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.

 

Implied-in-Law Contracts Versus Express Contracts: “Black Letter” Basics

Taxi Medallion(Taxi Medallion – Hood of Car, 2.6.16 – Grand and Halsted, Chicago, IL)

Tsitiridis v. Mahmoud, 2015 IL App (1st) 141599-U pits a taxi medallion owner against a medallion manager in a breach of contract dispute.  Plaintiff pled both express and implied contract theories against the medallion manager based on an oral, year-to-year contract where the plaintiff licensed the medallions to the defendant (who used them in his fleet of cabs) for a monthly fee.  Under the agreement, the defendant also assumed responsibility for all its drivers’ traffic and parking violations and related fines.

When the defendant failed to pay its drivers’ traffic fines, plaintiff covered them by paying the city of Chicago about $60K.  Plaintiff then sued the defendant for reimbursement.

After the trial court dismissed the complaint on the defendant’s motion, the medallion owner plaintiff appealed.

The First District partially agreed and disagreed with the trial court. In doing so, it highlighted the chief differences between express and implied-in-law contracts and the importance of a plaintiff differentiating between the two theories in its Complaint.

A valid contract in Illinois requires an offer, acceptance and consideration (a reciprocal promise or some exchange of value between the parties).

While the medallion contract involved in this case seemed factually unorthodox since it was a verbal, year-to-year contract, the plaintiff alleged that in the cab business, it was an “industry standard” agreement.  Plaintiff alleged that the agreement was a classic quid pro quo: plaintiff licensed the medallions to the defendant who then used the medallions in its fleet of cabs in exchange for a monthly fee to the plaintiff.

Despite the lack of a written agreement, the court noted that in some cases, “industry standards” can explain facially incomplete contracts and save an agreement that would normally be dismissed by a court as indefinite.

The plaintiff’s complaint allegations that the oral medallion contract was standard in the taxicab industry was enough to allege a colorable breach of express contract claim. As a result, the trial court’s dismissal of the breach of oral contract Complaint count was reversed.

The court did affirm dismissal of the implied contract claims, though.   It voiced the differences between implied-in-law and implied-in-fact contracts.

An implied-in-law contract or quasi-contract arises by implication and does not depend on an actual agreement.   It is based on equitable concerns that no one should be able to unjustly enrich himself at another’s expense.

Implied-in-fact contracts, by contrast, are express contracts.  The court looks to the parties’ conduct (instead of the contract’s language) and whether the conduct is congruent with a mutual meeting of the minds concerning the pled contract terms.  If there is a match between alleged contract terms and the acts of the parties, the court will find an implied-in-fact contract exists.

Illinois law is also clear that an implied-in-law contract cannot co-exist with an express contract claim.  They are mutually exclusive.  While Illinois does allow a plaintiff to plead conflicting claims in the alternative, a plaintiff cannot allege a breach of express contract claim and an implied-in-law contract one in the same complaint.

Since the plaintiff here incorporated the same breach of express contract allegations into his implied-in-law contract count, the two counts were facially conflicting and the implied-in-law count had to be dismissed.

Take-away:

Like quantum meruit and unjust enrichment, Implied-in-law contract can serve as a viable fallback theory if there is some factual defect in a breach of express contract action.

However, while Illinois law allows alternative pleading, plaintiffs should take pains to make sure they don’t incorporate their implied contract facts into their express contract ones. If they do, they risk dismissal.

This case also has value for its clarifying the rule that industry standards can sometimes inform a contract’s meaning and supply the necessary “gap fillers” to sustain an otherwise too indefinite breach of contract complaint count.

Talent Agency’s Implied In Law Contract Claim Survives Dismissal In Suit For TV Commercial Services

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Karen Stavins Enteprises, Inc. v. Community College District No. 508, 2015 IŁ App (1st) 150356 stands as a recent example of a plaintiff suing in quasi-contract – specifically, under an implied-in-law contract theory – to recover the reasonable value of unpaid acting services rendered in connection with a television commercial.

The plaintiff, a well-known Chicago talent agency, sued the City Colleges of Chicago’s corporate parent (“City Colleges”) when it failed to pay for the services of nine actors (just over $13K) booked by the plaintiff who starred in a commercial promoting the benefits of a City Colleges education.

The trial court dismissed the agency’s complaint on City Colleges’ Section 2-615 motion.  Plaintiff appealed.

Held: reversed.

Reasons:

City Colleges argued that the plaintiff’s claim failed because it didn’t comply with the procurement standards set forth in the Illinois Public Community College Act, 110 ILCS 805/3-27.1 – a statute that delineates specific requirements for a party entering a contract with a public educational entity.

Reversing the trial court’s dismissal, the appeals court first attacked City Colleges’ motion to dismiss on procedural grounds, noting that a Section 2-615 motion cannot be supported by affidavit or based on facts not contained within a complaint’s four-corners. 

Since City Colleges supported its motion with its agent’s affidavit testifying to some background facts concerning the creation of the commercial, the affidavit should have been excluded from consideration by the trial court.  (¶ 5).

Turning to the merits, the First District provides a useful primer on the salient rules governing implied in law contracts (“ILC”).

In Illinois, an ILC is not an express contract.  Instead, as the name suggests, it’s an implied promise by a recipient of services or goods to pay for them. 

An ILC presupposes that no actual agreement exists between parties, but the court imposes a duty to pay a reasonable value of the services in order to prevent unjust enrichment.  ILC’s “essence” is where a defendant voluntarily accepts a benefit from a plaintiff and fails to pay the plaintiff.

No ILC claim will lie, however, where there is an express contract (including a contract implied in fact) between the parties.  To state a valid ILC claim, a plaintiff must plead and prove specific facts that support the conclusion that a plaintiff conferred a benefit on a defendant who unjustly retained the benefit in violation of basic principles of fairness and good conscience.  Put another way, the plaintiff must establish he supplied valuable services to a defendant under circumstances where it’s unjust for the defendant to retain them without paying a reasonable value for the services.  (¶ 7).

Applying the operative ILC rules, the court found the talent agency plaintiff sufficiently pled that it booked actors to perform TV commercial services for City Colleges, that the actors weren’t working for free, and City Colleges’ refusal to pay.  Under Illinois pleading rules, this was enough of an ILC claim to survive City Colleges’ motion to dismiss.

Afterwords:

I’ve experienced how difficult it is to comply with a government entity’s (like a school, e.g.) byzantine contractual requirements.  Typically, you must follow the procurement rules to the letter or else risk case dismissal – usually for a failure to contract with an authorized party or to not adhere to the government’s contract award policies.  The practical problem I see is that your client usually won’t even know of the procurement policies until after a default and it’s time to sue.

Stavins provides a useful summary of the implied-in-law contract claim and illustrates how it can serve as a valuable fall-back or Plan B claim in situations where a contract formation defect precludes a breach of express contract action.

The important take-away is that a party who enters a business relationship with a unit of government can still recover for the reasonable value of its services even where it fails to strictly comply with the government contract award policies and procedures.