In 2006, Lake County Grading Co. was contracted by FCL Investors, Inc. (“FCL”), to excavate and install a sewer line for a development in Northbrook, Illinois. FCL was previously hired by Northshore Center THC to be the general contractor for the development after taking out a mortgage to develop the property. After submitting and receiving payment on Lake County Grading’s initial invoice, subsequent invoices totaling approximately $776,000 were left unpaid by FCL. In 2008, Lake County Grading recorded a subcontractor’s lien, and, nine months later, FCL then recorded a contractor’s lien for more than $943,000.
The mortgage was foreclosed upon and Lake County Grading filed a counter complaint which alleged breach of contract claims against FCL. FCL responded that the subcontract with Lake County Grading required that FCL receive payment from the owner before it was obligated to pay the subcontractor. In 2011, Lake County Grading settled with the bank that held the mortgage for $475,000 in exchange for a release of its subcontractor’s lien. FCL later secured a judgement against Northshore Center for the amount it was owed, but Northshore Center had been dissolved by this time. Subsequently, the court presiding over the foreclosure of the property stated that the existing liens were subordinate to the mortgage. The court presiding over Lake County Grading’s breach of contract action against FCL then granted summary judgment in favor of FCL, stating that payment to FCL was a required condition precedent to FCL’s obligation to pay Lake County Grading. Thus because FCL had not been paid, the court concluded FCL owed no sums to Lake County Grading. Lake County Grading appealed.
The appellate court reversed the circuit court’s decision in Beal Bank Nevada, v. North Shore Center THC, LLC, et al., 2016 IL App (1st) 151697, noting the different contractual meaning between “pay-when-paid” and “pay-if-paid” clauses. In its opinion, the appellate court stated that “pay-if-paid” language specifically grants that the contractor is only required to pay subcontractors if the contractor itself has been paid, so at each level, the contractor assumes the risk only for its own work. In contrast, “pay-when-paid” language, which the court found applied to the FCL/Lake County Grading agreement, specifies only the method for payments, but does not provide a way for the contractor to rid itself of its obligation to pay for completed work by a subcontractor.
The appellate court wrote that, absent contract language “which plainly and unambiguously establishes payment by the Owner as a condition precedent to the Contractor’s obligation to pay the Subcontractor…,[t]he subcontract… requires the Contractor to pay the Subcontractor and does not impose any condition precedent on such a fundamental obligation.”
This opinion clearly leaves many Illinois contractors open to claims against them unless the subcontract clearly includes a “pay-if-paid” provision. For this reason, it is always important to have contractor/subcontractor agreements drafted or reviewed by an experienced legal professional. The legal professionals at Rock Fusco & Connelly LLC have the experience and knowledge necessary to draft and review construction contract need.