Category: Mechanics Lien/Construction Law

Contractor ‘Extras’ Claims Versus Quantum Meruit: A Fine-Line Distinction? (IL Case Summary)

Twin contract law axioms include (1) a quasi-contract claim (i.e. quantum meruit) cannot co-exist with one for breach of express contract, and (2) to recover for contract “extras” or out-of-scope work, a plaintiff must show the extra work was necessary through no fault of its own.  While easily parroted, the two principles can prove difficult in their application.

Archon v. U.S. Shelter, 2017 IL App (1st) 153409 tries to reconcile the difference between work that gives rise to quantum meruit recovery and work that falls within an express contract’s general subject matter and defeats a quantum meruit claim.

The subcontractor plaintiff installed a sewer system for a general contractor hired by a city.  The subcontract gave the City final approval of the finished sewer system.  City approval was a condition to payment to the plaintiff.  The subcontract also provided that extra work caused by the plaintiff’s deficiencies had to be done at plaintiff’s expense.

The subcontractor sued the general contractor to recover about $250K worth of repair work required by the City.  The trial court granted summary judgment for the general contractor on both plaintiff’s quantum meruit and extras claim.  On remand from an earlier appeal, the plaintiff dropped its extras claim and went forward solely on its quantum meruit claim.  The trial court again found for the general and the sub appealed.

Result: Summary judgment for general contractor affirmed.  Plaintiff’s quantum meruit claim fails as a matter of law.

Reasons:

To recover for quantum meruit (sometimes referred to as quasi-contract or implied contract), the plaintiff must prove (1) it performed a service to benefit a defendant, (2) it did not perform the service gratuitously, (3) defendant accepted the benefits of plaintiff’s services, and (4) no contract existed to prescribe payment for the service.

A quantum meruit claim cannot co-exist with a breach of express contract one: they are mutually exclusive.

Parties to a contract assume certain risks.  Sometimes, when they realize their contractual expectations aren’t going to be realized, they resort to quantum meruit recovery as a desperation maneuver.  The law doesn’t allow this.  “Quasi-contract is not a means for shifting a risk one has assumed under the contract.” (¶ 34)(citing Industrial Lift Truck Service Corp. v. Mitsubishi International Corp., 104 Ill.App.3d 357).

A contractor’s claim for ‘extras’ requires the contractor to prove that (1) the work for which it seeks compensation was outside the scope of a contract, and (2) the extra work wasn’t caused by the contractor’s fault.  

In a prior appeal, the Court found that it wasn’t clear whether the extra work was the result of the plaintiff contractor’s mistake.  As a result, the contractor made a strategic decision to abandon its extras claim and instead proceeded on its quantum meruit suit.

At first blush, an extras claim mirrors quantum meruit’s requirement of work that’s not tied to any express contract term.

However, as the Court emphasized, there’s a definite legal difference between a claim for extra work and one for quantum meruit.  “A claim for quantum meruit lies when the work the plaintiff performed [is] wholly beyond the subject matter of the contract that existed between the parties.” [¶ 39]

The key question is whether an express contract covers the same general subject matter as the challenged work.  If it does, there can be no quantum meruit recovery as a matter of law.  [¶ 45]

Applying these principles, the Court found that the work for which plaintiff sought to recover in quantum meruit – sewer pipe repairs and replacement – involved the same sewer system involved in the underlying express contract.  As a result, plaintiff’s quantum meruit claim failed.

Take-aways:

This case provides an interesting illustration of the fine-line distinction between a contractor’s action to recover for extra, out-of-scope work and services that merit quantum meruit recovery.

Contractors should take pains to make it clear in the contract that if they do perform extra work, there is a mechanism in place (i.e. time and materials terms) that quantifies the extras.  Since the sewer repair work fell within the general subject matter of the underlying sewer installation contract, it was easy for the Court to find that the express contract encompassed the plaintiff’s work and reject the quantum meruit claim.

In hindsight, the plaintiff should have pressed forward with its breach of express contract claim premised on the extra work it claimed it performed.

Massive Wind Turbine Tower A Trade Fixture, Not Lienable Property Improvement – IL Second Dist.

AUI Construction Group, LLC v. Vaessen, 2016 IL App (2d) 160009 wrestles with whether a massive wind turbine tower that can be removed only by detonating several bombs at a cost of over half a million dollars qualifies as a lienable property improvement or is a non-lienable trade fixture under Illinois law.

The property owner and turbine seller signed an easement agreement for the seller to install a turbine on defendant’s land for an annual fee.  The easement provided the turbine would remain the seller’s property and that the seller must remove the structure on 90 days’ notice.  The seller also had to remove the turbine when the easement ended.  The turbine seller then contracted with a general contractor to install the turbine who, in turn, subcontracted out various aspects of the installation.

The owner-general contractor agreement and the downstream subcontracts referenced the easement and stated the turbine system remained the seller’s property.

When the plaintiff sub-subcontractor didn’t get paid, he sued its subcontractor, ultimately getting an arbitration award of over $3M.  When that proved uncollectable after the subcontractor’s bankruptcy, the plaintiff sued the property owner to foreclose a mechanics lien it previously recorded to recover the unpaid judgment.  The trial court dismissed the suit on the basis that the turbine was a removable trade fixture that was non-lienable as a matter of law.

Affirming, the Second District first noted that Illinois’ Mechanics Lien Act (770 ILCS 60/0.01 et seq.)(MLA) protects those who furnish material or labor for the improvement of real property.  The MLA allows a claimant to record a lien where its labor, materials or services improves the property’s value. In Illinois, real estate improvements are lienable; trade fixtures are not.

The factors considered in determining whether equipment is lienable includes (1) the nature of attachment to the realty, (2) the equipment’s adaptation to and necessity for the purpose to which the premises are devoted, and (3) whether it was intended that the item in question should be considered part of the realty.  Crane Erectors & Riggers, Inc. v. LaSalle National Bank, 125 Ill.App.3d 658 (1984).

Intent (factor (3)) is paramount.  Even where an item can be removed from land without injuring it, doesn’t mean the item isn’t lienable. So long as the parties manifest an intent to improve the realty, a removable item can still be lienable.  Moreover, parties are free to specify in their contract that title to equipment furnished to property will not pass to the land owner until its fully paid for.

Applying the three-factored fixture test, the court found the  nature of attachment, and necessity of the item for production of wind energy weighed in favor of finding the turbine lienable.   However, the all-important intent factor (factor number 3 above) suggested the opposite.

The easement agreement specified the turbine seller retained its ownership interest in the turbine and could (and had to) remove it at the easement’s end.  The court wrote: “the easement agreement establishes that the tower was a trade fixture.”  (¶ 20)

The Court also found that plaintiff’s “third party” rights were not impacted since plaintiff’s sub-subcontract specifically referenced the easement and prime contract – both of which stated the turbine would remain seller’s property. (¶ 23)

The Court examined additional factors to decide whether the turbine was lienable.  From a patchwork of Illinois cases through the decades, the Court looked at (1) whether the turbine provided a benefit or enhancement to the property, (2) whether the turbine was removable without material damage to the property, (3) whether it was impractical to remove the item, (4) whether the item (turbine) was used to convert the premises from one use to another, and (5) the agreement and relationship between the parties.

The sole factor tilting (no pun intended) in favor of lienability was factor 4 – that the turbine was essential to converting the defendant’s land from farmland to harnessing of wind energy.  All other factors pointed to the turbine being a nonlienable trade fixture.

The Court noted the property owner didn’t derive a benefit from the turbine other than an annual rent payment it received and rent is typically not lienable under the law.  The Court also pointed out that the tower could be removed albeit it through a laborious and expensive process.  Lastly, and most importantly, the parties’ intent was that the turbine was to remain seller’s personal property and for it not to be a permanent property improvement. (¶¶ 38-39)

The Court also rejected the subcontractor’s remaining arguments that (1) the Illinois Property Tax Code evinced a legislative intent to view wind turbines as lienable improvements and (2) it is unfair to disallow the plaintiff’s lien claim since it could not have a security interest in the turbine under Article 9 of the Uniform Commercial Code (UCC).

On the tax issue, the Court held that Illinois taxes turbines to ensure that wind turbines do not escape taxation and is purely a revenue-generating device.  Taxation of a structure is not a proxy for lienability. (¶¶ 43-44)

The Court agreed with that the subcontractor plaintiff did not have a security interest in the turbine under UCC Section 9-334 since, under that section, security interests do not attach to “ordinary building materials incorporated into an improvement on land.”  Since the turbine was replete with building materials (e.g. concrete, rebar, electrical conduit), the UCC didn’t give the plaintiff a remedy.  The Court allowed that this was a harsh result but the parties’ clear intent that the turbine remain the seller’s personal property trumped the policy arguments.

Afterwords:

This case strikes a blow to contractors who install large structures on real estate. Even something as immense as a multi-piece turbine system, which seemingly has a “death grip”- level attachment to land, can be nonlienable if that’s what the parties intended.

Another case lesson is for contractors to be extra diligent and insist on copies of all agreements referenced in their contracts to ensure their rights are protected in other agreements to which they’re not a party.

The case also portrays some creative lawyering.  The court’s discussion of the taxability of wind turbines, UCC Article 9 and the difference between a lease (which can be lienable) and an easement (which cannot) and how it impacts the lienability question makes for interesting reading.

 

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.