Indemnity and Non-Payment Claims on Construction Projects: You May Have Longer than You Think

October 18, 2016 Firm News

A Laurie & Brennan article featured in the Construction Law Corner, Winter, 2015, eNewsletter.

by Daniel Brennan

Construction lawyers in Illinois and many of their clients have come to understand generally that claims arising out of the design or construction of an improvement to real property must be asserted within four years of the date of discovery of the claim.   This understanding is based on the construction statute of limitations and repose contained in 735 ILCS 5/13-214.   That understanding is often well-founded but Illinois courts have, over the years, issued decisions demonstrating that simply because a claim has some connection to design or construction does not necessarily mean that the four-year statute of limitations applies.   The precise language of Section 13-214 and the judicial interpretation of that language shows that in many cases a claim arising from a construction project, depending upon the nature of the claim, may be subject to a much longer statute of limitations.   For lawyers and their construction clients, it is important to understand the implications of these decisions.

The Latest Decision — A Contractor’s Indemnity Obligation

In 2014, the Illinois Appellate Court held that a developer’s express indemnity claim against a third-party defendant contractor was governed by the ten-year statute of limitations generally applicable to written contracts and not by the four-year statute of limitations for construction-related claims even though the underlying lawsuit against the developer included claims for workmanship defects.   In 15th Place Condominium Association v. South Campus Development Team, LLC, 2014 IL App (1st) 122292, South Campus Development Team (“SCDT”) was the developer of two adjacent condominium towers located at 811 and 833 West 15th Place in Chicago, Illinois (the “Project”).   SCDT contracted with Fitzgerald Associates Architects P.C. (“Fitzgerald”) for architectural services and with Linn-Mathes, Inc. (“Linn-Mathes”) to be the general contractor for the Project.   In April, 2005, after a number of condominium units were sold, SCDT turned over control of the Project to 15th Place Condominium Association (the “Association”).

In 2008, following turnover, the Association discovered many design and workmanship defects and filed a lawsuit against SCDT which included claims of breach of the implied warranty of fitness and habitability, breach of fiduciary duty, and negligence.   In June, 2011, SCDT filed a third-party complaint against Fitzgerald and Linn-Mathes alleging claims for breach of contract, breach of implied warranty of good workmanship, express indemnity, and, alternatively, implied indemnity against both Fitzgerald and Linn-Mathes.   Among other things, the trial court dismissed the express indemnity claim against Linn-Mathes as being barred by the four-year statute of limitations set forth at 735 ILCS 5/13-214.

The appellate court reversed basing its decision upon the Illinois Supreme Court’s ruling in Travelers Casualty & Surety Co. v. Bowman, 229 Ill.2d 461 (2008), which held that a written agreement to indemnify was not one of the activities protected under the four-year statute of limitations applicable to construction matters (i.e. the design, planning, supervision, observation or management of construction), but was instead subject to the ten-year statute of limitations applicable to written contracts.   Like in Travelers, the express indemnity claim against Linn-Mathes arose from Linn-Mathes’ refusal to perform its obligation to indemnify SCDT pursuant to an express promise to indemnify SCDT contained in the contract between the parties.   As such, Linn-Mathes’ action or inaction as an indemnitor was not protected under 735 ILCS 5/13-214(a), and therefore the ten-year statute of limitations applicable to written contracts under 735 ILCS 5/13-206 applied to SCDT’s express indemnity claim against Linn-Mathes.

What is striking about the 15th Place decision is that the indemnity claim was so closely tied to an underlying act, error or omission in connection with the construction of the condominiums. The genesis of the indemnity claim was in fact the construction of an improvement to real property.   Notwithstanding the factual underpinnings of the indemnity claim, the Illinois appellate court focused on the precise duty alleged to be breached — the duty to indemnify.   That duty is not one of the enumerated activities in 735 ILCS 5/13-214(a) so the four-year statute of limitations did not apply.

A Principal’s Indemnity Obligation to Its Surety

The linchpin for the court’s decision in 15th Place was the Travelers decision that also involved a duty to indemnify but under different circumstances.   In Travelers, a surety issued three performance bonds to a metalworking contractor for projects on two correctional facilities and a college campus.   These bonds secured the metalworking contractor’s performance of its contractual obligations.   Before these bonds were issued, the surety obtained a written general indemnity agreement signed by the contractor’s president and sole shareholder.   The surety eventually had to pay more than $500,000 in losses, costs and expenses under the bonds in 1994 and 1996.

The surety filed a complaint against the contractor’s president and sole shareholder in October, 2004 seeking reimbursement for the amounts paid pursuant to the general indemnity agreement that backstopped the bonds.   Travelers at 464.   The president and sole shareholder moved to dismiss the complaint as time-barred under 735 ILCS 5/13-214(a) because the complaint was filed more than four years after the claim was discovered.   The trial court granted the motion to dismiss. Id. at 465.   On appeal, the Illinois appellate court reversed and held that the complaint was timely because the applicable statute of limitations was the ten-year statute for actions based on written agreements set forth in 735 ILCS 5/13-206.   Id.

The Illinois Supreme Court agreed with the appellate court.   The Supreme Court began its analysis with a review of applicable principles in determining which statute of limitations applies to a cause of action.   The Court stated:

[t]he determination of the applicable statute of limitations is governed by the type of injury at issue, irrespective of the pleader’s designation of the nature of the action. [citations omitted] In identifying the applicable limitations period . . .”[w]e have long held that ‘it is the nature of the plaintiff’s injury rather than the nature of the facts from which the claim arises which should determine what limitations period should apply.’ ” [citations omitted] To determine the true character of a plaintiff’s cause of action, [we] emphasized that “[t]he focus of the inquiry is on the nature of the liability and not on the nature of the relief sought.” [citation omitted]

Id. at 466-67.

Applying these principles, the Illinois Supreme Court concluded that the surety sought damages from the contractor’s president and sole shareholder based on their failure to perform the contractual duties set forth in the written indemnity agreement.   Those duties were:

[t]o indemnify, and keep indemnified, and hold and save harmless the Surety against all demands, claims, loss, costs, damages, expenses, and attorney fees whatever, and any and all liability therefore, sustained or incurred by the Surety by reason of executing or procuring the execution of any said Bond or Bonds, or any other Bonds, which may be already or hereafter executed on behalf of the Contractor, or renewal or continuation thereof, or sustained or incurred by reason of making any investigation on account thereof, prosecuting or defending any action brought in connection therewith, obtaining a release therefrom, recovering or attempting to recover any salvage in connection therewith or enforcing by litigation or otherwise any of the agreements herein contained. Payments of amounts due Surety hereunder together with legal interest shall be payable on demand.

Id. at 468.   The surety alleged that the president and sole shareholder, after a written demand was made, failed to indemnify the surety.   The Illinois Supreme Court stated that the defendants failed to pay under the indemnity agreement and that was the basis of the claim not a failure to perform construction work, even though that latter failure was what triggered the surety’s duties under the performance bond.   Id.   The Court explained its rationale:

[The contractor’s] breach of construction contracts resulted in payment of claims under the performance bonds. The payment of claims under the performance bonds then triggered the [president’s and sole shareholder’s] obligation to perform under the indemnity agreement. The [president’s and sole shareholder’s] liability to [the surety] does not, however, emanate from [the contractor’s] breach of the construction contracts. Rather, the [president’s and sole shareholder’s] liability emanates from the refusal to perform their obligation of indemnification under the written indemnification agreement after claims were made against the underlying performance bonds. We hold, therefore, that section 13—214 is inapplicable to [the surety’s] cause of action.

Id. at 470.   The applicable statute of limitations was instead the 10-year statute in 735 ILCS 5/13-206.This passage from the Travelers’ decision captures the logical progression that the court in 15th Place followed.   Even if the factual origins of a claim emanate from a construction project, the courts will focus on the alleged injury and the alleged breach of duty.   Unless the claim involves one of the specifically enumerated activities in 735 ILCS 5/13-214(a) — an act or omission in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property — then another statute of limitations will apply.

An Owner’s Failure to Pay for Construction Work

The Illinois courts have also applied the ten-year statute of limitations in the context of a contractor’s claim for non-payment against an owner.   While most prudent contractors will act more swiftly to preserve and advance mechanics lien rights, in some cases, contractors may only be able to assert contract claims unsecured by a mechanics lien.   In many such cases, contractors have up to 10 years to file a claim.

One of the leading cases that illustrates this point is Prate Installations, Inc. v. Thomas, 363 Ill. App. 3d 216 (2d Dist. 2006).   In Prate, the contractor was hired to perform roofing repairs on a residence.   The work was completed in October, 2000.   The contractor repeatedly invoiced for the work but the homeowners never paid.   The contractor filed suit in March, 2005.   The homeowners moved to dismiss based on the four-year statute of limitations in 735 ILCS 5/13-214(a).   The trial court agreed with the defendants and dismissed the contractor’s claim.

The Illinois appellate court reversed because the defendants were not protected by 735 ILCS 5/13-214(a).   The court stated:

[a]s defendants recognize, plaintiff, rather than defendants, arguably engaged in an activity protected by the statute. Defendants are being sued for their alleged failure to pay a bill rather than for their act or omission in the construction of an improvement to property. Thus, defendants are not protected by section 13—214(a).

Id. at 219.   Because failure to pay a bill for construction services is not one of the enumerated activities in 735 ILCS 5/13-214(a), that section did not apply.   Instead the ten-year statute of limitations set forth in 735 ILCS 5/13-206 applied and the contractor’s claim was timely.

Conclusion

A variety of claims can arise from a construction project.   The statute of limitations that will apply to such claims will depend upon the nature of the activity involved and the type of injury.   The Travelers, 15th Place and Prate cases strongly support the proposition that an obligation to make a payment — whether pursuant to a written indemnity or a written contract — is not an activity that will enable a defendant to invoke the four-year construction statute of limitations.   On the other hand, aggrieved parties who believe that a payment is due for a written financial obligation that arises from a construction project appear to have a much longer time frame to assert claims.