the developer of an eight unit condominium went out of business. The developer didn’t do the construction work but hired a general contractor. Serious defects arose and the homeowners association sued the general contractor and several of the subcontractors. The general contractor brought a motion to dismiss and argued that there was no liability since the general was not the seller of the residences and the implied warranty of habitability did not apply since the general was not the builder-vendor. The Trial Court agreed and dismissed the case. The Appellate Court reversed and ruled that although prior cases referred to builder-vendors it would defeat the policy goal of the implied warranty of habitability to hold builders accountable for latent defects to limit the warranty’s application to builders who are also vendors. What this decision means is that if you are a general contractor and enter a contract with a developer for construction of a residential project you and your subcontractors are going to be subject to liability under the implied warranty of habitability. This is so even though you have no connection with the buyers contracts.

The implied warranty of habitability can be disclaimed in the contract of sale. If the disclaimer language is specific, conspicuous and fully discloses the consequences of its inclusion and truly reflects the agreement between the parties, it will be upheld. In this condominium project the developer’s contracts with the purchasers had language disclaiming the implied warranty of habitability. When the case was returned to the trial court, the general contractor and one of the subs made another motion to dismiss, this time based on the disclaimer in the sale contracts. The general contractor argued that since the implied warranty was waived as to the developer it was also waived as to the general and its subcontractors. The Trial Court agreed and dismissed the case again. The condominium association appealed again and the Appellate Court reversed again. The Appellate Court referred to a prior Illinois Supreme Court decision that held the burden to establish a knowing waiver of the implied warranty is on the builder and that disclaimer language will be strictly construed against the builder. Remember as noted above, the language of a disclaimer has to be not only conspicuous and fully disclose the consequences of its inclusion it also has to be specific. The Appellate Court held that while the disclaimer clearly mentioned the developer it said nothing about the general contractor or its subcontractors. In determining the disclaimer was not applicable the Appellate Court noted there was nothing in the sale contracts to indicate that the individual unit owners agreed to disclaim the warranty as to the general contractor or its subs or that they were aware of the possible consequences of disclaiming the warranty as to them.

These two Appellate Court decisions have definite consequences for those of you engaged in residential construction. If you’re a general contractor working for a developer you had better make sure the developer’s disclaimer of the implied warranty of habitability includes you and your subcontractors. If you’re a sub you should also check the developer’s disclaimer language. If you’re not included then you need to make sure your contract with the developer or your contract with the general has indemnity language to protect you if a lawsuit on the implied warranty of habitability is filed. If you don’t protect yourself you may find yourself on the wrong end of an implied warranty of habitability claim that could be avoided. If you need assistance drafting appropriate language to protect yourself give me a call.

Spoilation of Evidence – What Is Your Responsibility

Let’s assume you are running a job and an I-beam you are installing fails and falls to the ground and several of your men are injured. You are informed of the accident and immediately go out to the jobsite to inspect. You take pictures of the site and the I-beam. The public agency that has jurisdiction as well as OHSA come out and make an inspection. The next day you destroy the I-beam. One of the reasons you do so is to salvage the embeds because the manufacturer informs you that a replacement can be made more quickly if the embeds are retrieved and sent back as soon as possible. Another reason you destroy the I-beam is because the public agency involved advised that you could not leave it where it fell. However, you acknowledge the beam could have been preserved by bringing in equipment to lift the beam and remove it from the jobsite.

Your employees file a lawsuit against the manufacturer of the I-beam and the designer of the bearing assembly and you. The employees lawsuit against you is based upon spoilation of evidence. The employees contend you had a duty to retain the beam as potential evidence; you breached that duty by destroying the beam and that as result they are not able to prove their claims against the manufacturer and designer. Are you liable?

The Illinois Supreme Court recently held a contractor in this situation was not liable to his employees for negligent spoilation of evidence. Spoilation of evidence is a form of negligence and in order to recover there first has to be a duty owed to preserve the evidence. As a general rule the law in Illinois is that there is no duty to preserve evidence. However, as you know there are exceptions to every general rule. There is a two prong test that a plaintiff must meet in order to establish an exception to the general “no-duty rule.” Under what is call the “relationship” prong of the test there needs to be shown an agreement, contract, statute, special circumstance or voluntary undertaking that gives rise to a duty to preserve the evidence. The second prong of the test is known as the “foreseeability” prong and here it needs to be shown that the duty extends to the specific evidence at issue and that a reasonable person in the circumstances that exist should have foreseen that the evidence was material to a potential civil action. If a plaintiff does not meet both prongs of the test there is no duty to preserve the evidence at issue.

The Illinois Supreme Court held that a voluntary undertaking requires a showing of affirmative conduct that reveals an intent to voluntarily assume a duty to preserve evidence. The Supreme Court found that the contractor’s conduct fell short of a voluntary undertaking to preserve evidence. The Court focused on the fact that the I-beam was not moved from where it fell. Also the fact the contractor, the public agency having jurisdiction and OSHA inspected the beam was not enough to constitute “affirmative steps to preserve the I-beam as evidence.”

The contractor’s employees also argued that “special circumstances” existed. They pointed to the contractor’s exclusive possession of the I-beam; his status as their employer; and his status as a potential litigant. The Supreme Court did not agree. As far as possession is concerned the Court held that more than possession is required such as a request by the plaintiff to preserve the evidence and/or segregation of the evidence for the plaintiff’s benefit. The Court also held that the employer-employee relationship in itself is not a “special circumstance” giving rise to the duty to preserve evidence. In rendering its decision the majority opinion glossed over the contractor’s position as a potential litigant. There was a dissenting judge who found that “special circumstances” did exist because the contractor admitted the accident would be the basis for future litigation and the fact that the plaintiff’s did not request that he preserve the I-beam was due to the fact they were hospitalized and could not act on their own.

If you have a job and an accident occurs what should you do? Although the general rule is you have no duty to preserve evidence I would counsel that you take a more conservative approach than what the contractor did in this case. Today’s society is prone to litigation and everyone knows that lawsuits are commonly filed. In my opinion it was a “stretch” to find that “special circumstances” did not exist. If the I-beam had been preserved and tested it may very well have been found a defect existed in its manufacture or that the bearing assembly was defective. If you are faced with a similar situation be cautious in what you do.

An Unsigned Contract with a Twist

In the January issue of this newsletter my article dealt with a trial I won that involved an unsigned contract. The trial court found in my client’s favor based upon the facts. Currently I have another situation involving an unsigned contract but this time there’s a twist.

My client gave a proposal based upon a bid set of drawings. The proposal was accepted via an email “intent to award contract.” The general contractor is a design build firm and proceeded to send my client its form subcontract agreement. The subcontract listed the plans and specifications on three pages referring to the bid set of drawings all of which were dated in May and June, 2013. My client never signed the subcontract nor did the gc.

About a month after receiving the subcontract a scope review meeting was held in the field and certain items were pointed out that were not on the drawings. It was agreed this work would be done and a price given and accepted. My client then proceeded to do certain of the preliminary work. At this point if the story ended you might think my client is bound by the subcontract even though not signed. Remember from the January article, the parties conduct can show that an unsigned contract is binding. But wait, there’s more.

In December of last year my client and all the other subs received an email from the gc advising that the “construction” drawings are now on line and that from that point forward they are to be used. The “construction” drawings are dated October 30, 2013. As I said the gc is design build and its architectural division prepared the “construction” drawings. Contrary to industry standard the changes to the “construction” drawings were not clouded so picking up where these plans differed from those listed in the subcontract and upon which my client’s bid was based was not easy.

My client’s estimator made a detailed review of the new drawings and found they required additional work that would cost $36,000 more. The gc was notified of the price increase and because the work was now to be done per different plans my client requested a new contract. The gc responded by asking my client to give a breakdown of the additional cost. This was done and again a request was made for a new contract. This second request was ignored and the gc responded to my client’s breakdown by saying the request for additional compensation would be considered. In addition many items were just referred to as being on hold. My client became suspicious and decided to walk off the job and ceased performance. This action was not met favorably by the gc.

Once my client refused to return to work the gc’s project manager threatened to replace my client and hold my client responsible for the additional costs incurred. After a few telephone conversations and email exchanges the gc issued a formal letter of termination and advised my client that it would be held responsible for the additional costs being incurred plus liquidated damages for project delay. At this point my client asked me to get involved and respond to the gc’s threats.

Based upon these facts I have taken the position that no contract exists. The difference in this situation and the one I wrote about in my January article is this time a basic element of contract law is missing, “a meeting of the minds.” How can there be a contract if the gc changes the plans?

I advised the gc the termination notice is meaningless since no contract exists. Also I advised them it didn’t take a genius to figure out what they were trying to do by issuing a “construction” set of drawings after my client began performance which were not clouded and then insisting that they continue performance under a new set of plans while the issue of what would be paid for was worked out. Not surprisingly the form subcontract agreement provides that if the sub does extra work without a signed change order it won’t be paid for.

I also advised the gc if a lawsuit is filed it will be vigorously defended and a counterclaim asserted for lost profits, fraud, misrepresentation and punitive damages. As you can see whether an unsigned contract is binding depends on the facts. In this case there is no contract because how the work was to be done and what it consisted of was not agreed upon. As of the writing of this article no response has been received from the gc or its legal counsel. Stay tuned.

Public Work – No Bond Doesn’t Mean No Pay

On public jobs the government entity i.e. IDOT, Village, School District, or Park District is required by law to obtain from the general contractor not only a performance bond but also a payment bond. These requirements are set forth in the Illinois Bond Act. The performance bond protects the government entity and the payment bond protects both the government entity as well as subcontractors providing materials and labor. The Bond Act does require a claimant to file a verified notice of its claim within 180 days after the date of the last item of work or the furnishing of the last item of materials.

What happens if the government obtains a performance bond but fails to get a payment bond, the general contractor goes bankrupt and the subcontractor does not give the required notice within 180 days of the last date worked? Is the subcontractor out in the cold? A recent Illinois Appellate Court decision out of the 2nd District Appellate Court addressed this situation.

The facts showed a Village did not require a house builder who was developing two subdivisions to provide payment bonds. The Village obtained performance bonds but not payment bonds. A subcontractor who did work did not file a claim within 180 days of its last date worked. Its excuse was that it wanted to maintain its relationship with the builder and not risk the loss of future work. As a result of the downturn in the economy the builder/developer filed bankruptcy. The subcontractor filed a lawsuit against the Village and maintained it was what the law calls a third-party beneficiary of the contract between the Village and the builder and could hold the Village liable for the amount due the subcontractor. The Appellate Court agreed. It found that the provisions of Section 1 of the Bond Act that require the furnishing of a payment bond are read into the provisions of every construction contract for public work. In order to be a third-party beneficiary of a contract you have to show that the contract at issue was entered into for your direct benefit. The Appellate Court held this requirement was satisfied since Section 1 of the Bond Act was incorporated into the contract at issue. The contract also had a provision in which the Village acknowledged that in constructing the public improvements the general contractor would be using subs and material suppliers. The Second District Appellate Court held that the 180 day requirement to file a claim did not apply since no bond had been obtained. A similar case out of the First District Appellate Court (Cook County) holds just the opposite.

The subcontractor’s decision not to timely perfect its claim was a risky decision. I fully understand the “business decision”. It’s the usual sales vs collections dichotomy. The situation would have been different had the job occurred in Cook County since an Appellate Court decision already existed finding that even though a payment bond had not been posted it was still necessary to give the required notice in order to make a third-party beneficiary claim. The moral of the story is that it’s always better to follow the requirements of the law regarding perfecting a claim. But if you don’t all may not be lost except in Cook County.

Architectural Copyright Infringement – Successful Result

Our client entered into an agreement to design a multi-million dollar luxury house. The design process took over two years and designs were made for several different sites. Finally, husband and wife decided upon a site but after construction began terminated my client. The design agreement had a provision that the plans could be purchased for a certain percentage of the estimated cost of construction. The homeowners didn’t want to pay for the design so they retained another architect who “supposedly” created an entirely independent design. The new architect allegedly created this independent design in just two months.

My client obtained a copy of the “new” plans and there was no doubt they were not independently created. This particular client has built a business based upon one of a kind designs and is committed to protecting the company’s design work. There was no good reason for the client being terminated except interference from outside sources. My client was not about to let two years of work be taken and not recover for the many hours of work involved in creating a truly unique luxury house that incorporated the stunning creativity of his design team.

Architectural plans have copyright protection. If there is infringement by unauthorized copying a lawsuit can be instituted in Federal court to recover damages. The damages recoverable are the reasonable value of the plans, the profit that would have been made if the builder had built the house and depending on when infringement occurs attorneys fees and costs. I filed a lawsuit to recover all of these damages.

Since I’ve had experience with this type of matter before (not only filing suit but going all the way through trial and judgement) I knew the best way to proceed was to have the two sets of plans compared. I had this done not only by my client’s chief in house architect but also by an independent architect retained as an expert witness. Both architects concluded that the infringing plans were almost an exact duplicate of my client’s plans. Room sizes were the same, as were room locations, niches, wall thickness and other interior details. Our expert concluded this could only have occurred if there were tracing, scanning or use of computer disk. The exterior design was modified slightly but not to any great extent.

Once we filed suit the homeowners countered with eighteen affirmative defenses, a counterclaim and a third party complaint. In addition they tried to bury us with discovery requests. Since most records are now kept on computer there are issues that arise concerning how computer records are maintained and what information is within a record kept by computer. ESI issues(electronically stored information) are the new hot topic in litigation. I had to overcome a twenty-seven page letter from my opponents addressing what were alleged as discovery response deficiencies. I learned a great deal about ESI but overcame their objections.

Once my opponents realized my client was not going to cave in and that I knew what I was doing in an architectural copyright infringement lawsuit (my opponents were the Intellectual Property practice group of a large law firm) they requested that a mediation/settlement conference be held. My client and I set certain parameters that the homeowners had to consent to before agreeing that we would participate in settlement discussions. The parameters concerned a certain dollar amount the homeowners had to be willing to offer in settlement before we would lower our settlement demand.

Before participating in the mediation/settlement conference I submitted a detailed “Pre-Settlement Conference Letter” setting forth my client’s position and the strengths of our case. I emphasized the substantial similarity of the infringing plans to my clients drawings and that the test to determine copyright infringement of architectural drawings is the ordinary observer test. “Two works are substantially similar if the ordinary observer, unless he sets out to detect the disparities would be disposed to overlook them and regard their aesthetic appeal as the same.” In Federal Court settlement conferences are usually conducted not by the trial judge but a magistrate judge. Fortunately we were before a magistrate who was experienced, took the matter seriously and reviewed all of the material before we got to court. My client explained in detail the similarities in the plans and how certain unique things his company does in their drawings were copied in the infringing plans. It didn’t take the magistrate long to see through the homeowners defenses and conclude they were weak at best. One of these defenses was that the homeowners contributed so many ideas for the design that they were co-authors of the plans. This contention was not only refuted by a provision in the design agreement but also not supported by case law. “This is because the drawing is not created until it is fixed in copy and the ideas and sketches contributed by the homeowner do not sufficiently constitute fixed expressions of ideas(that is, copyrightable work) to make the buyer a co-creator.”

Before beginning the settlement conference my client told me the bottom line number he would take in settlement. We never had to consider that number because a significantly higher amount was negotiated and obtained. I think the reason this came about was because I had put together a very sound case that was supported factually and in the law. Also of great importance was the other side realized my client was steadfast in his conviction that his company’s unique design work was not going to be taken and he was going to protect the foundation upon which he built his company’s reputation. If that meant going all the way through trial then so be it. Fortunately a very good settlement was obtained and the inconvenience, time and expense a trial takes was avoided.

Architectural copyright infringement cases are intricate and somewhat complex. However, I know how to prepare a case like this and for me as a lawyer they are challenging and present issues where my lawyering skills can be used. This type of case doesn’t come along too often but when it does I am well equipped to handle the matter and welcome the opportunity.

Good Corporate Governance – Revisited

In the June 2010 issue of this newsletter I wrote about corporate governance and how important it is to maintain corporate formalities. The reason for doing so is to avoid a claim of “piercing the corporate veil” should your business run into difficulties. The reason you do business as a corporation or limited liability company is to protect your personal assets from creditors of the business. If you think you can outsmart everyone by forming a company and having others be the shareholders, directors and officers and avoid creditors claims think again. A recent Illinois Appellate Court opinion expanded the ability to pierce the corporate veil and hold an individual responsible.

A creditor of a corporation obtained a judgment against the corporation. It turned out to be non-collectible against the corporation so a new action was instituted to pierce the corporate veil and hold an individual responsible. However, this individual was not a shareholder, director, officer nor employee of the corporation. Upon being served with a summons he made a motion to dismiss and the trial court granted it. The Appellate Court reversed. The facts showed that the defendant’s sister owned all the stock in the corporation and she and her husband were the directors and officers and registered agent for the corporation. However, the defendant provided the funds to start up the business, negotiated the corporations lease and arranged sales agreements. It was alleged that no corporate formalities were followed such as issuing stock, holding meetings of stockholders and directors nor were dividends ever paid. The creditor claimed that the named individual exercised control over the corporation to such a degree that separate personalities of the corporation and individual did not exist.

The Appellate Court in finding that a valid claim for piercing the corporate veil was stated focused on the individual’s domination of the corporation. The Appellate Court stated “it would elevate form over substance to allow the defendant to avoid personal liability merely because he has avoided owning stock in his own name and assuming a corporate title such as officer or director.” What counts is if you are the “principal figure” in the corporations dealings with others. Accordingly, lack of status as a shareholder, director, officer or employee is not going to preclude piercing the corporate veil if you are in fact the person “in charge” and calling the shots even though you do so behind the scenes.

As I advised in my June 2010 article good corporate governance is of critical importance and should be strictly followed. You don’t want your personal assets subject to a “veil piercing” claim. It’s never advisable to think you can outsmart everyone. As this Appellate Court decision shows being the power behind the scenes is not going to shield you from personal liability. For a nominal yearly fee we maintain our clients corporations and LLC’s. If we are not already providing this service for you, I suggest you consider having us do so.

Another Appellate Court Smack Down for Architects and Engineers

The Illinois Mechanic’s Lien Act clearly provides that architects, structural engineers, professional engineers (i.e. civil engineers) and surveyors have a lien if they provide “any services or incur any expense” in, for or on a lot or tract of land for the purpose of improving the property. For some reason the Illinois Appellate Courts don’t want to recognize this language of the Act and continue to hold that these professionals have to show their services improved the property before they can have a lien. I addressed this issue in the August, 2010 issue of this newsletter. Just recently a majority opinion of the Illinois Appellate Court, Third District, got it wrong again.

In this most recent smack down for architects and engineers, a civil engineering firm did preliminary engineering and performed land surveying services for a preliminary and final plat. The development did not proceed. The civil engineering firm claimed a lien for its services and filed a lawsuit to foreclose its lien. The Bank holding a mortgage on the property sought dismissal of the engineer’s lien. A motion for summary judgment was granted in the Bank’s favor on the ground the civil engineering and land surveying services provided did not constitute an improvement to the property. The civil engineering firm appealed.

The majority of the Appellate Court upheld the trial court and again relied upon a line of decisions that hold the purpose of a mechanic’s lien is to permit a lien where a benefit has been received by the owner and where the value or condition of the property has been increased or improved by reason of the furnishing of labor and materials. The Court’s reasoning is wrong. What the Appellate Court failed to realize is that the line of decisions relied upon are the typical situation where a contractor or subcontractor furnishes labor and materials to a job. Architects and engineers don’t furnish the usual type of materials and labor. They provide designs and drawings but they do so for the purpose of improving land and the Act specifically states they have a lien for the type of services they provide. The fact that a development doesn’t go forward doesn’t mean the services were not provided for the purpose of improving the property.

One Judge dissented and this judge got it right. The dissent stated the appropriate inquiry is whether the services were provided “for the purpose of improving the subject property.” This Judge referenced the specific language of the Act and stated the Act allows architects and engineers to have a lien regardless of whether the services actually improve the property. The dissent referred to the fact the engineering services were used to obtain financing and municipal approval for the development. As this Judge stated, “Professionals who design buildings and developments should not be penalized for an owner’s choice not to proceed with a construction project.”

In my opinion this Appellate Court decision is flat out wrong since it ignores the explicit language of the Illinois Mechanic’s Lien Act. Hopefully this engineering firm will petition the Illinois Supreme Court to allow a further appeal to our State’s highest Appellate Court. This is a significant issue and should be addressed by our Supreme Court. Hopefully they will read the Act and enforce the Act’s explicit provisions in favor of design professionals.

Builders Beware

Alan L. Stefaniak

Alan L. Stefaniak

We have all heard the phrase “Buyer Beware”. A recent Illinois Appellate Court decision turns the table on residential homebuilders and those of you who build houses now “need to be aware.” Illinois has long recognized the Implied Warranty of Habitability in residential construction. The purpose of the implied warranty is to protect home buyers from latent defects and place the responsibility for the costs of repair on the builder-vendor who created the latent defect.

Over the years the implied warranty of habitability has been expanded to apply to subsequent purchasers if there is a short intervening ownership between that of the first purchaser. The warranty has also been held to apply not only to builders but developers and in some cases to subcontractors if the original builder is no longer in business. The implied warranty of habitability not only applies to new construction but also remodeling. While Illinois Courts have expanded the warranty from what was first announced, the implied warranty can be disclaimed if there is a knowing disclaimer that is conspicuous, fully discloses its consequences and clearly sets forth that the disclaimer is the agreement of the parties.

The Illinois Appellate Court, First District, recently extended the implied warranty of habitability to a subsequent purchaser who bought the house three years after it was first built; the defect didn’t arise until a year after the second sale which means four years after construction; the subsequent purchaser bought the house Aas is@ and what’s even more disturbing is that in the initial sale there was a disclaimer of the implied warranty that met all the criteria for a valid waiver.

The Appellate Court ruled that since the implied warranty of habitability does not depend upon privity of contract and since the second purchaser did not have notice that the implied warranty had been waived, the subsequent purchaser could bring a claim against the builder for breach of the implied warranty.In my opinion this decision makes residential home builders virtually guarantors of the house.The only salvation in the Court’s decision is that it held the subsequent purchaser still has to prove that there are in fact latent defects in the house; those defects interfere with the reasonably intended use of the house; and that the latent defects arose within a reasonable time after the house was purchased. The case was sent back to the trial court for determination of these issues. It remains to be seen if a reasonable time means from initial construction or after the second purchaser buys the residence.

Almost all residential builders include a disclaimer of the implied warranty of habitability in their contracts. However, this decision means that is no longer protection against the claim of a second purchaser. How can a builder protect itself? I suggest if you are building on your own lot you have the waiver of the implied warranty on a separate document and record it. If you’re building on your customer’s property include in the contract a provision that gives you the right to record the disclaimer of the implied warranty of habitability. If this is done at least an argument can be made that the subsequent purchaser had constructive notice that the implied warranty was waived. If you would like assistance in preparing such a document contact me.

Mechanic’s Lien Act – Amendments

Alan L. Stefaniak

Alan L. Stefaniak

In the March 2012 issue of this newsletter I addressed the Illinois Supreme Court’s decision in the case known as Cypress Creek. This is the decision that stood on its head the concept of enhancement when there are competing liens of a prior mortgage and mechanics lien claimants. In Cypress Creek the majority of the Court held that if construction disbursements are used to pay for lienable work the lender is subrogated and has equal priority to an enhancement claim under section 16 of the Mechanic’s Lien Act. As I advised in the March issue this decision adversely affected a mechanic’s lien claimant faced with an enhancement situation since it would dilute the lien claimants percentage of any sale proceeds.

Legislation was introduced to overturn the Cypress Creek decision. I am pleased to report that this legislation was passed and signed into law by our Governor on February 11, 2013. The law takes effect immediately. The bill passed with the minimum number of votes for passage, 60. There were 44 votes against and 9 present votes.

The passage of this legislation and enactment into law is important because it restores the concept of enhancement as set forth in Section 16 of the mechanic’s lien act. Section 16 as amended now clearly provides that a prior mortgage holder is only preferred as to the value of the land at the time the contract is made and shall not be preferred to the value of any subsequent improvements. Further Section 16 as amended provides that each mechanic’s lien claimant is to be preferred to the value of all subsequent improvements whether or not they were provided by the lien claimant.

In my opinion these amendments regarding enhancement were essential to level the playing field once again. I doubt if restoring the concept of enhancement is going to stop construction lending as some in the banking industry have predicted. While it may cause lenders to more carefully scrutinize their risk and take precautions to better protect their interests, that is a good thing. Certainly a lender is in a much better position to protect itself then those in the construction industry such as subcontractors, material suppliers, architects and engineers who are most times removed from the credit risk analysis process. After the Supreme Court’s decision in Cypress Creek I read in several trade articles about dire situations where contractors lost several hundreds of thousands of dollars in enhancement situations and several were forced into bankruptcy. These unfortunate situations should no longer occur and those who have provided value to the property will now be better able to recover for their work when a project runs into financial difficulty or goes bust.

The bill that dealt with enhancement also made another amendment to the Act. Section 34 allows an owner to serve on a mechanic’s lien claimant a notice to proceed to file suit and if not done in thirty days the lien is lost. The notice that is given must now provide a warning. It has to contain the following language in at least 10 point bold face type: Failure to respond to this notice within 30 days after receipt, as required by Section 34 of the Mechanic’s Lien Act, shall result in the forfeiture of the referenced lien.

Another amendment to the Mechanic’s Lien Act took effect on January 1, 2013. In response to the slowdown in our economy especially with regard to commercial projects which are often started but then stopped and put on hold Section 6 of the Act has been amended to state that a claimant can still have a lien so long as the work is done or material furnished within 3 years from the time it is commenced as to owner-occupied residential property and within 5 years as to any other type of property.

While the amendment to Section 6 is not as dramatic as the amendment overturning the Cypress Creek decision it is still important and a benefit to those of you in the construction industry. If you have any questions as to how these amendments might affect any situations you are confronting give me a call or send me an email and I will be happy to respond.

Illinois Supreme Court Gets It Right – Finally

In the February issue of this newsletter I wrote about an Illinois Appellate Court decision that dealt with the lien rights of design professionals. The article was Another Appellate Court Smack Down for Architects and Engineers.” The Appellate Court held that design professionals can only have a lien if their services increase the value of the property or the property has actually been improved by reason of their services. I stated this decision was “flat out wrong” since it was contrary to the explicit language of the Illinois Mechanic’s Lien Act. As I previously informed you this case was further appealed to the Illinois Supreme Court. I am pleased to advise you our Supreme Court reversed the Appellate Court. This is a major victory for architects, structural engineers, professional engineers and surveyors.

As you will recall this case involved a civil engineering firm who did preliminary engineering and performed land surveying services for a preliminary and final plat. The development did not proceed. In a contest between the mortgage lender and the engineering firm both the trial court and the Appellate Court ruled that since the development did not proceed there was no increase in the value of the property and no physical improvement was made. Accordingly the engineer had no lien. The trial and Appellate Court ignored the explicit language of the Act that provides design professionals have a lien if they provide “any services or incur any expense” if it is for the purpose of improving a lot or tract of land. Fortunately, the Illinois Supreme Court did not ignore the language of the Mechanic’s Lien Statute and specifically referred to it in reversing the Appellate Court decision on this issue.

The Illinois Supreme Court stated, “If a physical improvement is required for an engineer to secure a lien for their work, then these professionals would be subject to the whims of the parties with whom they contract, who may decide to complete the project or not. Such an outcome is contrary to the protective purpose of the Act.” In rendering its decision the Illinois Supreme Court seemed a little taken aback by the Appellate Court’s position that a physical improvement or increase in property value had to exist before a design professional had a lien. The Supreme Court cited to a decision it rendered way back in 1900, Freeman v Rinaker and another it rendered in 1930 Crowen v Meyer and said both decisions stand for the proposition that a design professional is entitled to a lien if the services provided are rendered for the purpose of improving property. The Illinois Supreme Court stated it saw no reason to depart from this rule.

I have represented several architects and engineers and have confronted this same issue. In most cases a design professional’s need to assert a lien arises when the project doesn’t proceed. In these situations there is no physical improvement to the property and while there may be an increase in the property’s value it can be difficult to quantify and prove. I have advocated for the position that the Illinois Supreme Court has now ruled is the law under the Illinois Mechanic’s Lien Act. I am very pleased that the Illinois Supreme Court got it right. There is now an Illinois Supreme Court decision that upholds the specific language of the Act in favor of design professionals – FINALLY!

The Pitfalls of Zoning

As many of you know in addition to concentrating my practice on Construction law and litigation I do a great deal of zoning work. Once the “Great Recession” hit this area of my practice dropped off considerably. Now that the economy has picked up, I find this area is getting busier and I have several current matters that I am handling. Not like the “Old Days” with large scale residential and commercial projects but smaller projects are being undertaken that need municipal entitlements.

Zoning and land development law is an interesting area but a minefield. Each municipality has its own Zoning Ordinance and Subdivision regulations. These need to be reviewed and understood with every case since each City or Village has its own rules and procedures. You need to not only know them but make sure you adhere to the required rules and procedures. A recent Illinois Appellate Court decision brought home that Zoning lawyers need to know and follow the rules precisely or suffer the consequences.

A developer’s large high rise project (13 stories, 155 feet tall) was approved by the City of Chicago and the neighboring property owners were not pleased. They filed a lawsuit and contended the project was oversized and out of character with the neighborhood. They also complained there was inadequate off street parking. The lawsuit requested that the rezoning be declared invalid because it would cause changes to their neighborhood that would diminish property values and was arbitrary and capricious and violated their right to substantive due process of law. Unfortunately for the neighbors none of these arguments were reached by the trial court.

There is a State Statute that requires when you are challenging a rezoning in municipalities of 500,000 or more in population that you give notice of your lawsuit to all property owners within 250 feet of the property that was rezoned. The Statue provides that a property owner who is entitled to notice who shows that his property will be substantially affected by the lawsuit can enter an appearance and if he does so he’ll have the same rights as a party to the suit.

Unfortunately for the neighbors their attorney did not precisely follow the notice requirements. When a zoning search was done several parcels were listed as “tax exempt” and no notice to these owners was given. In addition the common address of the property was used in determining owners within 250 feet. However, the common address only included two of three parcels. Accordingly, not all properties within 250 feet were picked up and several were not given the requisite notice of the lawsuit’s filing.

The Developer and City of Chicago sought dismissal of the lawsuit and the trial court granted their motion to dismiss. The dismissal was upheld on appeal. The neighbors argued that they had made a bona fide effort to comply with the Statute and that substantial compliance was achieved. The Appellate Court did not agree and held that strict compliance with the Statue was required. The neighbors also argued that proper notice had been given with regard to two out of the three parcels and their lawsuit should be allowed to proceed with regard to those parcels. Again the Appellate Court did not agree and held that the Statute does not refer to the common address of the property. The Statute refers to the location of the property involved and its property index number. In ruling against these neighbors the Appellate Court emphasized that substantial compliance is not enough since every property owner within 250 feet may either want to defend the zoning or assist the plaintiff in challenging it. The Appellate Court ruled that the purpose of the Statute cannot be met unless all property owners entitled to notice are given the required notice.

The moral of this story is to know the rules and precisely follow them. If a property is listed as tax exempt more has to be done to determine who the owner is and provide the requisite notice. In addition don’t rely on the common address but use the legal description. Unfortunately for the zoning lawyer involved in this case a lesson was learned but the hard way.

Unsigned Proposal Found Binding – The Last Hurrah

In the June 2012 edition of this newsletter my article was “An Unsigned Contract-Is It Binding?” I advised that it depends and what it depends on are the facts. In September of last year I tried a case for a long time client who had given a proposal to manufacture and erect flexicore slabs for a warehouse building in Bloomington. The client’s proposal was not signed so we had a real life experience with an unsigned contract. We prevailed at trial. The trial judge found in our favor based upon you know what, “the facts.”

I have represented this client for over thirty years. While it’s a family owned business during those thirty years I have worked with three different management groups. I am very proud that I was able to satisfy three different management teams and keep the client for all these years. Unfortunately with the downturn in the economy in 2008 and the profound effect this recession had on the construction industry the client ceased operations in 2010. At this time we had a couple of claims pending and were able to settle all but one. We had to go to trial on the last one involving the unsigned proposal. The trial took place in McLean County in downstate Bloomington. We had a day and a half bench trial and the Judge found in our favor because I was able to prove that through the parties conduct the general contractor accepted my client’s proposal.

In March of 2008 the client issued a written proposal to manufacture and erect flexicore slabs for a 500,000 square foot warehouse building. Our salesman/estimator was not available for trial but I was able to get into evidence company records that showed that in early June a phone call was received from the general’s project manager giving the order to go ahead with the flexicore slabs. Our salesman/estimator then wrote a letter acknowledging the order and asking for full sized copies of the plans and also the specifications for the project. The general sent them a few days later. While the client asked on several occasions that its proposal be signed and returned it never was.

Once my client received the full sized project drawings and the specs shop drawings were prepared and submitted to the general for review and approval. My client and the general then went through a six month process of shop drawing submittal, review, revision and resubmittal until the fourth set of shop drawings was approved. I subpoenaed the general’s project manager who no longer worked for the general as a witness in our case in chief. I was able to have him admit that many of the revisions to the shop drawings were due to changes being made in the building and what was finally submitted and approved met all the job requirements. In addition I was able to have him testify that one of the things the general required of subs it hired was to have the sub submit a certificate of insurance. I was then able to have my client’s business record admitted into evidence showing the general made a request for us to submit a certificate of insurance in early October of 2008 and that we did submit it.

The project for which these slabs were made was never completed because the owner filed bankruptcy. While my client manufactured the slabs they were not delivered and erected since the project went bust. The general didn’t want to pay for the slabs and his main defense was that there was no contract. The owner of the general contractor testified that subs are required to sign their standard form agreement which has a “no pay until I get paid” provision. On cross examination I brought out that they had no record of ever sending their standard form agreement to my client and no copy of such an agreement in their files.

The general also tried to establish that my client was taking the risk of manufacturing the slabs without a written contract being signed. However, I was able to show through emails that were sent back and forth the general knew my client was manufacturing the slabs even before the final set of shop drawings was approved and never took any action to stop my client. The President of my client testified that what was manufactured before the final set of shop drawings was approved was what she termed the “safe slabs”; those that would not change even if changes were made to the shop drawings.

The trial Judge found in our favor and ruled that the conduct of my client and the general showed that my client’s written proposal was accepted. While the trial Judge reduced the amount of damages we were seeking(not uncommon in a bench trial for a judge to give everybody something) he did find that because my client’s proposal was accepted the provision in the proposal for interest at 18% was binding as well as the provision for my client to recover the attorneys fees incurred.

In my June 2012 article I advised that when you have an unsigned contract it can be found to be binding depending on the “facts”. This case I tried bore this out. My petition for interest and attorneys fees is pending before the trial court and I’ll let you know how it turns out. This case was the last one for a long time client. It was our LAST HURRAH and I am pleased we went out with a victory.