Parties To Construct Contracts Cannot Use Indemnity Provisions To Opt Out Of The Contribution Act
May, 2008
The Appellate Court for the First District of Illinois has rejected the attempts of an owner/developer to use an indemnity provision to derail a settlement between a subcontractor and a plaintiff in a property damage case and held that the express policy of the Contribution Act to encourage good-faith settlements trumped the parties’ freedom to contract. See The Pierre Condominium Association v. Lincoln Park West Associates, LLC, et. al., No. 1-05-3567 (1st Dist. 12/31/07).
The case involved construction of a high-rise building at 2120 North Lincoln Park West by Baker Development Corporation as the owner and Lincoln Park West Associates as the developer (“Baker/LPWA”). Baker/LPWA retained McCauley Construction Corporation (“McCauley”) as the general contractor, and McCauley, in turn, subcontracted with Case Foundation Company (“Case”) to perform excavation services to create an underground foundation for the building.
The proposed high rise at 2120 abutted a building located at 2100 North Lincoln Park West, known as The Pierre. During the excavation work being performed by Case, the north end of The Pierre began to subside and caused cosmetic damage to the building. The Condominium Association for The Pierre filed suit against Baker, LPWA, McCauley and Case premised on strict liability under the Illinois Adjacent Landowner’s Excavation Protection Act, common law negligence, and willful and wanton conduct.
Baker/LPWA filed a counterclaim against Case under the Joint Tortfeasor Contribution Act (“Contribution Act”), but also included a count premised on the “contractual indemnity” created by a provision of the subcontract between McCauley and Case, which stated:
4.6.1 To the fullest extent permitted by law, the Subcontractor [Case] shall indemnify and hold harmless the Owner, Contractor, Architect, Architect’s consultants and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Subcontractor’s Work under the Subcontract, provided that any such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Subcontractor, Subcontractor’s Sub-Subcontractors, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligations shall not be construed to negate, abridge, or otherwise reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Paragraph 4.6. (Emphasis added.)
Case filed a Motion for Partial Summary Judgment on Baker/LPWA’s counterclaim. In the motion, Case argued that Paragraph 4.6.1 of the subcontract was void because it was in violation of the Construction Contract Indemnification For Negligence Act (“Anti-Indemnity Act”) because the provision required Case to indemnify Baker/LPWA for Baker/LPWA’s own negligence in violation of that Act. Though the provision stated that the indemnification was “only to the extent caused by negligent acts or omissions of the Subcontractor,” that limitation, Case asserted, was taken away by the phrase “regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.” In the alternative, Case argued that the clause amounted to a contractual provision for contribution which was duplicative of Baker/LPWA’s statutory contribution counterclaim and, therefore, must be stricken.
While the motion was pending, Case reached a settlement agreement with plaintiff for an amount that was between the plaintiff’s and Case’s estimate of the property damage to The Pierre. The settlement agreement, however, was contingent upon the court finding the settlement was in good-faith and dismissing all counterclaims against Case.
Baker/LPWA opposed the entry of a good-faith finding, though they presented no concrete evidence to challenge such a finding. Baker/LPWA urged the trial court to interpret the indemnification provision of the subcontract as one for contractual contribution requiring only that Case indemnify Baker/LPWA for Case’s negligence, and, therefore, not in violation of the Anti-Indemnity Act. Further, Baker/LPWA argued that the parties had the freedom to contract for contribution outside the purview of the Contribution Act so that, ostensibly, under a “contractual contribution” provision, Case could be found to be liable for more than the settlement that was reached with the plaintiff, specifically attorneys’ fees and expenses.
The trial court did not find that the provision violated the Anti-Indemnity Act, but did hold that the provision was essentially a “contractual contribution” claim. The court held that “. . . the relevant case law supports Case’s motion and asserts that contractual contribution is invalid.” The court granted Case’s Motion for Good-faith Finding and the Motion for Partial Summary Judgment on the Counterclaim. Baker/LPWA appealed.
On appeal, the Illinois Appellate Court for the First District acknowledged that the language of the indemnification provision could be read to support Case’s contention that it was being required to indemnify Baker/LPWA for its own negligence, but that Illinois case law required it be read otherwise. A party such as Baker/LPWA is presumed to know that a pure indemnification clause is void under the statute, and the Court, therefore, interpreted the disputed provision to require only contribution. As such, the Anti-Indemnity Act was not implicated, and the subject provision was not void.
The appellate court then considered the arguments of Baker/LPWA as to whether the “contractual contribution” count could survive a finding of good-faith settlement under the Contribution Act. Baker/LPWA conceded at both the trial and appellate court level that a proper good-faith settlement finding would extinguish the statutory contribution claim, but contended that a contribution claim based on a contractual right could continue. Case countered that a good-faith settlement with the plaintiff extinguished any contribution claim whether based on statute or contract. Baker/LPWA argued that the subcontractor could relinquish by contract the good-faith settlement dismissal provision of the Contribution Act and drew a parallel to the Illinois Supreme Court’s approval of an employer’s right to contractually waive the worker’s compensation liability cap on its contribution liability. This cap on the employer’s liability was established in Kotecki v. Cyclops Welding, 146 Ill.2d 155, 585 N.E.2d 1023 (1991), but later cases have allowed parties to contractually agree to waive the “Kotecki cap.” Braye v. Archer-Daniels-Midland Co., 175 Ill.2d 201, 676 N.E.2d 1295 (1997); Liccardi v. Stolt Terminals, Inc., 178 Ill.2d 540, 687 N.E.2d 968 (1997).
The appellate court confirmed earlier case law that held that a contract provision for contractual contribution, absent a dismissal provision mirroring the Contribution Act’s good-faith settlement requirement, was contrary to public policy favoring settlement. The Court rejected Baker/LPWA’s analogy between a waiver of a limitation on liability, such as the Kotecki cap, and a waiver of a provision of the Contribution Act. The appeals court pointed out that the decisions of the Supreme Court in upholding “Kotecki waivers” were grounded in the determination that such contract provisions do not violate the terms and policy of the Contribution Act. The Court observed that, unlike the waiver of the Kotecki cap, which was found not to violate the goals of achieving comparative fault and encouraging good-faith settlement, “Baker/LPWA’s contention that parties may contract out of the good-faith settlement provision tears at the very fabric of the Contribution Act.” The Court held that any claim for contractual contribution without an accompanying dismissal provision based on a good-faith settlement is invalid as against public policy.
Baker/LPWA has filed a Petition for Leave to Appeal with the Supreme Court of Illinois. The Petition takes issue with the appellate court’s ruling, primarily by arguing that the contractual provision at issue provided the right to recover damages other than those recoverable under the Contribution Act, such as attorneys’ fees and expenses, and that the appellate court had ignored this distinction. Clausen Miller will continue to keep our readers apprised of developments surrounding this important legal issue and whether the Illinois Supreme Court takes the appeal.
Practice Point
This would be a good time for design professionals, contractors and subcontractors to review the “indemnity” provisions that might be in place in their contracts. At least in Illinois, the contract provisions that indemnify a party for its own negligence will either be found void under the Anti-Indemnity Act or be read to only indemnify the party to the extent that the indemnitor is negligent. Further, if the provision is read to be a contractual contribution action, it will be invalid unless it also contains a dismissal provision that mirrors the Contribution Act.
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