Illinois Court Gives Agency Law Tutorial In Commercial Lease Fight

Three agency law issues that I regularly encounter in commercial litigation practice are (1) authority, (2) ratification and (3) a contract that doesn’t identify a valid entity.

The authority question posed is whether an individual – typically a company employee or independent contractor – can bind the company by the individual’s conduct.

Ratification applies where a corporate principal accepts the benefits of an agent’s unauthorized conduct.

The third, “unclear party” issue arises where a contract is signed by an individual on behalf of an unsueable entity such as a street address (i.e. “Tenant: 15 S. Wacker Drive”) or a generic business name with no “Inc.”, “Ltd.” or “LLC” designation.

Cove Management v. AFLAC, Inc. 2013 IL.App (1st) 120884, features all of these in a commercial lease dispute involving a large insurance company.

The lease designated the company as “tenant” but was signed by an independent  (non employee) sales agent.  After a lease default, the plaintiff landlord sued the company to recover rent damages.

The trial court dismissed the suit, buying the company’s argument that the agent who signed the lease wasn’t authorized to sign on the company’s behalf.  The landlord appealed.

Held: Affirmed.

Rules/Reasoning:

Even though the agent used business cards, envelopes and stationery submitted that bore the company colors and logo, it wasn’t enough to saddle the company with lease liability.

The Court rejected this argument as it laid out the operative Illinois agency rules:

An agent’s authority to bind a principal can be actual or apparent;

Actual authority can be express or implied;

Express authority is authority explicitly granted to the an agent by the principal, while implied authority is proven circumstantially based on the nature of the agent’s position;

Apparent authority is authority imposed by law – regardless of whether there is actual (express or implied) authority – based on a principal holding out an agent as having authority to bind the principal;

– Apparent authority must be based on words or conduct of the principal; not of the agent;

– If there is no showing of detrimental reliance by a third party on the agent’s authority; there can be no finding of apparent authority;

– A third party dealing with an agent has a duty to inquire into an agent’s supposed authority and can’t blindly rely on an agent’s claim that he has authority to enter contracts on behalf of his corporate principal;

Ratification applies where a principal learns of an unauthorized action (taken by a supposed agent) but retains the benefits of the transaction;

– Ratification requires the principal- with full knowledge of an agent’s unauthorized act – to manifest the intention to accept the benefits of the unauthorized act or to acquiesce in the transaction

¶¶ 9-14.

The Court found that there was no actual authority since the agent’s independent contractor agreement specifically provided that the agent could not sign contracts for the company.

There was also no apparent authority since plaintiff pointed to no conduct by the company that clothed the agent with authority to execute leases in the company’s name.

All of plaintiff’s apparent authority arguments were based on conduct of the agent; not the company.

The Court also found the lessor failed to show the company ratified the agent’s conduct.  All rent payments that were made came from the agent and there was  no evidence the company even knew the lease existed before suit was filed.

The corporate lack of lease knowledge also doomed the lessor’s alternative unjust enrichment/quantum meruit counts.  Since the company didn’t know about the lease, the plaintiff couldn’t show it conferred a benefit on the insurance company based on the sales agent renting the office space.  (¶¶ 34-35). (Quantum meruit requires plaintiff to prove that the defendant benefitted from plaintiff’s services.)

Take-aways: This case demonstrates the paramount importance of precision in lease drafting.  The insurance company defendant probably should have vetted all independent agent leases to ensure that the leases don’t designate the company as tenant.

Procedurally, the case shows how important it is to file counter-affidavits in response to a section 2-619 or summary judgment motion.  Since the landlord didn’t file a counter-affidavit in response to the company’s own affidavit, the Court had to accept the company’s version of events as true.  This spelled defeat for the landlord.

Contractor’s Material Breach of Construction Contract Dooms Mechanics’ Lien and Breach of Contract Claims

In Kasinecz v. Duffy, 2013 IL App (2d) 121329-U, an August 2013 Second District case, a contractor suffered a three-pronged defeat in his lawsuit against a homeowner.  The Court affirmed the lower court’s bench trial judgment for the homeowner on the contractor’s breach of contract, mechanics’ lien and quantum meruit claims.

Facts: This is the second appeal involving the parties.  In 2004, defendant hired plaintiff to build a house pursuant to a verbal agreement which was later formalized in a written contract.  The contract required the plaintiff to submit invoices to defendant before defendant was obligated to pay plaintiff.  Kasinecz, ¶ 20.  Over several months, the plaintiff and his crew built part of the house until a payment dispute arose.  Plaintiff walked off the job and sued for breach of contract, mechanics lien foreclosure and quantum meruit.  The trial court entered a directed finding for the homeowner half-way through the first bench trial (because the contractor materially breached by failing to furnish a statutory lien waiver, among other reasons) and plaintiff appealed. 

In the first appeal, the Second District reversed on the ground that it was unclear whether defendant homeowner requested a sworn statement and because the factual record was too scant to uphold judgment in total for the defendant.  Kasinecz, ¶ 6.  On remand, the trial court received additional witness testimony and written submissions and again entered judgment for defendant.  This time, the Second District affirmed.

Reasoning: The Court sided with the homeowner on all three of the contractor’s claims. 

(1) Breach of Contract: the contractor materially breached (and therefore, couldn’t prove that he performed) the contract by not providing invoices to the defendant as required by the contract.  Kasinecz, ¶¶ 21-23.  The contractor admitted at trial that he didn’t supply invoices until after he walked off the job.  Since the contractor breached, he couldn’t prevail on his breach of contract claim.   

(2) Mechanics’ Lien claim:  The contractor lost his lien claim because he didn’t substantially perform.  A necessary condition to mechanics lien recovery is substantial completion of the contract.  Id., ¶ 25; Fieldcrest Builders, Inc. v. Antonucci, 311 Ill.App.3d 597 (1999)(note: Fieldcrest provides a thorough discussion of substantial completion/quantum meruit issues in the context of a construction case).  Here, the Court found there were holes in the roof, no windows or doors were installed, and the house lacked interior mechanical systems and finishes.  Id., ¶¶ 25-26.  Because the house was so incomplete when plaintiff and crew stopped work, plaintiff couldn’t show substantial performance.  This doomed his mechanics’ lien count.  Id., ¶ 25.

(3) Quantum meruit – the Court also rejected plaintiff’s quantum meruit claim based on the black-letter principle that quantum meruit recovery won’t apply where an express contract governs the parties’ relationship.  Kasinecz, ¶ 29; Installco Inc. v. Whiting Corp., 336 Ill.App.3d 776 (2002).  Since plaintiff and defendant had a written (express) contract for plaintiff to build defendant’s house, this defeated plaintiff’s quantum meruit count.  The fact that plaintiff couldn’t enforce the contract (since he breached it) doesn’t matter: the contract’s existence alone defeats the quantum meruit claim.  Kasinecz, ¶ 29.

Law of the Case.  The plaintiff contractor argued that the Second District’s reversal in his favor on the first appeal was law of the case to the trial court on remand and even moved for summary judgment immediately upon remand.  Id., ¶¶ 7, 14-15.  The law of the case doctrine provides that questions of law actually determined in a prior appeal are binding on the trial court on remand as well as on subsequent appeals. Id., Kreutzer v. Illinois Commerce Comm’n, 2012 IL App (2d) 110619.  Both the trial and appeals court found that the law of the case rule didn’t apply because the issues decided in the first appeal (whether the parties had an oral contract and whether the contractor provided statutory lien waivers) differed from the second appeal’s salient issues (whether plaintiff submitted invoices to defendant and whether plaintiff substantially performed).  Kasinecz, at ¶¶ 15, 20.  

Take-aways: A material breach will preclude contractual recovery; a contractor’s failure to substantially perform will doom a mechanics’ lien suit; and quantum meruit and a breach of express contract claim are mutually repugnant: they can’t co-exist.  The Court did appear to express surprise that the contractor didn’t argue that the homeowner waived strict compliance with the contract’s invoicing requirement.  The defendant made several progress payments to the plaintiff without first receiving invoices.  This would seem to give rise to a waiver of strict compliance argument.  However, since the contractor never argued waiver, the Court didn’t tip its hand as to how it would rule on the issue.

Quantum Meruit Basics – Illinois Law

QMQuantum meruit (Latin derivation: “as much as he deserved”) has repeatedly saved the day in situations where my client has performed services for a defendant but there is a contractual defect (such as missing price terms or an unclear completion date)that makes suing under a breach of contract impossible.  Time and again, quantum meruit has proved to be a valuable fallback or “Plan B” to a failed breach of express contract claim.  The remedy has ensured that my client at least gets something in situations where it would normally get nothing.

I’ve found quantum meruit to be especially useful in view of the realities of modern-day business transactions.  In my experience, it seems that contracts are often entered into by people (usually non-lawyers) who are bound and determined to get a deal done.  No matter what.  This single-mindedness of purpose often results in a myopic focus on finalizing the agreement instead of a meaningful consideration of a deal’s details or the possible consequences that could flow from a future breach.  It’s no surprise then, that key contract terms are often omitted, agreements aren’t signed, or are signed by the wrong parties.

Bernstein and Grazian, P.C. v. Grazian and Volpe, P.C., 402 Ill.App.3d 961 (1st Dist. 2010) provides a good summary of  quantum meruit’s pleading and proof elements.  The case is a partnership dispute between two law firms fighting over  – what else? – fees.  The plaintiffs (a dissolved law firm and representative of a deceased partner of that firm) filed suit for monetary and injunctive relief against defendants,  two former law partners of the plaintiff firm and those partners’ current firm. 

The trial court ruled against plaintiffs on breach of fiduciary duty and breach of contract claims but entered judgment for plaintiffs on a quantum meruit theory – awarding them 10% of the attorneys’ fees collected on open files which defendants’ firm assumed after plaintiff firm’s dissolution.  Id. at 965-966.   The First District reversed.  It held that there was insufficient evidence for the court to award 10% of attorneys’ fees earned on all pending cases which were formerly plaintiff’s (and were now defendants’ cases).  Volpe, 402 Ill.App.3d at 980. 

The black letter quantum meruit elements: (1) plaintiff performed a service to benefit the defendant; (2) he did not perform the  service gratuitously; (3) defendant accepted plaintiff’s service; and (4) no contract existed to prescribe payment for this service. 

The quantum meruit plaintiff has the burden of proving that valuable services were rendered by him, that the services were received by defendant, and the circumstances are such that it would be unjust to allow the defendant to retain the benefits of plaintiff’s services.  The measure of quantum meruit recovery is the “reasonable value of work” and the plaintiff must show that its uncompensated services were of measurable benefit to defendant.  Volpe, 402 Ill.App.3d at 979. 

The Court held that while defendants did benefit from plaintiff’s legal services, plaintiff failed to offer sufficient evidence to substantiate the trial court’s quantum meruit award.  Id. at 979-80.  The plaintiff didn’t offer the court any basis to quantify the value of the plaintiff’s services.  As a result, the plaintiffs ended up with nothing.

Conclusion – I always file quantum meruit as an alternative claim to a breach of contract claim.  Illinois  Code Sections 2-604 and 2-613 permit alternative pleading.  This does two things: (1) it ensures that my client at least gets something in the event of a contract defect or if my client is in breach; and (2) it mitigates the all-or-nothing nature of only proceeding on a breach of contract theory.  When pleading quantum meruit, I also make sure I don’t incorporate by reference my breach of contract allegations.  

By definition, quantum meruit can’t co-exist with a breach of express contract claim.  Some firms love (and I do mean love) to file motions to strike complaints on this basis.  The Volpe case ( and others like it) shows that a quantum meruit plaintiff must do more than simply allege that he benefitted a defendant.  Instead, the plaintiff must produce competent evidence that quantifies the monetary value of plaintiff’s services.