Construction Contract Ambiguity: Court Considers Expert Testimony To Clarify Contract Terms

imageA construction site injury provides the setting for the First District’s recent application of Illinois contract interpretation rules to the question of when and how contracting parties’ prior course of dealing can inform the court’s analysis of an ambiguous written agreement.

In Gomez v. Bovis Lend Lease, 2013 IL App (1st) 130568, the plaintiff plumbing subcontractor was injured when he fell through a floor gap known in the trade as an “infill” while working on the construction of the 102-story Trump Tower in Chicago.  He sued the project manager and general contractor who in turn, filed a third-party complaint against the concrete forms subcontractor for breach of a written concrete flooring contract.

The flooring contract required the subcontractor to provide “designs, drawings and technical support” for the concrete forming systems. The parties (the general contractor and the concrete subcontractor) had worked together several times in the past.  In these prior projects, the subcontractor never provided any infill design services or technical support to the general contractor.  The trial court granted the subcontractor’s motion for summary judgment on the basis that the subcontractor wasn’t obligated to provide support for the infill areas.

Held: Affirmed

In siding with the subcontractor, the First District applied several key contract interpretation and enforceability principles:

–  The court must give effect to the parties’ intentions when interpreting a contract;

– The best indication of the parties’ intent is the plain meaning of the contract’s language which must be interpreted in light of the contract as a whole;

 – A contract is ambiguous where it’s subject to more than one reasonable interpretation;

 – If a contract’s ambiguous, extrinsic evidence may be used to interpret it;

 – If the contract is unambiguous, extrinsic evidence may not be used to interpret it;

–  Mere disagreement over contract terms doesn’t equate to ambiguity;

– If a contract contains an integration clause, a court may not use extrinsic evidence to interpret the contract;

– But if the contract’s ambiguous, the integration clause will not preclude consideration of extrinsic evidence;

Gomez, ¶¶ 13-14, 25-26.

The Court found the subject contract ambiguous.  While the contract was detailed in its delineation of the subcontractor’s design, drawing, calculation and technical support requirements, it was silent on what if any obligations the subcontractor had for an infill area, which was the location of the plaintiff’s injury.  The court considered extrinsic evidence including expert affidavit testimony on the parties’ previous projects to determine the scope of the subcontractor’s obligations.

The subcontractor’s summary judgment evidence showed that in the parties’ prior 20 or so projects, neither the general contractor nor the project manager ever asked the subcontractor to provide design or support for infill areas.  Because of this, the Court held that the parties’ past dealings and their course of performance on the Trump Tower project conclusively showed that the concrete subcontractor had no contractual responsibility for the infills.  The Court affirmed summary judgment for the subcontractor on the general contractor’s contribution claim.  Gomez, ¶¶18-19, 30.

Take-away: Gomez presents a good summary of some fundamental and prevalent Illinois contract interpretation principles.  The case specifies that where a contract is ambiguous, a court will consider evidence – namely, expert testimony – of the contracting parties’ prior dealings as well as their course of performance on the same project in order to give content to an unclear contract term.

Requests to Admit in Illinois: How and When To Respond (The 28-Day Rule)


I once read a tongue-in-cheek article that said if you’re ever served with a Request to Admit Fact (RTA), you should staple it to your forehead. (Ouch!)

That way, you won’t forget about the RTA and miss the 28-day deadline to send your sworn responses to the opposing side.  And while some recent cases may have softened Illinois’ draconian RTA rules, the hyperbolic sentiment expressed in the “staple statement” endures: a failure to timely respond to an RTA can have grave consequences for your case.  The main one being that the facts (or documents) contained in the RTA can be deemed admitted against you.

Once that happens, the party sending the RTA can move for summary judgment and win all or most of his case.

Armagan v. Pesha, 2014 IL App (1st) 121840 examines the question of when the 28-day timing requirement starts and ends and when the service of and response to an RTA is deemed complete under Illinois law.

The plaintiff deposited over 250 gold coins with the defendants who operated a rare coin shop.  Plaintiff alleged he placed the coins with the defendants temporarily with the understanding that plaintiff could always get them back.  Several months later when plaintiff asked for the coins back, defendants apparently refused and plaintiff sued for conversion, breach of bailment and other claims.

During discovery, plaintiff mailed an RTA on defendants on November 18, 2010.  Defendants filed their response with the court on December 17, 2010 (29 days later) and mailed the response to plaintiff that same day.  Plaintiff then moved to deem the RTA facts admitted on the basis that defendant missed the 28-day deadline by one day.

The trial court agreed (November 18 service is complete November 22, 2010; December 17, 2010 service is complete on December 21, 2010 – 29 days after November 22, 2010), deemed the facts admitted and entered summary judgment for plaintiff for almost $500,000.  An expensive, one-day mistake to be sure.  Defendants appealed.

Held: Trial Court reversed.  Defendants’ RTA response was timely under Illinois Supreme Court Rule 12.

The First District found that defendants timely responded to the RTA.  In doing so, the Court discussed the interplay between Supreme Court Rules 216, 12 and 11 which govern RTAs and the manner of serving documents. The key rules:

the purpose of Rule 216  is to narrow issues for trial and only requires the responding party to serve his responses within the 28-day deadline; as opposed to filing them with the court within 28 days;

– Rule 216 requires only that the RTA responses be served (by the responding party), not received (by the requesting party) within 28 days;

– failing to comply with Rule 216’s requirements can result in a judicial admission of the facts contained in the RTA;

– Under Rule 12(c), service is complete four (4) days after mailing;

– the method of service differs from proof of service;

– serving a document by U.S. mail is an acceptable method of service; 

– Rule 11 specifically allows a party to serve documents (other than complaint) by U.S. mail (“regular” mail);

¶¶ 16-20.

Application: Plaintiff mailed his RTA on November 18, 2010.  Under Rule 12, service of the RTA was complete on November 22, 2010 – four days later.  Defendants then had 28 days – through December 20, 2010 – to serve their response.  Since defendants served their RTA response by placing it in the mail on December 17, 2010, they complied with the 28-day deadline (with three days to spare). ¶ 23.

Policy concerns also motivated the Court’s reversal.  It noted that Illinois has a broad policy of cases being resolved on the merits instead of technicalities and that discovery is not designed for tactical gamesmanship or a trap for the unwary.  Accordingly, the Court would have allowed the defendants response even if it was late under Rule 183 (which governs extension of time for “good cause”).  ¶¶ 25-26.

Take-aways: A Request to Admit is the quintessential “gotcha” discovery device.  The serving party hopes you will blow the 28-day deadline and then do exactly what the plaintiff did here: try to get the facts deemed admitted against you.

This case seems to strike a fair balance between giving teeth to a discovery tool while at the same time being willing to look at the realities of litigation practice, where the exigencies of the moment practically dictate last-minute responses.

In hindsight, the defendants’ attorney probably should have hand-delivered and faxed (and e-mailed) his response instead of mailing it.  That would have saved him a lot of time and (I imagine) frantic energy trying to undo the $500,000 judgment against his client.

 

7th Circuit Affirms Fraudulent Transfer and Alter Ego Judgment Against Corporate Officers

The Seventh Circuit affirmed an almost $3M judgment against the defendants under fraudulent transfer, successor liability and alter ego rules in Center Point v. Halim, 2014 WL 697501.

The plaintiff energy company entered into a written contract to supply natural gas to defendants’ 41 Chicago area rental properties.  The individual defendants – a husband and wife – managed the properties through a management company (Company 1).

Over a two-year period, defendants used over $1.2M worth of plaintiff’s gas and didn’t pay for it.  Plaintiff sued Company 1 in state court and got a $1.7M judgment.  When plaintiff discovered that defendants transferred all of Company 1’s assets to Company 2, plaintiff sued Company 2 and the husband and wife in Federal court alleging a fraudulent transfer and successor liability.  The Northern District entered summary judgment for plaintiff in the amount of $2.7M on all claims and defendants appealed.

Affirming, the Seventh Circuit first found that the defendants’ conduct violated the Illinois Fraudulent Transfer Act, 740 ILCS 160/1 (the “Act”).  The Act punishes debtor attempts to avoid creditors through actual fraud or constructive fraud.

Constructive fraud applies where (1) a debtor transfers assets without receiving a reasonably equivalent value in exchange for the transfer and (2) the debtor intends to incur or reasonably should believe he will incur debts beyond his ability to pay them as they become due.  Halim, *2, 740 ILCS 160/5.

The Court found that the defendants’ actions were constructively fraudulent. First, the Court noted that during a three-year time span, Company 1 (the state court judgment debtor) transferred almost $11M to the individual defendants; ostensibly to repay loans.

But the Court found it odd there was no documentation of loans or a paper trail showing where the millions of dollars went.  The suspicious timing of defendants’ creation of a new company – Company 2 – coupled with the defendants’ inability to account for the millions’ whereabouts, bolstered the Court’s constructive fraud finding.

Since the individual defendants’ depletion of Company 1’s assets made it impossible for it to pay the state court judgment, the defendants’ actions were constructively fraudulent under the Act. *3.

The Court also affirmed summary judgment for the plaintiff under successor liability and alter ego theories.  In Illinois, the general rule is that a company that purchases assets of another company does not assume the liabilities of the purchased company.

A common exception to this rule is where there is an express assumption (of liability) by the purchasing company.  Here, the record showed that Company 2 assumed all rights, obligations, contracts and employees of Company 1.  As a result, the unsatisfied state court judgment attached to Company 2 under successor liability rules.

The Court also affirmed the judgment under the alter ego doctrine.  Alter ego applies where there is virtually no difference between the business entity and that entity’s controlling shareholders.  That is, the dominant shareholders don’t treat the corporation as a separate entity and fail to follow basic corporate formalities (e.g. minutes, stock issuance, incorporation papers, etc.).

The individual defendants treated Company 1 as their personal piggy bank by commingling their personal assets with the corporate assets.  There were no earmarks of “separateness” between the individual defendants’ assets and Company 1’s corporate assets.  *3-4.

Because of this, the husband and wife defendants were responsible (in the Federal suit) for the unsatisfied state court judgment entered against the defunct Company 1.

Take-away: Halim illustrates that where a judgment debtor corporation or controlling shareholders of that corporation transfer all corporate assets to a new, similarly named (or not) entity shortly after a lawsuit is filed, it will likely look suspicious and can lead to a constructive fraud finding.

The case also underscores the importance of following corporate formalities and keeping corporate assets separate from individual/personal assets – especially where the corporation is controlled by only two individuals.  A failure to treat the corporation as distinct from the dominant individuals, can lead to alter ego liability for those individuals.