Tag: subcontractor

Subcontractor’s Failure to Get Certified Mail ‘Green Cards’ into Evidence = Draconian Trial Loss in Lien Spat

The Second District appeals court recently affirmed a harsh result against a subcontractor who failed to properly serve a Section 24 notice in accordance with the strictures of the Illinois Mechanics Lien Act.

The earth-moving subcontractor recorded a lien against a nascent Starbucks in Chicago’s western suburbs seeking payment for various change orders. It sent its lien notice to the property’s lender by certified mail but not to the property owner.

After a bench trial, the trial judge reluctantly found for the property owner defendants and held that the subcontractor’s lien notice failed to follow the Act.  The subcontractor appealed.

Affirming judgment for the property owner, the Court first emphasized the oft-cited rule that since rights created by the Act are statutory, the statutory technical and procedural requirements are strictly construed. The burden of proving that each requirement of the Act has been satisfied is on the party seeking to enforce its lien – here, the subcontractor.  But where there is no dispute that an owner actually received notice, courts will overlook technical defects.

Section 24 of the Act requires a subcontractor to serve notice of its intent to lien by certified mail or personal delivery to the record owner and lender (if known)within 90 days after completing the work on the property. 770 ILCS 60/24(a).

An exception to this notice requirement is where a general contractor’s sworn statement provides the owner notice of the subcontractor’s work and unpaid amount.

While courts will uphold a lien notice sent only to an owner (and not to the lender) since there is no concern of the owner being prejudiced or having to pay twice, the reverse isn’t true. Citing to half-century-old case law, the Court held that since notice to an owner is the ‘very substance of the basis on which a mechanic’s lien may be predicated,’, the Court refused to excuse the subcontractor’s failure to serve the owner with its lien notice even though the lender was given proper statutory notice.

And while the plaintiff attached some certified mail green (return) card copies to its written response to Defendant’s directed verdict motion at trial, the plaintiff never authenticated the cards or offered them in evidence at trial. As a result, the appeals court refused to consider the green cards as part of the appellate record. (An appeals court cannot consider documents that were not admitted into evidence at trial.)

In addition, the plaintiff’s trial testimony was conflicting. The Plaintiff’s owner’s testimony conflicted with a 2014 affidavit of mailing prepared by one of Plaintiff’s employees.  This evidentiary dissonance failed to show the owner’s actual notice of the plaintiff’s lien notice.  As a result, the trial court found that the plaintiff failed to carry its burden of proving that it complied with its Act lien notice rules.

The court then rejected the subcontractor’s argument that the owner had actual notice of its work since it saw the plaintiff performing grading work on the property and the plaintiff sent regular invoices to the owner’s agent.  However, under Illinois law, the mere presence of or owner’s knowledge that a contractor on a job is not a valid substitute for the required statutory notice.

The court also nixed the subcontractor’s claim that the owner had actual notice of the subcontractor’s work based on the sworn statements submitted to the owner from the general contractor. While courts have upheld an otherwise deficient subcontractor lien notice where sworn statements in the record plainly show the subcontractor’s identity and amounts owed.  Here, there were no sworn statements in the record. A trial witness may only testify to matters on which he/she has personal knowledge. Ill. R. Evid. 602. Since the plaintiff didn’t call to testify the owner’s construction manager – the only one who supposedly received the GC’s sworn statements (that identified plaintiff) –  there was no competent evidence that the owner received and reviewed any sworn statements that referenced the plaintiff’s work and amounts owed.

Afterwords:

This case shows how unforgiving statutory notice requirements can be in the mechanics lien context.

In hindsight, the subcontractor plaintiff should have introduced certified mail receipts into evidence.

Failing that, it should have called the owner’s construction manager as an adverse agent to lock in testimony that the general contractor furnished the owner with sworn statements and those statements sufficiently identified the subcontractor plaintiff.

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.

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.