Supreme Court Applies 10 Year Statute of Limitations to Indemnity Agreement
A surety issues performance bonds to a contractor. A third-party signs an indemnification agreement with the surety, agreeing to indemnify the surety for the payments made on the bonds. The contractor breaches its contract for construction services and the surety pays out on the bonds. The payments were made between 1994 and 1996. The surety demands payment, the third-party refuses and in 2004, the surety sues for breach of contract stating that the third-party has breached the indemnity agreement.
That’s the start of the situation in Travelers Casualty & Surety Company v. James Bowman et al. (Ill. Sup. Ct. 2008, Doc. No. 103759). The trial court dismissed the action of the surety, Travelers, finding that section 13-214(a) which applies a four-year statute of limitations to certain construction actions applied. Travelers appealed and the appellate court held that the section 13-206 10 year statute of limitations applied to the action.
For those interested, section 13-214(a) and 13-206 read in relevant part as follows and are important to anyone contracting in the construction setting as they are the statutes of limitations usually found applicable to actions arising from disputes over construction agreements:
- 13-214(a)
“Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.”
- 13-206
“[A]ctions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing … shall be commenced within 10 years next after the cause of action accrued…”
Travelers asserted in the Supreme Court that the appellate court was right and that a 10 year statute of limitations was correct since they had brought a claim for breach of contract based on the indemnity agreement with the third-party. The third-party claimed that either the four-year statute of limitations applied, or that an even shorter two-year statute of limitations for contribution and indemnity expressed under section 13-204 applied.
The Supreme Court agreed with Travelers. The court noted that it is the nature of the liability to which a person is subject and not the nature of the relief sought by a party is the test for determining the character of a cause of action. In other words no matter what an attorney might call an action, it is the underlying nature of the action and the facts of the dispute that will determine what kind of action it is.
Here, although construction omissions had led to the payment by Travelers on the bonds, the payment on the bonds triggered obligations under the separate indemnity agreements with the third-parties and when the third-party refused to pay under the indemnity agreements, Travelers had a cause of action against them for breach of contract.
With regard to the second theory of a two-year statute of limitations, the Supreme Court held that the third-party was incorrect in claiming that any of its cases had ever held that a two year statute of limitations would ever apply to actions based on written indemnification agreements. The court stated that the claims of indemnity and contribution addressed under the section 13-204 addressed “cases involving the allocation of damages in connection with an underlying tort claim for injury to person or property.” It went on to state that such a claim based on indemnity was only for “implied indemnity” (where the law offers indemnity) not for the express indemnity (where the indemnity claim is based on an agreement providing that one party will indemnify the other).
“In sum, section 13–204 is applicable to claims for implied indemnity involving allocation of damages in connection with an underlying tort claim for injury to person or property, regardless of whether subsection (a) or (b) is at issue. Section 13–204 is not applicable to claims for express indemnification based on a written contract. Because the claim at issue is based on a breach of express indemnification provisions in a written agreement, it is subject to the10-year limitations period in section 13–206.” Slip. Op. at 12.
The court then held that the 10 year statute of limitation applied to the indemnity agreement.
