Liquidated Damages Provisions in Illinois: Specific Amount for Specific Breach = Good; Optional or Penalty = Bad

imageLiquidated damages clauses appear frequently in a variety of commercial contracts and similar agreements. Several Illinois cases – some old and some very recent – examine liquidated damages clauses in multiple factual settings.

Here are some bullet-point liquidated damages rules, gleaned from the caselaw:

– Liquidated damages clauses are enforceable where:  (1) the parties intended to agree in advance to the settlement of damages that might arise from a breach;(2) the amount provided as liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and (3) the actual damages would be uncertain in amount and difficult to prove

– Damages must be in a specific amount for a specific breach – they may not be a penalty to punish nonperformance or a threat to secure performance:

– The key issue is whether the liquidated damages amount is a reasonable forecast of possible loss at the time of contracting.  Parties are not required to make the “best” damages estimate, just one that is reasonable.

Recent cases in which liquidated damages provisions were upheld:

Dallas v. Chicago Teachers Union 408 Ill.App.3d 420, 424 (1st Dist. 2011)(held: liquidated damages clause setting $100K as minimum damages if either party breached a confidential settlement agreement was valid.  $100K was reasonable figure based on plaintiff’s pre-settlement agreement salary history and desire for future employment with Chicago Teachers Union)

Karimi v. 401 N. Wabash Venture, LLC, 2011 IL App (1st) 102670; and Burke v. 401 N. Wabash Venture, LLC, 2013 WL 1442280 (7th Cir. 2013).

In Karimi and Burke, the First District and Seventh Circuit (Burke was a diversity case) respectively, enforced liquidated damages clauses in Trump Tower condo purchase contracts which stated that if buyer breached, seller’s remedy was retention of the buyer’s earnest money deposit – 15% of the condo unit’s sale price.  The courts held that this amount was both specific and reasonable enough to be enforced against the breaching buyer.

Three cases with  unenforceable liquidated damages clauses:

Med+Plus Neck & Back Pain Center v. Noffsinger, 311 Ill.App.3d 853 (2000).

 – liquidated damages clause in two-year employment contract invalid where (a) it’s a penalty to secure performance and (b) damages bore no relationship to possible damages if employee prematurely breached.  Evidence of the penal nature of the provision was the fact that employer’s damages decreased the longer the defendant employee worked for employer and increased the earlier employee breached).  

Grossinger Motorcorp, Inc. v. American National Bank & Trust Co., 240 Ill.App.3d 737 (1992)

– liquidated damages clause in a real estate contract struck down due to its optional nature: plaintiff could either (a) recover liquidated damages (keep the earnest money) or (b) at plaintiffs option, exercise other remedies.

H&M Driver Leasing v. Champion, 181 Ill.App.3d 28 (1st Dist. 1989)

– liquidated damages clause in truck driver services contract clearly a penalty to secure performance where contract provides for baseline liquidated damage amount AND actual damages:

Now What??

– If you are trying to enforce a contractual liquidated damages provision (LDP) in the Illinois courts, Karimi, Burke and Dallas should prove useful.  If you’re opposing and trying to defeat an LDP, you should try to analogize your case’s facts to those of the Med+Plus, Grossinger and H&M Driver Leasing cases.

– If a contract sets forth a specific amount for a specific breach, and it’s a reasonable forecast of possible damages (based on objective data to support the liquidated amount – see Dallas – plaintiff’s salary history provided a quantifiable basis to support minimum damage figure), the liquidated damages term will likely be enforced.

– But, if the provision contains indicators of a penalty or threat to secure performance or is optional (contains the word “option” or gives the non-breaching party the option of pursuing actual damages OR liquidated damages), it will likely be struck down.

 

Misnomer vs. Mistaken Identity – More Than Semantic Hairsplitting?

The misnomer and mistaken identity doctrines apply where a plaintiff sues a defendant too late.

Misnomer occurs when the plaintiff has the wrong name of the right party (ex: I intend to sue Donald Trump but instead name “Ronald Trump” as Defendant). 

Mistaken identity is involved where the plaintiff has named the wrong party. (I sue and serve Marla Maples but later realize I should have served Mr. Trump all along.)

Misnomer is basically a spelling error and the proper party defendant’s name can be corrected at any time, even after judgment.  735 ILCS 5/2-401(b).  

With mistaken identity, Code Section 2-616(d) controls. 

Determining whether misnomer or mistaken identity applies turns on the intent of the plaintiff as established by his objective manifestations of that intent including who the plaintiff actually named in the original complaint.  Maggi v. RAS Development, Inc., 2011 IL App (1st) 091955, ¶ 23. 

In Maggi, a construction negligence case, the First District affirmed the trial court’s ruling that an amended complaint that named the right general contractor (but not until after the statute of limitations ran) – related back to the original complaint’s filing date. 

Maggi followed the US Supreme Court in Krupski v. Costa Crociere, 130 S. Ct. 2485 (2010) and held that the contractor should have known that it was the intended target of plaintiff’s suit; noting the relation-back test is what the defendant to be added knew; not what the adding plaintiff knew.

Code Section 2-616(d)’a three mistaken identity elements are:

(1) whether the original complaint was timely filed;

(2) the defendant to be added – within the time that an action might have been brought against him plus the time for service under Supreme Court Rule 103(b) – received notice of the commencement of the action such that (a) he will not be prejudiced in defending the case and (b) knew or should have known that but for mistaken identity, the action would have been brought against him; and

(3) the original and amended pleadings grew out of the same transaction.  Maggi, ¶ 35.

In finding the amended complaint against the general contractor related back to the original complaint, the Maggi Court analyzed factor (2) above and focused on whether the proper defendant knew or should have known that it would have been named a defendant but for plaintiff’s error and did not focus on what the plaintiff knew (or should have known) .  (¶ 37). 

The Court pointed to evidence that the general contractor defendant knew it was the intended target of plaintiff’s suit.  The plaintiff engaged in extensive discovery to determine the correct identities of the defendants and the general contractor didn’t produce the prime contract (which specifically confirmed the general contractor’s identity) until after the four-year construction repose period lapsed despite repeated requests from the plaintiff. (¶¶ 5, 38). 

Finally, Maggi emphasized that under the Supreme Court Krupski decision, the plaintiff’s speed in moving to amend a complaint (once it has proper defendant info in its possession) is not a factor to consider under Section 2-616(d).  ¶ 39. 

The take-away:

It’s clear that when determining whether a time-barred complaint relates back, the focus is on what the defendant knew or should have known, not on plaintiff’s knowledge, diligence or speed with which he tries to amend a pleading. 

Clearly, the courts are giving primacy to the policies of deciding cases on the merits over a defendant’s competing interest in repose and finality.  

My guess is that cases that follow Maggi and  Krupski will result in more denials of Section 2-619 motions to dismiss based on untimeliness grounds.

Illinois’ Contribution Law and the ‘Savings’ Statute

Illinois has a 2 year statute of limitations (SOL) for contribution claims.  Contribution applies where two or more defendants have common liability to an injured plaintiff.  740 ILCS 100/1 (Illinois’s contribution statute).

The idea is that each defendant responsible for injuring a plaintiff should pay his share of liability to the plaintiff.  Section 13-204(b) of the Code prescribes the two year limitations period for contribution claims.

Another section of the Code of Civil Procedure, 735 ILCS 5/13-207 – labelled the “savings statute” – gives a defendant extra time to file an otherwise time-barred counterclaim or set-off under certain circumstances.

This statute protects against last minute filings by plaintiffs that would prevent a defendant from having a reasonable opportunity to assert counterclaims against that plaintiff.

Example: Assume plaintiff has personal injury claim against defendant and defendant has defamation claim against plaintiff arising from same underlying facts.  Illinois has a 2 year limitations period for personal injury claims (735 ILCS 5/13-202) and 1 year period for defamation (735 ILCS 5/13-201).  If plaintiff files personal injury suit on day 729 after he is injured and serves defendant some weeks later, the defendant’s defamation counterclaim would normally be barred since well over 1 year has elapsed from the underlying injury.  But, under the savings statute, the defendant now has 1 year from the date of service of plaintiff’s complaint to sue for defamation.

But consider this fact pattern: plaintiff serves defendant 1 on January 1, 2013 and serves defendant 2 on January 15, 2013.  Defendant 1 does not file any counterclaims.  Defendant 2 sues defendant 1 for contribution on January 14, 2015, the day before the 2-year SOL expires and defendant 1 is served on February 1, 2015.

Q:  Can defendant 1 now file a counterclaim for contribution against defendant 2 on or after February 1, 2015? Remember, defendant 1 was served with the underlying complaint on January 1, 2013 – so under 13-204(b)(see above), defendant 1 would have had until January 1, 2015 to file contribution counterclaims.  Clearly, defendant 1’s contribution action is time-barred by the 2-year SOL, right?

A: Wrong.  An off-shoot of the above fact pattern is exactly what the Illinois Supreme Court addressed in Barragan v. Casco case, 216 Ill.2d 435 (2005).  There, the Court reversed the Appellate Court and held that a contractor’s contribution counterclaim against a co-defendant architect could proceed even though it was time-barred under 13-204’s two-year SOL for contribution claims.

In Barragan, the plaintiff served the defendant contractor on July 25, 1997 and the defendant architect on September 15, 1997.  Under 13-204(b), the contractor and architect would have until July 25, 1999 and September 15, 1999 respectively to sue for contribution..  The architect filed its contribution claim against the contractor on July 29, 1999 – about six weeks before the 2-year limitations period expired.  The contractor filed its responsive contribution claim against the architect in December, 2000 – about 3.5 years after it was served by the underlying plaintiff and 16 months after the contribution 2-year limitations period expired.

The Court still permitted the contractor’s counterclaim to go forward under Code Section 13-207, the savings provision.  The  Court ruled that Section 13-207’s savings provision trumped the two-year SOL contained in Section 13-204(b) for contribution claims, noting that the contractor and architect were in an adversarial posture and that the contractor’s counterclaim was responsive to the architect’s.

Take-away: Personal injury defendants should be cognizant of Barragan and the interplay between 13-204 and 13-207.  If you – as a defendant – sue another defendant for contribution, be prepared for that defendant to counter-sue you for contribution beyond the 2-year limitations period.  This seems to penalize the timely filing defendant by allowing the contribution counter-defendant to circumvent the 2-year SOL for contribution.