Illinois Supreme Court Affirms Condo Owners' Rights


In Palm v. 2800 Lake Shore Drive Condominium Association (2013 IL 110505), Gary Palm, attorney and Emeritus of Law, University of Chicago Law School professor, sought production of his condominium association’s financial records pursuant to Chicago Municipal Code 13-72-080. The Association refused, claiming that the condo record requests in Illinois are governed by state statute (Condominium Property Act and General Not For Profit Corporation Act of 1986), rather than the City’s ordinance. The state statutes require that a unit owner state a proper purpose for obtaining association financial books and records, state that the association is only required to produce 10 years of records, and allow an association 30 days to gather and produce the records.  However, requests made pursuant to the City's ordinance do not require a proper purpose be stated, there is no limitation on the years of the records, and the association must produce the documents within three business days.

The unit owner filed suit in January of 2000 seeking to inspect the documents he requested. After motion practice and the filing of amended complaints, the City of Chicago intervened in the lawsuit, alleging that the ordinance superseded the state statutes as a valid exercise of the City’s home-rule powers. In April 2001, the trial judge found in favor of the unit owner and ordered the Association to turn over the documents pursuant to the ordinance, finding that the ordinance was a valid exercise of the City’s home rule authority. In 2008, the trial judge again ruled in favor of the unit owner with respect to attorneys’ fees as the “prevailing party.” In 2010, the Illinois Appellate Court affirmed the trial judge’s decision, holding that that the records examination provisions of the ordinance supersede those of the state statutes and that the trial court did not abuse its discretion with respect to the amount of attorneys’ fees awarded.

The Illinois Supreme Court allowed the Association’s petition for leave to appeal and, on April 25, 2013, affirmed the Appellate Court and trial judge’s rulings. 

The Association argued that the ordinance exceeds the City’s home rule authority because it conflicts with the statutory provisions and renders them unenforceable. In other words, that a municipality may not enact an ordinance that is less restrictive than a state statute. 

The unit owner and the City countered that the General Assembly may limit home rule authority to regulate in a given field by expressly reserving that power for itself or prohibiting home rule units from exercising that power and neither has occurred.

After reviewing the current state of home rule law, the Illinois Supreme Court found that the conflict between the City’s ordinance and the state statutes did not render the ordinance invalid or beyond home rule power and, therefore, the City’s ordinance is a valid exercise of its home rule power: “The legislature has not specifically denied the City’s exercise of home rule power or required its exercise of that power to be consistent with statutory provisions. If the General Assembly wishes to deny or restrict the City’s home rule authority, it may enact a statute expressly providing for that action at its next session.”

Both condo associations and unit owners must not only know the board’s obligations and responsibilities as set forth in the by-laws and declarations, but those imposed by applicable local ordinances and statutes.  Please check all applicable local ordinances and state statutes when considering requesting financial records from your condo association or responding to a request.


Claims Arising out of Construction Accidents in Illinois

The Illinois Institute for Continuing Legal Education (IICLE) recently published the 2013 edition of its Construction Dispute Litigation manual.  This all-new title in IICLE’s Construction Law Library is devoted to the litigation of construction disputes, with 20 chapters and a free forms CD.

Douglas R. Allen and Douglas J. Palandech co-authored Chapter 6, Claims Arising out of Construction AccidentsThe topics discussed in Chapter 6 include:

•             theories of liability (negligence, strict liability, and statutory);

•             liability issues (comparative fault, contribution/indemnity, joint & several liability, and settlement considerations); and

•             defenses to liability and damages.

For more information on the publication, click here.

Designers' Risk: The Dark Side of Going Green

The language and presumptions of sustainable “green” design are changing a significant portion of the landscape for all stakeholders in the construction and building-related industries.  “Green” building impacts everything from the selection of carpeting and window treatments to how far the materials have to be shipped to the project before installation.  And with ever evolving sustainable design standards and building codes (e.g. the International Green Construction Code), it is important that designers understand how “green” projects affect their risk. 

“Green” projects necessarily include additional commitments.  Some of the additional commitments may be expressly set forth in the designer’s contract.  Other commitments may be implicit or expected by the client.  For that reason, perhaps the two most obvious implications of “green” projects are the client’s expectations and the design professional’s scope of service. 

The first step in analyzing “green” risks is to identify the risks associated with a particular project.  The process should begin with the designer’s initial dialogue with the client.  After all, a project cannot be successful unless everyone is on the same page and working toward the same goal.  The owners’ expectations (e.g. certification, costs, building performance, etc.) should also be expressly defined and managed from the very beginning.  Designers must educate their clients of the realities of sustainable design (what can be done, what it will cost, who controls or participates in the process).  Design is but one element of a “green” project.  Sufficient funding and time are elements beyond the designer’s control.  Additionally, third-parties are involved in the process (i.e., production, installation, commissioning, certification, etc.).  While, a designer may provide estimates for budgets and schedules and often counsels clients as to expected code interpretations or product performance, the designer does not have complete control over these elements.  As such, the client should acknowledge the realities of the process, which may implicate the project goals.

In identifying and defining the client’s expectations, it is important to refrain from making promises, guaranties or other absolutes.  A simple statement (even if not included in the contract) that the design will meet a designated “green” certification may be interpreted as a guaranty or warranty.  And, it is important to note that guaranties and warranties are generally excluded from coverage by professional liability insurance carriers.  Accordingly, caution must be employed in defining a client’s expectations so as to no implicate warranty liability.  Nevertheless, documenting expectations is vital wherever possible to assure that mutual assent has been achieved and the parties move forward with a clear understanding of the project goals and scope. 

Without an express promise, warranty or guaranty, the designer’s performance will be judged against the standard of care as implied warranties do not attach to the services of design professionals in most jurisdictions.  Again, in defining the client’s goals, it is easy for a designer to indicate that “best efforts” or “best practices” will be utilized.  Be careful not to be lured into employing such terms as the standard of care only mandates reasonable care and skill.  Otherwise, a heightened performance standard may apply.

Additionally, it is equally vital to document events and decisions during the project that implicate the client’s expectations and goals.  “Green” products often come with high upfront costs.  An owner may initially agree to “green” initiatives incorporated during the design development phase to meet the program requirements but later cut those same “green” products to save on construction costs.  Or, perhaps a natural disaster 3,000 miles away has made a particular product temporarily unavailable.  It may be easy to substitute a product or material on a traditional project, but substitutions on a “green” project can have significant ramifications.  Is the project delayed or is a substitute product utilized?  Clients must be counseled on the impact of such decisions or events, and the designer’s efforts in counseling the client should be documented.  Further, each decision or event that impacts the original project goals must be documented.  If a dispute later arises, the designer must be able to demonstrate that the client was counseled in a manner so as to make an informed decision, which explored the implications of the decision relative to the project goals.  Through contemporary documentation, the client should acknowledge the risks and relieve the designer of responsibility for decisions and events that deviate from the original design intent or project goals.

Even still, understanding, carefully defining, and documenting what the client wants only takes us half way.  To effectively manage the associated risks, the role and responsibilities of each party must be defined.  Defining the designers’ scope of work is a critical task in contracting for any project, but on “green” projects, the additional tasks associated with sustainable design should be expressly assigned and/or expressly identified as not included in the designer’s services (i.e., registering the project, compiling documents, applying for certification, appeals, etc.). 

Even with a well-defined program and scope of work, “green” projects carry significant risk.  Those risks must be allocated in a manner that reflects the role each participant played on the project.  The exposure associated with “green” projects can be quite substantial.  Damages associated with the failure to achieve an expected “green” certification can include diminished marketability, increased life-cycle costs, loss of government incentives, etc.  A simple “consequential loss” waiver may not apply to such damages, which could be found to: (1) be within the contemplation of the parties at the time of contracting and (2) flow naturally and probably from the failure to achieve the intended level of certification.  Nevertheless, damages associated with the client’s loss of income or profit, inability to realize reductions in operating/maintenance costs and tax benefits/credits can and should be expressly limited or waived by contract for proper risk allocation. 

Additionally, the expectation interests associated with “green” projects are very difficult to completely define and are often subject to misunderstandings when project goals are not realized.  Furthermore, damages associated with life-cycle costs may not be discovered for several years, which could lead to a dispute many years after the project was completed.  As such, contractually limiting the amount of damages available and the time for which a claim can be asserted is often appropriate for proper risk allocation on “green” projects.

Going “green” has risks.  However, the key, as with all risks, is to identify and properly allocate those risks.  Failure to do so is the most significant risk of all.  

General Contractor Named Additional Insured and Not "Solely Negligent" Entitled to Defense and Indemnity


In A-1 Roofing Co. v. Navigators Ins. Co., the First District reversed the trial court’s entry of summary judgment on behalf of the defendant insurer in a declaratory judgment action in which A-1 sought a finding that the insurer owed a duty to defend and indemnify it in an underlying wrongful death suit.

A-1 was the general contractor for a roof resurfacing job at a high school.  Jack Frost Iron Works Inc. ("Frost") was one of A-1's subcontractors. Frost had a CGL policy with Navigators Insurance Company under which A-1 was an additional insured.  An employee of Frost's subcontractor Midwest Sheet Metal Inc. was killed at the job site when a boom-lift he was operating flipped over.  The boom-lift had been leased by another Frost subcontractor, Bakes Steel Erectors, Inc. (BSE).  The deceased's estate filed suit against A-1, BSE and two other defendants.

A-1 then filed a declaratory judgment action against Navigators, seeking a judgment that the insurer had a duty to defend and indemnify A-1. The trial court found Navigators had no duty to defend or indemnify A-1 because the underlying complaint did not state a cause of action against the insured, Frost.

On appeal, the court noted that the policy stated that an additional insured was covered "with respect to liability arising out of 'your work' for that insured by or for you." "Your work" was defined as "work or operations performed by you or on your behalf."  The underlying complaint alleged the decedent's death occurred while BSE was performing its work on Frost's behalf, in furtherance of work Frost was contractually obligated to perform for A-1.  A-1's liability in the underlying suit arose out of work performed for A-1 on behalf of Frost by BSE. Therefore, the court found that the claim against A-1 was within the scope of the additional insured endorsement.

Next, the court considered whether the policy's "sole negligence clause" negated Navigator's obligation to provide coverage to A-1. The sole negligence provision stated coverage did not apply "to any claim arising out of the sole negligence of any additional insured or any of their agents/employees."  Finding that the underlying complaint did not allege that the decedent's injuries arose solely from A-1's negligence, but rather negligence on the part of BSE and two other parties as well, the sole negligence exclusion was not triggered to negate coverage as to A-1.

This case represents another example of the variety of coverage issues which arise out of multi party construction projects and the distribution of risk between the participants and their insurers.  It emphasizes the importance to not only review the contracts for indemnity, insurance and other risk allocation provisions but also the importance of reviewing not only contracts, but any applicable insurance policies when involved in construction projects. 


More Hurdles for Subcontractors that Perform Work on Public Contracts


In August, the Illinois State legislature enacted an amendment to the Public Construction Bond Act (the "Act"), the substance of which amounts to nothing more than an additional burden for the unwary or unsophisticated subcontractor that provides labor and/or materials under a contract with the State (or one of its political subdivisions).

Prior to the amendment, a subcontractor, in order to maintain its right to sue, was only required to file a verified notice of the action with the "officer, board, bureau or department awarding the contract" within 180 days of the date on which the last item of work was performed or material was furnished by the subcontractor and also provide a copy of the same verified notice to its contractor within 10 days of filing the notice with the State.

Public Act 97-0487 amended Section 2 of the Act by including an additional notice requirement for all actions brought to recover for performance and/or labor that has gone unpaid. Now, in addition to the preceding requirements, a subcontractor must file the same verified notice with the "Clerk or Secretary" of the same political subdivision within 180 days of the date on which the last item of work was performed or material was furnished by the subcontractor and also provide a copy of the same verified notice to its contractor within 10 days of filing the notice with the Clerk or Secretary.

The Act was further amended to require all notices to include a brief description of the subcontractor's contract, the work performed by the subcontractor and the amount due and unpaid as of the date of the notice.

The final substantive amendment to the Act extended the limitations period for all actions. Prior to the amendment, all actions had to be brought no earlier than 120 days after the date on which the last item of work was performed or material was furnished by the subcontractor and no later than six months from the same date. The Act now requires all actions to be filed no later than one year after the date on which the last item of work was performed or material was furnished by the subcontractor.

Nothing within the text of the amendment sheds light on the legislature's intent in passing this amendment. As of the date of this article, neither the House nor Senate transcripts pertinent to debate of the amendment were available. Regardless, the amendment can be interpreted as nothing more than additional hurdles to trap subcontractors and allow the State to avoid paying for services and/or labor received. The additional notices are to be directed to the same entities; both the political subdivision and the contractor will now each receive two copies of the notice with the only difference being the addressee. The extension of the limitations period, while seemingly a benefit, is immaterial if a subcontractor fails to comport with the duplicative notice requirements.

The amendment to the Act becomes effective on January 1, 2012. Subcontractors planning to perform under contracts for public improvement projects would be wise to become familiar with the statute's new obligations and revise their notice documents accordingly well in advance of the new year.


First District Affirms Summary Judgment in GC's Favor for Construction Accident


This spring, in O’Connell v. Turner Construction Co., the First District of the Illinois Appellate Court decided that a company serving as construction manager had no liability for injuries sustained by an employee of a subcontractor with whom the construction manager did not have a written contract. The case originated from the construction of a new high school campus undertaken by Grayslake Community High School District 127 which began in 2002.

The School District retained Turner Construction Company to manage the project. By its agreement with the School District, Turner, among other duties, assisted in preparing construction contracts, advised as to the acceptability of subcontractors, and reviewed and coordinated safety programs of contractors. There existed a written agreement between Turner and the School District; however, Turner did not have agreements with any of the contractors or subcontractors. In July 2003, the plaintiff, an employee of Linden Erectors, was injured on the construction site. Linden was a subcontractor of Waukegan Steel, a contractor of the School District. The plaintiff brought a lawsuit against several parties, including Turner, claiming liability on the basis of negligence and premises liability.

The court did not find that Turner entrusted any of the independent contractors with work; the School District, not Turner, selected the contractors and executed contracts with them. Thus, the court held that the exception alleged by the plaintiff was inapplicable.

Likewise, the court found no liability on the part of Turner with respect to plaintiff’s claim for premises liability. In exploring the legal concepts of possession and occupancy of land, the court contrasted the act of exercising dominion and control over the land with that of control over individuals and/or activities on the land. The court, focusing on the specifics of plaintiff’s allegations, found the record contained insufficient evidence showing Turner’s degree of control extended to the land at-large (as opposed to merely the activities and individuals upon it) and ruled that Turner was not the “possessor” of the construction site because its authority over the land did not exceed that of the School District.

This case provides guidance regarding the risk, and limitations thereof, associated with oversight and/or consultation of a construction project. Construction companies in a managerial, consultative, and/or supervisory role must ensure that the scope of their authority is not perceived to supersede that of the owner/developer.


Subcontractors As Additional Insureds: Check the Contract!

Recently, in Westfield Insurance Co. v. FCL Builders, Inc., the First District considered whether a contractor was an additional insured under an insurance policy issued by Westfield to a third party.  This case arose out of the all too common situation where a general contractor requires a subcontractor to obtain insurance as part of its agreement to perform work on a particular project.  In this case, FCL subcontracted the steel fabrication out to Suburban Ironworks, Inc. and required Suburban to obtain liability insurance which would cover not only Suburban but FCL as well.  Suburban in turn subcontracted the steel erection work to JAK Ironworks, Inc.  The agreement between Suburban and JAK was incorporated by reference a master agreement between the two parties which required JAK to obtain insurance that would cover JAK, Suburban and FCL in the event of an accident on the steel erection project.

The project progressed and one of JAK’s employees was injured.  Westfield, which issued the insurance policy to JAK was asked by FCL to defend and indemnify it against the allegations made by the injured employee in a lawsuit.  Westfield refused to do so claiming that FCL did not qualify as an additional insured under the policy issued to JAK.  The JAK policy contained an endorsement which required two conditions to be met before a third party could become an additional insured.  Those conditions were:  1) the entity seeking coverage must be one “for whom you [JAK] are performing operations;” and 2) JAK and the entity seeking insurance coverage must have agreed “in writing in a contract or agreement” that the entity seeking coverage must be added to the policy as an additional insured. 

The First District found that Westfield had no duty to defend FCL under the policy it issued to JAK because there was no agreement in writing between JAK and FCL for FCL to be an additional insured.  Because the policy explicitly and unambiguously required a direct written agreement between the insured, JAK and the prospective additional insured, FCL and no such written agreement existed, the court found that FCL did not become an additional insured.

This case represents another example of the variety of coverage issues which arise out of multi party construction projects and the distribution of risk between the participants and their insurers.  It emphasizes the importance to not only review the contracts for indemnity, insurance and other risk allocation provisions but also the importance of reviewing not only contracts but any applicable insurance policies when involved in construction projects. 

Thompson v. Gordon: Design Professionals' Duty Limited to Contract


The Illinois Supreme Court’s holding in Thompson v. Gordon reinforces what cases such as Ferentchak v. Village of Frankfort, 105 Ill. 2d 474 (1985), have held for years: that the duties and obligations of a design professional, including the duty of care, are defined by contract.

By way of background, the defendant engineers entered into a contract to design improvements to roads adjoining a shopping mall and to design a replacement of an existing bridge over the interstate.  The contract also provided that “the standard of care applicable to engineer’s services will be the degree of skill and diligence normally employed by professional engineers or consultants performing the same or similar services.”  The bridge, as replaced pursuant to the plans, had a seven-inch high median, which was essentially identical to the median it replaced on the original bridge.  Plaintiff, in an unsuccessful opposition to the entry of summary judgment, offered an expert affidavit expressing the opinion that the engineering standard of care required the design of a barrier on the bridge as opposed to merely “replacing” the raised median.

The appellate court, over a dissent, reversed the summary judgment.  The Supreme Court reversed, holding that the difference between the terms “replacement” and “improvements” made it clear that the specific terms of the contract did not require the redesign of the bridge deck, and that the standard of care provision of the contract related only to the express engineering services to be provided, as opposed to expanding the scope of services and duty of the engineers to redesign the “replacement” structure to include a barrier.

The impact of this case on design professionals is that the Supreme Court confirmed what was stated in Ferentchak, that the degree of skill and care required of the civil engineer depended on his contractual obligation and the scope of that duty was defined by the contract. 

Additionally, the case reiterated useful guidelines regarding the interpretation of contracts:

  1. When contract terms are unambiguous, they are given their common meaning without outside evidence;
  2. When they are ambiguous (subject to more than one meaning), then you need additional evidence to figure out what the parties to the contract meant;
  3. Just because parties disagree as to a term's meaning does not make it ambiguous.

Thompson underscores the value of attorney review of a contract prior to execution.  As in this case, the design professional was protected from liability based solely on the language of its contract.


First District Leaves Questions Unanswered in Construction Contracting Case


Recently, in Rojas Concrete v. Flood Testing Laboratories, Inc., the First District of the Illinois Appellate Court considered when one party to a construction project owes a duty of care to another. The project was related to the construction of the UIC Forum, a mixed use classroom, office and entertainment facility at UIC. Rojas Concrete contracted with one of the subcontractors on the project to provide and install concrete. Flood Testing Laboratories (“FTL”) contracted with UIC to monitor and test the concrete. 

Rojas alleged that on several occasions during the course of the project FTL tested and approved concrete which did not conform to the project specifications. Rojas sued FTL alleging negligence and negligent misrepresentation. FTL moved to dismiss arguing that it did not owe a duty to Rojas.

The court found that FTL did not owe Rojas a duty and dismissed Rojas’ complaint. The court considered whether FTL owed Rojas a duty arising out of 1) its contract; 2) the parties’ relationship; or 3) the voluntary undertaking doctrine. First, with regard to the contractual duty issue, the court found that FTL’s contract with UIC specifically stated that it did not create a contractual duty with any of UIC’s subcontractors. Accordingly, the court found that FTL did not have a duty of care to Rojas arising out of its contract. 

Next, the court considered whether FTL owed Rojas a duty based upon the parties’ relationship. The court considered several cases where a court found one party to a construction project had a duty to another without direct contractual privity. However, the court rejected Rojas’ contention that the relationship between it and FTL on the subject project constituted a special relationship giving rise to a duty. The court based its conclusion in part upon the fact that Rojas failed to raise certain arguments related to the foreseeability that it would rely on FTL’s work at the trial court level. 

Finally, the court considered whether a duty of care existed as a result of a voluntary undertaking by Rojas. The voluntary undertaking doctrine requires bodily harm to apply and Rojas did not allege any bodily harm. 

The court managed to skirt the real issue in this case: what level of foreseeability is required to create a duty on the part of one participant in a construction project to another? By finding that Rojas failed to raise that issue at the trial court, the First District did not answer the question of what types of activities create a duty of care on the part of one participant to a construction project to another party relying on the contractor’s work. However, this case does remind us that it is important to include language in a construction contract specifically defining the work to be performed and stating in clear terms that the performance of that work does not create a duty of care to any other party.


Surety v. Guarantor Revisited by Illinois Supreme Court

In November 2008, Illinois’ Second Appellate Court rendered its landmark decision in JP Morgan Chase Bank, N.A., v. Earth Foods, 386 Ill.App.3d 316 (2nd Dist. 2008). The decision departed dramatically from the strict definitions ascribed to “surety” and “guarantor.” As the appellate court’s decision relied in part on interpretations from sister jurisdictions, the decision had potential national implications. We offered a comprehensive analysis of that decision, specifically that it effectively dissolved the distinction between guarantors and sureties in Illinois.

Because of the importance of the precedent, on January 28, 2009, the Illinois Supreme Court accepted an appeal by JP Morgan. Last month the Illinois Supreme Court, in JP Morgan Chase Bank, N.A., v. Earth Foods, Illinois Supreme Court Docket No. 107682, October 21, 2010, affirmed in part and reversed in part the decision of the Second District and remanded the case back to the trial court.

The facts of the case are detailed here. The trial court rejected co-owner and defendant DeFranco’s argument that the notification to JP Morgan of Earth Foods’ near-insolvency discharged his obligation as a guarantor under Section 1 of the Sureties Act and summary judgment was entered in favor of JP Morgan.

On appeal, DeFranco argued that the even though the contract identified him as a “guarantor,” rather than a “surety,” the trial court erred when it rejected the application of the Sureties Act and entered summary judgment in favor of JP Morgan. The crux of DeFranco’s argument was that the term “surety” should be judicially construed to include guarantors. JP Morgan countered that the plain text of the Sureties Act made clear that its provisions were unavailable to DeFranco, as guarantor.

In holding that guarantors were included in the term “surety,” the appellate court, relying on Illinois jurisprudence, sister states’ jurisprudence, and several secondary sources, including the Restatement (Third) of Suretyship and Guaranty, undertook an analysis of the “popularly understood” meaning of the terms “suretyship” and “guaranty.”

The court found that the terms “guarantor” and “surety” are “unusually intertwined in legal parlance and that the distinctions between them are arcane and often ignored” and held that the statute applied with equal force to guarantors as it did to sureties.  Accordingly, the court found that the trial court erred in granting JP Morgan’s motion for summary judgment on the basis that DeFranco could not invoke a defense provided by the Sureties Act.

The Illinois Supreme Court reversed, holding that the Sureties Act applies to and protects only sureties, not guarantors. In its opinion, the Court found that, in spite of current usage, it was required to recognize the distinction between guarantor and surety. The Court noted that the Act is descended from a statute passed in 1819, with different language, but the same effect, and that the policy and purpose never changed.

According to the Court, at common law, the surety had no right to require the creditor to take action against the principal. So the surety was not discharged, even if the creditor neglected or failed to take action. As a result, many states, including Illinois, passed statutes like the Act to give the surety protections unavailable at common law.

Whether the parties intended to create a surety or a guarantor, and considering not only the language of the written agreement (which referred to a “guarantee”), is to be determined from all facts and circumstances, and thus summary judgment was inappropriate. The Court remanded for further proceedings to provide DeFranco an opportunity to establish whether he was a surety or a guarantor. The Court even suggested parol evidence may be necessary to that end. It appears that the Sureties Act is alive and well!