New York’s Public Policy On Construction Dispute Venue Trumps Illinois Forum-Selection Clause – IL 2d Dist.

Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (1st) 150839 offers a nuanced discussion of forum selection clauses and choice-of-law principles against the backdrop of a multi-jurisdictional construction dispute.

The plaintiff general contractor (GC) sued a subcontractor (Sub) in Illinois state court for breach of a construction contract involving New York (NY) real estate.  The contract had a forum selection clause that pegged Kane County Illinois (IL) as the forum for any litigation involving the project.  

The trial court agreed with the Sub’s argument that the forum-selection clause violated NY public policy (that NY construction litigation should be decided only in NY) and dismissed the GC’s suit.  Affirming, the Second District discusses the key enforceability factors for forum-selection clauses when two or more jurisdictions are arguably the proper venue for a lawsuit.

Public Policy – A Statutory Source

The Court first observed that IL’s and NY’s legislatures both addressed the proper forum for construction-related lawsuits.  Section 10 of Illinois’ Building and Construction Contract Act, 815 ILCS 665/10, voids any term of an IL construction contract that subjects the contract to the laws of another state or that requires any litigation concerning the contract to be filed in another state.

NY’s statute parallels that of Illinois.  NY Gen. Bus. Law Section 757(1) nullifies construction contract terms that provide for litigation in a non-New York forum or that applies (non-) NY law.

Since a state’s public policy is found in its published statute (among other places), NY clearly expressed its public policy on the location for construction litigation.

Forum Selection and Choice-of-Law Provisions

An IL court can void a forum-selection clause where it violates a fundamental IL policy.  A forum-selection clause is prima facie valid unless the opposing side shows that enforcement of the clause would be unreasonable.

A forum-selection clause reached by parties who stand at arms’ length should be honored unless there is a compelling and countervailing reason not to enforce it. (¶ 75)

A choice-of-law issue arises where there is an actual conflict between two states’ laws on a given issue and it isn’t clear which state’s law governs.  Here, IL and NY were the two states with ostensible interests in the lawsuit.  There was also a plain conflict between the states’ laws: the subject forum-selection clause was prima facie valid in IL while it plainly violated NY law.

Which Law Applies – NY or IL?

Illinois follows Section 187 of the Restatement (Second) of Conflicts of Laws (1971) which provides that the laws of a state chosen by contracting parties will apply unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (2) application of the law of the chosen state would violate a fundamental policy of a state that has a materially greater interest than the chosen state on a given issue.

The Court found the second exception satisfied and applied NY law.  

Section 757 of NY’s business statute clearly outlaws forum-selection clauses that provide for the litigation of NY construction disputes in foreign states.  As a result, the contract’s forum clause clearly violates NY’s public policy of having NY construction disputes decided in NY.

The question then became which state, NY or IL, had the greater interest in the forum-selection clause’s enforcement?  Since NY was the state where the subcontractor resided, where the building (and contract’s finished product) was erected and the contract ultimately performed, the Court viewed NY as having a stronger connection.  Since allowing the case to proceed in IL clearly violated NY’s public policy, the Court affirmed dismissal of the GC’s lawsuit.

Afterwords:

Forum selection clauses are prima facie valid but not inviolable.  Where a chosen forum conflicts with a public policy of another state, there is a conflict of laws problem.  

The Court will then analyze which state has a more compelling connection to the case.  Where the state with both a clear public policy on the issue also has a clearer nexus to the subject matter of the lawsuit, the Court will apply that state’s (the one with the public policy and closer connection) law on forum-selection clauses.

 

Pay-When-Paid Clause in Subcontract Not Condition Precedent to Sub’s Right to Payment – IL Court

Pay-if-paid and pay-when-paid clauses permeate large construction projects

In theory, the clauses protect a contractor from downstream liability where its upstream or hiring party (usually the owner) fails to pay.

Beal Bank Nevada v. Northshore Center THC, LLC, 2016 IL App (1st) 151697 examines the fine-line distinction between PIP and PWP contract terms. a lender sued to foreclose

The plaintiff lender sued to foreclose commercial property and named the general contractor (GC) and subcontractor (Sub) as defendants.  The Sub countersued to foreclose its nearly $800K lien and added a breach of contract claims against the GC.

In its affirmative defense to the Sub’s claim, the GC argued that payment from the owner to the GC was a condition precedent to the GC’s obligation to pay the Sub.  The trial court agreed with the GC and entered summary judgment for the GC.  The Sub appealed.

Result: Reversed.

Reasons:

The Subcontract provided the GC would pay the Sub upon certain events and arguably (it wasn’t clear) required the owner’s payment to the GC as a precondition to the GC paying the Sub.  The GC seized on this owner-to-GC payment language as grist for its condition precedent argument: that if the owner didn’t pay the GC, it (the GC) didn’t have to pay the Sub.

Under the law, a condition precedent is an event that must occur or an act that must be performed by one party to an existing contract before the other party is obligated to perform.  Where a  condition precedent is not satisfied, the parties’ contractual obligations cease.

But conditions precedent are not favored.  Courts will not construe contract language that’s arguably a condition precedent where to do so would result in a forfeiture (a complete denial of compensation to the performing party). (¶ 23)

The appeals court rejected the GC’s condition precedent argument and found the Subcontract had a PWP provision.  For support, the court looked to the contractual text and noted it attached two separate payment obligations to the GC – one was to pay the Sub upon “full, faithful and complete performance,”; the other, to make payment in accordance with Article 5 of the Subcontract which gave the GC a specific amount of time to pay the Sub after the GC received payment from the owner.

The Court reconciled these sections as addressing the amounts and timing of the GC’s payments; not whether the GC had to pay the Sub in the first place. (¶¶ 19-20)

Further support for the Court’s holding that there was no condition precedent to the GC’s obligation to pay the Sub lay in another Subcontract section that spoke to “amounts and times of payments.”  The presence of this language signaled that it wasn’t a question of if the GC had to pay the Sub but, instead, when it paid.

In the end, the Court applied the policy against declaring forfeitures: “[w]ithout clear language indicating the parties’ intent that the Subcontractor would assume the risk of non-payment by the owner, we will not construe the challenged language…..as a condition precedent.” (¶ 23)

Since the Subcontract was devoid of “plain and unambiguous” language sufficient to overcome the presumption against a wholesale denial of compensation, the Court found that the Subcontract contained pay-when-paid language and that there was no condition precedent to the Sub’s entitlement to payment from the GC.

Take-aways

Beal Bank provides a solid synopsis of pay-if-paid and pay-when-paid clauses.  PIPs address whether a general contractor has to pay a subcontractor at all while PWPs speak to the timing of a general’s payment to a sub.

The case also re-emphasizes that Section 21(e) of the Illinois Mechanics Lien Act provides that the presence of a PIP or PWP contract term is no defense to a mechanics lien claim (as opposed to garden-variety breach of contract claim).

Tacking Unsigned Change Orders On To Contractors’ Lien Not Enough For Constructive Fraud – IL Court

Constructive mechanics lien fraud and slander of title are two central topics the appeals court grapples with in Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 2016 IL App (3d) 140946.  There, a commercial properly developer appealed bench trial judgments for two subcontractor plaintiffs – a paving contractor and an excavating firm – on the basis that the plaintiffs’ mechanics liens were inflated and fraudulent.

The developer argued that since the subcontractors tried to augment the lien by adding unsigned change order work to it – and the contracts required all change orders to be in writing – this equaled that voided the liens.  The trial court disagreed and entered judgment for the plaintiff subcontractors.

Affirming the trial court’s judgment, the appeals court provides a useful summary of the type of proof needed to sustain constructive fraud and slander of title claims in the construction lien setting and when attorneys’ fees can be awarded to prevailing parties under Illinois’ mechanics lien statute, 770 ILCS 60/1 (the Act).

Section 7(a) of the Act provides that no lien shall be defeated to the proper amount due to an error of overcharging unless it is shown that the error or overcharge was made with an “intent to defraud.”  Constructive fraud (i.e., fraud that can’t be proven to be purposeful) can also invalidate a lien but there must be more than a simple overcharge in the lien claim.  The overage must be coupled with other evidence of fraud.

Slander of title applies where (1) a defendant makes a false and malicious publication, (2) the publication disparages the plaintiff’s title to property, and (3) damages.  “Malicious” in the slander of title context means knowingly false or that statements were made with a reckless disregard of their truth or falsity.  If a party has reasonable grounds to believe it has a legal or equitable claim to property, even if it’s later proven to be false, this won’t amount to a slander of title.

Here, the appeals court agreed with the trial court that there was no evidence to support a constructive fraud or slander of title claim.  The defendant property owner admitted that the subcontractor plaintiffs performed the contract as well as the extra change order work.

While the Court excluded the unsigned change order work from the lien amount, there was still insufficient constructive fraud or slander of title evidence to sustain the owner’s counterclaims.  Though unsuccessful in adding the change orders to the lien, the Court found the plaintiffs had a reasonable basis to recover the extra work in their lien foreclosure actions based on the parties’ contracting conduct where the owner routinely paid extras without signed change orders.

The Court then examined whether the subcontractors could add their attorneys’ fees to the judgment.  Section 17(b) of the Act allows a court to assess attorneys’ fees against a property owner who fails to pay “without just cause or right.”  This equates to an owner raising a defense not “well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”  770 ILCS 60/17(b), (d).

The evidence at trial that the subcontractors substantially performed the paving and excavation work cut in favor of awarding fees to the plaintiffs.  There was no evidence to support the owner defendant’s failure to pay the subcontract amounts.  The Court held that this lack of a colorable basis not to pay the subcontractors was “without just cause or right” under the Act.

Afterwords:

1/ Constructive fraud requires more than a computational error in the lien amount.  There must be other “plus-factor” evidence that combines with the overcharge;

2/ Where a contractor has reasonable basis for lien claim, it will be impossible for plaintiff to meet the malicious publication requirement of a slander of title claim;

3/ This case is pro-contractor as it gives teeth to the Mechanics’ Lien Statute’s fee-shifting section.