CONTRACTUAL INDEMNITY: IT STILL MATTERS

The Illinois Appellate Court recently issued an important opinion regarding indemnity provisions in construction contracts. In 933 Van Buren Condo. Ass’n v. W. Van Buren, LLC, 2016 IL App (1st) 143490, a condominium home owner’s association (HOA) sued the condominium developer for various claims based on warranty and fraud theories following the discovery of a leaky roof.   The developer then asserted claims against two roofing contractors that it hired for the project – Illinois Roof Consulting Associates, Inc. (IRCA) and Total Roofing & Construction Services, Inc. (Total) – asserting that both had a contractual duty to indemnify the developer against the HOA’s claims.  The trial court dismissed the indemnity claims because the HOA’s complaint was based on the developer’s failure to disclose the leaks (rather than the defective construction that led to the leaks) and, in any event, the indemnity clauses were not enforceable under the Construction Contract Indemnification for Negligence Act (the “Act”).  See id. at ¶ 23. The Illinois Appellate Court reversed in part and remanded the case. See id. at ¶ 62.

As a threshold matter, the Illinois Appellate Court found that the indemnity provisions from the roofers did not violate the Act.  See id. at ¶¶ 38, 41. This Act provides that a contract provision purporting “to indemnify or hold harmless another person from that person’s own negligence is void as against public policy.” 740 ILCS 35/1 (West 2012). The court noted that IRCA’s indemnity provision with the developer was broader than Total’s, and that IRCA’s contract with the developer “could be construed as indemnifying [the developer] from any party’s negligence, which could include the negligence of itself.” Id. at ¶¶ 6, 36. Nevertheless, the court refused to follow such a construction because Illinois law presumes that parties enter into contracts with full knowledge of the law—including the Act—and because “a construction of a contract which renders the agreement enforceable rather than void is preferred.” Id. at ¶¶ 33, 36, 38. Thus, the indemnity provisions did not violate the Act.

The Illinois Appellate Court further held that the roofing companies had a duty to indemnify the developer against the HOA’s claims for breach of warranty and breach of the implied warranty of habitability, but did not have to indemnify the developer for the HOA’s claims rooted in fraud theories. See id. at ¶¶ 1-2. The HOA’s breach of warranty allegations against the developer arose from faulty work on the leaky roof attributable to IRCA and Total’s scope of work, thus triggering the indemnification provisions.  Id. at ¶¶ 51, 53-54. However, the court found that IRCA and Total did not need to indemnify the developer against the HOA’s fraud claims against the developer because those claims were based on the developer’s intentional misconduct rather than the misconduct of others that could otherwise trigger the indemnity provisions.  See id. at ¶¶ 47-49.

This case demonstrates that courts are inclined to construe contract provisions to have an enforceable meaning rather than invalidate the provisions.  Nonetheless, it is important to be aware of the Act and draft in compliance with the Act rather than rely on serendipity from a court.

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