Ill. Developers’ Indemnity Rights Are Now Stronger
Law360,New York (September 24, 2014, 11:22 AM ET) —
On June 26, the First District Appellate Court of Illinois issued a decision that broke new ground in the area of indemnity rights defendants can assert against third-parties in construction defect cases. Until the decision in 15th Place Condominium Association v. South Campus Development Team LLC was published, developers were subject to construction defect cases for up to 14 years, but had only four years to recover for the losses they sustained in these suits from the contractors responsible for the construction defects. In earlier proceedings, the trial court had dismissed the defendant/developer’s express indemnity claim against the contractor as untimely under the four-year construction statute of limitations. On appeal, the First District reversed, holding for the first time in Illinois that under Travelers, an Illinois Supreme Court precedent, the 10-year statute for written contracts governs not just surety bonds, but indemnity agreements within construction contracts as well.
Imagine the scenario: a developer is sued 10 years after substantial completion of a condominium by the condominium association. The association seeks damages based on alleged defects caused by the contractor’s faulty work. Recalling the indemnity clause in its contract with the contractor, the developer demands that the contractor provide indemnification for any losses it may incur in the construction defect suit. The contractor refuses, on the grounds that the developer’s claim for indemnity is barred by the statute of limitations. Specifically, the parties’ contract provides that any claim is deemed to have accrued upon “substantial completion” of construction, and the statute of limitations for construction defect claims is just four years.
The hypothetical contractor in this example would have been correct, until the decision in 15th Place, and in some respects, his analysis is still correct. Since its adoption in 1965, Illinois has had a four-year statute of limitations and 10-year statute of repose for construction-related claims, so the homeowners’ suit was timely. Under this statute, actions based on “an act or omission … in the design, planning, supervision, observation or management of construction, or of an improvement to real property,” must be filed, “within four years from the time the person bringing an action, or his privity, knew or should reasonably have known of such act or omission.”
Under the 10-year statute of repose, “Any person who discovers such act or omission prior to expiration
of 10 years from the time of such act or omission shall in no event have less than four years to bring an action.” Thus, claimants have up to 14 years to file suit if the act or omission is not discovered with reasonable diligence until the 10-year period is about to expire. See Andreoli v. John Henry Homes Inc.
While homeowners, and homeowner/condominium associations, may sue from a point in time beginning with their discovery of the defect, for up to 14 years, developers must sue contractors for indemnity counting from substantial completion of construction. Developers are bound to this “accrual date” for the running of the statute of limitations under the terms of the widely influential “General Conditions” document created for the industry by the American Institute of Architects.
In 15th Place Condominium Association v. South Campus Development Team LLC, the court issued the first decision in Illinois to hold that indemnity clauses within construction agreements are not subject to the four-year statute of limitations for construction claims, but rather to the 10-year statute of limitations for written contracts. In 15th Place, a condominium association alleged it had discovered latent design and construction defects in the buildings, and asserted counts against the developer for breach of the implied warranty of fitness and habitability, breach of fiduciary duty and negligence. The plaintiff’s complaint did not allege that the developer had participated in causing the defects; its allegations against the developer were based solely on allegations concerning the developer’s subsequent failure to disclose and remediate the alleged defects.
Thereafter, the developer filed a third-party complaint against the contractor who built the condominium under the following indemnity clause of the construction contract:
To the fullest extent permitted by law, the Contractor shall indemnify, defend and hold harmless the Owner from and against any and all claims, damages, losses, expenses, including but not limited to attorneys fees, arising out of or resulting from the Contractor’s breach of the Contract or the failure of the Contractor to perform in accordance with the Contract Documents.
In response, the contractor filed a motion to dismiss on the grounds that the developer’s indemnity claim was filed over four years after substantial completion, and was therefore barred by the statute of limitations. The trial court denied the motion initially, but reversed on reconsideration, and dismissed the developer’s indemnity claim with prejudice.
On appeal, the court reversed. In support of its decision, the court relied expressly on Travelers Casualty & Surety Co. v. Bowman. The contractor in 15th Place tried to distinguish Travelers as a case dealing with construction bonds, not with construction contracts that contained indemnity clauses, so that the 10-year statute of limitations was therefore inapplicable. The court in 15th Place rejected this argument, finding that the basis for Travelers was its reasoning 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 which limitations period should apply.” Based on this reasoning, the 15th Place court concluded that “[t]he nature of SCDT’s [developer’s] claim against Linn-Mathes [the contractor] is indemnification, regardless of the fact that the indemnification clause is contained within the overall construction contract.”
This decision has far-reaching, industrywide implications because developers may now assert a right to express indemnification against contractors in construction defect cases up to 10 years after their claim has accrued. While this ruling is certainly an improvement, it does not eliminate the risk that a developer’s indemnity rights may have expired under the AIA’s “substantial completion” accrual clause by the time the developer is sued by homeowners.
Remember, homeowners have up to 14 years to file suit. Not only do developers still risk losing their express indemnity rights if they agree to the AIA’s substantial completion clause, but they risk losing their implied indemnity and contribution rights as well. Illinois has a two-year statute of limitations for implied indemnity and contribution claims, a period which is not unreasonable given the built-in accrual date of discovery or service in the underlying suit, whichever is later. But when combined with the substantial completion accrual date, developers should remain cautious of the two-year statute and seek an exception for indemnity and contribution claims.
—By Shelley Smith, Brown Udell Pomerantz & Delrahim Ltd.
Shelley Smith is senior litigation counsel in Brown Udell Pomerantz & Delrahim’s Chicago office.
Disclosure: Shelley Smith represented the developer and developer-appointed board members in 15th Place Condominium Association v. South Campus Development Team LLC.
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