‘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.

 

Is It a New Contract Or Modification of an Existing One? Illinois Case Discusses Why It Matters

In business relationships that contemplate a series of reciprocal services, it’s at times unclear if extra services are being offered as a modification to an existing contract or are done as part of a new agreement.  Landmark Engineering v. Holevoet, 2016 IL App (1st) 150723-U examines this sometimes fine-line difference and illustrates in stark relief the importance of honoring contractual provisions that require contract changes to be in writing and signed by the parties.

The defendant hired the plaintiff under a written contract to do some engineering work including a soil study on a parcel of land the defendant was going to sell.  The plaintiff’s work would then be submitted to the governing county officials who would then determine whether the sale could go through.

The contract, drafted by plaintiff, had a merger clause requiring that all contract modifications be in writing and signed by the parties.  When the plaintiff realized the contract’s original scope of work did not satisfy the county’s planning authorities, the plaintiff performed some $50,000 in additional services in order to get county approval.

The plaintiff argued the defendant verbally authorized plaintiff to perform work in a phone conversation that created a separate, binding oral contract.  For her part, the defendant asserted that the extra work modified the original written contract and a writing was required to support the plaintiff’s additional invoices.

The defendant refused to pay plaintiff’s invoices on the basis that the extra work and accompanying invoice far exceeded the agreed-upon contract price.  Plaintiff sued and won a $52,000 money judgment at trial.

Reversing, the appeals court examines not only the reach of a contractual merger clause but also what constitutes a separate or “new” contract as opposed to only a modification of a pre-existing one.

In Illinois, a breach of oral contract claim requires the contract’s terms to be proven with sufficient specificity.  Where parties agree that a future written document will be prepared only to memorialize the agreement, that oral agreement is still binding even though the later document is never prepared or signed.

However, where it’s clear that the parties’ intent is that neither will be legally bound until a formal agreement is signed, no contract comes into existence until the execution and delivery of the written agreement.

Illinois law defines a  contractual “modification” as a change in one or more aspects of a contract that either injects new elements into the contract or cancels others out.  But with a modification, the contract’s essential purpose and effect remains static.  (¶¶ 35-36)

In this case, since the plaintiff submitted a written contract addendum (by definition, a modification of an existing agreement) to the defendant after their telephone conversation (the phone call plaintiff claimed was a new contract), and defendant never signed the addendum, am ambiguity existed concerning the parties intent.  And since plaintiff drafted both the original contract and the unsigned addendum, the ambiguity had to be construed in defendant’s favor under Illinois contract interpretation rules.

Since the unsigned addendum contained the same project name and number as the original contract, the appeals court found that the record evidence supported a finding that the addendum sought to modify the original contract and was not a separate, new undertaking.  And since defendant never signed the addendum, she wasn’t bound by it.

Afterwords:

The case serves as a cautionary tale concerning the perils of not getting the party to be charged to sign a contract.  Where one party fails to get the other to sign it yet still does work anyway, it does so at its peril.

Here, since both the original and unsigned addendum each referenced the same project name, description and number, the court found plaintiff’s extra work was done in furtherance of (and as a modification to) the original contract.  As the contract’s integration clause required all changes to be in writing, the failure of defendant to sign off on the addendum’s extra work doomed the plaintiff’s damage claims.

 

 

 

Course of Dealing Leads to Implied-In-Fact Contract Judgment in Construction Spat – IL First Dist.

While a signed agreement is almost always preferable to an oral one, the absence of a writing won’t always doom a breach of contract action.

Trapani v. Elliot Group, Inc., 2016 IL App (1st) 143734, examines what happens when parties don’t sign a contract but still act as if an agreement exists.

In a construction dispute, the First District affirmed a trial court’s finding that an implied-in-fact contract existed between the contractor plaintiff and the real estate developer defendant.  In upholding the $250K-plus judgment for the plaintiff, the Court highlights the nature and scope of implied contracts and discusses the agent-of-a-disclosed-principal rule.

The plaintiff submitted a draft contract that identified the defendant as “owner.”  The defendant, who wasn’t the owner (it was the developer), never signed the contract.

Despite the absence of a signed contract, the plaintiff performed the work contemplated by the draft agreement and was paid over $2M over a several-month period.  Plaintiff sued to recover for its remaining work after the developer refused to pay.  The developer denied responsibility for the plaintiff work: it claimed it merely acted as the owner’s agent and that plaintiff should have looked to the owner for payment.

The trial court entered judgment for the plaintiff.  It found that the plaintiff and developer, while lacking a signed written agreement, had an implied-in-fact contract.  The developer appealed.

Result: affirmed.

Reasons:

Whether an implied in fact contract (or “contract implied in fact”) exists depends on the surrounding facts, circumstances and expressions of the parties demonstrating an intent to be bound.

A contract implied in fact is a classic contract by conduct.  It arises where the court imposes a contractual duty on a party based on the party’s promissory expression that shows an intention to be bound;

The promissory expression can be inferred from the parties’ conduct and an implied in fact contract can be found even where there is no express contract between the parties;

An implied in law contract differs in that it is an equitable remedy based on the principle that no one should unjustly enrich himself at another’s expense;

Acceptance of an implied in fact contract can be shown by conduct of the parties and a course of dealing that demonstrates the parties’ intent to form a binding agreement.

(¶¶ 40-44)

The Court agreed with the trial court that the parties’ conduct supported a finding of an implied in fact contract.  The Court noted that throughout the construction project, the plaintiff communicated regularly with the defendant and provided lien waivers and payment certificates to the defendant.  The defendant also provided project specifications to the Plaintiff and approved multiple change orders over the course of plaintiff’s work on the site.  Significantly, the defendant never rejected plaintiff’s work or demanded that plaintiff stop working at any time during the project.

Next, the Court tackled the developer’s argument that it wasn’t liable to the plaintiff since the developer was acting as the agent of the property owner.  In Illinois, an agent who contracts with a third party generally is not liable so long as he discloses his principal’s identity.  Where the agent fails to identify his principal, it creates an “undisclosed principal” scenario which will make the agent personally liable if the contract is later breached. (¶ 60)

The reason for the undisclosed principal rule is reliance: the third party (here, the plaintiff) relies on the agent’s credit when entering the contract.  As a result, it would be unfair to immunize the agent and have the undisclosed principal shoulder the financial burden when the agent fails to reveal the principal.  The dearth of evidence showing a relationship between the developer (agent) and the owner (principal) led the Court to sustain the trial court’s finding that the developer was responsible for the outstanding amounts owed the plaintiff contractor.

Afterwords:

1/  An implied in fact contract is a valid, enforceable contract, despite a lack of express agreement.  Instead, the parties’ intention to be contractually liable can be shown through course of dealing between parties;

2/ The agent of a disclosed principal is generally immunized from liability.  However, where the agent fails to sufficiently disclose its principal’s identity, the agent remains liable if the plaintiff can show it relied on the agent’s credit and lacked notice of the agent’s principal’s identity.