Tag: public policy

Missing Contingent-Fee Term Doesn’t Doom Law Firm’s Quantum Meruit Claim

Reversing a trial court’s dismissal of a law firm’s quasi-contract claims against a former client, the First District recently considered the enforceability of a contingency fee contract that was missing a material term.

The plaintiff law firm in Seiden Law Group, P.C. v. Segal, 2021 IL App (1st) 200877 sued the defendant, an ex-client, for quantum meruit and unjust enrichment to recover the value of its fees and costs incurred in a prior lawsuit.

Key Facts

In 2013, the client defendant hired the plaintiff law firm to petition the U.S. government in Federal court for the return of personal property the government confiscated after her ex-husband’s 2004 criminal racketeering conviction.

The contingent fee contract, drafted by the plaintiff firm, was silent on the percentage of recovery that would go to the firm if the suit was successful. It read: “_____% of recovered funds…. pursuant to a forfeiture resulting from a matter concerning [defendant’s ex-husband].” The contract also provided that in the event of discharge, the firm could recover pre-firing accrued fees and expenses advanced in the lawsuit.

In 2016, the client fired the law firm. At the time of its firing, the law firm had not recovered any property on the defendant’s (then, the plaintiff’s) behalf.

The law firm then sent defendant a bill for nearly $100,000 based on its assessed value of the legal services provided to the plaintiff in the case against the government. Plaintiff sued when defendant refused to pay under quantum meruit and unjust enrichment theories of recovery.

The basis for plaintiff’s claims was that since the underlying fee agreement was unenforceable since it was missing an essential price term, it could sue alternatively for quantum meruit and unjust enrichment.

The trial court dismissed the suit. It found that the existence of an express contract – the contingency agreement – precluded the law firm’s quantum meruit and unjust enrichment claims. That the contingent-fee contract was missing a recovery percentage, did not render the contract unenforceable. The trial court noted that courts routinely supplied missing price terms in a variety of contexts. And since the contract was enforceable, it defeated plaintiff’s claims.

Reversing, the First District first noted that under Illinois law, a contract’s material terms must be definite enough so that its terms are reasonably certain and able to be determined.

Where a contract lacks a term, a court can supply one where there is a reasonable basis for it. But where the absent term is essential or so uncertain that there is no basis for deciding whether an agreement has been kept or broken, there is no contract.

Illinois courts routinely scrutinize the reasonableness of attorney fees and contingent-fee contracts to ensure that collected fees are not excessive. Illinois courts have found contingency fees ranging from 25% – 40% to be reasonable. There are even statutory benchmarks for certain fee agreements. Code Section 2-1114 (735 ILCS 5/2-1114), for example, caps contingent agreements at 33.3% of total recovery in a medical malpractice case.

However, the Court held that in an arcane case involving recovery of assets seized by the government, there is no industry standard contingent fee amount. Because of this, the Court held that the trial court could not supply a missing percentage recovery term. [19-20]

The First District also noted the contingent-fee contract ran afoul of Illinois Rule of Professional Conduct 1.5(c) which requires that contingent-fee agreements specify the method by which the fee is to be determined, and the percentage accruing to the lawyer after trial or settlement. RPC 1.5(c) [21]

The Court ultimately found that the trial court should not have dismissed the plaintiff’s quantum meruit and unjust enrichment claims.

Quantum Meruit

In Illinois, a plaintiff can sue for quantum meruit where there is no enforceable contract between the parties. But quantum meruit is not available where the underlying contract is unenforceable as a matter of public policy; such as where a contract is illegal or violates a statute. The rationale is that a party to a contract that violates public policy should not be able to circumvent the offending contract by relying on quantum meruit.

But where a contract is unenforceable for violating an ethical rule that does not involve public policy, it will not bar quantum meruit recovery.

A contract only violates public policy where it “has a tendency to injure the public welfare.”  Here, the court found the omission of the percentage recovery an “innocuous omission” that was the product of “carelessness and sloppy contract formation.”  In the Court’s view, this did not rise to the level of a public policy violation. [28]

Because the contract’s missing percentage recovery term did not implicate public policy concerns, the First District held that the law firm could assert a successful quantum meruit claim. [24]

Unjust Enrichment

The Court then considered the Plaintiff’s unjust enrichment complaint count. To state a valid unjust enrichment claim in Illinois, a plaintiff must allege (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) absence of justification and (5) the absence of a remedy provided by law. [31]

While similar in that they both aim to provide a plaintiff with restitution where no contract exists, quantum meruit and unjust enrichment differ in their respective recoverable damages. The former measures recovery by the reasonable value of work and material provided while the latter considers the benefit received and retained because of the improvement provided.

The Court sustained plaintiff’s unjust enrichment claim for the same reason it found plaintiff’s quantum meruit cause was prematurely dismissed.

Afterwords:

Seiden Law’s lessons are many for commercial litigators. For one, a missing contractual term cannot always be supplied by a court; especially if contract involves specialized subject matter.

The case also makes clear that a breach of RPC 1.5’s contingency fee strictures will not automatically void a contract. It is only when an ethical violation rises to the level of a public policy breach, that a court will nullify a contract.

This case also solidifies the proposition that, when faced with an unenforceable contract that does not implicate public policy concerns, a plaintiff can still bring alternative and equitable claims for quantum meruit and unjust enrichment.

 

 

Contractual Exculpatory Provisions and Procedural and Substantive Unconscionability – Some Illinois Bullet-Points

Exculpatory and limitation of damages provisions are staples of commercial transactions; especially in the service contract setting.  The former shields a contracting party from all liability (“if something goes wrong, I’m not responsible”), while the latter caps a party’s monetary damages (“if something goes wrong, my maximum liability is $100”).

For decades, cases across the land have grappled with the validity and enforceability of these contract terms.  Generally, whether a given disclaimer is upheld comes down to a fact-specific analysis of the terms’ prominence and text size (can you find it?) along with the nuances of the parties’ relationship. (is a dominant person taking advantage of a more vulnerable person?)

 Exculpatory Provisions

Illinois favors freedom of contract and exculpatory provisions are generally enforceable unless (1) it’s against public policy to do so or (2) there is something in the social relationship of the parties which weighs against enforcing the term.

Exculpatory terms are not favored and must be strictly construed against the benefitting party, especially where that party drafted the contract.

An exculpatory clause violates public policy where (1) the contract involves an employer-employee relationship, (2) is between the public and those charged with a public duty (i.e. a common carrier or utility), or (3) there is a disparity in bargaining power between the parties so that freedom of choice is lacking.

Courts also look at whether Disclaimers are unconscionable.  Procedural unconscionability applies where the disclaimer is hard to find, buried or hidden.

A contract term is substantively unconscionable where it’s blatantly one-sided and completely favors one party at the expense of the other.

 Illinois’ Construction Contract Indemnification for Negligence Act, 740 ILCS 35/1 posits that agreements to indemnify against a contractor’s negligence are void as against public policy. 

Illinois Disclaimer rules glaringly reflect the importance of pre-contract negotiation.  Parties are free to allocate risks as they see fit and where they are both sophisticated commercial entities, freedom of contract rules prevail and exculpatory clauses will be upheld – save for any public policy reasons against their enforcement.

 

 

 

Contractual Illegality and Medical Fee-Sharing

A contract law axiom states that an illegal contract is unenforceable.  The prototypical example involves a plaintiff attempting to sue on a contract that violates a statute or encourages criminal or fraudulent conduct.  Those situations clearly give rise to an illegality defense.  But what if a contract term technically violates a statute, but the resulting damage is either trivial or nonexistent? A “no harm no foul” situation.  Can the illegal contract term still be enforced?

That’s one of the questions the First District recently addressed in Ritacca v. Girardi, 2013 IL App (1st) 113511 (Sept. 2013), where a plaintiff physician sued to enforce a settlement agreement stemming from an earlier, illegal fee-sharing agreement with two of his former business partners.

After the plaintiff paid over $60,000 to settle a lawsuit filed by an equipment lender (suing on loans which were the parties’ joint responsibility), he sued his two former business partners for reimbursement under a written agreement to operate a medical facility. 

Defendants moved for summary judgment on the basis that the written agreement was unenforceable since it called for doctors and non-doctors sharing profits. The trial court agreed and granted summary judgment for the defendants.

Holding: Reversed.  Plaintiff could enforce the agreement against the defendants.

Rules/Reasons:

The contract – that amended an earlier fee-splitting agreement – clearly violated the Illinois Medical Practices Act’s (the “MPA”) anti-fee-splitting section. 226 ILCS 60/22.2(a)(physicians and non-physicians are precluded from sharing professional fees).  The agreement involved improper fee-splitting between two doctors (plaintiff and one defendant) and a lay person (the other defendant) and so was facially illegal.  ¶ 9. 

However, the Court stressed that just because a new contract stems from an earlier illegal one, this doesn’t mean the later contract is always void. As long as the new/later contract isn’t a continuation or modification of the prior illegal contract, the new contract can be upheld.  ¶ 27.

Plaintiff’s suit was premised on a second agreement that made it clear that the underlying (and illegal) first agreement was dissolved and the parties were no longer conducting business.  ¶¶ 29-30.  This led the Court to find that the second agreement wasn’t a continuation or modification of the earlier illegal agreement.

The Court ruled that the two contracts were sufficiently remote in time and substance from each other so that the plaintiff could enforce the second agreement and seek money damages from the defendants. 

The Restatement of Contracts’ Balancing Test

The Court went further and held that even if the second Agreement was sufficiently intertwined with the earlier one, the Court would still enforce it.

In Illinois, a Court can void a contract if a public policy against enforcing the contract “clearly outweighs” upholding it.  ¶ 36.  The factors that weigh in favor of enforcing a contract that violates public policy include: (a) the parties expectations, (b) the forfeiture that would result if the contract ‘t enforced, and (c) the public interest in enforcing the contract. 

The factors weighing against enforcement are (a) the strength of the policy manifested by the legislature or judicial decisions, (b) the likelihood that refusing to enforce a contract term will promote that policy,  (c) the serious of the misconduct involved, and (d) the connection between the misconduct and the contract term.  Id.

Applying these factors, the Court held that if the latter contract wasn’t enforced, it would result in a $60K plus forfeiture by the plaintiff and unjust enrichment for the defendants – since defendants were jointly responsible for the loan. 

The Court also noted that the Medical Practice Act’s dual policies of (1) discouraging profit-seeking doctors from churning their services and (2) deterring non-physicians from recommending doctors out of financial self-interest weren’t served by voiding the second agreement as the parties had long ceased doing business together.  The Court ruled that the public policy against medical services fee-sharing didn’t “clearly outweigh” allowing plaintiff to sue on the second agreement.  ¶ 40.

Lessons: Ritacca emphasizes that a technical statutory violation won’t always result in a finding of illegality.  But if a facially valid contract continues or refers to an earlier illegal one, the “new” contract will be illegal and unenforceable.  By contrast, if that new contract is far enough removed from the prior contract in time and subject matter, the new contract can be enforced.