Neighbors’ Indemnification Agreement Relating To Construction Project Is Not Governed By Illinois’ Four-Year Statute of Limitations For Construction-Related Activity

The Illinois Appellate Court, First District, recently held that the ten-year statute of limitations applicable to written contracts, rather than the four-year statute of limitations applicable to construction-related activity, applies to a property owner’s indemnification claim against another property owner for losses suffered as a result of a construction project.  The court held that the liability at issue emanates from the breach of a contractual obligation to indemnify, not from construction-related activity. Water Tower Realty Co. v. Fordham 25 E. Superior, L.L.C., 936 N.E.2d 1127 (1st Dist. 2010).

In Water Tower Realty, a property owner (“Fordham”) sought to construct a fifty-story high-rise building in the River North neighborhood.  To obtain consent from its neighbor (“Water Tower”), who owned a building across the street from the planned high-rise, Fordham agreed to indemnify Water Tower for any losses it suffered due to the construction.  Five years after Fordham completed construction, Water Tower sued Fordham for breach of the indemnity agreement alleging that the construction activity rendered its property unsuitable for rental to commercial tenants.

Fordham moved to dismiss the complaint asserting that the four-year statute of limitations for construction-related activity barred the claim.  Water Tower responded that the ten-year statute of limitations for written contracts governed its claim because it sued for breach of the indemnification agreement, not for an act or omission related to construction.  The trial court found that the four-year limitations period for construction claims governed and dismissed the complaint with prejudice.

On appeal, the appellate court reversed the trial court’s dismissal holding that the ten-year statute of limitations applied.  The court relied heavily on the Illinois Supreme Court’s reasoning in Travelers Casualty & Surety Co. v. Bowman, 893 N.E.2d 583 (Ill. 2008).  In Travelers the Court refused to apply the four-year statute of limitations for construction-related activity when Travelers sought indemnity from a contractor for Travelers’ payment on performance bonds that were paid as a result of the contractor’s breaches of its construction contracts.  The Illinois Supreme Court held that the liability at issue emanated not from construction-related activity, but rather from the breach of a contractual obligation to indemnify payment on the performance bonds.

Similarly, in Water Tower Realty the court focused on the nature of Water Tower’s injury and Fordham’s liability, not the cause triggering the indemnification obligation.  The Court noted that while the construction project allegedly caused Water Tower to lose rental income, the liability emanated from an indemnity obligation.  Therefore, Fordham’s potential liability emanated from a contractual obligation to indemnify, not from construction-related activity, and the four-year statute of limitations for construction-related activity did not apply.

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