Does your indemnification clause permit recovery of costs in prosecuting your own claim?

Posted on February 15, 2010 by Doug Allen

 Maybe…maybe not. Typically, a party will invoke an indemnity provision to seek protection from claims made by some third party. 

However, consider a situation where an owner files suit against its architect alleging certain errors and omissions. In the Complaint, the owner cites the indemnity provision contained in the Owner-Architect Agreement and alleges that it is entitled to damages associated with the retention of experts to investigate the claimed defects and attorneys’ fees and expenses to prosecute the lawsuit against the architect. 

 

Is the owner’s indemnity claim viable? Not surprisingly, the answer depends on the particular language of the indemnity provision. In Illinois, courts interpret indemnification agreements like any other contract clause – a court must give effect to the intention of the parties as determined from the language of the agreement as a whole. See Zadak v. Cannon, 59 Ill.2d 118, 319 N.E.2d 469 (1974) and McRaith v. BDO Seidman, LLP, 391 Ill. App. 3d 565, 577-78, 909 N.E.2d 310 (1st Dist. 2009).

 

Recently, we successfully defeated an indemnity claim similar to the hypothetical above. Essentially, the owner was seeking indemnification from its own claim against the architect. In the case against our client, the Owner-Architect Agreement contained the following indemnification provision:

 

Notwithstanding any other terms and conditions stated herein, including any obligations regarding insurance coverage, Architect agrees to defend, indemnify, keep, save and hold harmless fully the Owner, its agents, officials and employees, against all claims, suits or judgments, costs or expenses, including attorneys’ reasonable fees, that may be based on or the result of any error, omission, negligence, or any willful or intentionally tortious conduct of Architect or of any person employed or engaged by Architect to perform Services under this Agreement. 

 

The Architect shall promptly provide to the Owner copies of such notices as it may receive of any claims, actions or suits as may be given or filed in connection with Architect’s performance or the performance of any person or entity employed or engaged by Architect to perform Services under this Agreement.

 

In response to the Owner’s Complaint, we filed a motion to dismiss arguing that the Owner’s indemnity claim does not exist in the absence of a claim or judgment against the Owner. To support this argument, we cited Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 466 N.E.2d 1313 (1st Dist. 1984). In Open Kitchens, the indemnity clause in the contract between the plaintiff and Gullo provided:

 

To the extent permitted by law, [Gullo] shall indemnify and hold harmless the [plaintiff] and their [sic] agents and employees from and against all claims, damages, losses, expenses, liabilities, and demands, including attorneys' fees, of whatsoever kind or nature, arising out of, resulting from or connected with the performance of the Work by the Contractor or any Subcontractor for and in behalf of the [plaintiff] or Architects. The Contractor shall defend at its own expense, any actions based thereon and shall pay all attorneys' fees, costs and other expenses arising therefrom.

 

Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 63-64, 466 N.E.2d 1313 (1st Dist. 1984). 

 

The First District Court held that Gullo’s obligations under the indemnity provision did not arise until a third party asserted an action against Open Kitchens. Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 65, 466 N.E.2d 1313 (1st Dist. 1984). The Court explained that in reading the indemnity provision as a whole, including the last portion of the subject provision requiring Gullo to defend actions arising out of its performance of the contract, the agreement indicated that the indemnity was only intended to apply to matters involving losses incurred by third parties. Id. 

 

As in Open Kitchens, where the indemnity provision contained language referencing actions by third parties, the indemnity provision contained in our client’s Owner-Architect Agreement refers to claims filed by others (i.e. “The Architect shall promptly provide to the Owner copies of such notices as it may receive of any claims, actions or suits as may be given or filed in connection with Architect’s performance”). Accordingly, we argued that the First District’s analysis in Open Kitchens applied and the language of our client’s indemnification clause indicates that the indemnity was only intended to apply in the context of losses incurred by third parties. 

 

The court agreed with our analysis and dismissed the Owner’s indemnity claim with prejudice. In her order, the judge relied on the language contained in the second paragraph of the indemnity provision stating that “this language immediately follows the indemnity language, making it clear the intent of the parties was to limit the indemnification to instances where third party claims are raised.” 

The lesson here is that not all indemnification provisions are created equal. The specific language must be reviewed so that risks are allocated as intended.

Tags: , , , , ,

Home Repair and Remodeling Act Only Requires Substantial Compliance

Posted on February 8, 2010 by Garrett Kern

 

In the recent decision of Behl Construction v. Gingeric, the Fourth District addressed whether a plaintiff is precluded from recovering the amount he claims is due from a defendant when there was no signed contract and no delivery by him of the consumer-rights brochure to defendant, both of which are required pursuant to the Home Repair and Remodeling Act (Act) (815 ILCS 513/1 through 999 (West 2006)).  The Act requires that for any repair or remodeling work over $1,000, "a person engaged in the business of home repair or remodeling shall furnish to the customer for signature a written contract or work order." This contract or work order must meet certain disclosure requirements, including cost and the name and address of the construction company.  The Act also requires that "any person engaging in the business of home repair and remodeling shall provide to its customers a copy of the 'Home Repair: Know Your Consumer Rights' pamphlet prior to the execution of any home repair and remodeling contract"; the text of this brochure appears in the statute itself. 815 ILCS 513/20 (West 2006). The Act specifies that it is "unlawful for any person engaged in the business of home repairs and remodeling to remodel or make repairs before obtaining a signed contract or work order [when the amount of the work is] over $1,000."

Behl filed a complaint against Gingerich, alleging Gingerich had failed to pay Behl $15,500 for labor and materials plaintiff had provided under a construction contract to remodel defendant's home. Gingerich filed a motion to dismiss, claiming plaintiff was precluded from recovering any amounts from him because plaintiff had violated the Act. 

After trial, the trial court found in plaintiff's favor and awarded him $9,594.03 in damages. Defendant appealed, arguing that plaintiff could not enforce the contract due to the specific requirements of the Act or, in the alternative, if the contract was enforceable; the court erred in calculating the judgment amount. Plaintiff filed a cross-appeal, also arguing that the court erred in its calculation of damages on different grounds. Plaintiff also claimed the court erred in finding that his mechanic's lien was unenforceable as untimely.  There was no dispute that the work order that was provided by Behl wasn’t signed by Gingerich, and that Behl did not provide Gingerich with the brochure.  Accordingly the issue before the Fourth District was whether Behl substantially complied with the Act so as to allow him recovery from Gingerich.

                The court noted that the two pertinent provisions of the Act used the term “shall” (the contractor “shall” provide the brochure and “shall” furnish a contract for signature).  Typically, use of the word "shall" in a statutory provision indicates that the legislature intended a mandatory, rather than a directory, provision. However, a mandatory provision does not always require strict compliance. "Substantial compliance can satisfy even a mandatory provision." Jakstas v. Koske, 352 Ill. App. 3d 861, 864, 817 N.E.2d 200, 203 (2004).  The court looked at (a) the purpose of the Act to determine whether the purpose was achieved without strict compliance, and (b) whether Gingerich suffered any prejudice from Behl’s failure to strictly comply with the Act.  The court determined that the Act’s purpose was to improve communication between consumers and persons engaged in the business of home repairs or remodeling in order to "increase consumer confidence, reduce the likelihood of disputes, and promote fair and honest practices in [the repair and remodeling] business in this State."

                The court ultimately found that Behl substantially complied with the provisions and purpose of the Act by negotiating with Gingerich regarding the scope of the work and cost and by presenting Gingerich with a written work order, which contained the details of the project with "reasonable particularity" and included Behl’s business name and address as required by section 15 of the Act. The court further found that Gingerich was not prejudiced by Behl’s failure to strictly comply with every provision of the Act. 

The court based its decision on the fact that Behl and Gingerich, both engaged in the construction trades, negotiated the scope and cost of the project until they finally reached an agreement regarding the scope of the project. Before beginning construction, Behl supplied Gingerich with a written work order that represented their final agreement, which Gingerich did not dispute. The court also found significant that during the project, Gingerich paid Behl several draws, and the dispute between the parties was unrelated to Behl’s failure to secure Gingerich’s signature on a construction contract.

 

Tags: , ,