Estate of Willis v. Kiferbaum Construction Corp.

Citations: 830 N.E.2d 636; 357 Ill. App. 3d 1002; 294 Ill. Dec. 224; 2005 Ill. App. LEXIS 520Docket: 1-04-0122

Court: Appellate Court of Illinois; May 26, 2005; Illinois; State Appellate Court

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Kiferbaum Construction Corporation (Kiferbaum) appealed a trial court's decision that a settlement agreement between Debbie McDaniel, representing the estate of Robert P. Willis II, and Decking and Steel, Inc. (Decking and Steel) was made in good faith. The trial court dismissed Kiferbaum's third-party complaint against Decking and Steel for contribution with prejudice. Kiferbaum had been the general contractor for a construction project in Vernon Hills and had subcontracted Arlington Structural Steel Corp. (Arlington) for steel work. The subcontract included an indemnity clause requiring Arlington to assume responsibility for damages related to the project, though it did not mandate Arlington to indemnify Kiferbaum for Kiferbaum's own negligence. The subcontract specified that in cases of inconsistency with the general contract, the subcontract would prevail. Arlington subsequently subcontracted Decking and Steel, which was bound by similar terms, stipulating that Decking and Steel would assume Arlington's obligations towards Kiferbaum while also specifying that any inconsistencies would be governed by their subcontract. The court upheld the trial court's ruling, affirming the dismissal of Kiferbaum's complaint.

The subcontract included an indemnification clause (Article 11.11.1) requiring the Subcontractor to indemnify the Owner, Architect, Contractor, and their agents from claims related to the Subcontractor’s work, specifically for bodily injury caused by the Subcontractor's negligence. Article 11.11.2 specified that this indemnification obligation was not limited by any workers' compensation or similar acts. An insurance rider mandated that Decking and Steel name several parties, including Kiferbaum, as additional insureds. Following the fall and death of Decking and Steel employee Robert Willis II in October 1999, his estate sued Kiferbaum and Arlington for wrongful death. Kiferbaum and Arlington sought contribution from Decking and Steel, which argued its liability was capped under the Workers' Compensation Act, referencing Kotecki v. Cyclops Welding Corp. Arlington countered that Decking and Steel waived this cap through the indemnification clause. The trial court ruled that Decking and Steel had waived the Kotecki cap concerning Arlington but granted its motion regarding Kiferbaum, determining Kiferbaum was not a third-party beneficiary of the subcontract. In 2003, Arlington settled with the plaintiff, and Decking and Steel settled by waiving its workers' compensation lien on past payments but not on future benefits. Decking and Steel sought a finding of good faith for the settlement under the Joint Tortfeasor Contribution Act, aiming to eliminate Kiferbaum's contribution claim.

Kiferbaum contends that the trial court erred in its previous ruling regarding the Kotecki waiver, asserting that the settlement between Decking and Steel and Arlington was not in good faith due to a disparity between the settlement offer and actual liability. The trial court found the settlement to be in good faith and dismissed Kiferbaum's contribution complaint with prejudice, leading to Kiferbaum's voluntary dismissal of the case and subsequent appeal. Kiferbaum argues it is a direct and intended third-party beneficiary of the subcontract between Arlington and Decking and Steel, claiming that Decking and Steel waived the Kotecki cap concerning its contribution claim. Kiferbaum cites several factors, including its explicit naming in the subcontract's insurance rider, incorporation of its contract with Arlington, the presence of a Kotecki waiver in that contract, a "flow-down" clause obligating Decking and Steel to assume Arlington's responsibilities to Kiferbaum, and a Kotecki waiver in the subcontract itself. In contrast, Decking and Steel argues that it did not waive the Kotecki cap, highlighting that its indemnification provisions do not reference Kiferbaum and that the subcontract governs inconsistencies. The Illinois Supreme Court's Kotecki decision limits third-party employer liability in contribution claims to statutory liability under the Workers' Compensation Act, allowing for waiver only if an employer assumes full liability prior to litigation. To validly waive the Kotecki cap, a contract must specifically include such a provision, and any indemnification agreement violating the Construction Contract Indemnification for Negligence Act is void as against public policy.

The provision under 740 ILCS 35/1 aims to protect workers and the public by preventing liability avoidance through indemnity agreements while promoting worksite safety. Illinois courts interpret partial indemnity provisions as seeking contribution. An employer that accepts unlimited liability waives the Kotecki limitation on contribution claims. In the case at hand, Decking and Steel, as "Subcontractor," agreed to indemnify Arlington, the "Contractor," for injuries arising from the Subcontractor’s negligence, explicitly waiving the Kotecki cap on Arlington's contribution claims.

However, Kiferbaum's subcontract with Arlington does not contain a clear Kotecki waiver. Its indemnity clause lacks explicit language indicating a waiver of limitations on the indemnification for negligence, unlike the subcontract between Arlington and Decking and Steel. Therefore, Kiferbaum's argument that it also waived the Kotecki cap is rejected.

Furthermore, while Kiferbaum's contract is referenced in the Arlington-Decking and Steel contract, the incorporation does not automatically confer Kiferbaum the status of an intended third-party beneficiary. Illinois law presumes against granting contractual rights to third parties unless it is clearly indicated that the parties intended to benefit them. There are distinctions between intended beneficiaries, who can enforce the contract, and incidental beneficiaries, who cannot. Any rights for a third party rely on explicit language from the contract affirming the promisor's liability.

Liability cannot be broadened based solely on the parties' circumstances; third parties cannot claim damages from a contract unless specifically intended as beneficiaries. A contract need not name a third party but must clearly define a class of beneficiaries. In construction contracts, simply anticipating that a third party will benefit is insufficient; the contract must explicitly state that it is for the third party's direct benefit. Liability to a third party must be clear in the contract language, and cannot be inferred from circumstances alone. Illinois courts require explicit provisions for third-party beneficiary status due to a strong presumption against it, which can only be overcome by a clear implication. In the construction context, general contractors may assume third-party beneficiary status from subcontracts, and subcontractors can gain this status under the Public Construction Bond Act and through surety bonds. Subcontractors may also seek compensation from public entities via the Mechanics Lien Act. Additionally, engineers not party to a general contract may be recognized as intended beneficiaries if their role is clearly defined in the contract. Owners can also enforce contracts as third-party beneficiaries if the contract outlines their involvement and recovery methods.

Illinois courts maintain that building owners and subsequent purchasers cannot enforce subcontract terms unless specifically mentioned within those contracts. The privity of contract between general contractors and third-party contractors is viewed as stronger than that between building owners and subcontractors. However, existing case law does not support altering third-party beneficiary status based solely on the parties involved. In the case at hand, the Kiferbaum-Arlington contract lacks any provisions that would grant Kiferbaum the right to enforce subcontracts or designate it as an intended third-party beneficiary. The Arlington-Decking and Steel subcontract similarly fails to reference Kiferbaum or impose obligations toward it.

Kiferbaum's argument that the subcontract implies an intention to benefit it, based on its inclusion as the general contractor in an insurance rider, is rejected. The distinction between a promise to obtain insurance and a promise to indemnify is emphasized, indicating that naming Kiferbaum as an additional insured does not equate to an indemnification obligation. The contracts contain provisions that establish separate contractual relationships, further asserting that the indemnification terms vary between agreements. Specifically, the Arlington-Decking and Steel subcontract includes a waiver on claims for employee injuries, which does not extend to Kiferbaum under the Kiferbaum-Arlington agreement.

Ultimately, Kiferbaum is determined not to be an intended third-party beneficiary of the Arlington-Decking and Steel subcontract, and its claim for contribution is confined to the limits set by the Workers' Compensation Act, following the Kotecki rule. This ruling poses significant implications, potentially exposing general contractors to considerable losses due to subcontractor negligence.

Subcontractors based their agreement on an outdated form that granted Arlington unlimited contribution rights from Decking and Steel, but not Kiferbaum. Although it may seem unfair to limit Kiferbaum's contribution rights due to the use of an obsolete contract, altering contract interpretation rules would be inappropriate. The court advises general contractors to include clauses in future contracts designating them as explicit third-party beneficiaries of subcontractors’ agreements to secure rights of recovery. This recommendation aims to prevent similar issues in the future. Since Decking and Steel's liability to Kiferbaum was capped by Kotecki, the court finds no need to review the trial court's ruling on the good-faith settlement or its dismissal order, affirming the decision without remand. Judges Reid and Theis concur.