Illinois Construction Law Blog : Illinois Construction Lawyer & Attorney : Foran Glennon Palandech & Ponzi Law Firm : Chicago IL

You may recall our discussion of the Second District’s decision in Artisan Design Build, Inc., v. Bilstrom, in which the Second District was faced with the same decision as the other districts have been faced with… what, if anything, does a contractor’s failure to comply with the Act mean for its claims against the homeowner?

The Second District interpreted the Act to mean that the contractor’s failure to provide the consumer with the brochure does NOT remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien).

“To hold that a failure to provide a consumer with the brochure allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief and a result the legislature could not have intended.”

In reaching this conclusion, the Court said it was looking to legislative intent, which is a phrase and methodology addressed in many of the cases involving this Act. However, the Court attempted to discover the legislative intent through reading the “plain language” of the statute but does not examine what the legislature had to say about the bill in debate or committee.

In Roberts d/b/a Roberts Cleaning, Maintenance and More v. Adkins, the Third District has now added its voice to the discussion and disagreed with the Second District. In, Roberts a contractor sued to enforce a mechanic’s lien and the homeowner asserted, as an affirmative defense, that the contractor violated the Home Repair Act by failing to provide a consumer rights brochure or a written agreement. The Court determined that the failure to obtain a written contract was a violation of the Home Repair Act and further determined that, “[W]hen a contract does not comply with the Act, it is invalid and cannot form the basis of a breach of contract action or an action to foreclose a mechanic’s lien.”

Stay tuned for further discussions regarding SB 2540, introduced by Senator Wilhelmi to address at least part of the confusion regarding the remedy associated with the Home Repair Act. The proposed amendment will entirely replace Section 30 of the Act to clarify and more accurately identify the remedies available to private parties under the Act.

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 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 (1^st 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 (1^st 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 (1^st 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 (1^st 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.

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According to the 7^th Circuit it does when someone seeks payment for those materials by submitting a claim to an insurance company. 

One method of recovering for materials on a site or at a shop that have been damaged by a storm or rain is to submit a claim to the property insurer. Most property insurance policies have an “in the open” exclusion.  The terms of the exclusion may vary, and that variance is important, but the exclusion is usually present.

Oddly, up until recently, the issue of interpreting the phrase “in the open” from a property policy’s exclusion hadn’t been litigated in front of the 7^th Circuit… which is where the case of Twenhafel v. State Auto Property and Casualty Ins. Co. (Doc. No. 08-4275) comes in.

The facts of the case from the opinion are worth reiterating in full:

“Twenhafel manufactures kitchen and bathroom cabinets. On September 22, 2006, a violent storm blew through Murphysboro, Illinois, where Twenhafel’s business is located. Before the storm, Twenhafel had some of the wood inventory he uses to make cabinets stored outdoors under an industrial covering or tarp. The tarp was secured with six-by-six oak beams and large concrete blocks which weighed about ninety pounds each and had been placed on top of the tarp. The storm lifted the tarp, along with the beams and blocks, and dropped them on the roof of a building about 150 feet away. As a result of the violent storm, the wood inventory was damaged by rain. The storm did not cause any other damage to Twenhafel’s property, except for some minor damage to the building’s roof, which was repaired by Twenhafel’s employees. The insurance policy State Auto issued to Twenhafel was an “open peril” policy which covers all losses unless specifically excluded under the terms of the policy. Twenhafel made a claim under the policy for the loss of his wood inventory. State Auto denied Twenhafel’s claim, relying on the following specific policy exclusion:

CAUSES OF LOSS—SPECIAL FORM

B. Exclusions

2. We will not pay for loss or damage caused by or resulting from any of the following:

. . . .

j. Rain, snow, ice or sleet to personal property in the open.”

The plaintiff filed suit to recover the money for the damaged lumber from his insurance.  The trial court found in favor of the plaintiff and the insurance company appealed the determination.

The appellate court agreed with the district court that the phrase “in the open” was commonly understood to mean something that was “exposed to the elements” and not simply “outside.”

In reaching this determination the court pointed other cases that also offer examples of stored materials at a construction site being damaged by the elements and other courts’ determinations.

One case the court analogized to that provides another example of this form of storage was Victory Peach Group, Inc. v. Greater N.Y. Mut. Ins. Co., 707 A.2d 1383 (N.J.Super.Ct.App.Div.1998)

In the Victory Peach case from the New Jersey Appellate Court, the plaintiff stored personal property in a building with a damaged roof that was being repaired.  Tarps were nailed over portions of the roof because the repairs couldn’t be completed in one day.  A rainstorm blew the tarps off the roof and water got into the building and damaged the plaintiff’s stored property.  The policy exclusion was similar and the New Jersey court found for the plaintiff against the insurance company holding that nothing in the method of protecting the property left it open to the elements.

Another example in the court’s finding came from a case in Texas and can be found in the opinion, in that case, there was no reimbursement for the damage to steel at a construction site after a rain storm, but it involved slightly different “in the open” exclusion language that included rust.

One thing is for certain, don’t cover the materials at a site with newspapers… the opinion and the oral argument took pains to contradict an “absurd” position from the insurance company:

“State Auto contends that equating the phrase “in the open” with “exposed to the elements” would lead to an absurd result because such an interpretation does not take into account the adequacy of the protection in question. State Auto argues that, under such an interpretation, a pile of wood covered by newspapers would not be “in the open” because the wood was not “exposed to the elements.” We find State Auto’s contention without merit because a reasonable person would not think that newspapers would protect property from exposure to the elements. Therefore, the interpretation does not lend itself to absurdity.” Slip Op. at 9.

The oral argument in this case is filled with the questions from the judges posing “construction site” hypotheticals to the attorney and can be heard here.

The lessons are not only to remember to make sure that there’s some policy covering the materials that are stored at a site or at a shop, but also to make certain that the way they’re preserved at that location doesn’t keep someone from getting paid if they’re damaged.

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The district split that we identified in our posting about K. Miller Construction Company, Inc. v. McGinnis (1^st Dist. Doc. No. 1-08-2514) has another fracture. Last week, the Illinois Second District Appellate Court handed down its decision in Artisan Design Build, Inc. v. Bilstrom (2^nd Dist. Doc. No 2-08-0855).

In case you don’t feel like re-reading, the split is over the Illinois Home Repair and remodeling Act (815 ILCS 513/1 et seq.) and whether the failure of a contractor to comply with the act will strip the contractor of the right to recover monies that it is owed or whether the failure to comply with the act bars certain claims but not others. For instance, a contractor may be owed $10,000 for a job, but failed to provide a copy of the pamphlet required under the act – in the fourth district, this would be a bar to all claims for payment including mechanics liens, breach of contract claims, unjust enrichment claims and the like. In the first district, the failure to provide the pamphlet would not currently bar an unjust enrichment claim but would bar the mechanic’s lien claim and the breach of contract claim given that the act calls contracts made in contravention of its requirements “unlawful” and unlawful contracts are void. (see K. Miller above.)

Now comes a new wrinkle. 

In Artisan, the plaintiff was a contractor who claimed it was owed in excess of $208,695.69 for construction work on a house in Hinsdale, Illinois. The plaintiff wasn’t paid and sued the owner alleging it had a mechanic’s lien for the sum, that the owner had breached the contract, and also pled a claim for unjust enrichment (even if there wasn’t a contract, the owner benefited from the work and should have to pay for that work).

The owner asked the district court to dismiss the case because the plaintiff had failed to provide the owners with the brochure, had failed to commence or complete work within the contracted time period, and didn’t maintain insurance. The district court dismissed the case on the basis that the plaintiff admittedly did not furnish the owners with the consumer rights brochure. The plaintiffs appealed and asked that the appellate court overturn the decision.

The Second District was faced with the same decision as the other districts have been faced with… what, if anything, does a contractor’s failure to comply with the act mean for its claims against the home-owner?

The Second District interpreted the act to mean that the contractor’s failure to provide the consumer with the brochure does NOT remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien).

“To hold that a failure to provide a consumer with the brochure allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief and a result the legislature could not have intended.”

In reaching this conclusion, the Court said it was looking to legislative intent, which is a phrase and methodology addressed in many of the cases involving this act. Oddly, apart from attempting to interpret legislative intent through reading the “plain language” of the statute, none of the cases attempt to examine what the legislature had to say about the bill in debate or committee.

Many of the transcripts of the Illinois Legilsature’s general session debates dating back to 1971 are available online. These transcripts include debate on House Bill 1177 from the 91^st General Assembly’s session in 1999 that became the Home Repair and Remodeling Act. Of note from the debates are the main debate from the House after the final reading of the bill, and the similar debate from the Senate.

From the Senate and House transcripts on the matter, we see that there was not only opposition to this bill on the part of people who felt the bill just added an extra hoop for honest contractors to have to jump through without punishing the ne’er-do-wells who were the reason for the bill, but that the main justification for its passage was the protection of seniors and unwary consumers. Another point was the information this bill would force on people having their homes repaired – like the rights involved in contracting, an up-front contract price, and – after a 1994 amendment – a knowing acceptance or relinquishment of arbitration and the right to trial by jury. The debates focus on the Attorney General’s ability to prosecute and say nothing about voiding contracts or allowing a private right of action (an issue heavily debated by the justices of the Courts).

During the original House debate, representative Winters had these closing remarks,

“The Attorney General of the State of Illinois has listed home repair fraud as the #1 consumer complaint in their offices. Over the last five years, they average almost 500 complaints from consumers a year of being ripped off by artists who simply go up and down the street looking for the elderly, looking for the unprotected, looking for the uninformed. This Bill seeks to inform the consumer, it is not onerous to the contractors, a simple brochure and contract language is all that it requires….

“The only way that the criminal provision in this would be put forward is in fact that the State’s Attorney or the Attorney General can find a consistent pattern of fraud. And it is only a civil penalty in this Bill, it is not criminal. We have other criminal statutes under deceptive business practices. This Bill is simply civil penalties for failing to have the brochure disseminated and signed off by the consumer. It is a great consumer protection Bill, very little burden to the, to the contractors of this state. And I would urge adoption of this Bill.” [emphasis added]  IL H.R. Tran. 2000 Reg. Sess. No. 55

The failure to have the brochure passed out and signed off on was to be the ground for a penalty… and not just the loss of the right to arbitrate or to have a trial by jury, that provision wasn’t even part of the act until 1994, so the statement that there would be a penalty for failure to have the brochure passed out contemplated some other form of a civil penalty.

The notion that there should be some form of a penalty for failure to comply with the act by passing out a brochure along with the “shall” language of the act's requirements seems to make more sense when interpreted with the loss of the legal rights given the nullification or voidance of any contract between parties subject to the act where the act hasn’t been complied with. But again, that reading means that Section 35 of the act giving the AG and SAGs the power to enforce the act is not the sole mechanism for enforcement… If the act was to help seniors, did that really mean that the legislature wanted the “500” annual complaints referenced by representative Winters to be handled solely by the AG’s office? Wouldn’t it make more sense to allow Seniors to void any contracts and eliminate mechanics liens where the act hasn’t been complied with… if, as discussed in the General Assembly’s debates, compliance was as simple as handing over a brochure?

Another issue comes out of the transcripts of the assembly’s deliberations – that of the knowing contractor vs. the unwary contractor.

Back in March of this year, we discussed a case called Kunkel v. P.K. Dependable where the 5^th District decided that a contractor guilty of a violation under the act wouldn’t have to pay the attorneys fees of a home owner forced to go to court and pay an attorney to prosecute this kind of action if the contractor didn’t “knowingly” not comply with the act.

Interestingly, the Assembly transcripts show that the “knowing” issue was also important to the legislature and they expected the contractors to know about the act and also thought other State agencies as well as trade associations would hand out brochures and increase awareness… but in the end, that “knowing” would not be an issue.

The best way to make sure there are no problems is to comply with the act.  The brochure is linked above and getting the homeowner to sign off on it, having insurance, and delineating the terms of the project in a written contract or statement are what the act requires.  No home-owner should be allowed to reap a windfall for the failure to turn over the pamphlet, but if allowing a few wind-falls finally forces everyone to comply with the act, which is what the legislature intended, it is not unlikely that a few more courts may award a few wind-falls to accomplish that.

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Yesterday we discussed the court’s analysis of contractual language for arbitration provisions in short form contracts in the case of Timmerman v. The Grain Exchange.  A discussion of the factual matter surrounding the case can be found in the previous entry. Today we discuss the decision in Timmerman, to invalidate the contracts that the individual farmers had entered into with the grain dealer because the dealer’s license was revoked.

First, it’s important to understand that the licensure process for grain dealers in the state of Illinois is regulated by the Illinois Grain Code (240 ILCS 40/1-1 et seq.). Much like the codes regulating the professions for Illinois architects, engineers, warehouseman, and many other design and construction professions, the operation of a grain dealership without a license from the state of Illinois is a criminal offense.

What happened in this case was that The Grain Exchange signed the contracts for the future purchase of the grain with the farmers, lost its license, and then after losing the license, assigned the contracts to a subsequent grain dealership that did have a valid license. The subsequent grain dealer sought to enforce the contracts and have the assignment found valid. The farmers wanted the contracts declared void premised on the idea that the original party they had contracted with was unlicensed, but in reality, voiding the contracts favored the farmers because the price of grain had increased from the time the contracts had been entered into with The Grain Exchange. The farmers could now make more profit if they had the chance to sign new contracts.

The court’s analysis struck a middle ground in reasoning but held in favor of the farmers by finding that the that the contracts with The Grain Exchange were anticipatorily repudiated (Even though it was not yet time for the contracts to be performed, the contracts could not be performed because something had happened that rendered performance impossible - Check here for the Uniform Commercial Code’s definitions for anticipatory repudiation at 810 ILCS 5/2-610). The court found that the contracts were repudiated when the license was lost because without a license, it would be against the law for the Grain Exchange to perform under the Grain Code.

At the moment of repudiation (i.e. when the license was lost) the farmers were justified in treating the contracts as terminated. The court would not enforce the assignment made by the Grain Exchange to the other grain dealer after the loss of the license had occurred, and the farmers were not bound by those contracts.

The court noted that if the contracts had been assigned to the other grain dealer prior to the loss of the Grain Exchange’s license, then the assignments might be valid.  There was no mention of the interesting question regarding what would have happened if The Grain Exchange could have gotten a new license before the contracts were due to be performed and had attempted to do so, but the farmers signed new contracts with a different dealer in the interim.  - What if the architect loses his license before completing the design drawings and attempts to renew the license but in the interim the owner hires a new architect for the project?

We’ve written before about the difference between “registration” and “licensure” but nothing has brought home the point as clearly as Timmerman, which is a lesson that licensed professionals or firms should take to heart. The failure to maintain a valid license can completely nullify your existing performed or in the process of being performed contracts, it can subject the unlicensed party to criminal penalties as well as excessive civil damages including the full disgorgement of the earned payments on the contracts. On the flip side, for the sophisticated party, checking the license of a party that has aggrieved you by something under the contract to issue can be one of the first steps to determining the full amount of damages available to you for a breach.

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Yesterday we examined the astute discussion of the duty to mitigate found in Judge Cole’s recent opinion in R.R. Donnelley & Sons Co. v. Vanguard Transportation Systems, Inc.

Today we discuss that portion of the opinion directed at R.R. Donnelley’s request for attorneys’ fees based on the indemnity provision of the contract.

The contract’s indemnity provision read:

[Vanguard] shall indemnify and hold [Donnelley] harmless from any from any liability, loss, cost, damage or expense, including attorneys' fees, which may accrue against [Donnelley] by reason of any liability claims, cargo claims and workers compensation claims by an entity that arise out of or are due to acts or failures to act of [Vanguard].

R.R. Donnelley sought to use this provision to recoup the attorneys’ fees it expended in prosecuting the action against Vanguard. In essence, although the court would only award nominal damages to R.R. Donnelley, it hoped to have Vanguard pay the cost of achieving that award.

The court rejected the argument that the provision could be read to imply that attorneys’ fees would be awarded to R.R. Donnelley in a dispute with Vanguard over the enforcement of the indemnity provision. Instead the court found that the “by an entity” phrase could not be read to include Vanguard. The court found that the provision applied to disputes between R.R. Donnelley and others, but not between R.R. Donnelley and Vanguard for the enforcement of the indemnity agreement.

This interpretation is important because it serves to remind everyone contracting for indemnification to include the phrase “including the enforcement of this agreement” in their indemnity clauses.

The court pointed out that the varying interpretations of indemnity provisions could be read to mean that a self-referencing portion in a clause was necessary to include disputes over the indemnity agreements themselves, even though the court referenced the Illinois Supreme Court’s own admission that little guidance can come from attempting to analyze or reconcile the numerous cases interpreting indemnity clauses.

The interpretations cited by the court were:

Cincinnati Ins. Co. v. Leighton, 403 F.3d 879, 881 (7th Cir.2005)(indemnification required “from and against any liability, loss, cost, attorneys' fees, and expenses whatsoever, including the enforcement of this agreement”);

Central Die Casting and Mfg. Co., Inc. v. Tokheim Corp., 1998 WL 160900, *8 (N.D.Ill.1998)(fees incurred in enforcing indemnity provision not caused by “the specific claim indemnified against. Instead, they are costs incurred to sue for breach of contract, or the failure to indemnify.”);

Fidelity Mut. Life Ins. Co. v. Harris Trust & Savings Bank, 1997 WL 308846, *2 (N.D.Ill.1997)(fees incurred in pursuing indemnification allowed where language “expressly permits ... recover[y][of] attorneys' fees and expenses ‘incurred in connection with the enforcement of th[e] Agreement’ ”);

Board of Trustees of University of Illinois v. U.S. Fidelity and Guar. Co., 1991 WL 274462, *3 (N.D.Ill.1991)(contract specifically included “all attorney's fees and costs incurred in bringing an action to enforce the provisions of this indemnity....”);

Eckley v. Lone Star Forge Co., 1991 WL 222076, *2 (N.D.Ill.1991)(noting “the distinction between attorney's fees in defending a third party suit and attorney's fees in enforcing a right to indemnity and thus offer no guidance to the court.”).

Jackson v. In-tertech Resources, Inc., 1990 WL 16969, *1 (N.D.Ill.1990). (The seller agreed to “indemnify and hold harmless Buyer from and against any and all actions, suits, proceedings, demands, judgments, losses, costs, damages, and expenses (including with-out limitation, attorney fees and disbursements) resulting from or arising out of: ... (d) any breach of any of the representations or warranties, covenants or agreements of Seller set forth in this Agreement.” The plain language of the clause contemplated a suit by one party to the contract against the other in the event of any breach of the agreement and provided for reimbursement of attorney's fees should that occur.)

The indemnity agreement in this case did not.

Again, while we are consistently warned that interpretations may be inconsistent, the self-reference in an agreement appears necessary for recouping the costs of enforcing the agreement itself.

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As Judge Posner has put it:

“If you invite someone to dinner, and hours after he was due he still hasn't arrived, you had better infer that he isn't coming, and start eating. You can't let yourself and your other guests starve merely because there is a slight chance that he will show up days later.”

The recent case of R.R. Donnelley & Sons Co. v. Vanguard Transportation Systems, Inc. (N.D.IL Doc. No 06 C 5837) has ended in an interesting decision based entirely on the failure of one party to affirmatively act to “mitigate” its damages even though the other party breached their agreement and could also just as easily have mitigated the damages.

The opinion has an excellent description of the duty to mitigate:

“The so-called duty to mitigate damages, which is often referred to as a general contractual duty is a principle of ancient vintage.  Referring to mitigation of damages-or as it is called in tort law “avoidable consequences “in terms of a “duty” is somewhat misleading, because a plaintiff incurs no liability for failing to act.  Rather, the amount of loss that could reasonably have been avoided by stopping performance or making substitute arrangements is simply subtracted from the amount that would otherwise have been recoverable as damages.  Phrased differently, the duty to mitigate damages “forbids the victim of a breach of contract, which might well be involuntary, to allow his damages to balloon (when he could easily prevent that from happening), as he might be tempted to do in order to force a lucrative settlement.”

“The victim of the breach must “ ‘exercise reasonable diligence and ordinary care in attempting to minimize the damages after injury has been inflicted.’ “ And while he must act with “reasonable dispatch,” the injured party is not required to take steps that involve “undue risk or burden.”  But there are instances where the victim of the breach might be lulled by the breaching party into inaction because of assurances that all will be well. “[T]o put this differently, the [breaching party] may not insist on mitigation when by its words or deeds it has led the [non-breaching party] to believe that it has assumed what would otherwise be the buyer's burden of mitigation.” While that is going on, the duty to mitigate is suspended.” [Internal citations omitted]

The case involved the shipment of time-sensitive brochures by Vanguard to an R.R. Donnelley facility in Atlanta. The brochures were for a Macy’s after-Christmas sale and needed to be delivered by December 21 in order to be mailed out and received timely by consumers for the December 27^th Sale. 

R.R. Donnelley contracted with Vanguard to deliver the brochures to its facility by no later than 2:00 p.m. on December 16^th. This time was important because the contract between the parties contained a “time is of the essence” clause. Vanguard got to the facility after 2:00 p.m. on the 16^th and delivery was not made. Rather than wait to be able to unload the delivery on the 16^th, the driver for the Vanguard truck took the trailer with the materials to a facility and left them there. The parties contacted each other regarding scheduling a new delivery over the next few days each time a delivery was expected or possible, something occurred to kept that delivery from happening, and ultimately, no delivery was ever made. The brochures did not get mailed in time for the Macy’s sale.

R.R. Donnelley paid the company that printed the brochures $81,650 for damages it suffered because the brochures did not get mailed for Macy’s and then sued Vanguard for the $81,650 in damages for breach of the agreement to deliver the brochures by the 16^th.

The parties completed discovery and had a trial. Of the many findings made by the Court after it heard the evidence one regarded R.R. Donnelley’s failure to take action and mitigate its damages.

In many cases, the steps for mitigation are varied and may not amount to a full recovery of the damages suffered by a party because of the breach, but for R.R. Donnelley in this case the Court decided:

“all that would have been entailed was the minimal cost of renting a truck from a local cartage company and driving the half hour to the Vanguard lot to pick up the load and delivering it to the Atlanta facility.   Mr. Menne, of Vanguard, estimated that the cost would have been about $250. Even if that estimate is low, the cost would have been less than the $750 it cost to haul the load the several hundred miles from Kentucky to Georgia.”

The court found that of the roughly $81,000 in damages claimed by R.R. Donnelly, $80,000 could not be assessed against Vanguard because of R.R. Donnelly’s failure to mitigate. The court held that because the money at issue was only nominal, and R.R. Donnelley didn’t request nominal damages, judgment should be made in favor of Vanguard due to the failure of the plaintiff to mitigate.

This same duty to mitigate applies to construction. It is best to understand that you cannot sit around and wait for something to happen thinking you have a remedy at law when some action on your part could completely alleviate your damages.

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Take a look at this chart:

The different colored sections represent the jurisdictions of the different appellate court districts in the state. The answer to the question is “yes” if you’re in the green, “no” if you’re in the tan, and “undecided” if you’re red, blue or orange. It’s a split between the districts that just occurred.

In the case of K. Miller Construction Company, Inc. v. McGinnis (1^st Dist. Doc. No. 1-08-2514) the first district appellate court (the green one) has recently decided that a claim for quantum meruit (unjust enrichment) can be made against a home owner by a contractor even if the contractor failed to comply with the Illinois Home Repair and Remodeling Act (815 ILCS 513) which requires that contracts for more than $1000 on home improvements be put in writing or they are deemed “unlawful” by the statute.

As a side note, the 4^th District (the tan one above) has ruled that such a claim cannot stand if the requirements of the act are not met in Smith v. Bogard (2007)

In McGinnis, Miller was a contractor that worked on the renovation of McGinnis’ house. After some work was performed, but before it was all completed, the McGinnis refused to continue paying Miller’s invoices which by then were more than $123,000 and demanded that he finish the job before any more payments occurred. Miller took out a $150,000 line of credit to complete the project and when he was done, the McGinnises approved of his work. The opinion notes that the project’s construction price increased to more than $500,000 by the time of completion.

The McGinnises, however, refused to pay more than $177,580.33, and Miller filed suit to recover payment. The opinion notes that Mr. McGinnis is no ordinary consumer, but that as a lawyer, he is a “sophisticated consumer”. The district court dismissed claims made by miller for a mechanics lien and breach of a time and materials oral contract because the terms of the Act provide that such contracts are unlawful if not in writing for home repair. The appellate court agreed. What the appellate court did not agree with was the district court’s interpretation that a claim for unjust enrichment was not available to a contractor who had actually performed the work where that work was accepted.

Noting that the 4^th District reached a different conclusion, the 1^st District found that where the work was accepted, the availability of an unjust enrichment claim was not quashed by the use of the term “unlawful” in the Home Repair and Remodeling Act.

Where no party disputed that a trial on the unjust enrichment claim would render “justice” to both parties, the appellate court found that because the Act did not expressly repeal the quantum meruit claim the “unlawful” nature of contracts that are not in writing did not preclude the cause of action and such a claim would likely not “reward deceptive practices” or violate public policy.

The court also noted that a real estate attorney like Mr. McGinnis might well utilize his expertise in the field to exploit the 4^th District’s interpretation by keeping any contract for home renovation oral in order to deprive a contractor of the reasonable value of his services.

Interestingly, a concurrence by Justice Gordon notes, as several others have contended, that the Home Repair and Remodeling Act was not intended to provide either a cause of action or an affirmative defense to any private party, but rather, the sole remedy under the act is through action by the Attorney General’s Office.

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In Burke v. 401 N. Wabash Venture, LLC (N.D. Ill, Doc No. 08 C 5330) a prospective purchaser of a condominium at the new Trump Tower brought an action against the LLC selling the units when they kept his earnest money deposit after he failed to close on the unit.

Reading the opinion, its apparent that the alleged reason for failing to close on the unit, with a purchase price of over $2 Million, was that an additional floor of parking was added after the initial earnest money deposit was tendered. The plaintiff’s argument was that the addition of parking made the price he had paid for his parking spot unfair given that the additional parking reduced the value of the spots. He also alleged that the additional floor of parking increased the maintenance fees for the association.

The plaintiff brought a class action lawsuit against the LLC alleging that a liquidated damages provision in the sale agreement violated the Illinois Consumer Fraud and Deceptive Trade Practices Act (815 ILCS 505) because it gave the LLC the choice between liquidated damages or actual damages.

The provision at issue read:

“In the event of a default or breach of this Purchase Agreement by Purchaser, Seller shall notify Purchaser of such breach or default and of the opportunity, which shall be given the Purchaser, to remedy such breach or default within twenty (20) days after the date such notice was received. If Purchaser fails to remedy such breach or default within twenty (20) days after receipt of Seller's notice, then, subject to the limitations set forth below, Seller may terminate this Purchase Agreement and, as its sole and exclusive remedy upon termination, retain as liquidated damages from Purchaser an amount equal to the sum of (i) the amount set forth in Paragraph 1(b) hereof required to be paid as an Earnest Money deposit and (ii) all amounts paid or to be paid by Purchaser to Seller for any other services or work performed or to be performed by Seller. In collecting such liquidated damages, subject to the limitations set forth below, Seller shall be entitled to retain all monies paid by Purchaser to Seller hereunder; to keep, retain, or take any security or other instrument either evidencing Purchaser's obligation to pay any sums hereunder Or given by Purchaser to Seller to secure payment of such sums; and· to pursue any other appropriate lawful process. In accordance with Section 1703(d) of the Interstate Land Sales Full Disclosure Act, if Seller is otherwise entitled to the liquidated damages described above, Seller shall return to Purchaser amounts paid to Seller (excluding interest paid under the Purchase Agreement) in excess of: (x) 15% of the Purchase Price (excluding any interest owed under the Purchase Agreement) or (y) the amount of Seller's actual damages, whichever is greater.”

The court’s opinion is instructive to anyone faced with contractual situations including multiple remedies that include liquidated and actual damages. Here, because the provision at issue included language that the Interstate Land Sales Full Disclosure Act authorizes and even encourages developers to include in the contracts, the express exceptions of the Consumer Fraud Act allowed the provision. Because the provision was allowed, the Court dismissed that count in the complaint with prejudice.

In recent years a large portion of suits brought on behalf of plaintiffs against developers and even others involved in the construction process have begun to include counts for Consumer Fraud. It is best to make sure your contracts comport with the act in order to eliminate the possibility that a class action could be brought by individuals for a simple error in contracting.

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It’s New Suit Friday and this week we have some new cases that just about every reader will be interested in. From attorneys looking at sample complaints and causes of action to design professionals, owners and contractors wondering what issues they might face and what could give rise to liability, this week’s spot is interesting.

In Erickson v. 2678 Orchard LLC, the plaintiff is alleging that the defendant violated several building code regulations after the plaintiff’s property became infested with rodents shortly following the beginning of excavation of the defendant’s property. The complaint also alleges that plaintiff’s tenant vacated the rental property due to the infestation and plaintiff had to reimburse pre-paid rent and incurred a revenue loss. The plaintiff seeks a permanent injunction forcing defendant to remove materials from plaintiff’s property, an end to the trespassing, correction of damages to the property and compliance with the building codes along with counts for trespass, negligence and nuisance.

In Phillips v. Savino, the plaintiffs allege that defendant, contractor, breached its contract when it failed to complete home renovations it had been paid to perform. The complaint states that the plaintiffs purchased their home and contracted with Savino for construction work, the purchase of construction materials, and services as a general contractor. The plaintiffs allege that they paid Savino for work, materials and services approximately $250,000 and that defendant did not complete and/or deficiently completed excavation of the patio, interior and exterior calking, roof flashing, floor resanding, driveway damage and siding work they also seek damages for work performed to fix work that defendant performed, and other out-of-pocket expenses they were asked to pay by the defendant during the term of the job.

In K-Mart Corp. v. Menard, Inc., a sublessor is suing a sublessee for damages which allegedly incurred during the sublessee’s 18 year tenancy in a building in Hanover Park. The complaint seeks damages for monies K-Mart says it had to/ or will have to expend to replace a parking lot a drainage system, a building roof, exposed wiring and many other problems that it claims the sublessee had a duty to maintain and keep in good repair under the lease.

In McWalters v. Lee and GLP, Inc., a partner in a design firm is suing another partner alleging that the partner and the company have damaged him by breaching their shareholder agreement which required that his shares be purchased back at a price described in a specific formula, that the defendant partner breached fiduciary duties to both the plaintiff partner and the company and the because of the breach, the shares are worth less than what they would be worth had the breach not occurred, and that the plaintiff partner was fraudulently induced into purchasing his shares of the company based on the defendant’s false representations that the shares would be redeemed at the price derived through the specified formula. As a shareholder, the plaintiff partner also asserts causes of action against the defendant partner on behalf of the company. The allegations include claims that the defendant partner used company money for personal travel and renovation of his private residences, to pay himself an undeserved salary, to start up a publishing company, and offered a rent-free sublet to a friend.

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O'Connor Construction Company v. Belmont Harbor Home Development is a classic case in construction dispute damages. The plaintiff filed a mechanics lien against a condominium project after the developer refused to let it complete the project. O'Connor had been the carpentry subcontractor responsible for blocking and for trim finishing. It completed most of its work under its contract and had been asked to work, contrary to the contract, to finish the units as units were sold rather than finishing the project as a whole.

After a dispute over payment applications, O'Connor requested that the developer deliver the materials it needed to complete the project in a timely fashion, and the developer failed to supply the needed materials in a timely way. O'Connor then filed a mechanics lien for the amount it was owed under its contract and refused the developer's demand to rescind the lien. When O'Connor would not rescind its lien, the general contractor terminated the contract with O'Connor.

The facts in the trial court showed that O'Connor's contract price plus extras was $351,989.00. This is what O’Connor would have been paid under its contract if the contract had been completed. It also showed that O'Connor had been paid $175,189.50. The trial court found that O'Connor had substantially completed its contract and that the cost to finish the contract for work that was not performed after O’Connor was let go was $41,200. Using a method of calculating damages that would award damages for the benefit received by the developer from O'Connor's work, the trial court found that O'Connor was owed $50,876.50. On appeal, the appellate court found that this was the wrong measure for damages in both a mechanics lien action and a breach-of-contract action.

The appellate court found that the proper measure of damages owed to O'Connor would be $351,989.00 O'Connor would have received had it been allowed to finish the project minus the $175,189.50 that O'Connor had been paid, and also less the $41,200 it would cost the defendants to finish the work O'Connor was in not allowed to complete. This is in stark contrast with the $50,876.50 figure the trial court had awarded. The appellate court also found that under the mechanics lien statute O'Connor was allowed its attorneys fees where a portion of the payment that O'Connor was owed had not been turned over, and the defendants testified that it was due to O'Connor.

Also worth noting in the opinion is the fact that the mechanics lien statute provides interest at 10% per annum, which was greater than the 5% per annum O'Connor could expect under its contract. As we’ve said before, along with the Contractor Prompt Payment Act the mechanics Lien act provides any party who has not been paid a powerful tool and obtaining payment for services rendered. Knowing that in a fixed-price contract, there is a certain expectation you may have when someone else breaches your contract, using the mechanics in statute to get that payment back allows you a remedy that you otherwise might not have… and awards damages in a manner similar to contractual damages and possibly not just for damages in line with the benefit someone has received from your work.

In a day and age when attorneys fees can become a considerable hindrance to the prospect of recovering on low-cost contracts – it is worth noting that payment held without just cause can  entitle someone to remuneration for the fees of having to bring a court action under the statute.

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There are a few interesting cases for today.

In what is sure to be a case you’ll want to follow… the complaint in Weatherguard Construction Company, Inc. et al. v. John Does 1-18 is brought by construction companies against posters to a comment section on the website Topix.com for allegedly defamatory remarks and postings about the companies. The complaint includes the comments as well as the IP addresses of many of the posters. In a count for interference with a prospective business relationship, the complaint sets out other comments from the thread which allegedly show people indicating they would not be using the services of the companies after reading the website. The Cook County Clerk of Court’s website lists another case between Weatherguard and Topix.

This complaint in Burns v. GFGR, Inc. et al, alleges breach of contract, professional negligence, consumer fraud and conspiracy arising out of a transaction for the purchase of property. The plaintiffs, real estate investors, are suing, among others, an engineering firm and a real estate agent after they had to pay money to repair a building they bought that had allegedly been inspected at plaintiffs’ request by the engineering firm and found “structurally sound.” Plaintiffs claim they relied on the report prepared by the engineers when they agreed to purchase the building and later were cited by the City of Chicago for code violations including “an unstable West wall structure, rotting columns, beams and insufficient structural support of the rear porch and a front balcony lacking sufficient structural support.” The docket is here. The breach of contract claim seeks damages that include reimbursement for the “lost market opportunity in that Plaintiffs was [sic] unable to take advantage of selling 1619 West Carmen in a favorable real estate market due to delays caused by remediation of the material structural deficiencies mandated by the City of Chicago.”

The complaint in American Builders and Contractors Supply Co., Inc. v. Singles Roofing Company, et al, is brought by a supply company that was charged a $132,752.99 restocking fee by a third-party vendor when a roofing company allegedly cancelled its order. The supply company received a refund, but the restocking fee was a cost they apparently had to pay. The complaint contains counts for fraud, breach of contract and detrimental reliance.

Alleged construction defects led to the complaint in Sundararaj v. Kot. Plaintiffs claim they hired the defendant to build them a $930,000 house in accordance with “certain plans and specifications” and closed on the home in October of 2005. In 2006 and 2007 some leaks were noticed and the leaks were taken care of, in 2008 the plaintiffs noticed “a musty smell in multiple rooms” and had the property evaluated, the result of the evaluation: an allegation of “serious problems” with the construction of the property and are listed in the complaint at paragraph 15. They include the lack of a vapor barrier behind the drywall for the exterior walls, lack of proper flashing at parts of the roof, elevated mold levels and top floor bedrooms with a +20% moisture reading using a TRAMEX moisture meter. The complaint is for breach of contract.

The complaint in Studio D Architecture LLC v. Maresso et al alleges that a former employee of the architecture firm set up a competing company before he ceased working for the plaintiff. Plaintiff claims that the defendant misappropriated proprietary information including computer files, created false files on the plaintiff’s computer system and disabled their website. The trade secret count alleges that several other defendants used the proprietary information and that they knew it was proprietary since the defendant was not an architect.

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We’ve been following this mechanic’s lien case for you and wrote about the appellate court opinion here, and the decision to allow appeal here. Now that oral argument has occurred, we can soon expect the opinion, but before that happens, here’s something you’ll want to watch… the video of the oral argument. (.wmv file new window)  A link to just the Audio is available as well. (new window)

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A good document retention policy is a must and tailoring it to anyone involved in Illinois’ construction industry is an important part of its creation. With the advent of electronic discovery we all need to be aware of just how much we’re deleting when we erase files. In a fun article over at Law.com, Craig Ball has challenged the Gutmann method (that you need to overwrite your hard drive 35 times to completely erase data). The reality will be fascinating to those of you interested in making sure erased files stay erased.

In a suit filed in Cook County, the developer of the Palmolive Building (seen below) has sued its architecture firm for money that it may be forced to pay in arbitration with Pepper Construction in an arbitration action brought by Pepper against the developer. A copy of the complaint is here.

For those of you wondering why those forum selection clauses are so important, given that Illinois law mandates that construction contracts for project in Illinois be litigated in Illinois under Illinois law… Here’s a complaint filed by FC Stone against former clients who brought a suit in California despite a forum selection clause in their contracts. The suit is for the monies FC Stone had to expend to enforce the forum selection clause in the California court. Paying attention to both the Illinois law and the forum selection clause in contracts can help avoid such a challenge.

The Hartford is suing Grace Electrical Construction for close to $1.8 million that it had to pay out on bonds because Grace allegedly failed to perform. Under the Illinois Public Construction Bond Act (30 ILCS 550) Grace was required to obtain the bonds, but Hartford alleges that it has received more than $2.5 million in claims on the bonds that Grace was responsible for and has paid out the $1.8 million to settle those claims. The complaint can be found here.

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There’s a fun idea that I’ve always attributed to Bob Balaban that I first encountered it in an interview he gave on Fresh Air back in 2002.   Unlike some of his other interviews discussing his family’s history in the movie business, he was a little more descriptive about his silver screen pioneering ancestors.

In talking about his grandmother’s decision to want to get into the movie business he said that she left the theatre one day after seeing a movie for the first time and decided it was the business for the family because it was the only time she remembered anyone paying full price for something before they knew what they were going to get.

Don’t worry, this isn’t an article about putting an attorney on retainer. 

It’s about a recent case from the fourth district that has enforced a standard for properly allowing commercial tenants to set off rental payments in an amount equal to what they’ve paid in repairs for something the Landlord was liable to replace under the lease.

The case involved a damaged roof at a movie theatre in Quincy, Illinois. The theatre rents space from the mall.

In 2003 the theatre had the roof inspected because it had been leaking. Shortly after the inspection, the theatre sent the mall a letter requesting that the mall replace the roof. The mall did not respond and the theatre had its attorney send another letter that said:

"As it is the [Mall's] responsibility to replace the roof, [Theatre], by this letter, is making demand upon the [Mall] for reimbursement of the replacement cost. [Theatre] is willing to advance the cost of the replacement to be set off against future rents. If [the Mall] prefer[s], [it] may reimburse [Theatre] directly. The replacement will occur as soon as weather permits. Upon completion of and payment for the replacement,[Theatre] will initiate the setoff unless you wish to reimburse [Theatre]in a lump sum or pay the contractor directly."

The mall responded saying that the lease included the following provision which the mall interpreted to mean that the theatre was responsible for replacing the roof:

"Tenant agrees during the term hereof to keep and maintain in good condition and repair, the demised premises and every part thereof, including without limitation the foundations, exterior walls, roof, exterior and interior portions of all doors, windows, plate glass, etc."

The theatre replied that since the correspondence from the mall did not mention the need to replace the roof, nor the estimated cost to fix the roof, the theatre would go ahead with the replacement and that the theatre was not waiving any of its rights to reimbursement or damages relative to the mall’s duty to repair the roof.

The mall didn’t respond to the letter and the theatre had the roof fixed and sent the mall notice that the repairs were contracted for and that they would be setting off the entire cost of the roof repair from the rent obligation. The cost to repair the roof was $79,298 and the work was finished in March. 

Between June and December, the theatre set off $79,298 from the rent it owed the mall. In December, the mall sued the theatre to recover the rent. The theatre denied that it owed the mall rent and requested that the court make a determination that the theatre had satisfied its contractual obligations when it replaced the mall’s roof.

The trial court agreed with the theatre and entered a judgment stating that they had satisfied their rent obligations through payment for the roof and were entitled to set off the rent.

The appellate court agreed. It distinguished the clause for “repair” of the roof in the theatre’s contract with the mall from one in which “replacement” would be required. The court also held that the set off was proper.

In holding that set off was proper the court looked to the history of the law governing lease agreements and reasoned, in a similar fashion to the article from John Orth in the latest issue of the Green Bag, that the historic trend in real estate law that has transformed the lessor’s interest in land from a property right to a right under contract. This transformation, the court opined, has not changed the former covenants between the landlord and lessor, which allow for the lessor to set off rent in the amount equal to repairs the lessor made that the landlord should have made.

The court concluded:

“Thus, when a commercial landlord fails to replace a critical component of the leased premises, which is vital to the operation of its commercial tenant's business—in violation of the landlord's duty to do so, as previously discussed—the commercial tenant may set off such replacement cost, provided that (1) the tenant has informed the landlord of the need to replace the necessary component; (2) the landlord failed to replace the necessary component in a timely manner; and (3) the tenant informed the landlord of its intent to set off the reasonable costs of the necessary replacement.”

It’s a valuable lesson in drafting the lease agreement with particularity if there’s something that should be included in the agreement, and for a procedure to make sure set off is proper.

The opinion can be found here.

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Here’s another for your files on the Illinois Consumer Fraud Act and Deceptive Business Practices Act (815 ILCS 505/1 et seq.) and its application in matters relative to the Construction Industry in Illinois.

The Kunkels hired PK to build a new roof for their home. The contract price plus extras came to $5,623. After the contract was entered into, PK never furnished the Kunkels with the required: “Home repair: Know Your Consumer Rights” pamphlet that the Illinois Attorney General’s Office publishes for contractors to give to home-owners pursuant to the Illinois Home Repair and Remodeling Act (815 ILCS 513/1 et seq.).

To their surprise, the Kunkel’s new roof leaked. They requested that PK fix the problem several times. PK came out and attempted repairs, but the repairs did not alleviate the leaking. The Kunkels documented the leaks and their conversations with PK. They even took pictures of the pots and pans they used to catch the water.

Finally, the Kunkels filed suit in court alleging breach of contract, warranty and breach of the consumer fraud act. The case went to trial and the Kunkels prevailed. The trial court found that PK breached the contract and warranty (the contract contained a provision for a five-year warranty) and awarded $6,725 to the Kunkels based on their estimator’s uncontradicted testimony that $6,725 would be cost of a new roof.

The circuit court also awarded $6,161.50 in attorneys’ fees based on the allegation that the failure to provide the pamphlet amounted to a violation of the consumer fraud act.

PK appealed and the appellate court upheld the award for $6,725. The appellate court struck down the attorneys fees – finding that the consumer fraud act required a “knowing” violation and that the Kunkels never introduced evidence that PK “knew” it was required to turn over a copy of the pamphlet. The court went on to address the issue of damages… stating that even if the failure to turn over the pamphlet did amount to a violation of the consumer fraud act, the violation Kunkels failed to produce any evidence that they were damaged in not receiving the pamphlet.

This reasoning is a far cry from many of the other cases we see where parties are presumed to know the law at the time of contracting. One could even go so far as to say that so long as a contractor hasn’t read the Home Repair and Remodeling Act, they could always use their ignorance and this case as an excuse to avoid liability any time liability is attached to a “knowing” violation of the statute… which is a little ridiculous. The damages issue is correct. The failure to turn over the pamphlet shouldn’t entitle anyone to a windfall. We weren’t talking about a windfall here though, we were talking about the $6,161.50 in attorneys’ fees the Kunkels had to expend on a full trial just to get the money back for their leaky roof.

Additionally, the lessons learned by those involved in litigation over small projects is a powerful one. Payments of $5,623 for the original roof, and $6,151.50 to the attorneys netted the home-owners $6,725… which they still have to collect and then apply to getting a new roof that doesn’t leak, leaving an unpaid balance … of $5,059.50. That’s hardly worth it.

The opinion can be found here.

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Pepper Construction Company is being sued for its work constructing the high-rise condo building over at 720-726 Randolph in Chicago.  The complaint alleges multiple counts including:

• Delays on the project
• Faulty workmanship
• Slandering the title to the land
• Breach of warranty
• Breach of their contract with the owner
• And fraudulent concealment of defective work
  

This may be the first in a series of suits over this property, the City View Tower. 

Starting on page 23 of the complaint, you’ll see an interesting claim regarding the mechanic’s lien and its something worth noting if you’re either involved in the construction of condominium projects (high-rise or not) or if you’re developing them.  There are multiple cases presently before the courts regarding this issue.  The Condominium Property Act requires that mechanic’s liens be apportioned – Section 9.1.  So, in addition to making sure the strict timing requirements of the Mechanic’s Lien Act are followed, anyone seeking to file their lien against a condominium property (any property where the condominium declaration has been recorded) should familiarize themselves with Section 9.1 before filing.

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Larger projects tend to offer better protections to contractors and owners through the issuance of sureties and bonds and the design professional is often left with the court system as the sole remedy for recouping payment either through an action for breach of contract, or to foreclose on a lien.  Smaller projects offer similar pitfalls for design professionals… and depending on the amounts owed, recouping the money can seem daunting.

In situations where the fee is a fraction of the total project cost, consider the personal guarantee.  It’s an additional agreement signed by an individual, not an LLC or a Corporation obligating the person to the debt owed.   

A recent case from the Northern District, Kawasaki Motors, deals with these types of guarantees (albeit in a motor vehicle financing setting) and is illustrative of the shorter method recoupment on the guarantee can take.

In Kawasaki, two individuals had signed personal guarantees for the debts of a corporation that had contracted with the plaintiff.  The corporation defaulted on its obligations and ended up owing roughly $76,000 to the plaintiff.  The plaintiff had a judgment against the corporation and then sought the money from the guarantors that had signed agreements with the plaintiff guaranteeing the debts of the corporation.  The defendants failed to contest the validity of the guaranties and the court ruled in favor of the plaintiffs on summary judgment finding that no issues of fact existed for trial where the contract for they guaranties was not contested and the defendants failed to put forward any reason to contest the amount claimed by the plaintiff.

Someone financing a project should be able to personally guaranty the 7% to 10% fee that the design professional will earn… especially on smaller commercial projects or residential ones.  Given that the design professional usually will have completed the majority of its work before financing problems arise, an extra guaranty for those taking such a risk is a welcomed safety net.

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