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.

 

Missing “Course Of Dealing” Evidence Dooms Wedding Dress Seller on Summary Judgment – IL ND

In a Memorandum Opinion and Order that quotes Neil Sedaka and Taylor Swift in its footnotes, the District Court in House of Brides, Inc. v. Angelo, 2016 WL 698093 (N.D.Ill. 2016), examines the quantity and quality of evidence required to win a summary judgment motion. 

The plaintiff sold wedding clothes on-line and in retail stores and the defendant was the plaintiff’s main supplier.  The plaintiff sued the dress maker in state court for breach of contract claiming many of the dresses were defective or shipped later than promised. 

After it removed the case to Federal court, the defendant counter-sued the plaintiff for unpaid invoices. The defendant moved for summary judgment on its counterclaims as well as on plaintiff’s claims.

Partly siding with the defendant, the court discussed some common Uniform Commercial Code (UCC) claims and defenses and the required elements of a summary judgment affidavit.

The UCC governs contracts for the sale of goods and wedding dresses constitute goods under the UCC.  A seller who delivers accepted goods to a buyer can sue the buyer for the price of the goods accepted along with incidental damages where a buyer fails to pay for the goods.  810 ILCS 5/2-709.

In a goods contract, written contract terms can be explained or supplemented by a “course of performance, course of dealing, or usage of trade.” However, written terms cannot be contradicted by evidence of a prior agreement or an oral agreement made at the same time as the written one by the parties.

Here, the plaintiff argued that the course of dealing showed that defendant routinely accepted late payments and so defendant’s “net 30” invoice language was excused.

The court rejected this argument.  It held that avoiding the 30-day payment deadline was a material change that would have to be in writing since the Statute of Frauds governs contracts for the sale of goods exceeding $500 and the dresses involved in this suit easily eclipsed that value.

The court also rejected the plaintiff’s set-off defense against the defendant’s breach of contract counterclaim since a set-off must relate to the same contract being sued on (the court’s example: a seafood buyer can’t set off the price of frogs’ legs because the seller previously sent bad fish in a previous order)

Next, the court struck the plaintiff’s affidavit in support of its breach of implied warranty of merchantability claim on the basis of hearsay. 

In Federal court, an affidavit in support of or opposing summary judgment must be based on personal knowledge, show the witness’s competence and constitute admissible evidence.  Conclusory statements or affidavit testimony based on hearsay is inadmissible on summary judgment.  

The plaintiff’s affidavit testimony that there were dress defects that required refunds was too vague to survive defendant’s summary judgment motion.  This was because no employee stated that he/she personally issued any refunds or had first-hand knowledge of any dress defects that warranted a refund. 

What’s more, the seller failed to offer any authenticated business records that showed either the claimed dress defects or the refund amounts.  Without admissible evidence, the plaintiff seller failed to challenge the defendant’s breach of contract claim and the court awarded summary judgment to the defendant.

Afterwords:

1/ This case shows importance of furnishing admissible evidence when challenging summary judgment;

2/ Hearsay evidence in a summary judgment affidavit will be rejected;

3/ Course of performance or course of dealing can augment or explain written contract terms but cannot contradict them;

4/ A set-off defense must pertain to contract being sued on instead of a separate agreement;