Illinois Construction Law Blog : Illinois Construction Lawyer & Attorney : Foran Glennon Palandech Ponzi & Rudloff Law Firm : Chicago IL

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.

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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.

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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. 

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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.

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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.

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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!

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In 1324 W. Pratt Condominium Ass'n v. Platt Const. Group, Inc., 2010 WL 3788057 (Ill.App. 1 Dist.), a condominium association sued  a construction company it retained to build an eight-unit residential condominium. The condominium association asserted that the construction was performed in a faulty manner which resulted in roof leakage and damage to personal property of condominium residents during a series of severe rainstorms in September 2008 in Chicago. The rainstorms were alleged to have substantially worsened the leaks and exacerbated the mold problem. 

The First District Appellate Court of Illinois held that the construction company’s designation as a “builder” rather than a “builder-vendor” did not protect it from the condominium association’s claim that it violated an implied warranty of habitability in the construction of the condominium building. As a result, the Appellate Court found that the trial court’s dismissal of that count was in error. However, the trial court’s dismissal of the negligence count was upheld pursuant to Moorman doctrine as the “sudden or dangerous occurrence” exception was deemed to not apply, because the storms did not cause the damage requiring repair of the building and individual units. Because the leaks and mold were present before the storms of September 2008, the First District held that the storms did not cause the damage.

What can we take away from the 1324 W. Pratt case and its analysis of the implied warranty of habitability? The First District, at least, has eliminated the limited application of the implied warranty of habitability to only those builders who are also vendors as that limitation would “defeat the warranty’s policy goals of holding builders themselves accountable for latent defects in new homes and placing the costs of repairs on the builders who created the defect.” 

The 1324 W. Pratt case may also be read to imply that the implied warranty of habitability may be applied to design professionals. As discussed in more detail here, the application of the implied warranty of habitability against design professionals is unclear at best. The warranty, as defined in the opinion, applies against a lessor or builder of a residential unit where latent defects thereabout interfere with the inhabitant’s reasonable expectation that the unit will be suitable for habitation. This definition would seem to absolve design professionals. However, the doctrine seeks to assign liability for the damage upon the entity responsible for that latent defect. Certainly, a design professional is in the cross-hairs for damages attributable to a latent defect (i.e., a fault in the property that could not have been discovered by a reasonably thorough inspection before the sale) resulting in damage. Design professionals’ contributions are often subtle and hidden by the builder’s construction. 

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The First District Appellate Court, in K. Miller Construction Company, Inc. v. McGinnis, 394 Ill.App.3d 248 (1st Dist. 2009), decided that a claim for quantum meruit (unjust enrichment) could be made against a homeowner by a contractor even if the contractor failed to comply with the Illinois Home Repair Remodeling Act  (815 ILCS 513/15) which requires that contracts for more than $1,000 on home improvements be put in writing or deemed unlawful by a statute. As we reported here, Miller was a contractor that worked on the renovation of the McGinnis home. Prior to completion of the project, but after some work had been performed, the homeowners refused to continue paying Miller’s invoices which were then more than $123,000 and demanded that he finish the job before any more payments were made. Though the homeowner approved of the work upon completion, the project construction price increased to more than $500,000 by the time Miller was done. The homeowners, however, refused to pay more than $177,580.33 and Miller filed suit to recover payment. The trial court dismissed claims made by Miller for a mechanic’s lien and breach of a time and materials oral contract because the terms of the Act provided that such contracts were unlawful, at the time, if not in writing for home repair. 

The case was appealed. The Appellate Court unanimously agreed that Miller’s claim for breach of contract and foreclosure of mechanic’s liens could not go forward because the Act imposed a writing requirement for remodeling work costing over $1,000 and necessarily barred the enforcement of an oral contract. However, the Appellate Court was divided with respect to whether the contractor could recover in quantum meruit. Due to the fact that the Appellate Court permitted Miller to go forward on a quantum meruit claim, the homeowner appealed to the Illinois Supreme Court. The Supreme Court granted petition for leave to appeal and rendered its opinion on September 23, 2010.    In rendering its decision, the Illinois Supreme Court simply looked at the rewritten Public Act 96-1023 which was effective July 12, 2010 (after the project at issue). Public Act 96-1023 rewrote the Illinois Home Repair and Remodeling Act stating that any violations of the Act were to be remedied by an action under the Illinois Consumer Fraud Act. The Supreme Court ruled that the amendment made it quite clear that entering into an oral contract, rather than written, does make this contract unenforceable. Similarly, the Supreme Court held that quantum meruit would still be available to the contractor even in the absence of a written contract. 

This is the first case following the amendment to the Illinois Home Repair Remodeling Act and it is a clear indication that the Court is going to permit contractors to sue to recover on oral contracts for home repair work. 

Despite the ruling, it continues to be the best practice for contractors to use written contracts and otherwise comply with the Illinois Home Repair Remodeling Act in order to avoid the pitfalls of claim resolution and litigation.

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May a party request that a court rescind a contract on the ground of impossibility of performance because of the 2008 global credit crisis? The First District Appellate Court of Illinois, in the recent decision of YPI 180 N. LaSalle Owner, LLC v. 180 N. LaSalle II, LLC, stated that in a commercial transaction for the sale of real property, the 2008 global credit crisis was not a basis upon which a party may seek a rescission of a contract based on the impossibility of performance. 

The purchaser received notice that one of its lenders had pulled out of the financing arrangement because the economic conditions in Ireland had forced it to withdraw from the credit markets. After the purchaser failed to close on the purchase of the property, the seller terminated the contract and retained $6 million of earnest money as its sole remedy for the purchaser’s breach of the contract. The purchaser filed suit against the seller seeking that the court rescind the contract and demanded recovery of the $6 million in earnest money retained by the seller. 

The purchaser argued that pursuant to the contract-law doctrine of “impossibility of performance,” it was excused from performing its obligations under the contract due to the 2008 global credit crisis as it was this credit crisis that prevented it from obtaining the financing contemplated when the contract was originally formed. The trial court granted the seller’s motion to dismiss striking the purchaser’s complaint with prejudice.

The court had to determine whether the contract was rescindable on the ground of impossibility of performance under the specific facts of the case. In affirming the trial court’s dismissal of the complaint, the appellate court noted that the purchaser’s argument that its performance under the contract was made impossible due to the global credit crisis was misplaced. 

According to the court, the primary issue was whether it was foreseeable that a commercial owner might not provide the purchaser with the financing that was sought. The court noted that the inability to obtain commercial financing is generally considered a foreseeable risk that can be readily guarded against by including financing contingency provisions in the contract. Such contingencies were not set forth in the purchase agreement at issue. In addition, the doctrine of impossibility of performance does not excuse performance as long as it lies within the power of the promissor to remove the obstacle of performance. The court noted that the purchaser had sufficient assets to pay the contract purchase price without the financing and, therefore, the means by which to remove the obstacle to performance.   The court found that under the circumstances of the case, the purchaser’s failure to obtain the financing sought was not an adequate ground to rescind the contract under the doctrine of impossibility of performance and affirmed the trial court’s dismissal of the case with prejudice and without leave to amend. 

Many commercial projects have been affected by the global credit crisis. Precautions need to be taken and contingencies written into contracts and purchase agreements that permit a party that is affected by a prospective lender’s inability to provide financing to rescind the contract.

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