General Contractor Can Be Liable For Subcontractor Mishap: The ‘Retained Control’ Exception

stilts2In Lederer v. Executive Construction, 2014 IL App (1st) 123170, a drywall subcontractor’s employee sued a general contractor and an electrical subcontractor after the stilt-walking employee tripped on an uncovered electrical outlet at a downtown (Chi.) office building construction site.  The outlet was left uncovered by the electrical subcontractor who was hired by the general contractor.  The plaintiff’s theory of recovery was negligence: he argued that the general contractor owed and breached a legal duty of care to the plaintiff (and others like him) to ensure that the electrical subcontractor was adhering to project safety requirements.

The general contractor moved for summary judgment on the basis that it didn’t supervise the electrical subcontractor and wasn’t responsible for plaintiff’s injuries.  The trial court agreed and granted summary judgment for the general contractor. The plaintiff appealed.

Result: summary judgment for the general contractor reversed. Questions of fact concerning the degree of control the general contractor exerted over the project and the plaintiff’s work precludes summary judgment.

Rules/Reasoning:

The First District found that the evidence showed that the general contractor exerted enough supervisory control over the project that it could be liable for an independent (sub)contractor’s negligence.  The following liability principles controlled the Court’s analysis:

Under Illinois negligence law, whether a duty exists is a question of law to be determined by the court;

 – A general contractor defendant is usually not liable for negligence of an independent contractor;

 – Under Section 414 of the Restatement (Second) of Torts, a defendant can be liable for the negligence of an independent contractor where it retains (a) control over the operative detail of the independent contractor’s work; or (b) “supervisory control” over the work;

 – Supervisory control consists of the power to direct the order in which a contractor’s work is to be done;

 – But, a defendant is not liable where he merely has a general right to order work stopped or resumed, to inspect work progress and to receive status reports. In such a case, there isn’t enough control to subject the defendant to liability for the independent contractor’s negligence;

 – The best indicator of whether a contractor has retained control is the parties’ contract;

 – A defendant general contractor only needs to retain control over a single part of the overall work to be subject to liability for failure to exercise control with reasonable care.

(¶¶48-58); Restatement (Second) of Torts, s. 414, comments a-c.

Here, the Court pointed to substantial record evidence that showed the general contractor controlled and supervised multiple aspects of  both the electrical sub’s and the drywall sub’s (the plaintiff’s employer) work including: (1) retaining authority to stop unsafe work; (2) ensuring that all subs followed the general contractor’s safety policies; (3) having a strong work site presence; (4) having its safety coordinator visit the site regularly; and (5) all subcontracts had extensive references to project safety and required all subs to adhere to the defendant’s written safety guidelines.

Significantly, the defendant’s safety manual specifically banned the use of the type of stilts the plaintiff was using (to reach the high ceiling) when he was injured.  Taken together, these facts established as a matter of law that the defendant knew or should have known of the dangerous conditions surrounding the plaintiff’s injury.  (¶¶ 62-64).

Take-aways:  Aside from providing a thorough synopsis of the relevant negligence principles and liability-shifting rules that govern construction project injuries, the case should serve as a cautionary tale for general contractors who carry on an active presence on a job site.  It’s clear that if a general contractor exerts even a modicum of control over a subcontractor and takes an active role for setting the safety guidelines on a project, that contractor may be held liable for a subcontractor’s employee’s on-site injuries; at least enough to survive summary judgment.

 

Illinois Mechanics’ Lien General Contractor Doesn’t Morph Into a Subcontractor When Property is Sold Before Recording

imageQ: Does a general contractor transform into a subcontractor where a property owner sells its property to a third party AFTER the general contractor completes its improvements but BEFORE it records its mechanics lien?

A:  No.

Q: Does it matter?

A: Yes.  Because unlike a general contractor, a subcontractor must serve a 90-day notice to the new owner in order to preserve its lien rights under Section 24 of the Mechanics’ Lien Act (the Act).  770 ILCS 60/24.  If the subcontractor doesn’t serve the 90-day notice, the lien is invalid against the third party buyer.

Those are the key questions and answers distilled from Dirtwerks Excavating, Inc. v. Koritala, 2013 IL App (2d) 130329-U, a December 2013 Second District case where real estate was sold by the original owner to various purchasers after a paving general contractor completed its work but before it timely filed its mechanics’ lien.

Facts:

Plaintiff general contractor timely recorded his lien against several properties within the four month time period required by Section 7 of the Mechanics’ Lien Act (the “Act”), 770 ILCS 60/7.  But before the contractor recorded its lien, the owner sold the properties to various home buyers.

Those home buyers successfully moved to dismiss the lien on the basis that the plaintiff converted to a subcontractor once the properties were sold.  And since the plaintiff contractor never sent a 90-day notice (per 770 ILCS 60/24), the contractor’s lien wasn’t enforceable against the defendants.

Held: Trial court reversed.  Plaintiff’s lien was proper, timely and valid against the homeowner defendants.

Reasoning:

Illinois Mechanics’ Lien Act: ‘Contractor’ v. ‘Subcontractor’

The Act’s purpose is to protect those who in good faith furnish material or labor for the improvement of real estate.  The Act permits a lien on the property where a (a) benefit has been received by the owner and (b) where the property’s value or condition has been increased or improved by the furnished labor or materials. ¶ 5. 

A “contractor” under the Act is any person who contracts with a land owner or someone authorized by the owner to enter a contract with the contractor.  A “subcontractor” is one who performs construction work for the contractor.  770 ILCS 60/1(a)(contractor def.); 770 ILCS 60/21(a)(subcontractor def.).  A subcontractor must serve the owner with written notice of its lien within 90 days after completion of the work.  770 ILCS 60/24.  A contractor does not have to comply with the 90-day notice requirement.  He (a contractor) only has to file his lien within 4 months of completion. 770 ILCS 60/7.

Can Unverified Pleading Come Back to Haunt You?

No.  A complicating factor in Dirtwerks was that plaintiff alleged in its original complaint that it was a subcontractor.  But in later complaint amendments, it alleged it was a general contractor.   But since the original complaint wasn’t verified, it was superseded by the later filed complaints. 

A verified complaint that is amended remains a part of the record and can be used to impeach the pleader.  Not so with an unverified pleading.  Once an unverified pleading is amended, it’s erased from the record.  Even so, the plaintiff’s allegation in the first complaint that it was a subcontractor wasn’t a binding admission since it was a legal conclusion (and not a factual allegation). (¶¶ 6-7).

Lien Claimants’ Status Is Determined by the Original Contracting Parties

The Court’s key holding is that the plaintiff’s status (general contractor or subcontractor) was determined by the original contracting parties.  Plaintiff originally contracted with an entity that owned the properties.  That the properties were later sold to third parties didn’t change plaintiff from a general contractor to a subcontractor (who was required to send a 90-day notice). (¶ 9).

The court pointed to cases dating back more than a century for the proposition that once a lien attaches on the date of the owner-general contractor contract, a property buyer takes the property subject to the lien – so long as the lien is recorded/perfected within the four-month window.  

In fact, Section 7 of the Act expressly binds subsequent property buyers.  That section states that a timely recorded lien binds a creditor, incumbrancer or purchaser.   (¶10); 770 ILCS 60/7.

Take-away: This seems like a fair result.  The contractor shouldn’t be penalized just because a prior owner happens to transfer the property to a new buyer before the contractor records its lien.  Dirtwerks also solidifies lien law axioms that a plaintiff’s status – be it contractor, subcontractor, or sub-subcontractor, is determined by the original contracting parties and a timely recorded lien will bind subsequent purchasers.

 

 

 

 

Illinois Mechanics Lien Basics

image

The Statute: The Illinois Mechanics’ Lien Act, 770 ILCS 60/1 et seq.

Purpose: to provide a remedy to a contractor who provides valuable improvements to real estate by allowing him to lien the property (place a hold on the property to secure payment).

Once the lien is in place (or perfected), the lien clouds the property’s title and the contractor can sue to foreclose his lien and force a sale of the property.

Without this lien remedy, the contractor is at the mercy of the general contractor or owner.  If either runs out of money, the contractor gets nothing for his labor, materials, time and effort.

Cast of characters:

Owner = developer, person or entity that owns real estate

General Contractor (or Prime Contractor or Original Contractor or “GC”) = party that contracts with Owner

Subcontractor = party that contracts with General Contractor

Sub-subcontractor = party that contracts with Subcontractor

Lender (Mortgagee, Incumbrancer) = mortgage lender that funds construction activities on real estate

Notice and Timing Rules

General Contractor: “4 months/2 year rule”.  770 ILCS 60/7.  The GC must record lien within 4 months of last date of performance and must file suit to foreclose his mechanics’ lien within 2 years of last performance on the project.

Subcontractor: “90 days/4 months/2 years”.  770 ILCS 60/24.  The Subcontractor must serve notice to Owner within 90 days of last performance, must record its lien within 4 months of last performance, and must file suit to foreclose within 2 years of last performance.

Subcontractor on owner-occupied, single-family residential property: “60 days/90 days/4 months/2 years”.  770 ILCS 60/5.  A subcontractor on this type of property must serve notice on owner within 60 days of his commencement of work that he is a subcontractor on the property.  He then must serve notice on the owner of his intent to lien within 90 days of his last performance, record his lien in the Recorder’s offices within 4 months of last performance and file suit within 2 years of his last performance.

Venue (where to file): the lien is filed in the Recorder of Deeds for county where property is located (e.g. Chicago property = Cook County Recorder of Deeds; Waukegan property = Lake County Recorder of Deeds; Wheaton = DuPage County Recorder of Deeds).  770 ILCS 60/9.

Elements of a Mechanics Lien Claim (the Complaint):

A general contractor mechanic’s lien claimant must establish: (1) a valid contract; (2) with the owner of the property or someone authorized to contract on behalf of the owner; (3) for the furnishing of services or materials; and (4) performance of the contract or a valid excuse for non-performance.

A contractor can enforce a mechanic’s lien by proving that he substantially performed the contract in a workmanlike manner.

To perfect a mechanics lien, the subcontractor must serve the 90-day notice and record his lien within 4 months while  a general contractor must record his lien within 4 months of last performance.

A properly perfected lien will “relate back” and attach as of the date of the owner-general contractor prime contract.  This is important when the issue of priorities arises (e.g. when two liens are recorded against the same property, what takes priority?)

The general contractor does not have to serve a 90-day notice because he has contracted directly with the owner and so the owner presumably knows the general contractor’s identity.

Filing Suit to Foreclose the Lien

While recording the lien will certainly blemish the owner’s title and make it difficult to sell or refinance the property, to really go for the jugular, the contractor must file suit to foreclose his lien.  This sets in motion an eventual judicial sale of the property and provide sales proceeds from which to compensate the lien claimant.

To that end, a contractor suing to foreclose his lien must allege (a) a brief statement of the contract, (b) the date of the contract, (c) the date of last performance under the contract, (d) the amount unpaid, (e) a description of the premises, and (f) any other necessary facts.  770 ILCS 60/11(a).

The  contractor should name as defendants the owner, general, all other lien claimants and mortgage lenders on the property.  My experience is the vast majority of mechanics’ lien cases settle before trial.  However, the end-game is a foreclosure sale of the property with the court divvying up the sale proceeds among the various competing claimants (typically, the mortgage lender, general contractor, and at least one subcontractor).’

If You Didn’t Record the Lien On Time

If you fail to record a lien (such as in a situation where a client doesn’t tell you about its claim until more than 4 months have passed – it happens), you can still sue for breach of contract and alternatively for quantum meruit/unjust enrichment.  The limitations period for written contracts is 10 years (measured from the date of breach); for oral contracts, 4 years and for quantum meruit – 5 years.  Obviously, with these remedies, you run the risk of an insolvent or judgment-proof defendant.