On Monday February 24, my colleague Amie Bauer posted an article on the purpose of Supreme Court Rule 213(f) as gleaned from ESP Global, LLC v Northwest Community Hospital, 2020 IL App (1st) 182023. That same case also provides important lessons for parties wishing to engage in services agreements that contemplate multiple phases, and for the lawyers who represent them.
In ESP Global, LLC v Northwest Community Hospital, 2020 IL App (1st) 182023, decided February 11, 2020, the court considered whether an equipment consultancy could recover additional fees for services performed after the completion of work in a "Phase I" written agreement. The plaintiff, ESP, was initially hired by Northwest Community Hospital to perform an analysis of the hospital’s equipment maintenance and services agreements with various third parties. ESP charged the hospital a flat fee for this work, which was performed pursuant to a written agreement.
The hospital later asked ESP for help preparing a "Request for Proposal," or RFP, to be submitted to other third-party vendors who could provide and maintain the hospital’s equipment for less than the hospital’s existing costs. ESP prepared the RFP, which the hospital used to hire a new equipment company, at substantial cost savings to the hospital. ESP then sought 10% of the amount of the hospital’s savings as compensation for its work, claiming it had agreed upon this amount with the hospital’s supply chain director. The hospital refused payment, arguing that these services were covered by the parties’ original flat-fee agreement.
Following a bench trial, the trial court rejected the hospital’s argument that the RFP work was covered by the parties’ written agreement and found that an "implied in fact" agreement existed to pay ESP 10% of the hospital’s five-year cost savings achieved through an RFP prepared by ESP. The appellate court affirmed this aspect of the trial court’s ruling.
The court rejected the hospital’s argument that the RFP services were governed by the written agreement because it contained an "Additional Services" clause. That clause provided that "[a]t the conclusion of [the Phase I work] the Client may choose to hire ESP to provide services outside the scope of this agreement," and provided as an example of such additional services "Drafting a procurement document, such as an [RFP]."
This clause, in other words, was excellent protection for the service provider against just the type of argument that the hospital raised here, and services companies and their attorneys would do well to replicate it in comparable deals.
Less cost-effective, however, was ESP’s decision to proceed with the RFP work without a second written agreement. That error required ESP to prove at trial that the circumstances of their arrangement, and ESP’s oral conversations with the hospital, were adequate to prove a contract. The appellate court affirmed the trial court’s finding of such an agreement on the basis of (a) emails reflecting the request for the RFP and the promise to prepare it, (b) the "Additional Services" clause in the parties’ written agreement, which itself referred to the possibility of a contingency arrangement for non-covered work, and (c) testimony from the hospital’s supply chain director that he understood the hospital would owe 10% of its costs savings.
The appellate court based its decision upon the doctrine of a contract "implied in fact." As the court explained, "[u]nlike an express contract. . . acceptance of a contract implied in fact can be proven by circumstances demonstrating that the parties intended to be bound." Id. ¶ 26. Here, the court held that the circumstances, including the request for the RFP and the work performed to create it and the fact that the hospital accepted and used the RFP, adequately proved that the parties intended to contract.
However, the court’s framing of the agreement as one implied from the circumstances does not explain how the court ascertained the key term of the agreement the price for the work. The court evidently gleaned this term from testimony: "Both [the hospital’s supply chain director] and [ESP’s president] testified that ESP agreed to assist Northwest with an RFP in exchange for 10% of Northwest’s savings over a five-year period." Id. ¶ 27. But the court does not recite the testimony itself. If these parties testified to an oral conversation in which they agreed to this arrangement, there would be no need to rely upon the parties’ non-verbal actions and other circumstances. It is well settled that an oral contract is enforceable in Illinois as an express, rather than implied, contract. E.g., Cable America, Inc. v. Pace Electronics, Inc., 396 Ill. App. 3d 15, 20 (1st Dist. 2009) ("Oral and written contracts are both forms of an express contract.") It is likely, then, that the "agreement" referred to by the court was based upon the parties’ mutual understanding, rather than any express oral agreement.
Regardless, the lessons of ESP Global, LLC for parties that wish to engage in multi-phased services agreements are clear: first, put everything in writing, not just the first part of the agreement; second, where there will be multiple phases, it is just as important to state what will not be included in a given phase than it is to state what will be included.