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

 

The recent case of Peregrine Financial Group, Inc. v. TradeMaven, LLC, has at least offered some guidance.

In Peregrine, both the plaintiff and the defendant had been sued in another action over a patent dispute. The initial action had been resolved by a federal court through a settlement between the parties and the plaintiff in the patent action and  a consent judgment had been entered.

The indemnity provision in the TradeMaven contract stated that it agreed to hold Peregrine harmless from any claims for “expenses and costs (including any reasonable legal fees and expenses related to [Peregrine’s] defense) arising from any claim of infringement of any trademark, service mark, trade name, copyright, or other proprietary right.” In the patent suit, the parties placed a provision in the consent judgment that each party would bear its own costs and attorneys fees. 

After the federal suit, Peregrine sent a letter to TradeMaven’s counsel requesting the $416,081.22 in attorney's fees. TradeMaven didn’t indemnify Peregrine for the fees so Peregrine filed the indemnification claim in state court for recovery of those fees. The state district court ruled that the claim was precluded by res judicata.

One of Peregrine’s arguments on appeal was that even if Peregrine could have brought its claim for indemnity in the federal suit, it didn’t need to because a previous Illinois Supreme Court Case, Guzman, held that the claim for indemnification did not accrue until after the patent dispute concluded and TradeMaven rejected Peregrine’s written demand for indemnification. 

Guzman ruled that the 13-204 statute of limitations was applicable in construction defect contract dispute for indemnification between a defendant and a third-party in a situation where the third-party suit had been brought with three counts – implied indemnity, express indemnity, and breach of contract – and the opinion was rendered without an express statement of which theory the Court was considering.

The Appellate Court in Peregrine rejected Peregrine's argument and said that Guzman involved an “implied contract of indemnity” and a third-party complaint and that the instant case involved no third-party action where both parties had been named as defendants in the federal action and that the parties had an express contract of indemnity.

Peregrine then argued that the more recent Illinois Supreme Court decision in Travelers extended Guzman to express indemnity agreements. The Appellate Court said that because the indemnity provision in Travelers contained the words “on demand” – “Payments of amounts due Surety hereunder together with legal interest shall be payable on demand” – the express terms of the indemnity agreement in Travelers implied that the indemnity action did not accrue until demand was made and therefore, the instant action was different because the indemnity provision at issue in Peregrine contained no language providing that payment was triggered by demand for payment. 

In Travelers the Supreme Court apparently determined that the fact that the Guzman did not especially state whether it was addressing the nature of the indemnity claim on a breach of contract, implied indemnity or express indemnity basis meant that Guzman did not provide enough guidance to aid in the assessment of a suit based on express contractual indemnity.

Travelers also held that implied contractual indemnity is only available in tort. Which makes it odd that the court in Peregrine could say that the claim in Guzman was about implied contractual indemnity because it was a construction defect case and not one about a tort. 

Travelers also didn’t offer guidance on whether carefully constructed indemnity provisions in regular construction contracts could serve as the basis for a claim for breach of contract premised upon the breach of an indemnity provision thereby making them claims regulated by the ten-year statute of limitations addressed in Travelers,  or whether a claim for "express contractual indemnity" was different than a breach of contract claim and in construction defect case which could be brought as a third-party action (the commercial equivalent of contribution).  In the second type of claim, the defendant is basically saying “if I’m liable to the plaintiff, it is because this third party made a mistake.”  In the latter instance, Travelers would seem to imply that the four-year 13-214 statute of limitation would apply because the claim was based on the construction defect, in the former, because the claim is actually for failure to indemnify after a demand, it would appear that this is a 13-206 matter as discussed in Travelers.

By distinguishing the Travelers case based on the demand language the Appellate Court in Peregrine has created an interesting distinction and not resolved the issue created in Travelers regarding how and under what theory a defendant should sue a third-party in a construction dispute not based on negligence such as one where the party is looking to pass-through any potential economic damages.   Another question raised by these line of cases:

• Is the claim properly one for "express contractual indemnity" because there is an indemnity provision of the contract and the third-party contract was breached, or is it a claim for breach of contract for breach of the indemnity provision or both?

We know that professionals and contractors should arguably include indemnification for “economic damages” in their indemnification provisions if they want to attempt to recover those forms of damages at a later date. Friedman, Alschuler & Sincere v. Arlington Structural Steel Co., Inc., 140 Ill.App.3d 556, 489 N.E.2d 308 (1 Dist., 1985). Friedman and a line of cases following it support the contention that the indemnity provision needs to be specific as to the type of damages the parties will be able to seek, but nothing has settled the question raised by Travelers about where and when, if the provision is drafted properly, a party, if at all, must seek this contractual indemnity and what the cause of action actually is in third-party claims for construction defect where someone is looking to pass-through the claims of another.

For now the best practice seems to be to ensure that the contractual indemnity provisions include the “on demand” language in an effort to preserve a claim and to assert both a claim for express contractual indemnity and a claim for breach of that provision as a breach of contract.

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    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.

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Here's an interesting case about a pipeline that de-coupled after a weld failed.  The pipe's owner, had a continuing services agreement with the defendant regarding the installation of the pipe.  The agreement included warranties, representations and guaranties about the quality, workmanship and fitness for a particular purpose for the work done in connection with the pipe.  The pipe de-coupled roughly two months after its installation was completed.

Plaintiff brought a suit against defendant under breach of warranty and negligence claims.  The court, in the opinion, denies the defendant's motion to dismiss both claims notably holding that the complaint contains enough information to state a cause of action for both the "sudden and dangerous event" and "damage to other property" exceptions to the economic loss doctrine.  Finding that the pleadings were sufficient to state the claims, the court noted that discovery was needed to determine if the event would hold up to the standards for the exceptions, but that in pleading, the Plaintiff's papers were sufficient.

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The Moorman Doctrine has been applied to those providing professional services since Anderson Electric, Inc., v. Ledbetter Erection Corp. 115 Ill. 2d 146 (1986).

The Doctrine has several exceptions but often forces parties to a contract for services to seek redress for damages they have incurred by suing on the terms of the contract rather than in tort.  The Moorman decision has long been a tool of attorneys representing construction clients for limiting the issues and available remedies of different parties to construction disputes.

In designing a building or performing work under contract on a structure, the doctrine often operates in limiting the manner in which a professional can be sued unless some error has resulted in damage to other property or personal injury or property damage resulting from a sudden and calamitous or dangerous occurrence.

In Loman v. Freeman, (Doc. No. 104289, April 17, 2008), the Illinois Supreme Court had occasion to visit the "sudden or dangerous" exception to the doctrine in the scintillating context of veterinary medicine... and, sadly, decided against addressing the merits of the topic in favor of a procedural rule that bars consideration of arguments not adequately defined or argued in the briefs.  In Loman, the plaintiffs' race-horse required surgery.  Plaintiffs claimed they only authorized the vet to perform two procedures, and that a third procedure performed by the vet, was unauthorized and did irreparable damage to the horse, rendering it unfit for racing.  Plaintiffs sued on two theories, one in negligence claiming that the vet performed unauthorized surgery on the animal, and secondly on a count of conversion, claiming that the unauthorized surgery amounted to an unauthorized assumption of the right to possession or ownership of the horse.  We are concerned only with the first claim in negligence.

The defendants claimed that the Moorman Doctrine applied and that the plaintiffs were barred from bringing suit in negligence.  The district court agreed and dismissed the plaintiffs' case, the appellate court reversed the matter stating that the unauthorized surgery amounted to a sudden and dangerous occurrence under the Moorman Doctrine's exception; the defendants appealed to the Illinois Supreme Court.

The Supreme Court noted that the application of the "sudden and dangerous" exception to the conduct of the professional and not to the failure of a product contracted for was an awkward one, also pointing out that the application of the exception to veterinary surgery under this sort of theory could lead to the absurd result that veterinary surgery would fall under the exception, but veterinary practices resulting in, for example, misdiagnosis, would not.  The Court then went on to state that it would not consider the issue since it was not adequately briefed.

In his dissent, Justice Freeman pointed out something we often see in economic loss cases --confusion -- with half the opinion of the majority referred to the count as one in negligence, and half the opinion referred to a "contractual" relationship between the parties.  In providing assistance Justice Freeman pointed to the possibility that the court could reclassify the action as a contractual issue of bailment and proceeded to discuss the law of bailments and their contractual nature along with the bailment theory's ability to provide negligence-theory based relief in the contractual setting.  The issue is particularly interesting in that Justice Freeman argued that under a bailment scenario, a professional contracting to perform services is held to "exercise the proper degree of care and diligence about the work" (Slip Op. at 22) and notes that "generally, the bailee will be liable for losses that are proximately the result of the bailee's own negligence."

"Under the bailment, the bailee has a duty to exercise the skill or knowledge pertaining to the "nature of the business... Bailees will be liable for losses that result from their negligence or, more precisely, for their failure to exercise the skill or knowledge pertaining to the nature of their business."  (Slip Op. 23-24).

Justice Freeman went on to state that addressing the claim at issue under the bailments theory would arguably resolve every issue in the case.

Unfortunately, the Court decided not to address the "sudden and calamitous" issue.  Additionally, failing to fully flesh out the dicta concerning applying the exception to the acts of a person and not to something happening with the product will doubtlessly need to be addressed at some point.

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