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November 2007 Issue For a print-friendly version, download the PDF. All That Glitters Is Not Gold: Letters of Intent in the Construction Industry Preservation and Timely Presentment of Real Estate Claims All That Glitters Is Not Gold: Letters of Intent in the Construction Industry by David L. Simmons David concentrates his practice in construction law & litigation, public contract law & litigation, commercial law & litigation, creditors’ rights & remedies, and business entities & transactions. Letters of intent are commonly used in the construction industry where the performance of work must begin before all terms of the relationship have been defined. This arrangement often works well and allows for the timely completion of the work as the parties catch up their project records and contracts. However, letters of intent can also lead to dispute where conditions of the project change or there has not been a meeting of the minds with respect to the governing terms. A letter of intent in its purest form is an agreement that is incomplete in its essential terms and is simply an “agreement to agree” at some point in future. The courts have concluded time and again that a mere “agreement to agree” at some future time is not an enforceable contract. While this rule is a useful starting point, disputed letters of intent often involve additional considerations such as the parties’ conduct or representations that demonstrate the intent to form an enforceable agreement. Letters of intent are governed by the rule that the more important the uncertainty, the stronger the indication that the parties do not intend to be bound. Wolvos v. Meyer (Ind. 1996), 668 N.E. 2d 671, 675. Essential terms such as scope of work, contract price, and payment terms are generally included in any agreement that the parties intend to be enforceable. Letters of intent may also be unenforceable if they make the agreement conditional upon a future agreement or if terms of payment are left to a later date. Phrases such as “effective when a definitive agreement is reached” or “based on the terms of a contract agreement to be reached within 90 days” may be construed as demonstrating intent to reach an agreement on the transaction at some point in the future. Perini Bldg. Co. v. Fisher, Albright & Masters (D. Ill. 1998), 1998 WL 100274. On the other hand, a party cannot assume that a letter of intent is simply “an agreement to agree” and is therefore not enforceable. A writing may contain essential terms that have been agreed upon by the parties even though it is entitled “letter of intent.” The use of the phrase “letter of intent” is not determinative, and the courts will look to the substance of the letter to ascertain whether the parties intended to reach an agreement on essential terms. A letter of intent may also be enforceable even if it contains very few terms. For example, in Smith Paving & Excavating v. Vermillion Shore Dev. Group, Inc., (Ohio Ct Appeals, 2005), 2005-Ohio-3196, a contractor issued a letter of intent to a subcontractor that stated only “per plan and attached subcontractor quote.” Despite the lack of normal terms found in a contract, the court concluded that the agreement contemplated a specific amount of work for a specific price, and was a binding agreement that the contractor was required to honor. Letters of intent often contain language indicating that a more complete agreement will be created and signed by the parties at some later time. The parties may expressly provide that the agreement will be reduced to writing before it will be considered complete, in which case there is no contract until the writing is executed. Trianco, LLC v. IBM, (D.Pa. 2006), 466 F. Supp. 2d 600, 604. However, even where the parties stipulate that the agreement will be memorialized, the transaction may nevertheless be binding absent a positive agreement that it should not be binding until so reduced to writing and formally executed. Even where the parties agree that a more complete agreement will subsequently be prepared, there may be enough agreement on essential terms that a court will find the agreement to be enforceable. A variety of factors will be evaluated under such circumstances, such as the type of contract at issue, the number of terms agreed upon, the number of details yet to be ironed out, the relationship of the parties, and the degree of formality attending similar contracts. An unenforceable letter of intent may become enforceable by subsequent oral agreements or conduct demonstrating that the parties reached an agreement. For example, in Sand Creek County Club, LTD v. CSO Architects, Inc. (Ind. App. 1991), 582 N.E. 2d 872, the owner issued a letter of intent to an architect that defined certain terms but contained language that “nothing therein would bind the parties.” Despite this language, the court concluded that a binding agreement had been made as a result of the owner’s instructions that the architect begin work and send periodic invoices. Id. at 874. A letter of intent that is ambiguous may also lead to a binding agreement where there is sufficient reliance by one of the parties on the statements or conduct of the other. For example, in Quake Construction v. American Airlines, Inc. (Ill, 1990), 565 N.E. 2d 990, a letter of intent was issued by a general contractor to a subcontractor regarding work on an airport. The letter contained conflicting statements on whether there was an agreement of the parties, but the subcontractor relied on the letter and the instructions of the contractor in expanding its office space and hiring a project manager. The court concluded that the letter of intent was ambiguous, but the conduct and representations of the contractor were sufficient to create reliance by the subcontractor, who was entitled to recover damages for the loss of contract. Id at 996. There will be an increased likelihood that a letter of intent will be enforceable if the transaction is governed by the Uniform Commercial Code (UCC), which applies only to the sale of goods. The UCC provides that even though one or more terms are left open, a contract for the sale of goods does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. Ind. Code §26-1-2-204. Letters of intent that contain sufficient essential terms will be deemed enforceable, and the breaching party will be liable for damages resulting from the breach, including lost profits. However, even in the absence of sufficient essential terms to create an enforceable contract, the circumstances may give rise to a recovery on a quantum meruit basis for the reasonable value of the labor and materials furnished to the project. PRG Planning & Dev. v. Latenite Magic, 824 N.Y.S.2d 758 (Unreported) (N.Y. Sup. Ct. 2006). Disputes over letters of intent are often fact-sensitive and subject to well-established rules of judicial construction. Letters of intent that omit essential terms of a contract and are not the subject of reliance by another party will likely be treated as a nonbinding “agreement to agree.” Writings that are ambiguous and accompanied by oral agreements or changes in position by one of the parties are more likely to be construed as enforceable agreements. The courts will always look to the intent of the parties with respect to disputes over contractual agreements. A party that intends to perform in reliance on a letter of intent should demonstrate its intent to create an enforceable agreement both by communications with the other party and the accumulation of project records in support of its performance. If you have any questions regarding this article or related matters, please contact David L. Simmons at (317)580-4848 or dsimmons@drewrysimmons.com. top Preservation and Timely Presentment of Real Estate Claims By William E. Kelley, Jr. Will concentrates his practice in construction, real estate, and commercial litigation, and real estate acquisitions, sales, leasing and development Real estate litigation can involve a variety of claims, including disputes stemming from purchase agreements, leases, land contracts, implied warranties, and even non-contractual negligence claims relating to physical damage to real property. When dealing with real estate disputes, parties asserting or defending those claims must be aware of (1) when those claims accrue; and (2) the required timeframe within which any resulting lawsuit must be filed. The applicable statute of limitations is largely dependent on the nature of the claim or dispute and can range from two years to twenty years depending on the situation. Understanding which statute of limitations applies is critical to preserving a claim involving real estate. In addition, two recent cases from the Indiana Court of Appeals provide guidance regarding the events that trigger the running of statutes of limitations for certain real estate claims. These cases also provide a reminder of the harsh result that awaits anyone who fails to timely file a real estate claim. Real Estate Statutes of Limitation Indiana statutes contain several statutes of limitation that may be applicable to litigation involving real estate, including statutory periods of two, six, ten and twenty years. First, Ind. Code § 34-11-2-4 provides a two-year statute of limitations for claims generally involving injury to person, character, or personal property. These claims can include bodily injuries sustained as a result of a physical condition on the real estate. Second, Ind. Code § 34-11-2-7 provides a six-year statute of limitations for claims involving contracts not in writing, actions for the use, rents or profits relating to real property, actions for damages to real property, actions for recovery of real property, and claims of fraud. These claims may include claims related to oral contracts, implied warranties, or even non-contractual claims relating to physical damage to real estate. Third, Ind. Code § 34-11-2-11 provides both a ten-year and twenty-year statute of limitations for claims involving written contracts. The distinction between the ten and twenty-year statutory periods is that the ten-year statute of limitations applies to claims arising from written contracts entered into after September 1, 1982, while the twenty-year statute of limitations only applies to written contracts entered into prior to September 1, 1982. In addition, the ten-year statute of limitations is referred to as a “catch-all” provision because it is often applied to claims that have no other specific statute of limitations. While these statutes of limitation differ greatly in the number of years that a party has to present its claim through litigation, the statutes are similar insofar as they typically provide that the claim accrues and the statute of limitations begins to run when the claimant either knows, or, through the exercise of ordinary due diligence, should know, that the claimant has been legally injured as a result of a wrongful act of another. However, in some instances, a real estate claim can accrue even before a landowner holds title to the property, as recently held by the Indiana Court of Appeals. Implied Warranties / Knowledge of Prior Owners In Russo v. Southern Developers, Inc., 868 N.E.2d 46 (Ind. Ct. App. 2007), the Russos, owners of residential real estate, sued the developer for breach of an implied warranty of habitability due to flooding problems on the real estate. The home at issue was built by the developer in 1995 and then sold to the initial owners in 1996. Those owners began experiencing flooding problems in 1997, and, on multiple occasions, the developer unsuccessfully attempted to correct the drainage system that was affecting the real estate. In 2001, the owners sold the property to the Russos, allegedly without disclosing the previous flooding and drainage problems. In 2003 and 2004, the Russos experienced problems with the drainage system and filed a lawsuit against the developer in 2005. Since there was no written contract between the Russos and the developer, the lawsuit was based upon an alleged breach of an implied warranty of habitability and thus governed by a six-year statute of limitations. As such, the Russos were required to file their lawsuit against the developer within six years of the date when their claim accrued. The Russos argued that their claim accrued in 2003 or 2004 when they first became aware of the flooding and drainage issues at the real estate. However, the Indiana Court of Appeals held that the claim actually accrued when the prior owners first became aware of the drainage and flooding problems in 1997. The Court held that even though the Russos personally did not know about the claim in 1997 (or even when they purchased the real estate in 2001), the prior owners’ knowledge about the flooding and drainage problems was imputed to the Russos. Therefore, the lawsuit was required to be filed within six years of when the prior owners first learned of the problems in 1997. Since the Russos did not file their claim against the developer until eight years after the claim accrued, the Court held that the lawsuit was barred by the statute of limitations. Zoning Commitments / Knowledge of Present Owners In Beineke v. Chemical Waste Management of Indiana, LLC, 868 N.E.2d 534 (Ind. Ct. App. 2007), residential landowners sued a landfill operator for violation of recorded “covenants” that guaranteed that the landfill would not be seen from the first story of neighboring homes. The landfill was granted an improvement location permit (ILP) in 1974 for operation of a landfill; however, its use of the land was subject to several written restrictions for the property, which were recorded in the county recorder’s office. Among these recorded “covenants” was a requirement that as long as the property was operated as a sanitary landfill, the entire landfill would be fenced such that no portion of the landfill operations would be visible from the ground level of any existing residence. The landowners admitted that as early as 1985 or 1986, they were able to see the landfill operations from the first floor of their residence. However, they did not actually file a lawsuit against the landfill operator regarding the alleged violation of the recorded “covenants” until nearly nineteen years later in 2004. The landowners attempted to apply the twenty-year statute of limitations applicable to written contracts entered into prior to 1982, pointing to the “covenants” recorded in 1974 as support of their position. However, the Indiana Court of Appeals held that although the recorded restrictions on the landfill property were labeled as “covenants,” they were actually written commitments entered into as part of the zoning process, rather than a written contract or covenants between two private landowners. As such, the Court applied the ten-year “catch-all” statute of limitations, and found that the landowners’ claims accrued when they first observed the landfill from their residence in 1985 or 1986, which was more than ten years prior to their lawsuit in 2004. The landowners’ claims were thus barred by the statute of limitations. Conclusions Being aware of the multiple statutes of limitation applicable to real estate claims is crucial to preserving those claims and being able to file them in a timely manner. In addition, as the Russo case makes clear, landowners must be conscious of claims that are tied to the real estate and may have accrued prior to their acquisition of the real estate, thus emphasizing the importance of due diligence in the purchasing process. Since Indiana law disfavors parties who “sit” on their legal rights and claims, failing to timely file these lawsuits may result in a permanent bar to the landowner’s real estate claim and lead to loss of legal recourse for the landowner’s damages. If you have any questions regarding these cases or related matters, please contact William E. Kelley at (317) 580-4848 or email him at wkelley@drewrysimmons.com. top |
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