New York’s Public Policy On Construction Dispute Venue Trumps Illinois Forum-Selection Clause – IL 2d Dist.

Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (1st) 150839 offers a nuanced discussion of forum selection clauses and choice-of-law principles against the backdrop of a multi-jurisdictional construction dispute.

The plaintiff general contractor (GC) sued a subcontractor (Sub) in Illinois state court for breach of a construction contract involving New York (NY) real estate.  The contract had a forum selection clause that pegged Kane County Illinois (IL) as the forum for any litigation involving the project.  

The trial court agreed with the Sub’s argument that the forum-selection clause violated NY public policy (that NY construction litigation should be decided only in NY) and dismissed the GC’s suit.  Affirming, the Second District discusses the key enforceability factors for forum-selection clauses when two or more jurisdictions are arguably the proper venue for a lawsuit.

Public Policy – A Statutory Source

The Court first observed that IL’s and NY’s legislatures both addressed the proper forum for construction-related lawsuits.  Section 10 of Illinois’ Building and Construction Contract Act, 815 ILCS 665/10, voids any term of an IL construction contract that subjects the contract to the laws of another state or that requires any litigation concerning the contract to be filed in another state.

NY’s statute parallels that of Illinois.  NY Gen. Bus. Law Section 757(1) nullifies construction contract terms that provide for litigation in a non-New York forum or that applies (non-) NY law.

Since a state’s public policy is found in its published statute (among other places), NY clearly expressed its public policy on the location for construction litigation.

Forum Selection and Choice-of-Law Provisions

An IL court can void a forum-selection clause where it violates a fundamental IL policy.  A forum-selection clause is prima facie valid unless the opposing side shows that enforcement of the clause would be unreasonable.

A forum-selection clause reached by parties who stand at arms’ length should be honored unless there is a compelling and countervailing reason not to enforce it. (¶ 75)

A choice-of-law issue arises where there is an actual conflict between two states’ laws on a given issue and it isn’t clear which state’s law governs.  Here, IL and NY were the two states with ostensible interests in the lawsuit.  There was also a plain conflict between the states’ laws: the subject forum-selection clause was prima facie valid in IL while it plainly violated NY law.

Which Law Applies – NY or IL?

Illinois follows Section 187 of the Restatement (Second) of Conflicts of Laws (1971) which provides that the laws of a state chosen by contracting parties will apply unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (2) application of the law of the chosen state would violate a fundamental policy of a state that has a materially greater interest than the chosen state on a given issue.

The Court found the second exception satisfied and applied NY law.  

Section 757 of NY’s business statute clearly outlaws forum-selection clauses that provide for the litigation of NY construction disputes in foreign states.  As a result, the contract’s forum clause clearly violates NY’s public policy of having NY construction disputes decided in NY.

The question then became which state, NY or IL, had the greater interest in the forum-selection clause’s enforcement?  Since NY was the state where the subcontractor resided, where the building (and contract’s finished product) was erected and the contract ultimately performed, the Court viewed NY as having a stronger connection.  Since allowing the case to proceed in IL clearly violated NY’s public policy, the Court affirmed dismissal of the GC’s lawsuit.

Afterwords:

Forum selection clauses are prima facie valid but not inviolable.  Where a chosen forum conflicts with a public policy of another state, there is a conflict of laws problem.  

The Court will then analyze which state has a more compelling connection to the case.  Where the state with both a clear public policy on the issue also has a clearer nexus to the subject matter of the lawsuit, the Court will apply that state’s (the one with the public policy and closer connection) law on forum-selection clauses.

 

Contractor ‘Extras’ Claims Versus Quantum Meruit: A Fine-Line Distinction? (IL Case Summary)

Twin axioms of contract law include (1) a quasi-contract claim (i.e. quantum meruit) cannot co-exist with one for breach of express contract, and (2) to recover for contract “extras” or out-of-scope work, a plaintiff must show the extra work was necessary through no fault of its own.

Easily parroted, the two principles can prove difficult in their application.

Archon v. U.S. Shelter, 2017 IL App (1st) 153409 tries to reconcile the difference between work that gives rise to quantum meruit recovery and work that falls within an express contract’s general subject matter and defeats a quantum meruit claim.

The subcontractor plaintiff installed a sewer system for a general contractor hired by a city.  The subcontract gave the City final approval of the finished sewer system.  City approval was a condition to payment to the plaintiff.  The subcontract also provided that extra work caused by the plaintiff’s deficiencies had to be done at plaintiff’s expense.

The subcontractor sued the general contractor to recover about $250K worth of repair work required by the City.  The trial court granted summary judgment for the general contractor on both plaintiff’s quantum meruit and extras claim.  On remand from an earlier appeal, the plaintiff dropped its extras claim and went forward solely on its quantum meruit claim.  The trial court again found for the general and the sub appealed.

Result: Summary judgment for general contractor affirmed.  Plaintiff’s quantum meruit claim fails as a matter of law.

Reasons:

To recover for quantum meruit (sometimes referred to as quasi-contract or implied contract), the plaintiff must prove (1) it performed a service to benefit a defendant, (2) it did not perform the service gratuitously, (3) defendant accepted the benefits of plaintiff’s services, and (4) no contract existed to prescribe payment for the service.

A quantum meruit claim cannot co-exist with a breach of express contract one: they are mutually exclusive.

Parties to a contract assume certain risks.  Sometimes, when they realize their contractual expectations aren’t going to be realized, they resort to quantum meruit recovery as a desperation maneuver.  The law doesn’t allow this.  “Quasi-contract is not a means for shifting a risk one has assumed under the contract.” (¶ 34)(citing Industrial Lift Truck Service Corp. v. Mitsubishi International Corp., 104 Ill.App.3d 357).

A contractor’s claim for ‘extras’ requires the contractor to prove that (1) the work for which it seeks compensation was outside the scope of a contract, and (2) the extra work wasn’t caused by the contractor’s fault.  

In a prior appeal, the Court found that it wasn’t clear whether the extra work was the result of the plaintiff contractor’s mistake.  As a result, the contractor made a strategic decision to abandon its extras claim and instead proceeded on its quantum meruit suit.

At first blush, an extras claim mirrors quantum meruit’s requirement of work that’s not tied to any express contract term.

However, as the Court emphasized, there’s a definite legal difference between a claim for extra work and one for quantum meruit.  “A claim for quantum meruit lies when the work the plaintiff performed [is] wholly beyond the subject matter of the contract that existed between the parties.” [¶ 39]

The key question is whether an express contract covers the same general subject matter as the challenged work.  If it does, there can be no quantum meruit recovery as a matter of law.  [¶ 45]

Applying these principles, the Court found that the work for which plaintiff sought to recover in quantum meruit – sewer pipe repairs and replacement – involved the same sewer system involved in the underlying express contract.  As a result, plaintiff’s quantum meruit claim failed.

Take-aways:

This case provides an interesting illustration of the fine-line distinction between a contractor’s action to recover for extra, out-of-scope work and services that merit quantum meruit recovery.

Contractors should take pains to make it clear in the contract that if they do perform extra work, there is a mechanism in place (i.e. time and materials terms) that quantifies the extras.  Since the sewer repair work fell within the general subject matter of the underlying sewer installation contract, it was easy for the Court to find that the express contract encompassed the plaintiff’s work and reject the quantum meruit claim.

In hindsight, the plaintiff should have pressed forward with its breach of express contract claim premised on the extra work it claimed it performed.

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).