Construction Systems, Inc. v. FagelHaber LLC, 2015 IL App (1st) 141700, dramatically illustrates the perilous consequences that can flow from a construction contract’s failure to identify the contracting parties and shows the importance of clarity when drafting releases intended to protect parties from future liability.
The plaintiff contractor sued its former law firm (the Firm) for failing to properly perfect a mechanics lien against a mortgage lender on commercial property. The plaintiff alleged that because of the Firm’s lien perfection failure, the plaintiff was forced to settled its claim for about $1.3M less than the lien’s worth (about $3M).
In the underlying lien case, the plaintiff and defendant Firm got into a fee dispute and the Firm withdrew. The Firm turned over its file to the plaintiff after the plaintiff made a partial payment of the outstanding fees (owed to defendant Firm) and signed a release (the “Release”). The Release, which referenced “known and unknown” claims and contained “without limitation” verbiage, was signed by the plaintiff in 2004. Plaintiff filed the current malpractice suit in 2009.
The trial court entered summary judgment for the Firm on the basis that the Release immunized the Firm from future claims. Plaintiff appealed.
Reversing summary judgment for the Firm, the First District first applied the relevant rules governing written releases in Illinois.
– a release is a contract and is governed by contract law;
– a release will be enforced as written where it’s clearly worded
– the scope and effect of a release is controlled by the intention of the parties;
– the intention of the parties is divined by reference to the words of the release and a release won’t be construed to defeat a claim that was not contemplated by the parties when they signed it;
– A “general” release will not apply to specific claims where a party is unaware of other (specific) claims;
– Where one party to a release owes the other a fiduciary duty (e.g. lawyer-client), the party owing the fiduciary duty has the burden of showing that it disclosed all relevant information to the other party.
Here, the court gave the Release a cramped construction. It held that it didn’t apply to the malpractice suit since that case wasn’t filed until 5 years after the Release was signed and there was no evidence that the plaintiff knew that the Firm possibly flubbed the lien filing when it (the plaintiff) signed the Release. This lack of evidence on the parties’ intent raised a disputed fact question that required denial of summary judgment.
Next, the court turned to the Firm’s judicial estoppel argument – that the plaintiff couldn’t sue for malpractice since it obtained a benefit in the underlying lawsuit (a settlement payment of $1.8M from the competing lender) by claiming it was an original contractor and not a subcontractor. Judicial estoppel applies where (1) a party takes two positions under oath, (2) in separate legal proceedings, (3) the party successfully maintained the first position and obtained a benefit from it; and (4) the two positions are inconsistent. (¶ 37).
The issue was paramount to the underlying lien case because if the plaintiff was a subcontractor, it had to comply with the 90-day notice requirement of Section 24 of the Lien Act. But if it was a general or original contractor, plaintiff was excused from the 90-day notice requirement. Based on this factual uncertainty, the court found the plaintiff had a right to pursue alternative arguments to salvage something of its approximately $3M lien claim.
The court also agreed with the plaintiff that it could recover prejudgment interest on the legal malpractice claim. Since that claim flowed from the underlying allegation that the Firm failed to perfect plaintiff’s lien, and since Section 21 of the Illinois Mechanics Lien Act allows for prejudgment interest (770 ILCS 60/21), the plaintiff could add the interest it would have recovered to the damage claim versus the Firm. (¶ 48).
1/ A broad release can still be narrowly interpreted to encompass only those claims that were likely in the release parties’ contemplation. If a claim hadn’t come to fruition at the time a release is signed, the releasing party can argue that an expansive release doesn’t cover that inchoate claim;
2/ Judicial estoppel requires more than alternative pleadings or arguments. Instead, the litigant must take two wholly contradictory statements and obtain a benefit from doing so. What’s a “benefit” is open to interpretation. Here, the plaintiff received $1.8M on its lien claim in the earlier litigation. Still, this wasn’t a benefit in relation to the value of its lien – which exceeded $3M;
3/ If the underlying claim – be it common law or statutory – provides for pre-judgment interest, then the later malpractice suit stemming from that underlying claim can include pre-judgment interest in the damages calculation.