‘Lifetime’ Verbal Agreement To Share in Real Estate Profits Barred by Statute of Frauds – IL 1st Dist.

I previously summarized an Illinois case illustrating the Statute of Frauds’ (SOF) “one-year rule” which posits that a contract that can’t possibly be performed within one year from formation must be in writing.

Church Yard Commons Limited Partnership v. Podmajersky, 2017 IL App (1st) 161152, stands as a recent example of a court applying the one-year rule with harsh results in an intrafamily dispute over a Chicago real estate business.

The plaintiff (a family member of the original business owners) sued the defendant (the owners’ successor and son) for breach of fiduciary duties in connection with the operation of family-owned real estate in Chicago’s Pilsen neighborhood.  The defendant filed counterclaims to enforce a 2003 oral agreement to manage his parents’ realty portfolio in exchange for a partnership interest in the various entities that owned the real estate.   The trial court dismissed the counterclaim on the basis that the oral agreement equated to a “lifetime employment contract” and violated the SOF’s one-year rule.  Defendant appealed.

Result: Counterclaim’s dismissal affirmed.

Reasons:

The SOF’s purpose is to serve as an evidentiary safeguard: in theory, the Statute protects defendants and courts from proof problems associated with oral contracts since “with the passage of time evidence becomes stale and memories fade.”  (¶ 26; McInerney v. Charter Golf, Inc., 176 Ill.2d 482, 489 (1997).

An SOF defense is a basis for dismissal under Code Section 2-619(a)(7).

Section 1 of the SOF, 740 ILCS 80/1, provides: “No action shall be brought…upon any agreement that is not to be performed within the space of one year from the making thereof” unless the agreement is in writing.

Under this one-year rule, if an oral agreement can potentially be performed within the space of one year (from creation), regardless of whether the parties’ expected it to be performed within a year, it does not have be in writing.  As a result, contracts of uncertain duration normally don’t have to comply with the one-year rule – since they can conceivably be performed within a year.

What About Lifetime Employment Contracts?

Lifetime employment agreements, however, are the exception to this rule governing contracts of unclear duration.  Illinois courts view lifetime contracts as pacts that contemplate a permanent relationship.  And even though a party to a lifetime agreement could die within a year, the courts deem a lifetime agreement as equivalent to one that is not to be performed within a space of a year.  As a result, a lifetime employment contract must be in writing to be enforceable.

Here, the 2003 oral agreement involved the counterplaintiff’s promise to dedicate his life to furthering the family’s real estate business.  It was akin to a lifetime employment agreement.  Since the 2003 oral agreement was never reduced to writing, it was unenforceable by the counterclaim under the SOF one-year rule. (¶¶ 30-31)

What About the Partial Performance Exception?

The Court also rejected counter-plaintiff’s partial performance argument.  In some cases, a court will refuse to apply the SOF where a plaintiff has partially or fully performed under an oral contract and it would be unfair to deny him/her recovery.  Partial performance will only save the plaintiff where the court can’t restore the parties to the status quo or compensate the plaintiff for the work he/she did perform.

Here, the Counterplaintiff was fully compensated for the property management services he performed – it received management fees of nearly 20% of collected revenue.

Afterwords:

This case validates Illinois case precedent that holds lifetime employment contracts must be in writing to be enforceable under the SOF’s one-year rule.  It also makes clear that a party’s partial performance won’t take an oral contract outside the scope of the SOF where the party has been (or can be) compensated for the work he/she performed.  The partial performance exception will only defeat the SOF where the performing party can’t be compensated for the value of his/her services.

 

 

 

Pay-When-Paid Clause in Subcontract Not Condition Precedent to Sub’s Right to Payment – IL Court

Pay-if-paid and pay-when-paid clauses permeate large construction projects

In theory, the clauses protect a contractor from downstream liability where its upstream or hiring party (usually the owner) fails to pay.

Beal Bank Nevada v. Northshore Center THC, LLC, 2016 IL App (1st) 151697 examines the fine-line distinction between PIP and PWP contract terms. a lender sued to foreclose

The plaintiff lender sued to foreclose commercial property and named the general contractor (GC) and subcontractor (Sub) as defendants.  The Sub countersued to foreclose its nearly $800K lien and added a breach of contract claims against the GC.

In its affirmative defense to the Sub’s claim, the GC argued that payment from the owner to the GC was a condition precedent to the GC’s obligation to pay the Sub.  The trial court agreed with the GC and entered summary judgment for the GC.  The Sub appealed.

Result: Reversed.

Reasons:

The Subcontract provided the GC would pay the Sub upon certain events and arguably (it wasn’t clear) required the owner’s payment to the GC as a precondition to the GC paying the Sub.  The GC seized on this owner-to-GC payment language as grist for its condition precedent argument: that if the owner didn’t pay the GC, it (the GC) didn’t have to pay the Sub.

Under the law, a condition precedent is an event that must occur or an act that must be performed by one party to an existing contract before the other party is obligated to perform.  Where a  condition precedent is not satisfied, the parties’ contractual obligations cease.

But conditions precedent are not favored.  Courts will not construe contract language that’s arguably a condition precedent where to do so would result in a forfeiture (a complete denial of compensation to the performing party). (¶ 23)

The appeals court rejected the GC’s condition precedent argument and found the Subcontract had a PWP provision.  For support, the court looked to the contractual text and noted it attached two separate payment obligations to the GC – one was to pay the Sub upon “full, faithful and complete performance,”; the other, to make payment in accordance with Article 5 of the Subcontract which gave the GC a specific amount of time to pay the Sub after the GC received payment from the owner.

The Court reconciled these sections as addressing the amounts and timing of the GC’s payments; not whether the GC had to pay the Sub in the first place. (¶¶ 19-20)

Further support for the Court’s holding that there was no condition precedent to the GC’s obligation to pay the Sub lay in another Subcontract section that spoke to “amounts and times of payments.”  The presence of this language signaled that it wasn’t a question of if the GC had to pay the Sub but, instead, when it paid.

In the end, the Court applied the policy against declaring forfeitures: “[w]ithout clear language indicating the parties’ intent that the Subcontractor would assume the risk of non-payment by the owner, we will not construe the challenged language…..as a condition precedent.” (¶ 23)

Since the Subcontract was devoid of “plain and unambiguous” language sufficient to overcome the presumption against a wholesale denial of compensation, the Court found that the Subcontract contained pay-when-paid language and that there was no condition precedent to the Sub’s entitlement to payment from the GC.

Take-aways

Beal Bank provides a solid synopsis of pay-if-paid and pay-when-paid clauses.  PIPs address whether a general contractor has to pay a subcontractor at all while PWPs speak to the timing of a general’s payment to a sub.

The case also re-emphasizes that Section 21(e) of the Illinois Mechanics Lien Act provides that the presence of a PIP or PWP contract term is no defense to a mechanics lien claim (as opposed to garden-variety breach of contract claim).

‘It Ends When I Say So!’ – Automatically Renewing Contracts in Illinois

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My early experiences with automatic contract renewals were not warm and fuzzy ones. I recall in the early 1980s (can I really be that um, seasoned?) when Columbia House’s ageless pitchman Dick Clark breathlessly hawked offers for “13 tapes for a dollar!” (or was it a penny?)  I’d frantically sign up, the cassettes would soon arrive and – for a little while, at least – Eureka! (this was pre-Nirvana of course.)

But once the novelty wore off, I continued to receive tapes along the lines of Kansas’ Point of Know Return (Kerry Livgren anyone?) or Loverboy’s Get Lucky (remember Mike Reno??) for the next several months even though I never ordered them!  

Then there was that never-ending People magazine subscription.  The time and energy I spent trying to extricate myself from that vice-grip subscription definitely did not justify my fleeting moments of guilty-pleasure fluff-reading. The culprit in both examples: automatically renewing contracts.

The Illinois Automatic Contract Renewal Act, 815 ILCS 601/1 et seq. (the “Act”), is the legislature’s attempt to protect unwitting consumers from being locked into long-term contracts against their will.

The Act only applies to consumer (not business-to-business contracts) entered into after January 1, 2005.  The Act provides that if a contract is subject to automatic renewal, the renewal clause must be clear and conspicuous manner.  815 ILCS 601/10. In addition to the B2B exclusion, the Act also doesn’t apply to contracts involving banks, savings and loan associations or credit unions. 815 ILCS 601/20(c), (d).

 The caselaw interpreting the Act does not specifically define “clear and conspicuous”.  To give content to the clear and conspicuous requirement, courts look to other statutes for guidance.  The Uniform Commercial Code (UCC) defines “conspicuous” as “so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.”  810 ILCS 5/1-201(10). 

In the case of a warranty, the court looks to (a) how many times a customer was made aware of the notice, (b) whether it was on the front or the back of the page, (c) whether the language was emphasized in some way (d) whether the notice was set off from the rest of the document so as to draw attention to it; and (e) font size. 

The Seventh Circuit’s clear and conspicuous calculus includes: whether a reasonable person would notice it; how many times a customer was made aware of the notice; whether it was on the front or back of the page; whether the language was emphasized in some way; whether the notice was set off from the rest of the document so as to draw attention to it; and font size.

The issue is not whether the disclaimer (or renewal term) could have been more conspicuous, but whether the term is presented in a manner to draw attention to it.

Illinois courts have enforced contract disclaimers that appear in ALLCAPS, bold-faced and unambiguous and where the term is set apart from the rest of the contract’s text. 

Section 10 of the Act requires a contract party to send written notice of automatic renewal and the consumer’s cancellation rights where (a) the contract’s terms is 12 months or more and (b) the renewal period exceeds one month. The renewal notice must be given within 30-60 days before the contract’s expiration.

Example: If a contract automatically renews on 12/1/13, and the cancellation deadline is 11/1/13 – notice must be issued no earlier than 9/1/13 and no later than 10/1/13.

As for remedies, an Act violation gives rise to a private cause of action under the Consumer Fraud Act.  815 ILCS 601/15.  This is significant because the Consumer Fraud Act provides for prevailing-party attorneys’ fees.  The Act does  provide a safe harbor to a business that violates the Act and takes documented corrective actions.  815 ILCS 601/10(c).

The take-away:  If you’re a business entering into a contract with a consumer, and the contract automatically renews, the caselaw suggests that for the renewal term to be clear and conspicuous, and therefore enforceable, the provision: (1) should not be hidden amid boilerplate legalese,  (2) should be in a type size at least as large (if not larger than) the surrounding language, (3) the term should be in ALLCAPS and preferably in bold type face and (4) should appear on the first page or otherwise set apart from the rest of the contract.