Third-Party Beneficiary Claims in Public Construction Contracts – Illinois Law

Lake County Grading Company, LLC v. The Village of Antioch, 2013 IL App (2d) 120474, 985 N.E.2d 638 (2nd Dist. 2013), illustrates the importance of joining an alternative common law claim with a statutory one when the statutory claim  is time-barred.

The plaintiff subcontractor sued a public entity under a third-party beneficiary theory for improvements plaintiff made to two residential subdivisions.  After the general contractor who hired plaintiff defaulted and filed for bankruptcy, the plaintiff sued the public entity under the Public Construction Bond Act, 30 ILCS 550/1 and the Mechanics’ Lien Act, 770 ILCS 60/23 and also brought claims for third-party beneficiary breach of contract. 

The lien and Bond Act claims were dismissed and the trial court granted summary judgment for the plaintiff on its third-party beneficiary claims.

Affirming the trial court, the First District rejected the Village defendant’s argument that plaintiff’s sole remedy was under the Bond Act.  The Bond Act requires a subcontractor like plaintiff to serve a verified notice within 180 days of the completion of its work and to file suit within one year after the public entity accepts the project.  30 ILCS 550/1, 2; Lake County, ¶¶ 17-19. 

Siding with the plaintiff, the Court noted that Bond Act states that the Act’s statutory remedy is “in addition to and independent of any other rights and remedies provided at law or in equity”.  Id., ¶ 20.  The Court then stated some key third-party beneficiary rules:

a person’s status as a third-party beneficiary turns on whether the contract language shows that the parties’ intent was to directly benefit the supposed third-party plaintiff;

– the contract language must show that the contract was made for the direct, not merely incidental benefit of the third party;

– the intent to directly benefit a third party must be shown by express provision in the contract identifying the third-party beneficiary by name or description of a class to which the third party belongs;

– if a contract makes no mention of the plaintiff or a class to which he belongs, he is not a third-party beneficiary of the contract;

– the plaintiff bears the burden of showing that the contracting parties intended to confer a benefit on him.

( ¶ 24)

Applying these rules, the Second District found that the plaintiff was a direct third-party beneficiary under both the Bond Act – which is “read into” the prime contract and the prime contract itself. Read together, the two documents clearly conferred third-party beneficiary status on plaintiff. (¶¶ 26-27).

Once the Court found that plaintiff was a third-party beneficiary of the prime contract, the Court applied Illinois’ four-year limitations period for construction-related claims (see 735 ILCS 5/13-214) instead of the Bond Act’s shortened 180 day/one-year limitations period. (¶ 31). 

The Court also declined to apply the Bond Act’s 180-day notice period was because the Village failed to require the general contractor to tender a payment bond as required by the Bond Act.  (¶ 25)  Since the Village failed to require a payment bond of the general contractor, there was no bond for the plaintiff to sue on.  This rendered the 180-day rule inapplicable.

Take-aways

The case illustrates that where a subcontractor blows the 180-day Bond Act notice rule, he can still sue as a third-party beneficiary of the prime contract.  

This case also makes clear that the party suing as a third-party beneficiary must demonstrate that the contract language clearly shows that the plaintiff is an intended, direct contract beneficiary.  Finally, the case provides an interesting contrast to the Mechanics’ Lien Act cases that hold that a subcontractor’s exclusive remedy against an owner is a statutory mechanics’ lien foreclosure suit. 

Collateral Estoppel, Law Of the Case and Section 2-1401 Petitions: Illinois Basics

1600 Museum Park, LLC v. Williams, 2012 WL 6955718, chronicles an aborted condominium purchase and its ensuing litigation.  A condo owner and two purchasers signed a contract (Contract) and an approx. $25K promissory note in connection with a condo sale.  But only one of the buyers signed the contract and note.  The deal fell through and the defendants sent a written termination notice to the plaintiff.

Plaintiff sued to confess judgment against both defendants and the trial court entered judgment against both defendants jointly and severally for over $30K.  Defendants appealed. 

The First District affirmed the money judgment against the defendant that signed the contract and note but reversed as to the buyer that didn’t sign either document. 

Collateral Estoppel and Law of the Case Doctrines

The Appellate Court found that the trial court erred in its application of collateral estoppel. 

Collateral estoppel is designed to prevent the relitigation of issues that have already been resolved in earlier actions and specifically contemplates two separate, and consecutive cases.  ¶¶ 13-14. 

Collateral estoppel applies where (1) there is a final, valid judgment on the merits in a prior suit; (2) the issue in the prior suit is identical to the issue in the current case; and (3) the party against whom estoppel is asserted was a party to, or in privity with a party to the prior lawsuit.  ¶ 15. 

The Court held that since there was no prior lawsuit – there is only one case involved – collateral estoppel didn’t apply.  In addition, the Court found that the  ex parte confession of judgment entered against defendants was, by its nature, not a final judgment on the merits.  Id., ¶ 17. 

The First District also rejected plaintiff’s law-of-the-case (“LOC”) argument. 

LOC “bars relitigation of an issue previously decided in the same case.”  The rule applies where an appellate court decides an issue of law and then remands the case to the trial court and is designed to prevent a second appeals court from contradicting the first appellate court on an issue of law. 

The Court found that since this case did not involve a prior appellate ruling and there was no remand to a trial court, the law-of-the-case rule didn’t apply.  

Section 2-1401 Petitions

Code Section 2-1401 petition (735 ILCS 5/2-1401), which governs motions to vacate a judgment older than 30 days.  ¶ 20.

A Section 2-1401 petition establishes (1) a meritorious defense; (2) due diligence in discovering the defense; and (3) due diligence in bringing the petition. (¶¶ 19-20)

Promissory Note Liability and Contract Cancellation

The purchasers argued that since only one of them signed the Note, it wasn’t enforceable on either of them.  The First District disagreed and held the Note’s text didn’t require both purchasers’ signatures for the Note’s enforceability. ¶¶ 23-24. 

The defendants other argument was that since they cancelled the Contract, the Note was also necessarily cancelled.  The Court dismissed this noting that the Contract gave defendants only seven days to terminate the contract.  Since the defendants’ sent their termination letter more than four months after the Contract was signed, the termination was untimely.  As a result, the Contract was never cancelled and the Note was enforceable (but only as to the signing defendant).  (¶¶ 26-27).   

Take-aways:

– Real estate contract termination deadlines will be enforced as written;

– Collateral estoppel and law-of-the-case are construed narrowly and only apply where there are at least two separate, successive cases (for collateral estoppel) or where there is an appeals court decision on a legal issue and subsequent remand to a trial court (for law-of-the-case);

– A promissory note will be enforced to the letter and the court will not engraft conditions onto a clearly drafted note.  

Commercial Tenant Can’t Share in Shopping Mall Condemnation Award

strip-mallIn Village of Palatine v. Palatine Associates, LLC, 2012 IL App (1st)  102707, an eminent domain (condemnation) suit, the defendant owned a shopping center and was a lessor on several commercial leases – all of which contained provisions that said in the event of condemnation proceedings, the tenant would share in any award.  The plaintiff Village filed a condemnation suit about two years into a ten-year lease between the defendant landlord and a commercial tenant.  The condemnation suit eventually settled with the landlord getting nearly $5M in proceeds to the exclusion of the tenant.  Tenant appealed.

Held: Affirmed:

Basis: The First District agreed with the trial court that the landlord terminated the tenant’s lease before the condemnation award.  The Court rejected tenant’s argument that the landlord’s 5-day notice was deficient and that the landlord waived the notice by accepting partial payment.  In Illinois, acceptance of rent in a commercial lease setting is not a waiver if the notice explicitly gives the landlord the right to accept partial payment. Palatine Associates, ¶¶ 73-75. 

The Court also discarded the tenant’s fraud in the inducement defense.  The Court enforced the lease’s “non-reliance” clause, through which the tenant certified that it wasn’t induced to enter the Lease by any landlord representations.  Id., ¶ 79.  The non-reliance clause precluded the, tenant from establishing justifiable reliance – a required fraud in the inducement element.  The court also rejected tenant’s claim that the non-reliance clause was an unenforceable exculpatory clause that immunized the landlord for wilful and wanton conduct.  The reason: the lease text said nothing about insulating the landlord from intentional torts.  (¶¶ 82-83).

Conclusion

Palatine Associates provides a good summary of Illinois contract formation, interpretation and enforcement rules in the commercial lease context.  Though its  serpentine procedural history is hard to follow, the general rules gleaned from the case are simple.  For lessors, the case reaffirms the importance of both 5-day notices and that a lease specifically state that only full payment will waive a lease default.  The case also shows that in commercial lease context, integration and non-reliance clauses are enforceable against tenant defenses based on pre-lease representations by a landlord.

For tenants, the case cautions to be leery of lease terms that allow landlords to accept partial payments without waiving the default as well as lease integration and non-reliance clauses.  An integration clause will bar any evidence of a landlord’s oral representations that conflict with the written lease.  A non-reliance provision will preclude a fraud in the inducement claim.