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Indemnity Claims Arising from Construction Contracts Fall Outside of the Illinois Four-Year Statute of Limitations Governing Construction Claims
by Carolyn L. Morehouse
The Illinois Appellate Court recently addressed the interplay between the four-year statute of limitations governing construction claims, and statutes of limitation governing indemnity claims. In 15th Place Condominium Association v. South Campus Development Team, LLC, et al., 2014 IL App (1st) 122292, 14 N.E.3d 592 (1st Dist. 2014), the Court held that claims for indemnity that arise from construction contracts are not governed by the four-year statute of limitations applicable to construction claims, 735 ILCS 5/13-214. Instead, express indemnity claims are subject to the ten-year statute of limitations for written contracts, 735 ILCS 5/13-206, and implied indemnity claims are subject to the two-year statute of limitations applicable to contribution and implied indemnity, 735 ILCS 5/13-204(b). The Court also addressed contractual provisions that modify the accrual of a cause of action and eliminate the “common law” discovery rule.
15th Place arose from a construction project involving two adjacent condominium towers located at 811 and 833 West 15th Place in Chicago, Illinois (the “Project”). The developer, South Campus Development Team (the “Developer”) contracted with Fitzgerald Associates Architects P.C. (“Fitzgerald”) for architectural services and with Linn-Mathes, Inc. (“Linn-Mathes”) for general contracting services. The Developer’s agreements with Fitzgerald and Linn-Mathes contained an “accrual” provision, providing that all causes of action accrue no later than the date of substantial completion of the project.
Over four years after completion of the project, the condominium association filed suit against the Developer, alleging numerous design and workmanship defects on the Project. The Developer filed third-party actions, including an express indemnity claim against Linn-Mathes and an implied indemnity claim against Fitzgerald. The trial court dismissed these claims on statute of limitations grounds pursuant to 735 ILCS 5/13-214. On appeal, the Illinois Appellate Court addressed three primary issues:
(1) whether the contracts’ accrual provisions applied to the Developer’s third-party claims against Fitzgerald and Linn-Mathes;
(2) whether the Developer’s third-party express indemnity claim against Linn-Mathes was governed by the four-year limitations period applicable to construction claims, or the ten-year limitations period applicable to written contracts; and
(3) whether the Developer’s third-party implied indemnity claim against Fitzgerald was governed by the four-year limitations period applicable to construction claims, or the two-year limitations period applicable to contribution and implied indemnity claims.
The Accrual Provisions Eliminating the Discovery Rule are Enforceable and Apply to Third-Party Claims
The Court first addressed the accrual provisions in the Developer’s agreements with Fitzgerald and Linn-Mathes. Both agreements provided that all causes of action arising out of those agreements would accrue no later than the date of substantial completion of the project. These provisions have the effect of shortening the statute of limitations by eliminating the common law “discovery rule,” which tolls the statute of limitations until the date the plaintiff knew, or should have known, that its injury was wrongfully caused. Therefore, in this case, the statute of limitations was triggered on the date of the project’s substantial completion–not the date the plaintiff knew or should have known it had wrongfully caused injuries.
The Court held that the accrual provisions were enforceable and applied to the Developer’s third-party claims against Fitzgerald and Linn-Mathes. In its decision, the Court emphasized the strong public policy favoring parties’ freedom to contract, particularly in cases involving sophisticated parties who are able to negotiate and bargain for the terms of the agreements.
Express Indemnity Claims are Governed by the Ten-Year Statute of Limitations Applicable to Written Contracts, Even if They Arise from Construction Contracts
The Court then addressed the statute of limitations period applicable to the Developer’s express indemnity claim against Linn-Mathes. The Court held that although the indemnity agreement was a part of a construction contract, the ten-year statute of limitations governing written contract claims applied to the Developer’s express indemnity claim, rather than the four-year statute of limitations applicable to construction claims. In its decision, the Court relied heavily on the Illinois Supreme Court’s decision in Travelers Casualty & Surety Co. v. Bowman, 229 Ill.2d 461 (2008). Bowman held that a written agreement to indemnify for losses arising from a construction project pursuant to a surety relationship did not fall within the four-year statute of limitations applicable to construction matters. In support of that holding, the Court noted that the defendant’s liability emanates from the breach of a contractual obligation to indemnify–not from an “act or omission” in the “design, planning, supervision, observation or management of construction” within the meaning of 735 ILCS 5/13-214.
The Court reasoned that, like Bowman, the express indemnity claim against Linn-Mathes emanated from Linn-Mathes’ refusal to perform its obligation to indemnify the Developer pursuant to an express, written indemnity agreement. The Court concluded that the claim against Linn-Mathes for breach of the written indemnification agreement falls outside the four-year statute of limitations applicable to construction claims, 735 ILCS 12-214(a), and was governed by the ten-year statute of limitations applicable to written contracts.
Implied Indemnity Claims are Subject to the Two-Year Statute of Limitations Applicable to Contribution and Implied Indemnity Claims
The Court applied a similar analysis to the Developer’s implied indemnity claim against Fitzgerald, finding that the two-year statute of limitations governing contribution and implied indemnity claims applied. Under that statute, claims for contribution and implied indemnity must be filed within two years from the date the party was served with process in the underlying action, or the date the party knew or reasonably should have known of an act or omission giving rise to the claim for contribution or indemnity, whichever period expires later. 735 ILCS 5/13-204(b). The Court then applied the accrual provision, finding that the two-year statute of limitations began to run on the date of substantial completion, and that the Developer’s implied indemnity claim was therefore time-barred.
Important Practice Tips
The 15th Place decision imparts important lessons for construction clients and their counsel. When negotiating construction contracts, it is imperative to closely review and negotiate any contractual provisions modifying the accrual of claims. Accrual provisions that eliminate the discovery rule, and therefore shorten the statute of limitations, can drastically limit an owner’s ability to bring third-party claims. It is common for a purchaser or condominium association to rely on the discovery rule, and bring a claim for design or construction defects many years after the project is substantially complete. An accrual provision in a construction or design contract may deprive an owner of the opportunity to seek redress against the architect or contractor for those claims. Clients should be properly counseled regarding the possible effect of such provisions. Practitioners counseling owners should also ensure that construction contracts with architects and contractors include an express provision granting the owner rights to indemnification. Because express indemnity claims are subject to a ten-year statute of limitations, an indemnification provision may provide the greatest protection to owners, particularly where the contract includes an accrual provision.
Likewise, when a client is faced with a construction-related claim, it is important for practitioners to properly analyze the deadlines for filing third-party claims. A practitioner cannot simply assume that all claims arising from construction projects are subject to the four-year statute of limitations found in 735 ILCS 5/13-214. Instead, the practitioner should take care to identify the specific causes of action that could be asserted, and any applicable statutes of limitations or contractual provisions that may modify the limitations analysis. This is necessary to evaluate a client’s exposure to construction-related liability, and its corresponding rights to seek redress from other responsible parties.