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

 

Economic losses concern defeated or diminished expectation interests arising out of inadequate or failed contractual performance, which involve neither personal injury nor physical damage to other property. The Economic Loss Doctrine provides that purely economic losses, originating out of and concerning contractual performance, are addressable, if at all, under contract principles. Conversely, economic losses are not recoverable in tort, given that none of its safety-protection interests are implicated by such disputes.

The Indiana Supreme Court recently affirmed this tenet in a landmark ruling, which upheld the trial and appellate courts preclusion of tort recovery against design professionals by a project owner for damages associated with alleged design and construction defects. 

On June 29, 2010 the Indiana Supreme Court issued its opinion in Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 2010 WL 2594314 (Ind.). This dispute arose from the renovation and expansion of a library and parking garage.  The Library directly entered into contracts with the architect and general contractor for the project. The project architect, in turn, subcontracted for services with various design professional consultants.  

The Library asserted negligence claims against some subcontractors and the architect’s structural engineer, seeking recovery for construction and design defects in its renovated and expanded facilities. The trial court dismissed the negligence actions based on the Economic Loss Doctrine, with the state’s court of appeals affirming. Indiana’s endorsement of the Economic Loss Doctrine in Indianapolis-Marion County Public Library eliminated any doubt as to its application to design professionals given the authoritative nature of the Court’s opinion.

In justifying the application of the Economic Loss Doctrine to this design/construction dispute, the Court reasoned that the Library established the expectations of the parties by entering into various contracts.  If recovery in tort were permitted, the Library could effectively circumvent the bargained-for exclusions and risk allocation outlined in the governing contracts. The Court, citing Chief Judge Cardozo’s seminal opinion in Ultramares Corp. v. Touche, noted that allowing tort recovery for economic losses would effectively eliminate the line between tort and contract and expose a party “‘to a liability in an indeterminate amount for an indeterminate time to an indeterminate class.’"

In Indianapolis-Marion County Public Library, the owner advanced five arguments against the application of the Economic Loss Doctrine, including: 1) “other property” was damaged; 2) the damages were physical or created imminent risk of physical harm; 3) the defendants are professionals; 4) the defendants negligently misrepresented facts; and 5) the defendants provided solely services and not tangible products. 

So what constitutes other property in the context of the Economic Loss Doctrine? In Indiana, the issue is addressed by examining what product or service was secured by the plaintiff. The rationale behind this approach is that a supplier of an allegedly defective product or service is only in a position to bargain for the appropriate risk allocation with the purchaser relative to performance expectations. However, a supplier of a component product or service cannot generally negotiate with the end user or consumer. If damage to the finished product constituted other property, suppliers would be subject to uncertain liability, which is an underlying policy justification for the application of the Economic Loss Doctrine. To provide further context, in Indianapolis-Marion County Public Library, the Court found that the Library purchased a complete, renovated library and parking garage. The alleged defective “products” were the designs, construction materials and construction services, all of which collectively comprised the final product. Accordingly, the Indiana Supreme Court held that any physical damage in the completed facility would not and could not constitute “other property”.

Having decided that the plaintiff’s damages were not to other property, there was no reason for the Indiana Court to address the argument that the Library’s damages were physical damages to property. Nevertheless, the Court addressed the owner’s contention that the alleged defects created an imminent risk of physical harm, thereby excepting this case from the economic loss rule. Here, the Court simply relied on the precedent it established in Progressive Ins. Co. v. General Motors, Corp., which precluded a strict tort products liability action where the absence of personal injury was concededly fortuitous. Consequently, the Court held that the Economic Loss Doctrine applied the owner’s negligence claim despite the alleged presence of imminent risk of physical danger.

Regardless of the nature of injury, the Library maintained that the Economic Loss Doctrine should not apply to professionals, negligent misrepresentation claims and/or defective services.

The owner contended that the Economic Loss Doctrine should not be applied to design professionals as a matter of law. The Library compared design professionals to other service professionals (e.g. attorneys) where tort liability exists based on duties that arise outside of contractual obligations. For support in extending such a paradigm to design professionals, the plaintiff relied on Peters v. Forster where the Indiana Supreme Court found that design professionals owe a duty of care to third parties where injury is foreseeable. 

The Court rejected this analysis in relying on decisional law of other jurisdictions which addressed the application of the Economic Loss Doctrine to design professionals. The foreign decisions were divided into cases where privity of contract was present and cases where it was not.

Where plaintiffs were in privity of contract with the defendant-design professional, the Indiana Supreme Court cited Arizona and Nevada opinions in finding no justifiable distinction for applying the Economic Loss Doctrine to contractors while allowing tort claims against design professionals. There was simply no differing policy concern underlying contractors and design professionals relative to the application of the economic loss rule since each were being charged with alleged qualitative dissatisfaction in the performance of contractual duties.

In circumstances where plaintiffs are not in contractual privity with the defendant-design professionals, the Court ruled that the absence of a contractual right of action would not therefore create a negligence liability against such parties. Alternatively stated, the Library did not acquire an impermissible right of action against those entities who were not in privity of contract with the owner. 

The Indiana Supreme Court clearly recognized that permitting tort recovery for qualitative injuries would undermine and frustrate the bargained-for allocation of risk throughout the network of agreements without any overriding “unfairness” to justify upsetting the negotiated balance. A project owner allegedly sustaining economic losses is permitted its rights of action against those entities in privity of contract (or against those who extend warranties in their favor). Those entities may, in turn, pursue their derivative contractual rights against their privity parties through the network of contracts until liability resides with the ultimately culpable and responsible party. As such, the Indiana Supreme Court held that the Economic Loss Doctrine precludes negligence actions by owners against design professionals wherever and whenever the underlying claims consist of nothing more than defeated or diminished contractual expectations.

The Library’s position respecting the negligent misrepresentation exception to the Economic Loss Doctrine was summarily rejected by the Court. Of interest, no distinction was drawn between those engagements where the design professional’s services results in a tangible improvement to property as opposed to those where “pure information” was provided (e.g. an architect’s building audit for a prospective purchaser). Here, the Court held that the negligent misrepresentation exception was inapplicable since the Library and defendants were connected through a series of contracts.

The arguments limiting the application of the Economic Loss Doctrine to qualitative dissatisfaction in tangible product disputes, as opposed to services, was also summarily rejected. Again referencing the policy considerations underlying the Economic Loss Doctrine, the Indiana Supreme Court failed to recognize a meaningful distinction in the application of the principle in product and service settings.

The Indianapolis-Marion County Public Library decision not only provides a long-needed and definitive Indiana statement on the application of the Economic Loss Doctrine to design professionals, it raises and explores the universal policy considerations associated with the rule’s implementation where contractual interests are at issue. Quite simply, a party seeking recovery for defeated or invalidated expectation interests should not be permitted the extension of tort law for dispute resolution which can only serve to eviscerate the contracting parties’ intentions and agreed to risk/reward allocations.

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Beginning in 1991, Pella began selling its “Proline” casement windows. Owners of buildings with these Proline windows filed a class action lawsuit alleging that the windows contain a design defect. The Proline windows are constructed with an aluminum cladding over wood. According to the plaintiffs, the window design allows moisture to seep behind the aluminum cladding and prematurely rot the wood. In order to handle the volume of replacements due to the alleged defect, Pella created the Pella Proline Customer Service Enhancement Program (PCSEP) to compensate customers. However, Pella did not notify its customers of the defect or of the program. Furthermore, the consumer-plaintiffs alleged that Pella, through the PCSEP, modified the Pella warranty without notifying the consumers. 

 

In Pella v. Salzman, the U.S. District Court for the Northern District of Illinois certified two classes of consumers. One class includes members nationwide who own buildings containing the Proline windows that have not yet manifested the alleged defect or have shown signs of rotting but have not been replaced. The second class is a group of six statewide classes from Illinois, New York, New Jersey, California, Florida and Michigan, wherein Pella’s failure to disclose the defect is alleged to have violated those states’ consumer fraud laws. The members in the second group owned windows that manifested the defect and had their windows replaced.

 

The district court granted certification but limited the issue of the class certification to liability. Accordingly, the class action jury will only decide: (1) if there was a design defect present in the windows; (2) whether Pella had a duty to disclose the defect; and (3) whether Pella attempted to modify its warranty. Issues concerning causation and damages will be decided on an individual basis. 

Pella appealed the certification of the classes. However, for the first time, the 7^th Circuit Court of Appeals affirmed the certification in a consumer fraud action. The 7^th Circuit explicitly stated that “there is not and should not be a rule that” consumer fraud actions cannot be granted class certification. Pella Corp. v. Saltzman, 606 F.3d 391, 393 (7^th Cir. 2010). Rather, the panel agreed with the district court’s finding that the individual issues that typically arise in consumer fraud actions would not be preclude class treatment of the limited issues of liability presented in the Pella case.

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The United States District Court for the Northern District of Illinois recently held in Ware v. C.D. Peacock, Inc., 2010 WL 1856021 (N.D. Ill. 2010), that Section 7 of the Federal Arbitration Act does not authorize arbitrators to issue subpoenas for depositions of non-parties outside the physical presence of the arbitrator.  Plaintiff, a former employee of C.D. Peacock, filed an action with the American Arbitration Association alleging employment discrimination.  Following some discovery, C.D. Peacock filed a summary judgment motion.  In opposition, Plaintiff submitted an affidavit from a former co-worker, Helene Tomasian.  The motion for summary judgment was denied based in large part on Tomasian's affidavit.  On C.D. Peacock's request, the arbitrator issued a subpoena for Tomasian's deposition. 

At issue before the court was Tomasian's motion to quash the subpoena for deposition.  She argued that she could not be compelled to participate in a deposition without her consent.  The court began by noting that an arbitrator's authority over parties that are not contractually bound by the arbitration agreement is strictly limited by the Federal Arbitration Act.  Ware, 2010 WL 1856021, at *1.  And, because the Seventh Circuit had not addressed the specific issue in question, the court analyzed the split opinions of the other Circuit Courts of Appeal, ultimately adopting the position of the Second and Third Circuits.  Id., at *3. 

While it is true that non-parties can consent to discovery in arbitrations, the court stated that Tomasian clearly did not do so in this case.  Id.  In addition, C.D. Peacock would not be prejudiced by its inability to depose Tomasian prior to the arbitration.  To the contrary, C.D. Peacock was in possession of Tomasian's affidavit and could expect that her testimony would be consistent with her affidavit.  Id.  Finally, the court commented that by voluntarily entering into arbitration with Plaintiff, C.D. Peacock could not have reasonably expected to obtain full-blown discovery from non-parties.  Id.  "Parties to a private arbitration agreement forego certain procedural rights attendant to formal litigation in return for a more efficient and cost-effective resolution of their disputes... A hallmark of arbitration-and a necessary precursor to its efficient operation-is a limited discovery process."  Id. (citing COMSAT Corp. v. National Science Foundation, 190 F.3d 269, 276 (4th Cir. 1999).  Tomasian's motion to quash the subpoena was granted. 

The Ware Court's holding serves as a reminder of the limited, and hopefully efficient, nature of arbitration.

 

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In a March 31, 2010 decision, the First District Appellate Court of Illinois ruled in favor of Bank of America and other lenders against the Block 37 mall developer.  Bank of America led a group of lenders that moved to foreclose on Block 37 in late October, claiming the developer was in default on a $205-million construction loan. The Cook County Circuit Court appointed real estate services firm CB Richard Ellis as receiver on November 24. CBRE officially took control of the mall on February 1, after delays over insurance issues were resolved. The developer appealed the trial court’s ruling, citing the Illinois mortgage foreclose statute and arguing that Bank of America had not proven that there was a “reasonable probability” that it would prevail in the underlying foreclosure action and that it had shown “good cause” for not appointing a receiver.

In affirming the trial court’s order in appointing a receiver, the court noted the construction loan made to the developer is out of balance and, therefore, was in default pursuant to the terms of the loan agreement. The court found that the developer presented no evidence showing a commitment from a lender or investor to provide funding that would cure the imbalance. In addition, the arguments that the developer was in a better position to complete the project or that Bank of American had not shown or alleged fraud, mismanagement or waste were all deemed impermissible arguments that attempt to shift the burden of proof back on to the lender, when the burden of proof was on the developer to show why a receiver should not be appointed.

The First District’s ruling has made the road much easier for Bank of America to proceed with its foreclosure proceeding.

We will continue to keep you advised as to the progress of the Block 37 project, both during construction and in the court system.

 

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The Second District Appellate Court of Illinois recently discussed the application of injunctive equitable attachments with respect to two consolidated cases brought by the same plaintiff, Hensley Construction, LLC against defendants Pulte Home Corporation and Del Webb Communities of Illinois, Inc. In each case, Hensley entered into contracts by which the defendant would provide and install underground utilities in residential home communities. The plaintiff’s complaints alleged that each defendant owed the plaintiff money for the work performed and filed a motion to compel deposit of retention funds into an escrow account. In each case, the trial court granted the plaintiff’s motion and ordered each defendant to deposit funds into an escrow account. Each defendant appealed claiming that the trial court’s rulings amounted to prejudgment equitable attachment and the plaintiff had failed to establish the requisite elements for those injunctions. 

The Second District, in overturning the trial court’s order in each case, reiterated that Illinois courts have consistently forbade such injunctions and, further, the only exception is when the claimant has an interest in the specific funds (known as the “specific funds exception”). In these cases, plaintiff Hensley did not show that the specific funds exception applied because the funds that were ordered deposited were not specific to the underlying dispute. The court also noted that the plaintiff failed to earn the remaining 3% of the retainage because it failed to establish that municipalities gave their approval of the projects (a condition precedent to recovering the remaining retainage) and failed to show the irreparable harm requirement of injunctive relief.

The most compelling aspect of the testimony in these cases was that of the defendants’ affidavits. Defendants in both cases stated that funds for the project were not held in segregated accounts or earmarked for the specific project. Therefore, plaintiff could not state that the specific funds that were to be placed in escrow were directly related to the project at issue. 

This seems to be a very convenient way for a defendant-debtor to avoid equitable attachment. However, it is also noted that these types of equitable attachment are frowned upon in the law because the equitable attachment is a restraint of the defendant’s control over property in its possession to satisfy a claim not yet reduced to judgment.

 

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In Abari Construction Co., Inc. v. State of Illinois, 59 Ill. Ct. Cl. 316, 2007 WL 7076039 (2007), the Illinois Court of Claims dismissed a contractor's complaint for the contractor's failure to timely file suit under the terms of its contract with the Illinois Department of Transportation ("IDOT").  Abari sought delay damages from IDOT for a bridge reconstruction project.  The contract mandated three levels of administrative review prior to commencement of suit before the Court of Claims, but also required that suit be filed within 60 days of the final decision from the IDOT third level reviewers.

Abari made a contract claim, which made its way through the administrative review process and a final decision was issued in January 2003.  Abari did not file suit in the Court of Claims until October 2003, over eight months after the final decision was rendered by IDOT.  The State, on behalf of IDOT, moved to dismiss the complaint as time-barred by the contractual limitations period.

 

The Court granted the State's motion to dismiss, noting that Illinois law is clear that parties can contractually agree to shorter limitations periods to replace statutory limitations periods, so long as the contractual period is reasonable.  Moreover, the Court of Claims Act specifically allows for the applicability of shorter limitations periods than those set forth by the Court of Claims Act.

 

What should we take away from the holding in Abari?  Quite simply, reasonable contractual limitations periods will be upheld in nearly any context.  Contractors must be knowledgeable concerning the limitations periods in their contracts and vigilant in enforcing those limitations periods. 

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You’re not alone. Recently, the Third District Appellate Court issued an opinion in direct conflict with what we thought we knew about the Home Repair & Remodeling Act (the “Home Repair Act”).   

Here’s what we thought we knew. When a contract does not comply with the Home Repair Act, it is invalid and cannot form the basis of a breach of contract action or an action to foreclose a mechanic's lien. See K. Miller Constr. Co. v. McGinnis, 394 Ill. App. 3d 248, 913 N.E.2d 1147 (1^st Dist. 2009); Smith v. Bogard, 377 Ill. App. 3d 842, 879 N.E.2d 543 (4^th Dist. 2007); Central Illinois Electrical Services, LLC v. Slepian, 358 Ill.App.3d 545, 831 N.E.2d 1169 (3^rd Dist. 2005). 

Then, the Second District issued its opinion in Artisan Design Build, Inc. v. Bilstrom (2^nd Dist. September 22, 2009), which stated that a violation of the Home Repair Act did not automatically preclude a contractor from recovering at law (foreclosure of mechanic’s lien) or equity (quantum meruit). 

More recently, the Third District Court sided with the McGinnis line of cases in issuing its opinion in Roberts v. Adkins on January 7, 2010. Our discussion on the Artisan Design Build and Roberts cases are posted here. 

However, just one week latter, it appears as though the Third District has changed its mind. In Fandel v. Allen, the Third District Court stated that the Illinois Legislature did not intend for the Home Repair Act to give a private right of action to consumers or to create an affirmative defense to mechanic’s liens.  

The Fandel case involved a roofing contractor who had submitted a bid to replace the roof on the defendant’s home. The contractor provided the defendant with a written, itemized work order for the roofing work, which totaled over $9,000. The work order was not signed by the defendant, and the contractor failed to provide the defendant with the consumer rights brochure as required by the Home Repair Act. After the work was completed, the defendant issued a check for payment in full but later stopped payment on the check. The contractor filed a mechanic’s lien and then brought an action to foreclose on the lien. The trial court granted summary judgment for the defendant based on the contractor’s failure to comply with the Home Repair Act in obtaining a signed contract and providing the consumer rights brochure.  

However, the Third District Appellate Court reversed in stating that the Home Repair Act contains no explicit or implicit language indicating that the Legislature intended to provide homeowners with a private right of action to enforce the Home Repair Act or that the Home Repair Act provide an affirmative defense to mechanic’s liens. The Third District Court further noted that the defendant did not claim that she was not aware of her rights; rather, she simply maintained that the roofing contractor’s procedural errors in failing to comply with the Home Repair Act invalidated the mechanic’s lien as there was no valid contact. In its decision, the Court cited the Mechanic’s Lien Act (“MLA”) in stating that the MLA does not distinguish between oral and written contracts. Additionally, the Court stated that violations of the Home Repair Act do not automatically invalidate a contract. Instead, the Court explained that the roofing contractor’s violations of the Home Repair Act were simply due to oversights “grounded in ignorance of the statute” and that the consumer protection interests were not injured as the defendant received the benefit of the bargain. Moreover, all of the elements of a valid contract were present (offer, acceptance, and consideration).  

Accordingly, the Fandrel Court held that a valid and enforceable oral contract existed and that the contractor’s performance created a right to a mechanic’s lien. The Third District Court also added that a homeowner’s rights under the Home Repair Act may be asserted in a private cause of action under the Illinois Consumer Fraud Act where the homeowner sustains actual damages resulting from a violation of the Home Repair Act.

So, what do we now know? Given the different treatment of the Home Repair Act between the different courts, the Illinois Supreme Court may accept an appeal on this issue. Also, we will keep you updated on SB 2540, which would partially clarify parties’ remedies under the Home Repair Act. Until then, contractors must educate themselves on the Home Repair Act to ensure compliance as “ignorance of the statute” will, at best, subject you to lengthy and costly litigation.

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The Second District held as much in its recently released opinion in Thompson v. Gordon.  There, Plaintiff’s husband and daughter were fatally injured when the driver of a vehicle moving in the opposite direction lost control and vaulted over the concrete median separating traffic.  Plaintiff sued the engineer that designed the bridge deck and traffic area where the median was located, alleging the engineer was negligent in failing to design a median barrier that would have prevented the vehicle from crossing the median and causing the accident.  The trial court granted the engineer’s motion for summary judgment, relying on the services contract and holding that it did not require an assessment of the sufficiency of the median barrier and did not require the engineer to modify or redesign the median barrier.

On appeal, the Second District looked first to the plain language of the contract.  The court held that the contract required the engineer to submit design plans for a bridge deck “replacement.”  Viewing the contract as a whole, the court read “replacement” to mean that the engineer’s role was limited to submitting designs to recreate the bridge deck exactly as it had existed, rather than submitting designs for an improved or altered deck.  However, the contract also contained a provision stating that “[t]he standard of care for [defendants’] services will be the degree of skill and diligence normally employed by professional engineers or consultants performing the same or similar services.”  The court therefore concluded that the engineer labored under both of the above-mentioned duties.

Having determined the engineer’s duty, the issue then became whether the plaintiff provided any evidence that the engineer breached its duty.  In the court’s eyes, the plaintiff had proffered such evidence in the form of an expert report indicating that an engineer acting within the standard of care while creating plans to replace the bridge deck would have considered and designed an improved median barrier.  The court noted, “although the interpretation of defendants’ contract is indeed a question of law, our interpretation of that contract leads us to conclude that the contract imposed a professional duty of care on defendants’ work, and the extent of that duty (and whether it was breached) creates a factual question subject to expert testimony.”  Plaintiff’s expert report was, in the Second District’s opinion, sufficient to create questions of fact regarding defendants’ breach of duty and the judgment of the trial court was reversed.

 

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You may recall our discussion of the Second District’s decision in Artisan Design Build, Inc., v. Bilstrom, in which the Second District was faced with the same decision as the other districts have been faced with… what, if anything, does a contractor’s failure to comply with the Act mean for its claims against the homeowner?

The Second District interpreted the Act to mean that the contractor’s failure to provide the consumer with the brochure does NOT remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien).

“To hold that a failure to provide a consumer with the brochure allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief and a result the legislature could not have intended.”

In reaching this conclusion, the Court said it was looking to legislative intent, which is a phrase and methodology addressed in many of the cases involving this Act. However, the Court attempted to discover the legislative intent through reading the “plain language” of the statute but does not examine what the legislature had to say about the bill in debate or committee.

In Roberts d/b/a Roberts Cleaning, Maintenance and More v. Adkins, the Third District has now added its voice to the discussion and disagreed with the Second District. In, Roberts a contractor sued to enforce a mechanic’s lien and the homeowner asserted, as an affirmative defense, that the contractor violated the Home Repair Act by failing to provide a consumer rights brochure or a written agreement. The Court determined that the failure to obtain a written contract was a violation of the Home Repair Act and further determined that, “[W]hen a contract does not comply with the Act, it is invalid and cannot form the basis of a breach of contract action or an action to foreclose a mechanic’s lien.”

Stay tuned for further discussions regarding SB 2540, introduced by Senator Wilhelmi to address at least part of the confusion regarding the remedy associated with the Home Repair Act. The proposed amendment will entirely replace Section 30 of the Act to clarify and more accurately identify the remedies available to private parties under the Act.

 

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In the recent decision of Behl Construction v. Gingeric, the Fourth District addressed whether a plaintiff is precluded from recovering the amount he claims is due from a defendant when there was no signed contract and no delivery by him of the consumer-rights brochure to defendant, both of which are required pursuant to the Home Repair and Remodeling Act (Act) (815 ILCS 513/1 through 999 (West 2006)).  The Act requires that for any repair or remodeling work over $1,000, "a person engaged in the business of home repair or remodeling shall furnish to the customer for signature a written contract or work order." This contract or work order must meet certain disclosure requirements, including cost and the name and address of the construction company.  The Act also requires that "any person engaging in the business of home repair and remodeling shall provide to its customers a copy of the 'Home Repair: Know Your Consumer Rights' pamphlet prior to the execution of any home repair and remodeling contract"; the text of this brochure appears in the statute itself. 815 ILCS 513/20 (West 2006). The Act specifies that it is "unlawful for any person engaged in the business of home repairs and remodeling to remodel or make repairs before obtaining a signed contract or work order [when the amount of the work is] over $1,000."

Behl filed a complaint against Gingerich, alleging Gingerich had failed to pay Behl $15,500 for labor and materials plaintiff had provided under a construction contract to remodel defendant's home. Gingerich filed a motion to dismiss, claiming plaintiff was precluded from recovering any amounts from him because plaintiff had violated the Act. 

After trial, the trial court found in plaintiff's favor and awarded him $9,594.03 in damages. Defendant appealed, arguing that plaintiff could not enforce the contract due to the specific requirements of the Act or, in the alternative, if the contract was enforceable; the court erred in calculating the judgment amount. Plaintiff filed a cross-appeal, also arguing that the court erred in its calculation of damages on different grounds. Plaintiff also claimed the court erred in finding that his mechanic's lien was unenforceable as untimely.  There was no dispute that the work order that was provided by Behl wasn’t signed by Gingerich, and that Behl did not provide Gingerich with the brochure.  Accordingly the issue before the Fourth District was whether Behl substantially complied with the Act so as to allow him recovery from Gingerich.

                The court noted that the two pertinent provisions of the Act used the term “shall” (the contractor “shall” provide the brochure and “shall” furnish a contract for signature).  Typically, use of the word "shall" in a statutory provision indicates that the legislature intended a mandatory, rather than a directory, provision. However, a mandatory provision does not always require strict compliance. "Substantial compliance can satisfy even a mandatory provision." Jakstas v. Koske, 352 Ill. App. 3d 861, 864, 817 N.E.2d 200, 203 (2004).  The court looked at (a) the purpose of the Act to determine whether the purpose was achieved without strict compliance, and (b) whether Gingerich suffered any prejudice from Behl’s failure to strictly comply with the Act.  The court determined that the Act’s purpose was to improve communication between consumers and persons engaged in the business of home repairs or remodeling in order to "increase consumer confidence, reduce the likelihood of disputes, and promote fair and honest practices in [the repair and remodeling] business in this State."

                The court ultimately found that Behl substantially complied with the provisions and purpose of the Act by negotiating with Gingerich regarding the scope of the work and cost and by presenting Gingerich with a written work order, which contained the details of the project with "reasonable particularity" and included Behl’s business name and address as required by section 15 of the Act. The court further found that Gingerich was not prejudiced by Behl’s failure to strictly comply with every provision of the Act. 

The court based its decision on the fact that Behl and Gingerich, both engaged in the construction trades, negotiated the scope and cost of the project until they finally reached an agreement regarding the scope of the project. Before beginning construction, Behl supplied Gingerich with a written work order that represented their final agreement, which Gingerich did not dispute. The court also found significant that during the project, Gingerich paid Behl several draws, and the dispute between the parties was unrelated to Behl’s failure to secure Gingerich’s signature on a construction contract.

 

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 The Second District recently addressed this inquiry in American States Insurance Co. v. CFM Construction Co.  CFM Construction (CFM) was a general contractor which entered into subcontract agreements with NF Construction and International Decorators on a certain project. Under each of its subcontract agreements, CFM required NF Construction and International Decorators to name CFM as an additional insured on their respective general liability policies. NF Construction was insured by American States Insurance Company (American States), and International Decorators was insured by Michigan Mutual Insurance Company (Michigan Mutual). 

 

During the construction, Francisco Flores, an employee of International Decorators, was injured when he fell from a scaffold. Mr. Flores filed two separate lawsuits to be compensated for his alleged injuries. One lawsuit was against CFM and the other named NF Construction as the defendant. Both lawsuits claimed that the defendants negligently managed, supervised, and controlled the construction site.

 

The two lawsuits were consolidated, and CFM tendered its defense to Michigan Mutual. In turn, Michigan Mutual sought contribution for the defense of CFM from American States. However, American States denied the requested for contribution and filed a declaratory judgment action seeking a declaration that it had no duty to contribute to the costs of defending CFM in the Flores lawsuit. 

 

On cross-motions for summary judgment, the trial court ruled against American States, and American States filed its appeal. On appeal, the Second District Appellate Court held that American States owed a duty to defend CFM as an additional insured.

In the interim, the underlying Flores lawsuit was settled. Michigan Mutual paid $700,000 in the settlement, but American States only agreed to pay $200,000 on behalf of NF Construction and refused to contribute to the settlement on behalf of CFM.

 

On remand from the original appeal, American States filed a second amended complaint seeking a declaration that it had no duty to indemnify CFM. Michigan Mutual filed its counter-complaint seeking reimbursement for half of the $700,000 it paid to settle the Flores claims on behalf of CFM. Furthermore, Michigan Mutual sought attorney fees and prejudgment interest from American States. Again, on cross-motions for summary judgment, the trial court granted Michigan Mutual its requested relief, except for the attorney fees and interest.

 

American States again filed its appeal. In the appeal, American States argued that equitable contribution does not apply because the policies insured completely different risks. Generally, when an insurer has paid the entire loss, the doctrine of equitable contribution allows it to be reimbursed by other insurers that share the same liability as the insurer seeking contribution. This doctrine applies only where concurrent insurance policies insure the same entities and the same risks. The Second District Appellate Court held that equitable contribution applied as both policies insured the same risks.   

 

Nonetheless, the decision is puzzling as it fails to explain why CFM’s tender to Michigan Mutual did not foreclose Michigan Mutual from seeking equitable contribution from American States. See Kajima Construction Co. v. St. Paul Fire & Marine Ins. Co., 227 Ill.2d 102, 108, 879 N.E. 2d 305 (2007) (when an insured has knowingly chosen to forego one insurer’s assistance by instructing that insurer not to involve itself in the litigation, the targeted insurer has the sole responsibility to defend and indemnify the insured and is foreclosed from seeking equitable contribution from the other insurer that was not selected by the insured). 

Perhaps CFM’s tender to Michigan Mutual did not state that it was deselecting all other insurance and demanding that Michigan Mutual accept its tender on a primary and non-contributory basis. However, the American States Ins. Co. v. CFM Construction Co. opinion provides no explanation as to why CFM’s tender to Michigan Mutual did not foreclose it from seeking equitable contribution as explained by the Illinois Supreme Court in Kajima.

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In Diaz v. Legat Architects, et al.,  Nos. 1-08-3622 & 1-08-3635 consolidated, the plaintiffs, Jose Diaz and Maria Diaz, filed a complaint against defendant Boller Construction Company, Inc. (Boller), for personal injuries and loss of consortium. Mr. Diaz was injured when scaffolding he was working on collapsed.  Boller filed a third-party complaint against Mr. Diaz’s employer, Larmco Construction Company (Larmco), seeking contribution pursuant to the Joint Tortfeasor Contribution Act.  The jury returned a verdict for the plaintiffs and against Boller. The jury also returned a verdict for Boller and against Larmco. After reducing the award by the percentage of Mr. Diaz’s negligence, the jury awarded Mr. Diaz $1,246,875 on his negligence claim and Mrs. Diaz $50,000 on her loss of consortium action.

Following the filing of post-trial motions, the trial court ordered a remittitur of the jury award based on improper admission into evidence of future medical costs, reducing the personal injury recovery to $1,076,770.06. Further, the trial court granted Larmco’s Motion to Dismiss Boller’s contribution action (presumably based on Briseno, however, it is not specifically stated in the opinion). 

On appeal, Boller contended that it was entitled to a directed verdict or a judgment n.o.v. because plaintiffs had failed to show evidence of its liability pursuant to Section 414 of the Restatement (Second) of Torts. The jury had found Boller to be directly liable stemming from its failure to exercise supervisory control. The First District found that plaintiffs had established a prima facie case that Boller had retained sufficient control over project safety to incur legal responsibility for Mr. Diaz’s injuries. Specifically, the First District focused on the contract between Boller and the owner (which made Boller responsible for all construction means and methods), the testimony of Boller’s own retained safety expert to the effect that Boller was responsible for preventing injuries on the project and was required to maintain and supervise all of the safety precautions and programs in performance of its contract and the conduct of Boller’s superintendent in asserting his authority on site, having stopped excavation work on two prior occasions. 

Boller argued further that it could not be found directly liable because it had no notice of the dangerous condition, a precondition to direct liability under Section 414. Boller’s argument was that its superintendent was not familiar with the scaffolding utilized by Larmco and, therefore, could not be found to have actual or constructive knowledge of any safety hazard associated with the scaffolding. The First District disagreed, citing the contract requirement that Boller provide a competent superintendent. 

Further, it ruled that Boller was entitled to pursue its contribution action against Larmco for the amount of Boller’s liability not covered by the insurance provided to Boller by Larmco and that the trial court’s granting of remittitur was in error as to Mr. Diaz’s future medical expenses. The Court did not address Boller’s liability under Section 343 of the Restatement (Second) of Torts or plaintiff’s argument that the trial court erred in denying their motion to adjudicate the workers’ compensation lien. 

While this case appears to be another arrow in the plaintiff bar’s quiver against general contractors and construction managers, it should be pointed out that Boller’s contract with the owner in this case made it responsible not only for safety, but for all construction means and methods. 

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It’s still in its infancy, but Google Scholar’s beta version allows you to search scholarly articles, patents or legal opinions and journals. Here’s a sample search for “weather tite Illinois”

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According to the 7^th Circuit it does when someone seeks payment for those materials by submitting a claim to an insurance company. 

One method of recovering for materials on a site or at a shop that have been damaged by a storm or rain is to submit a claim to the property insurer. Most property insurance policies have an “in the open” exclusion.  The terms of the exclusion may vary, and that variance is important, but the exclusion is usually present.

Oddly, up until recently, the issue of interpreting the phrase “in the open” from a property policy’s exclusion hadn’t been litigated in front of the 7^th Circuit… which is where the case of Twenhafel v. State Auto Property and Casualty Ins. Co. (Doc. No. 08-4275) comes in.

The facts of the case from the opinion are worth reiterating in full:

“Twenhafel manufactures kitchen and bathroom cabinets. On September 22, 2006, a violent storm blew through Murphysboro, Illinois, where Twenhafel’s business is located. Before the storm, Twenhafel had some of the wood inventory he uses to make cabinets stored outdoors under an industrial covering or tarp. The tarp was secured with six-by-six oak beams and large concrete blocks which weighed about ninety pounds each and had been placed on top of the tarp. The storm lifted the tarp, along with the beams and blocks, and dropped them on the roof of a building about 150 feet away. As a result of the violent storm, the wood inventory was damaged by rain. The storm did not cause any other damage to Twenhafel’s property, except for some minor damage to the building’s roof, which was repaired by Twenhafel’s employees. The insurance policy State Auto issued to Twenhafel was an “open peril” policy which covers all losses unless specifically excluded under the terms of the policy. Twenhafel made a claim under the policy for the loss of his wood inventory. State Auto denied Twenhafel’s claim, relying on the following specific policy exclusion:

CAUSES OF LOSS—SPECIAL FORM

B. Exclusions

2. We will not pay for loss or damage caused by or resulting from any of the following:

. . . .

j. Rain, snow, ice or sleet to personal property in the open.”

The plaintiff filed suit to recover the money for the damaged lumber from his insurance.  The trial court found in favor of the plaintiff and the insurance company appealed the determination.

The appellate court agreed with the district court that the phrase “in the open” was commonly understood to mean something that was “exposed to the elements” and not simply “outside.”

In reaching this determination the court pointed other cases that also offer examples of stored materials at a construction site being damaged by the elements and other courts’ determinations.

One case the court analogized to that provides another example of this form of storage was Victory Peach Group, Inc. v. Greater N.Y. Mut. Ins. Co., 707 A.2d 1383 (N.J.Super.Ct.App.Div.1998)

In the Victory Peach case from the New Jersey Appellate Court, the plaintiff stored personal property in a building with a damaged roof that was being repaired.  Tarps were nailed over portions of the roof because the repairs couldn’t be completed in one day.  A rainstorm blew the tarps off the roof and water got into the building and damaged the plaintiff’s stored property.  The policy exclusion was similar and the New Jersey court found for the plaintiff against the insurance company holding that nothing in the method of protecting the property left it open to the elements.

Another example in the court’s finding came from a case in Texas and can be found in the opinion, in that case, there was no reimbursement for the damage to steel at a construction site after a rain storm, but it involved slightly different “in the open” exclusion language that included rust.

One thing is for certain, don’t cover the materials at a site with newspapers… the opinion and the oral argument took pains to contradict an “absurd” position from the insurance company:

“State Auto contends that equating the phrase “in the open” with “exposed to the elements” would lead to an absurd result because such an interpretation does not take into account the adequacy of the protection in question. State Auto argues that, under such an interpretation, a pile of wood covered by newspapers would not be “in the open” because the wood was not “exposed to the elements.” We find State Auto’s contention without merit because a reasonable person would not think that newspapers would protect property from exposure to the elements. Therefore, the interpretation does not lend itself to absurdity.” Slip Op. at 9.

The oral argument in this case is filled with the questions from the judges posing “construction site” hypotheticals to the attorney and can be heard here.

The lessons are not only to remember to make sure that there’s some policy covering the materials that are stored at a site or at a shop, but also to make certain that the way they’re preserved at that location doesn’t keep someone from getting paid if they’re damaged.

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We’ve been lax lately in getting our readers interesting district court opinions on topics that are facing the industry. Today we’re pleased to rectify a small portion of that delinquency with this written opinion from Judge Goldberg regarding an engineer’s motion to dismiss a negligent misrepresentation claim.

The facts of the case from the opinion detail the parties’ involvement in the City of Chicago’s Façade and Circulation Enhancement Project (“FACE Project”). After it was apparently sued by the City for breach of contract in connection with the construction of the FACE Project, a general contractor on the project brought a suit against an engineer hired by the City. The general argued that the engineer was hired by the “City to provide testing and review of welds and steel related to the FACE Project.” The general contended that this created a duty on the part of the engineer to advise the general, among others, of any defects that it found. Although its not apparent from the order, you can guess that the general was trying to pass through some form of damage liability, likely based on defects or errors in the welds, to the engineer.

Why is this important? In short, it is important because the economic loss doctrine usually allows architects and engineers in the state of Illinois to avoid suits based in negligence where part or all of what they were contracted to do involved creating plans and specifications and providing information that was ancillary to the construction of a building – a final project. The doctrine forces those seeking recovery against a design professional to bring an action based on the breach of the contract, the breach of the commercial expectation in the end product, the building. One of the exceptions to this rule is carved from an enterprise where the design professional is hired, not to render some end product, but to provide information with no tangible result.

Perhaps the most-cited Illinois appellate authority for not allowing a suit against a design professional in negligence when their job has involved both the creation of plans and specifications and the provision of testing and information is a 1^st District case from 1999, Tolan and Son, Inc. v. KLLM Architects, Inc, et al (Doc. No. 1-98-2581). Tolan recognized the distinction between the different activities of the design professional and chose not to split hairs when both inspections and plan design performed by a design professional took place during construction of the project. Tolan ultimately held that the dual tasks of both design and inspection could not be bifurcated where the design professional created an end product:

“Based on the foregoing, we find that KLLM and Walter's work cannot be bifurcated. They were not retained to provide an analytical end product. They were retained to design and construct the townhomes. The information supplied by them during the course of construction was incidental to the tangible object--the townhomes. Therefore, the circuit court properly granted their motions to dismiss.”

What is interesting about the Tolan decision is that it extended the economic loss rule to a situation involving the design professional both prepared plans and rendered an opinion outside the scope of the plans, but within the scope, temporally, of the construction project as a whole.

This temporal factor finds its way into the analysis in the instant opinion. The opinion does not state that the engineer in this case prepared plans and specifications – “[the engineer’s] work on the FACE Project was to provide testing and review of the work performed by [the welder], to ensure compliance of the work with the Contract Documents and the approved shop drawings.” The analysis finds that because this work was taking place during the construction process, it was ancillary to the construction and design of the project and therefore the economic loss doctrine barred a negligent misrepresentation suit against the engineer pursuant to Tolan.

This raises some unique issues.

What if the construction had concluded and the test was being performed after substantial completion? One year? Three years?

Does the portion of the Tolan opinion relative to the defendant “Reiss” imply that a design professional who supplies an opinion but not plans and specifications will not be exempt from negligent misrepresentation claims when the information is not supplied during construction?

Does this opinion create a distinction between an opinion for the guidance of others in their business transactions and “inspection information and review” for the purpose of insuring compliance of the end product to the Contract Documents? 

It is likely that we will be seeing answers to some of these new questions now that we’ve broached the topic.

 

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Post hoc ergo propter hoc may be a logical fallacy, but the alternative, the maxim that an event could not be caused by an occurrence happening afterward, sort of an ante hoc ergo non propter hoc finds some harbor in the law. This is the case in the recent opinion of Rock v. State Farm Fire and Casualty Co. (Doc. No. 3-08-0915).

In Rock, there was an underlying case where home purchasers brought a complaint against the sellers of their home for fraudulent, knowing, reckless and/or negligent misrepresentation, based on some false representations they allege were in the property disclosure statements regarding the foundation, mold and water infiltration. The purchasers claimed that the false representations caused them damage through the loss of value to their home, loss of their “bargain” in the purchase, and the cost of remediation.

The sellers won the underlying case and then had a dispute with their insurance company about whether or not the insurance company should pay for the defense of the suit against the sellers pursuant to the terms of an insurance policy. The policy’s terms stated that:

State Farm would provide a defense “[i]f a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage to which this coverage applies, cause by an occurrence.”

An “occurrence” was defined as “an accident, including exposure to conditions” that results in bodily injury or property damage.

“Property damage” was defined as “physical damages to or destruction of tangible property, including loss of use of this property.” 

The trial court heard the parties arguments on the matter and found that State Farm owed a duty to defend the Rock’s in the suit brought by the buyers. State Farm appealed the decision and the appellate court reversed the decision of the trial court. The appellate court held that the damages alleged by the buyers were economic and not caused by the misrepresentations. The court also noted that there was no allegation of “physical damage” to the home occurring after the misrepresentations and therefore the misrepresentations related to past or existing damage and could not have caused the past or existing damage.

The Third District agreed with the Second District’s in Stoneridge Development v. Essex (which we wrote about here) that claiming the cost of repair and diminished value as damages is actually claiming economic loss and not property damage. This is because the damages that are referred to in the suit happened prior to the misrepresentation, they cannot be caused by the misrepresentations. As the court held, these “lawsuit[s] pertain… to the nondisclosure of the damage, not the damage itself.” Slip op. at 8. The court also held that the phrase “loss of use of this property” included in the “Property damage” definition modified and referred to “physical damages” and “destruction” and held that the loss of use must be accompanied by the physical damage or destruction.

In a dissent by Justice Lytton, those opposing this view will find some comfort in an acknowledgment of a line of Illinois cases stating that “unknowing” or “reckless” misrepresentations are adequate to establish an “occurrence” under such a policy.

The interesting point to take away from the opinion is for those in the business of supplying information who may be subject to a claim of negligent misrepresentation. There’s a real need to check the policy language governing the coverage you’ve purchased to make sure that your potential liability is covered in the manner it’s believed to be covered.

 

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We’ve been writing with updates regarding the recent decisions by the differing appellate district’s in the state on whether causes of action can exist for payment when a contractor has failed to follow the requirements of the Illinois Home Repair and Remodeling Act (815 ILCS 513/1 et seq.) The debate between the districts is fast becoming an issue that the Illinois Supreme Court should decide given the rampant differences in the manner non-compliance with the act is treated depending on which appellate district the non-compliance occurred.

Adding clarity and insight to this debate is a post from one of the best construction law blogs out there. Josh Glazov’s Construction Law Attorney Blog (based right here in Chicago). This recent post discussing both our articles and additional information concerning the reality of the way some trade associates are dealing with informing their members about the act, its requirements and offering recommendations about how to go about complying with the act is worth a read.

What’s also worth reading are the posts Mr. Glazov recently did on FDIC takeovers and how they can affect your projects along with these fun discussions of his recent jury duty on a case picked up and reported on in the Chicago Tribune by Ameet Sachdev.

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Ezra Klein had an interesting piece back in June discussing Wendell Potter’s frank testimony about the insurance industry in front of the Commerce Committee. The testimony and the piece relate to healthcare, but the notions reflected in the article about profit motives and the need to sustain a business by generating money apply to any enterprise in the industry. Rightfully so. We need insurance to mitigate risk that businesses might otherwise not be able to justify taking if the prospect of excessive liability would fall to them directly. The coverage afforded by insurance is sometimes duplicative. 

Two companies can be faced with covering the same loss and in that instant it becomes worth their while to attempt to avoid paying or to shift the burden of paying to the other company. Many times, the business that is insured plays a role in deciding which insurance company will be faced with the prospect of both defending a claim and possibly paying out on it. Choosing between the companies, tendering defense of the claim to one and not the other is known as “targeting tender”. Targeting tender is a crucial tool for policy holders. In a choice between your policy and the policy of a sub, choosing to be defended under the sub’s policy can keep your premiums down and reduce costs over the long-term.

In a recent Illinois case, State Auto Property Casualty Insurance Co. v. Springfield Fire & Casualty Co. (Doc. No. 4-08-0977) the fourth district has held that where a company has two policies that it has purchased, as well as a situation where under contract one company is named on another company’s policy, it still has a right to select which of the policies it is seeking coverage under and which it is not. This is the case even where one of the policies may have a provision saying that if the insured is covered by more than one policy, it will be “other-insurance” and should be considered as excess insurance. But a crucial element to maintaining the right to “deselect” one of the policies is that it can never be triggered or tendered towards to begin with.

In essence, the court has stated that the right to select coverage is not superceded by an insurance policy’s “other-insurance” provision so long as the insured never triggers one of the policies. Basically, one of the policies has to never be activated by the tender of defense. Additionally, unlike the requirements of targeting tender when more than one insurer has been selected, the act of tendering in a situation where only one is active does not require the letter requesting coverage to inform the insurer that it is being looked to as the sole insurer for the matter.

 

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Restrictive covenants can make or break the real estate purchase/financing underlying the project. They run the gamut of justifications from restrictions for safety and public welfare all the way to terms for convenience of access and rules governing aesthetic choices. Generally they are enforced by the courts and a recent Appellate Court case shows that there may be creative alternatives for circumventing restrictions that might otherwise keep a project from going forward.

The restrictive covenant that a developer wanted to invalidate in Vo-Land, LLC, v. The Village of Bartlett (Doc. No. 1-08-0632) was an agreement to keep land developed in 1987 from being used as something other than open-space.

Vo-Land was the subsequent owner of a 107 acre parcel of property in the Village of Bartlett. In 1987, the previous owner had entered into a covenant with the Village that allowed it to construct 1,875 residential unites on its property provided that 96 acres of the site be maintained as a golf course or other open space. Vo-Land later took ownership of the property.

In 2004, Vo-Land sought to amend the zoning for the property and wanted to close the golf course, reduce the 96 acre open space mandate to 51 acres and build 350 new residential units on the remaining golf course land. The Village board denied Vo-Land’s request and refused to release the restrictive covenant and also denied Vo-Land’s request to have the zoning of the parcel amended.   That wasn’t the end to Vo-Land’s quest.

The owner brought an action asking the court to void the restrictive covenant, or, in the alternative, to force the village to allow it to apply for amended zoning – a petition for disconnection for the property from the village pursuant to Section 7-3-6 of the Illinois Municipal Code.

“Section 7-3-6 of the Illinois Municipal Code provides that property owners may have land disconnected from a municipality by court proceeding if the property: "(1) contains 20 or more acres; (2) is located on the border of the municipality; (3) if disconnected, will not result in the isolation of any part of the municipality from the remainder of the municipality, (4) if disconnected, the growth prospects and plan and zoning ordinances, if any, of such municipality will not be reasonably disrupted, (5) if disconnected, no substantial disruption will result to existing municipal service facilities, such as, but not limited to, sewer systems, street lighting, water mains, garbage collection and fire protection, (6) if disconnected the municipality will not be unduly harmed through loss of tax revenue in the future." 65 ILCS 5/7-3-6 (West 2002). The Code further provides that "[i]f the court finds that the allegations of the petition are true and that the area of land is entitled to disconnection it shall order the specified land disconnected from the designated municipality." 65 ILCS 5/7-3-6 (West 2002).”

The trial court supported the validity of the covenant and even went so far as to hold that Vo-Land was estopped from challenging its validity. The previous owner had agreed to keep the restrictive covenants conditions in place for 35 years in exchange for being allowed to develop portions of the property. Much like any other form of contract, Vo-Land would not be allowed the benefit of the zoning variance that allowed the initial construction without the open-space restrictions that gave a benefit to the village. The appellate court agreed.

The appellate court also agreed that Vo-Land was entitled to have its property disconnected from the municipality, thus rendering the restrictive covenant moot. Of the six factors listed above, the village fought the disconnection based on the third factor arguing that a water station would become isolated if the 107 acres were no longer part of the village. The water station was actually across a road from the acreage and that road, with a highway right-of-way owned by the village, was the only place that the village actually touched the water station’s parcel as well. The courts found that disconnecting the Vo-Land land would not lessen the touching between the water station property and the village.

This solution, a creative way of circumventing the municipalities decision to deny releasing the restrictions, was available because the restrictions imposed on the developer did not also include covenants restricting an owner of the 107 acre’s ability to disconnect from the village – something that could have been included by the municipality in 1987.

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In limiting and answering a certified question regarding Section 5(b) statements under the Illinois Mechanic’s Lien Act, the First District has opened the door to another interesting question in light of the Illinois Supreme Court’s recent Weather-Tite decision.

The case is Crawford Supply Company v. Schwartz, et al. (Doc. No. 1-09-0900) and the question presented was:

“Where a subcontractor asserts a claim for lien on an owner-occupied single-family residence and serves a 90-day notice as provided in Section 24 of the Mechanics Lien Act, does the subcontractor’s failure to serve a 60-day notice as provided in Section 5(b) of the Mechanics Lien Act render the claim for lien invalid?”

The scope of the question was narrowed by the court:

“We interpret the certified question to ask only whether plaintiff’s failure to serve a 60-day notice as provided in section 5(b) of the Act renders plaintiff’s claim for lien invalid as a matter of law.” (Slip Op. at 8).

The answer to the question was “no,” but the resulting discussion implied that a payment turned over to a general contractor that was not passed on to the sub might constitute prejudice to a home-owner under Section 5(b)(iii) of the Act. If it does, then its possible that Section 5(b)(iii) would allow for a different outcome than Weather-Tite (an owner paying the sub’s fee twice where the fee didn’t get to the sub the first time), which did not implicate 5(b)(iii) or owner-occupied single-family residences.

In Crawford, a sub sued the owner of a single-family owner-occupied residence to foreclose on a mechanic’s lien that it filed when it wasn’t paid for the plumbing supplies it delivered. The sub did not provide the home-owner with the 60-day notice required under Section 5(b)(ii) of the Act which requires that a sub on a project at an owner-occupied single-family residence provide the owner or agent with a statutorily specified notice and warning letting the owner know the name and address of the sub, the dates or its work, and the type of work. Owner-occupied single-family residences are different where many owners are not considered the sophisticated construction owner/consumers of commercial or large scale residential projects; the Act, along with other statutes, affords the unsophisticated owner a few added protections.

The owner moved to dismiss the action brought by the sub arguing that the failure to provide the required 60-day notice invalidated the lien. The trial court certified the question above. The appellate court held that the failure to serve the 60-day notice did not invalidate the lien. To hold as much contradicted with Section 5(b)(iii) and would read it out of the Act.

Section 5(b)(iii) states that the failure to serve the 60-day notice after the 60-day time-period will preserve the lien “only to the extent that the owner has not been prejudiced by payments made before receipt of the notice.”

The owner in Crawford had argued that since it never received the 60-day notice, the lien was invalid, although the owner had received the 90-day notice subcontractors must file under Section 24 of the Act (the court found that a 90-day notice substantially complied with the requirement for a 60-day notice). The appellate court found that because there had not yet been any evidence of prejudice and the 90-day Section 24 notice sufficed, Section 5(b)(iii) meant that the lien was not invalid as a matter of law and the claim made by the sub could go forward.

What is important here is that twice during the discussion of the matter the court noted that the owner had not yet introduced evidence of prejudice, and that prejudice might be shown by arguing that the owner had already made payment to the general for the sub’s work because the sub failed to provide the Section 5(b)(ii) notice. 

This would mean that although the situation is comparable to Weather-Tite, where payment was tendered, but it didn’t make it to the sub, there is a conceivable situation where, at least with owner-occupied single-family residences, the owner might not have to pay twice if it made payment without getting the Section 5(a) notice. For those working on single-family residences, supplying the 60-day notice is now extremely important.

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2009 has been an exciting year for Section 5 of the Illinois Mechanics Lien Act. The Illinois Supreme Court’s Weather-Tite decision set the record straight regarding the failure of an owner to withhold the funds delineated in a Section 5 statement, and the 2^nd District’s recent case of Weydert Homes, Inc. v. Kammes, is reiterating some of the other basic rules regarding the Section 5 statement.

Apart from holding that the Section 5 statement must be sealed/signed by an officiant as we discussed yesterday, Weydert is worth reading for the court’s discussion of a few other salient points:

• Perfection of the lien claim is not tied to providing a Section 5 statement. Whether or not an owner has requested the statement and whether or not it has been provided by the contractor are irrelevant issues to determining whether the lien is properly recorded under the statute.
• Provision of a Section 5 statement is predicate to enforcing the lien claim. The court refused in Weydert to address the absurdity of an owner continually requesting Section 5 statements to preclude a valid foreclosure by the GC. The holding did reaffirm the notion that the failure to provide the statement upon a valid request would defeat a lien claim.
• An owner must require the statement before paying the contractor any monies. This means that asking for the statement and then paying money before the statement is received may waive the protections.
• The failure to provide the Section 5 statement may not preclude a claim for breach of contract or quantum meruit if the owner is not prejudiced by the possibility of additional, undisclosed, subcontractor claims arising after the enforcement of breach of contract or quantum meruit actions have begun.

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Here’s a bit of trivia for today. The name of the clause at the foot of an affidavit or any other oath administered by an official that describes when where and in front of which official the oath was sworn is called the “jurat.” Jurat stems from the latin, juratum “sworn,” which conjugates from the verb jurare “to swear.”

This small clause and the seal of the notary or other official are very important. They distinguish and oath from simple swearing under the Illinois Oaths and Affirmations Act (5 ILCS 255/0.01 et seq.).

While many of us in everyday life make very little distinction between swearing to something before God and swearing to something before another person, the law makes a distinction between written attestations made in front of a person with the authority to administer oaths and simply making the oath, written or not, without the presence of such authority.

Oaths differ from affidavits:

"An oath, which has been defined as any form of attestation by which a person signifies that he or she is bound in conscience to perform an act faithfully and truthfully, is distinguished from an affidavit, which is a voluntary written statement of fact under oath sworn to or affirmed by the person making it before some person who has authority under the law to administer oaths and officially certified by the officer under his or her seal of office. The difference between an affidavit and an oath is that an affidavit consists of a statement of fact, which is sworn to as the truth, while an oath is a pledge." 58 Am. Jur. 2d Oath & Affirmation §3 (2009).

And not all oaths are equal… which is the point of this first post regarding the recent case of Weydert Homes, Inc. v. Kammes, et al., (2^nd Dist. Doc. No. 2-08-0768).

The sanctioned method of demonstrating that the oath was made in front of the proper authority is the presence of the officiant’s seal in the jurat.  Proving that the attestation is a proper “oath” becomes more difficult without the seal.

The distinction between an oath with a completed jurat and one without such an attestation is critical to today’s case and to future assurances that Section 5 of the Illinois Mechanic’s Lien Act (770 ILCS 60/5) has been complied with.

Section 5 of the Act requires that the statement to the owner, made by the contractor at the request of the owner before amounts are paid which delineates the monies owed to the subcontractors must be “in writing, under oath or verified by affidavit.” In Weydert, a general contractor seeking to assert a mechanic’s lien claim provided a statement to the owner. The GC claimed that the statement was a Section 5 statement, and the owner argued that the statement could not be a proper Section 5 statement where the GC’s president had signed the statement which said that it was “under oath”, but the jurat at the bottom of the statement had not been completed.

The trial court dismissed the mechanic’s lien claim. The issue was presented to the appellate court.   The appellate court also invalidated the lien and found that there was a distinction between both affidavits and oaths under the mechanic’s lien act because the word “or” was used in the language of Section 5.   The appellate court also held that Illinois’ law codified the requirements of an oath under the Oaths and Affirmations Act. The Oaths and Affirmations act requires that a required oath shall be administered by a person empowered to administer such oaths, namely, a court, judge, clerk of court, county clerk, deputy county clerk, Secretary of State, notary public, certified shorthand reporter or a commissioned officer in active service of the US armed forces.

The failure to have the jurat completed meant that the statement did not comport with Section 5.

Apart from the obvious lesson regarding the need to have the Section 5 statement notarized or signed by a recognized officiant, the distinction between an oath and an affidavit should be of some interest to those consistently confronted with affidavits attempting to establish legal conclusions to advance cases rather than properly limiting their attestations to statements of fact.

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The district split that we identified in our posting about K. Miller Construction Company, Inc. v. McGinnis (1^st Dist. Doc. No. 1-08-2514) has another fracture. Last week, the Illinois Second District Appellate Court handed down its decision in Artisan Design Build, Inc. v. Bilstrom (2^nd Dist. Doc. No 2-08-0855).

In case you don’t feel like re-reading, the split is over the Illinois Home Repair and remodeling Act (815 ILCS 513/1 et seq.) and whether the failure of a contractor to comply with the act will strip the contractor of the right to recover monies that it is owed or whether the failure to comply with the act bars certain claims but not others. For instance, a contractor may be owed $10,000 for a job, but failed to provide a copy of the pamphlet required under the act – in the fourth district, this would be a bar to all claims for payment including mechanics liens, breach of contract claims, unjust enrichment claims and the like. In the first district, the failure to provide the pamphlet would not currently bar an unjust enrichment claim but would bar the mechanic’s lien claim and the breach of contract claim given that the act calls contracts made in contravention of its requirements “unlawful” and unlawful contracts are void. (see K. Miller above.)

Now comes a new wrinkle. 

In Artisan, the plaintiff was a contractor who claimed it was owed in excess of $208,695.69 for construction work on a house in Hinsdale, Illinois. The plaintiff wasn’t paid and sued the owner alleging it had a mechanic’s lien for the sum, that the owner had breached the contract, and also pled a claim for unjust enrichment (even if there wasn’t a contract, the owner benefited from the work and should have to pay for that work).

The owner asked the district court to dismiss the case because the plaintiff had failed to provide the owners with the brochure, had failed to commence or complete work within the contracted time period, and didn’t maintain insurance. The district court dismissed the case on the basis that the plaintiff admittedly did not furnish the owners with the consumer rights brochure. The plaintiffs appealed and asked that the appellate court overturn the decision.

The Second District was faced with the same decision as the other districts have been faced with… what, if anything, does a contractor’s failure to comply with the act mean for its claims against the home-owner?

The Second District interpreted the act to mean that the contractor’s failure to provide the consumer with the brochure does NOT remove the contractor’s right to recover in either equity (quantum meruit) or law (breach of contract, mechanic’s lien).

“To hold that a failure to provide a consumer with the brochure allows the consumer to defeat all legal and equitable claims by the contractor would lead to mischief and a result the legislature could not have intended.”

In reaching this conclusion, the Court said it was looking to legislative intent, which is a phrase and methodology addressed in many of the cases involving this act. Oddly, apart from attempting to interpret legislative intent through reading the “plain language” of the statute, none of the cases attempt to examine what the legislature had to say about the bill in debate or committee.

Many of the transcripts of the Illinois Legilsature’s general session debates dating back to 1971 are available online. These transcripts include debate on House Bill 1177 from the 91^st General Assembly’s session in 1999 that became the Home Repair and Remodeling Act. Of note from the debates are the main debate from the House after the final reading of the bill, and the similar debate from the Senate.

From the Senate and House transcripts on the matter, we see that there was not only opposition to this bill on the part of people who felt the bill just added an extra hoop for honest contractors to have to jump through without punishing the ne’er-do-wells who were the reason for the bill, but that the main justification for its passage was the protection of seniors and unwary consumers. Another point was the information this bill would force on people having their homes repaired – like the rights involved in contracting, an up-front contract price, and – after a 1994 amendment – a knowing acceptance or relinquishment of arbitration and the right to trial by jury. The debates focus on the Attorney General’s ability to prosecute and say nothing about voiding contracts or allowing a private right of action (an issue heavily debated by the justices of the Courts).

During the original House debate, representative Winters had these closing remarks,

“The Attorney General of the State of Illinois has listed home repair fraud as the #1 consumer complaint in their offices. Over the last five years, they average almost 500 complaints from consumers a year of being ripped off by artists who simply go up and down the street looking for the elderly, looking for the unprotected, looking for the uninformed. This Bill seeks to inform the consumer, it is not onerous to the contractors, a simple brochure and contract language is all that it requires….

“The only way that the criminal provision in this would be put forward is in fact that the State’s Attorney or the Attorney General can find a consistent pattern of fraud. And it is only a civil penalty in this Bill, it is not criminal. We have other criminal statutes under deceptive business practices. This Bill is simply civil penalties for failing to have the brochure disseminated and signed off by the consumer. It is a great consumer protection Bill, very little burden to the, to the contractors of this state. And I would urge adoption of this Bill.” [emphasis added]  IL H.R. Tran. 2000 Reg. Sess. No. 55

The failure to have the brochure passed out and signed off on was to be the ground for a penalty… and not just the loss of the right to arbitrate or to have a trial by jury, that provision wasn’t even part of the act until 1994, so the statement that there would be a penalty for failure to have the brochure passed out contemplated some other form of a civil penalty.

The notion that there should be some form of a penalty for failure to comply with the act by passing out a brochure along with the “shall” language of the act's requirements seems to make more sense when interpreted with the loss of the legal rights given the nullification or voidance of any contract between parties subject to the act where the act hasn’t been complied with. But again, that reading means that Section 35 of the act giving the AG and SAGs the power to enforce the act is not the sole mechanism for enforcement… If the act was to help seniors, did that really mean that the legislature wanted the “500” annual complaints referenced by representative Winters to be handled solely by the AG’s office? Wouldn’t it make more sense to allow Seniors to void any contracts and eliminate mechanics liens where the act hasn’t been complied with… if, as discussed in the General Assembly’s debates, compliance was as simple as handing over a brochure?

Another issue comes out of the transcripts of the assembly’s deliberations – that of the knowing contractor vs. the unwary contractor.

Back in March of this year, we discussed a case called Kunkel v. P.K. Dependable where the 5^th District decided that a contractor guilty of a violation under the act wouldn’t have to pay the attorneys fees of a home owner forced to go to court and pay an attorney to prosecute this kind of action if the contractor didn’t “knowingly” not comply with the act.

Interestingly, the Assembly transcripts show that the “knowing” issue was also important to the legislature and they expected the contractors to know about the act and also thought other State agencies as well as trade associations would hand out brochures and increase awareness… but in the end, that “knowing” would not be an issue.

The best way to make sure there are no problems is to comply with the act.  The brochure is linked above and getting the homeowner to sign off on it, having insurance, and delineating the terms of the project in a written contract or statement are what the act requires.  No home-owner should be allowed to reap a windfall for the failure to turn over the pamphlet, but if allowing a few wind-falls finally forces everyone to comply with the act, which is what the legislature intended, it is not unlikely that a few more courts may award a few wind-falls to accomplish that.

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If people really bought into the adage that you can’t fight city hall, or at least the asserting-your-rights-against-a-state-seeking-to-infringe-on-them principle that it represents, we’d all be British subjects. In truth, we’d be a lot of things, likely all the same things given the unusual mandate authority consistently seems to have for homogeny. But this post isn’t a lesson about the Shakman decrees or the recent end of the Chicago Desegregation order or any other lesson in the history of fighting city hall. It’s a new chapter in the fight and it involves challenging public works projects... anyone thinking they might need to fight city hall or challenge bid awards when Chicago’s 2016 Olympic dreams are realized will want to bone up on the proper procedures for fighting city hall… which is what today’s case is all about.

The plaintiff’s in Ziller v. Rossi (Doc. Nos. 2-09-0511 and 2-09-0592) were fighting town hall, literally… they wanted to keep it from being built, and based on their town board’s inadequate notices for the issues to be discussed at town meetings and improper requests for funding in light of pending requests to present the issues to the electors of Grafton Township, they were successful. 

The board was attempting to enter into lengthy installment contracts and pledge public funds in excess of $3.5 million in debt certificates in order to purchase land and construct a new town hall. Plaintiffs were a group of individuals who sought to challenge the board’s authority for the action given the board’s failure to follow the proper statutory procedures and rules for acting in such a manner.

In 2007 and in 2008, the board had voted to purchase land for, and construct, the town hall, but had failed to properly place notification of these actions on the notice of the meeting that was required to be distributed prior to the meetings. They had also passed an ordinance in a similar manner for financing the projects. The plaintiffs challenged the action and sought an injunction from the court to stop the board from taking any steps towards purchasing the land, financing the purchase, entering into construction contracts for the town hall, or constructing the town hall because the notices for the meetings were in violation of the Illinois Township Code (60 ILCS 1/1 et seq.).

In addition to claiming that the board had violated the Township Code and that because of the violation, the boards actions were void, the plaintiff’s also followed the code and submitted their own petition to submit the town hall issue to the electorate during an election rather than allowing the town board to vote on the matter and bind the citizens. (In addition to other issues, the town code allows citizens to submit petitions requiring that question of constructing a town hall, be put to the electorate during the general election and not decided by the town board when appropriate). The plaintiffs sought a second injunction compelling the clerk to certify the question in their petition to the proper election officials to be submitted to the electorate at the general election.

The trial court granted the plaintiff’s request for an injunction and told the board that it could not obligate the township and that its previous actions had not comported with the requirements of the township code and required clerk to certify the question. The town board appealed the decision and the appellate court’s opinion upheld the decision of the trial court. The township code must be followed and the petition should be submitted to the electorate for a vote.

Few issues are as publicly contentious as the use of common property, this is why the procedures for addressing these issues are so heavily detailed in statute. The greater guidance for public deliberation and decision regarding the commons, the less chance a party has to feel like they were not given a voice and heard… This assumes the procedures were followed. When the procedures aren’t followed, not only is it more likely that trouble will result, it is more likely that someone is attempting to assert their rights over another and that the assertion may not be entirely justified or proper.

The municipal codes, county codes and township codes and local government regulations of the State of Illinois are an interesting mix and rarely do the issues of electoral procedure become so entwined with issues of construction, zoning, environmental law and even the private rights of citizens against each other… If you want to fight city hall, the first thing to know is how to fight city hall, and the Illinois statutes, along with the city’s own codes are a good place to start.

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If there’s one thing our legal system abhors, it’s a lie. Apart from just making a decision about liability or guilt, juries help ferret out the veracity of our fellows by listening to live testimony and making a decision about credibility. The success of a lie, its perpetration on our populace, can shake the foundational beliefs regarding the just nature of our judicial process. 

Lie takes on many names. The fun lie of what is possible is fiction. The lie under oath is perjury. The damaging lie we are concerned with today is fraud.

In our previous posts on the case of Cordeck v. Construction Systems, Inc., we have discussed the issues raised by a bank, FMB, with a mortgage on a property against which two mechanic’s liens were filed and foreclosed on. (The liens and the appellate briefs of the parties can be found in the earlier posts) One lien was filed by a contractor, CSI, the other, by the contractor’s sub, Cordeck. Cordeck’s lien alleged that it was owed over $1 Million for work on the project because it had performed close to $1 Million under the contract and $500 thousand in extras and had only been paid $500 thousand.

During discovery on the issue of work performed, Cordeck only supplied evidence of $100 thousand in extra work – the other $400 thousand was not substantiated by the documentation produced. After this revelation, Cordeck apparently settled its claim for the extra work with the general, CSI and amended the Cordeck lien by reducing more than $500 thousand. In the trial court, the bank, in challenging the Cordeck lien, made the argument that the magnitude of the reduction compelled the conclusion that Cordeck’s initial lien claim was intentionally overstated and should therefore be invalidated.

The operative principle here is that “where a lien claimant knowingly files a lien containing a substantial overcharge, the claim should be defeated on the basis of constructive fraud.” Much like timeliness, constructive fraud is a lien defeating issue. A finding of constructive fraud as a result of an intentional overstatement of the amount invalidates the entire lien. The overstatement is not enough to prove an intent to defraud, constructive fraud must be proved though additional evidence from which the intent to defraud can be inferred. (Slip Opinion at 9).

In its opinion, the appellate court provides a litany of examples of overstatement invalidating a lien claim and additional evidence as proof of constructive fraud:

“In Lohmann Golf Designs, Inc. v. Keisler, 260 Ill. App. 3d 886 (1994), the contractor filed liens against each of three separate properties for the full amount of the total claimed to be due, resulting in a total lien filing of triple the outstanding debt. 260 Ill. App. 3d at 891-92. In Fedco Electric Co. v. Stunkel, 77 Ill. App. 3d 48 (1979), the contractor's president admitted that his lien total had intentionally overcharged and undercredited the property owner, apparently due to animosity resulting from prior difficulties in collecting payment. 77 Ill. App. 3d at 50-51. In Marsh v. Mick, 159 Ill. App. 399 (1911), the court found that the contractor's overcharge was a claim for the full amount of a contract that it had not completely performed; the court also found that the overstated liens were intentionally filed to compel the property owners and other lienors to pay him an "unjust amount." 159 Ill. App. at 405.”

The appellate court found that at the trial court level, the bank had not produced any such additional evidence of an intent to deceive, but took note of the fact that the bank had been denied a copy of the settlement agreement between the sub and its general. The Court held that the potential relevance of the settlement agreement was evidenced by the facts that the general’s original answer to the sub’s complaint stated that the sub’s work was substantial or not done at all; that the general spent a substantial sum to correct problems with the sub’s work; that over $400 thousand of the original lien claim was not supported by the evidence provided by the sub during discovery; and that after the settlement, the sub abandoned its claim for the extras reducing the lien by more than half.

With the potential relevance noted, the court found that the bank should have been given a copy of the settlement agreement because to the extent that it may or does demonstrate acknowledgement that any portion of the sub’s original claim was not asserted for a valid debt, it would constitute the additional evidence that would support the bank’s claim of constructive fraud.

Even after the amount claimed by the sub was reduced, proof that the original amount claimed was constructive fraud would invalidate the whole lien.

So what does that mean for the sub? It means that the sub better hope that the settlement agreement doesn’t contain any terms stating that the debt wasn’t valid or even inferring such a case – which it likely doesn’t, given that settlement agreements rarely, if ever, acknowledge anything other than that a claim has been made and usually specifically state that the settlement agreement makes no recognition regarding the validity of the settled claims… but you never know.

The lesson in defending against a lien is to be on the lookout for overstated sums and in filing and prosecuting a lien is to make sure you’re not inflating the amounts owed for some reason.

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In yesterday’s post we began our discussion of the issues raised in the recent appellate court opinion of Cordeck Sales, Inc. v. Construction Systems, Inc. et al. (Doc. No. 1-08-0554). The opinion is the second opinion rendered in this case within the past two years. Both opinions discuss a host of issues pertaining to the Illinois Mechanic’s Lien Act and are recommended reading for contractors, subcontractors, owners and anyone involved in a construction project that worries about having to file a lien to get paid.

A short description of the case and the appellate briefs filed by the parties can be found in yesterday’s post. In short, a bank with a mortgage appealed several issues involving liens filed by contractors on a condominium development project. The bank wanted the liens invalidated and the contractors wanted to be paid. The liens filed by the two contractors can be found here, and here. Both purport to be subcontractor liens, but the opinion refers to Construction Systems (CSI) as a general contractor (Section 7(c) of the Act states that a statement that a party is a subcontractor will not invalidate a later determination that the party was, in fact, a contractor).

One of the issues raised by the bank, First Midwest Bank (FMB), in challenging the lien filed by CSI, involved the timeliness of CSI’s lien filing given facts and evidence regarding CSI’s last date of work.

Timeliness is a make-or-break issue under the Illinois Mechanic’s Lien Act. This means that the failure to file within the statutorily prescribed time limits, even by one day, can completely invalidate a lien. This all-or-nothing style issue is contrasted with issues surrounding property descriptions within the lien or innocent errors in stating the amounts owed which can be weighed by court’s and, as we have seen in other posts, ignored if justice may require it. In short, and in lieu of another hyphenated catch-phrase; timeliness is essential.

Under the Act, against private property, a general contractor must file the lien within four months of the date of completion of the work, a subcontractor must send notice of the lien within 90 days of completion to the required parties and the lien must be filed within 4 months from the completion date. For a public contract the timelines are different – here is our post from April regarding the issue – and getting the notice of lien on file with the proper public officer is essential to your claim.

The requirements are not simply some arbitrarily imposed deadlines.  The limits protect subsequent purchasers and owners from having their property interests infringed by unforeseen or delinquent claims for payment and provide contractors with a clear map for obtaining payment when it is owed them.  The boon is that there are clear guidelines for what must be done that can be relied on; the detriment is that if the guidelines are not followed to the letter, there may be no relief at all.  Without the statutory requirements, the Act would be nothing more than another cause of action to add to a complaint that would inevitably take as long to litigate as any other cause of action.  The desire to protect the right of contracts and see that the contractor is paid is on equal footing with the rights of the owner when the edicts of the Act are followed, e.g. requiring notice of subcontractors performing work, and statements of amounts owed.  This is true because if the Act were followed, assuming the owner had money to satisfy the contract, a lien would not be possible or necessary.  When the act is not followed, and liens become necessary, issues like timeliness become important.

Usually, timeliness can be established through work-orders, employee logs, emails or even GPS logs of the location of fleet trucks. However, as is the case with the challenge to the timeliness in this matter, two conflicting assertions regarding the date of a party’s completion of work with adequate proof for each can create an issue of fact that can preclude summary judgment.

In this case, FMB had evidence from logs kept by the project manager, AMEC Construction Management, recording the times and dates that contractors were present that placed CSI on the project at no time from May 25 of 2003 forward. CSI presented an affidavit of its vice president indicating that he and other workers were on the project through June 18^th, 2003. This is important because the date for filing the lien in a timely fashion is four months from the last date of work/date of completion. Since the CSI lien was filed on Septembe25, 2003, that date would be May 23, 2005 or after for the lien to be timely. If CSI is correct about the last date of June 18^th, the lien is timely, if the logs are correct and CSI was not there on May 25^th or afterwards, the lien would not be timely.

After reviewing the evidence the trial court granted summary judgment in favor of CSI because of the affidavit of the vice president, the appellate court reversed that decision and remanded the case for further proceedings finding that the absence of CSI from the project manager’s logs created an inference in favor of FMB, the CSI affidavit created an inference in favor of CSI and that these two competing inferences should be determined by the trier of fact and not resolved in summary judgment. Note that the dissenting opinion in this case offers some additional information about the affidavit – it apparently stated the names of the employees, the hotels that they stayed in, detailed the work they performed and the materials they used.

The lessons from the opinion and its holding are apparent. Adequate documentation of the work performed is essential. Keeping time logs, receipts, and any other form of documentation regarding the work can either win the issue of timeliness, create an issue precluding summary judgment, or even outright defeat a claim that a given lien was timely filed. It is imperative that your operations take these facts into account and that a system for documentation and proof is established. 

Tomorrow we will address the issue raised in this appeal regarding constructive fraud in stating the amounts due and owing in a lien claim.

 

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Back in April of 2008 we wrote about a lengthy opinion delivered by the 1^st District Appellate Court concerning a mechanic’s lien dispute over the property shown below:

View Larger Map

Since the Appellate Court delivered that opinion some of the parties were apparently able to settle their disputes and some of the parties found new issues to appeal. On September 9, 2009, the Court issued a second appellate opinion in this matter addressing several issues surrounding mechanic’s liens. Over the next few days, we will be addressing these decisions.

The full set of facts is available in the opinions. In short, Cordeck was subcontracted to Construction Systems, Inc. (CSI) to supply and install structural steel for a condominium project in Chicago. On January 23, 2003, Cordeck filed this lien stating it was owed $1,003,489.70 for work on the project and filed suit to foreclose on that lien in April 2003. In August of 2003, the condominium declaration was filed (if you want to read it, you’ll have to go to the Cook Count Recorder of Deeds office – it’s document 0324110024). On September 25, 2003, CSI filed this lien claiming it was due $1,979,412.00 and filed an answer and amended counterclaim in the Cordeck case alleging as much.

A bank holding a mortgage on the property, First Midwest Bank (FMB) challenged the validity of the liens filed by both Cordeck and CSI, the challenges and the Court’s decisions are the subject of our posts on this case.

The first challenge raised by FMB to the lien filed by CSI was that the lien failed to sufficiently describe the property encumbered by the lien. Here is the appellate brief filed, you will see that it contains arguments regarding the sufficiency of the description under Section 7 of the mechanic’s lien act, but also that it asks the court to consider the issue of Section 9.1 of the Illinois Condominium Property Act which arguably requires apportionment of a mechanic’s lien on a condominium property once a unit has been conveyed to a purchaser.

Here are the briefs in response to the appellate brief and the reply brief filed. You will see that the argument made in contravention of applying the apportionment rule of 9.1 centers around the fact that no unit had yet been transferred to a purchaser when CSI filed its lien and arguably then, CSI was not required to apportion the lien.

The reason we’re attaching the briefs and discussing the argument is that the appellate opinion didn’t address the issue. While we don’t know why the Court did not want to finally wade into the waters of Section 9.1, we can see from the briefs that a decent argument was advanced in contravention of applying the apportionment requirement to the CSI lien which may be the reason it wasn’t included in the opinion.

FMB also argued that even if Section 9.1 did not apply, the fact that a more recent and particular property description had been filed prior the recording of the CSI lien meant that the CSI lien was invalid if it did not include the most recent and more particular description. The Court addressed the description included in the CSI lien in accordance with the terms of Section 7(a) which requires that the claim for lien include:

“a sufficiently correct description of the lot, lots or tracts of land to identify the same”

The court found that the description of the CSI lien met the requirement that “the description be sufficient to identify the affected land” – adequate under the standard of the Act – and rejected the request to invalidate the lien on the basis of the description.

As you can see from the lien, it used the plat of survey description, included the common address of the property and also had the property identification numbers for the parcels that had existed prior to the apparent merger of the property into a different number. It is also interesting that there was testimony from an employee of the recorder’s office who testified that a lien recorded on the property as a whole would appear in a search of the chain of title of each unit included in the condominium declaration. (This is perhaps true of searching at the actual recorder’s office, but searching online with the PINs for the condominium units shows none of the liens filed by Cordeck or CSI. The first condominium unit PIN can be found on this map from the Assessor’s Office).

There are more than a few parties that would have appreciated a discussion of the application of Section 9.1, but the facts appear to have been against the treatment of the issue. For now, we have another case that offers some welcome guidance regarding the sufficiency of a property description under the Act. 

Tomorrow we will discuss the issue of timeliness in filing the lien raised in this case.

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After yesterday’s outline and brief discussion of the opinion in International Production Specialists, Inc. v. Schwing America, Inc., several of our readers have written in with a common question:

“Why was a case involving a project in Illinois litigated under Wisconsin law where the Illinois Construction Contracts Act (815 ILCS 665/1 et seq.) bars such a practice?”

For those not familiar with the Illinois Construction Contracts Act, construction contracts - “contract for the design, construction, alteration, improvement, repair, or maintenance of real property, highways, roads, or bridges” - that are performed in Illinois are prohibited by the statute from containing a forum selection clause that subjects the contract to the law of another state or that “requires any litigation, arbitration, or dispute resolution to take place in another state.”

In IPS v. Schwing, the project and a majority of the work took place in Illinois. A review of the docket and filed documents on Pacer didn’t turn up the purchase order referenced in the opinion or the change order. However, we do know that the original purchase order was sometime in 2001 and the subsequent negotiations were in 2004.

Unless the 2004 change order augmented a forum selection provision in the 2001 contract, the Construction Contracts Act would not apply because it did not go into effect until 2002 and it does not apply retroactively, or so says the Illinois Second District’s opinion in Foster Wheeler v. LSP Equipment (Doc. No. 2-03-0963).

The other possibility, if the contract didn’t pre-date the act, would be that neither party brought up the argument because they wanted to avail themselves of Wisconsin law, and the court did not seek to enforce the act sua sponte. In any event, the application of Wisconsin or Illinois contractual law would not have altered the considerations of betterment or the principals of contractual damages.

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It’s not that often that we get to see an in depth analysis of a factual scenario in a construction dispute case. It is even less often that such an analysis is performed by the 7^th Circuit.

In the recent case of International Production Specialists, Inc. v. Schwing America, Inc. (Doc. No. 07-3632) the facts were an integral part of the appellate court’s decision to uphold a district court’s determination regarding delay.

A full recitation of the unique situation can be found in the opinion linked above. In short, IPS sued Schwing after Schwing terminated a contract with IPS under which IPS was to supply several silos for a waste treatment facility. Schwing terminated alleging delay on IPS’ part. The contracts had been negotiated and even suspended for a period of time over the course of three years. However, once the contracts were negotiated for a final time and work resumed, Schwing was correct in assuming certain negotiated time-frames and rightfully terminated the contract when IPS failed to perform within time-frames that, while not specifically delineated in the final contract, were at least feasible under previous iterations of the parties’ agreements.

The court upheld the decision in favor of Schwing and also reduced a breach of contract damages award under a theory of betterment for money Schwing was awarded that it hadn’t actually lost through payment to IPS.

The decision is important for anyone looking to understand a nuanced delay scenario and will be of interest to parties looking to re-negotiate terms after suspension or through a mutual decision to alter material terms. What’s most important is the consideration of previous performance obligations under an altered construction contract to determined unspecified altered or corrected present obligations. Again, delay is often a basis for terminating a contract and the damages resulting from delay can be steep, but as we’ve said before, the point of the action against another for breach of contract is not putting a party in a better position than it would have been if there was no delay and no breach.

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Yesterday we discussed the court’s analysis of contractual language for arbitration provisions in short form contracts in the case of Timmerman v. The Grain Exchange.  A discussion of the factual matter surrounding the case can be found in the previous entry. Today we discuss the decision in Timmerman, to invalidate the contracts that the individual farmers had entered into with the grain dealer because the dealer’s license was revoked.

First, it’s important to understand that the licensure process for grain dealers in the state of Illinois is regulated by the Illinois Grain Code (240 ILCS 40/1-1 et seq.). Much like the codes regulating the professions for Illinois architects, engineers, warehouseman, and many other design and construction professions, the operation of a grain dealership without a license from the state of Illinois is a criminal offense.

What happened in this case was that The Grain Exchange signed the contracts for the future purchase of the grain with the farmers, lost its license, and then after losing the license, assigned the contracts to a subsequent grain dealership that did have a valid license. The subsequent grain dealer sought to enforce the contracts and have the assignment found valid. The farmers wanted the contracts declared void premised on the idea that the original party they had contracted with was unlicensed, but in reality, voiding the contracts favored the farmers because the price of grain had increased from the time the contracts had been entered into with The Grain Exchange. The farmers could now make more profit if they had the chance to sign new contracts.

The court’s analysis struck a middle ground in reasoning but held in favor of the farmers by finding that the that the contracts with The Grain Exchange were anticipatorily repudiated (Even though it was not yet time for the contracts to be performed, the contracts could not be performed because something had happened that rendered performance impossible - Check here for the Uniform Commercial Code’s definitions for anticipatory repudiation at 810 ILCS 5/2-610). The court found that the contracts were repudiated when the license was lost because without a license, it would be against the law for the Grain Exchange to perform under the Grain Code.

At the moment of repudiation (i.e. when the license was lost) the farmers were justified in treating the contracts as terminated. The court would not enforce the assignment made by the Grain Exchange to the other grain dealer after the loss of the license had occurred, and the farmers were not bound by those contracts.

The court noted that if the contracts had been assigned to the other grain dealer prior to the loss of the Grain Exchange’s license, then the assignments might be valid.  There was no mention of the interesting question regarding what would have happened if The Grain Exchange could have gotten a new license before the contracts were due to be performed and had attempted to do so, but the farmers signed new contracts with a different dealer in the interim.  - What if the architect loses his license before completing the design drawings and attempts to renew the license but in the interim the owner hires a new architect for the project?

We’ve written before about the difference between “registration” and “licensure” but nothing has brought home the point as clearly as Timmerman, which is a lesson that licensed professionals or firms should take to heart. The failure to maintain a valid license can completely nullify your existing performed or in the process of being performed contracts, it can subject the unlicensed party to criminal penalties as well as excessive civil damages including the full disgorgement of the earned payments on the contracts. On the flip side, for the sophisticated party, checking the license of a party that has aggrieved you by something under the contract to issue can be one of the first steps to determining the full amount of damages available to you for a breach.

 

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In using most standard-form agreements on a particular project the primary parties tend to negotiate the specific terms and reach an accord that will either include or exclude arbitration as their chosen form of primary dispute resolution. Opinions on the effectiveness and usefulness of arbitration are as varied as the fish in the sea.

The decision to utilize arbitration as the default on short standard form contracts is an individual one in the hands of the entity providing the contract for signature. In the construction industry there are many organizations offering arbitration services for one to choose from. But making sure the party who signs your contract will be bound by them is a trickier issue. Anyone wishing to add an enforceable arbitration provision to a short, standard form agreement would do well to familiarize themselves with the recent Illinois case of Timmerman v. The Grain Exchange, et al. (5^th Dist. Doc. No. 5-08-0404).

In Timmerman, farmers caught up in The Grain Exchange fiasco brought an action against the grain dealer they had contracts with for the supply of grain. The dealer had its license revoked and assigned the contracts it had with the farmers to another grain dealer after the revocation; also a defendant sued by the farmers.

The farmers sought a determination that they were not bound by the contracts because the grain dealer’s license had been revoked.  In arguing against such a finding, the grain dealers asked the court to determine that the arbitration provisions contained in the one-page-single-sided contracts that the farmers entered into with the grain dealer. The contracts were created by the dealer and contained a term stating that “the Rules of the National Grain and Feed Association” would apply to the contract. Nowhere did the contract mention arbitration, which is contained in the Rules referenced in the contract. And, the rules were not made available to the farmers prior to signing, nor were the farmers told that the Rules referenced in the contract contained an arbitration provision.

The district court found that the attempt to apply the Rules’ arbitration provision to the farmers would be procedurally unconscionable – “a situation where a term is so difficult to find, read, or understand that the plaintiff cannot fairly be said to have been aware he was agreeing to it.”

The appellate court agreed. In agreeing with the district court, the appellate court cited a long string of cases and examples of contractual provisions found to be unconscionable due to their placement in the contract, the lack of their conspicuous nature, the failure to point them out to signatories and the failure to allow signatories time to understand or peruse the contract before signing.

While many of the cases cited by the court are examples of what not to do, for those seeking to have an enforceable arbitration provision in a short contract there were several decisions referenced.

Of note was the appellate court’s recitation of the decision in Bunge Corp v. Williams (45 Ill. App. 3d 359) from 1977 which upheld an arbitration provision printed on the back of a contract where the words:

“THE TERMS PRINTED ON THE BACK HEREOF ARE A PART OF THIS CONTRACT.”

Appeared in bold letters just above the signature line on the front page.

The decision in Turner Construction v. Midwest Curtainwalls (187 Ill. App. 3d 417) from 1989 where a construction subcontract was valid where it incorporated an arbitration provision in the general contract by reference and stated that the general contract was “available for examination by the Subcontractor at all reasonable times at the office of the general contractor” and that the subcontractor “represents and agrees that it has carefully examined and understands the general contract.”

While any party to your agreement may attempt to challenge its arbitration provision, carefully crafting one that will be upheld with an eye to decisions regarding upheld provisions can help you overcome any such challenge.

 

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In a recent Seventh Circuit opinion, Haber v. Biomet, Inc. et al., (Doc. No 08-1670), the federal circuit court found that a state court determination could preclude it from considering an issue regarding the arbitrability of a contract dispute.

In Haber, the plaintiff brought an action in the Southern District of Indiana after it had been sued in Indiana state court by the defendant over a contract dispute. The plaintiff acted as a distributor of defendants prosthetic parts and the two actions were based on allegations that plaintiff performed some work on behalf of the defendants competitor.

The parties also had a disagreement over the proper dispute resolution portion of their contracts controlled their actions. The defendant believed that a litigation clause in a 1995 contract stating that any disputes would be settled through litigation in Indiana held sway and the plaintiff believed that an arbitration clause in a 1999 contract stating that arbitration would take place in Chicago, Illinois.

The federal district court held that it the Southern District of Indiana was an improper venue for an motion to compel arbitration based off an arbitration provision which stated that Chicago, Illinois would be the location of the arbitration. The State court denied a motion to compel arbitration in part, stating that the arbitration provision should apply to disputes arising out of the 1999 contract and that the litigation provision should apply to disputes arising out of the 1995 contract.

The plaintiff chose only to appeal the federal district court’s decision and the 7^th Circuit held that pursuant to Section 4 of the Federal Arbitration Act…

“The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order directing such arbitration is filed.” 9 U.S.C. §4

…it was plain that any determination about the arbitration in federal court needed to be filed in the Northern District of Illinois. The 7^th Circuit even noted how odd it was that there was no motion to transfer venue to the Northern District:

“We do find it strange that [Plaintiff] did not at some point file a motion for transfer to the Northern District of Illinois in Chicago”

The appellate court held that it was improper to bring the claim in the Southern District of Indiana.

With regard to the state court claim, the court found that it lacked the authority to review the decision because res judicata barred it from doing so given that the doctrine of issue preclusion applied once the state court made a determination regarding arbitrability. The state court decision should have been appealed.

The lessons regarding familiarizing yourself with the FAA are clear for practitioners. For those contracting for certain dispute resolution rights and entering into multiple agreements, it is painfully apparent how important consistency in those provisions can be.

 

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“An ounce of prevention is worth a pound of cure.” Benjamin Franklin’s idiom is well suited to many aspects of life and the construction industry is no exception. In yet another case involving elements of design and construction that are in conflict with the Fair Housing Act, the United States District Court for the Southern District of Illinois has issued an informative opinion in the resolution of a particular instance of a violation.

Construction professionals should familiarize themselves with the provisions of the Federal regulations, statutes and reports cited in the opinion in understanding the duties and obligations they are beholden to under the FHA.

In U.S. v. Shanrie Co, Inc., et al., (S.D. IL, Doc No. 07-491-DRH), The United States brought an action against the developers, designers, and owners of two apartment complexes in southern Illinois near St. Louis alleging that the buildings, as constructed, violated key portions of the Fair Housing Act.

Interestingly, these parties were already the subject of an order entered in 2007 in another action involving many similar issues which were left unresolved.

Violated the Fair Housing Act’s (42 U.S.C. §§3601-19) provisions regarding “adaptive design.” As an aside, HUD has had regulations in place discussing the FHA’s design and construction requirements 24 C.F.R. §100.200, and guidelines of the minimum standards for compliance with the design and construction requirements, 56 Fed.Reg. 9473-9515.

This case contains a detailed analysis of the congressional intent behind the enactment of the FHAA noting the House of Representatives Report stating that the purpose of the act was not just to address intentional discrimination but to also address those acts that have the effect of causing discrimination. The discussion is interesting in that it lays the foundation for the Court’s decision to follow the FHA and hold that the Act contemplates “discrimination” to include a “failure to design and construct multifamily dwellings… in compliance with the accessibility features specified in the statute.” 

Yes, the court found all defendants, liable including the owners who took possession after the building was constructed and the design professionals that did not own the building at any time. One of the design professionals was the engineer that certified the plans. The Court also found that a remediation plan was necessary and that retrofitting the apartments would be an appropriate remedy.

Familiarize yourself with the requirements for FHA compliant structures – not only because it will keep you from litigating and correcting non-compliance issues, but because a society espousing equal access actually looks to our industry to provide the concrete reality of equal access and we should provide it.

 

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Yesterday we examined the astute discussion of the duty to mitigate found in Judge Cole’s recent opinion in R.R. Donnelley & Sons Co. v. Vanguard Transportation Systems, Inc.

Today we discuss that portion of the opinion directed at R.R. Donnelley’s request for attorneys’ fees based on the indemnity provision of the contract.

The contract’s indemnity provision read:

[Vanguard] shall indemnify and hold [Donnelley] harmless from any from any liability, loss, cost, damage or expense, including attorneys' fees, which may accrue against [Donnelley] by reason of any liability claims, cargo claims and workers compensation claims by an entity that arise out of or are due to acts or failures to act of [Vanguard].

R.R. Donnelley sought to use this provision to recoup the attorneys’ fees it expended in prosecuting the action against Vanguard. In essence, although the court would only award nominal damages to R.R. Donnelley, it hoped to have Vanguard pay the cost of achieving that award.

The court rejected the argument that the provision could be read to imply that attorneys’ fees would be awarded to R.R. Donnelley in a dispute with Vanguard over the enforcement of the indemnity provision. Instead the court found that the “by an entity” phrase could not be read to include Vanguard. The court found that the provision applied to disputes between R.R. Donnelley and others, but not between R.R. Donnelley and Vanguard for the enforcement of the indemnity agreement.

This interpretation is important because it serves to remind everyone contracting for indemnification to include the phrase “including the enforcement of this agreement” in their indemnity clauses.

The court pointed out that the varying interpretations of indemnity provisions could be read to mean that a self-referencing portion in a clause was necessary to include disputes over the indemnity agreements themselves, even though the court referenced the Illinois Supreme Court’s own admission that little guidance can come from attempting to analyze or reconcile the numerous cases interpreting indemnity clauses.

The interpretations cited by the court were:

Cincinnati Ins. Co. v. Leighton, 403 F.3d 879, 881 (7th Cir.2005)(indemnification required “from and against any liability, loss, cost, attorneys' fees, and expenses whatsoever, including the enforcement of this agreement”);

Central Die Casting and Mfg. Co., Inc. v. Tokheim Corp., 1998 WL 160900, *8 (N.D.Ill.1998)(fees incurred in enforcing indemnity provision not caused by “the specific claim indemnified against. Instead, they are costs incurred to sue for breach of contract, or the failure to indemnify.”);

Fidelity Mut. Life Ins. Co. v. Harris Trust & Savings Bank, 1997 WL 308846, *2 (N.D.Ill.1997)(fees incurred in pursuing indemnification allowed where language “expressly permits ... recover[y][of] attorneys' fees and expenses ‘incurred in connection with the enforcement of th[e] Agreement’ ”);

Board of Trustees of University of Illinois v. U.S. Fidelity and Guar. Co., 1991 WL 274462, *3 (N.D.Ill.1991)(contract specifically included “all attorney's fees and costs incurred in bringing an action to enforce the provisions of this indemnity....”);

Eckley v. Lone Star Forge Co., 1991 WL 222076, *2 (N.D.Ill.1991)(noting “the distinction between attorney's fees in defending a third party suit and attorney's fees in enforcing a right to indemnity and thus offer no guidance to the court.”).

Jackson v. In-tertech Resources, Inc., 1990 WL 16969, *1 (N.D.Ill.1990). (The seller agreed to “indemnify and hold harmless Buyer from and against any and all actions, suits, proceedings, demands, judgments, losses, costs, damages, and expenses (including with-out limitation, attorney fees and disbursements) resulting from or arising out of: ... (d) any breach of any of the representations or warranties, covenants or agreements of Seller set forth in this Agreement.” The plain language of the clause contemplated a suit by one party to the contract against the other in the event of any breach of the agreement and provided for reimbursement of attorney's fees should that occur.)

The indemnity agreement in this case did not.

Again, while we are consistently warned that interpretations may be inconsistent, the self-reference in an agreement appears necessary for recouping the costs of enforcing the agreement itself.

 

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As Judge Posner has put it:

“If you invite someone to dinner, and hours after he was due he still hasn't arrived, you had better infer that he isn't coming, and start eating. You can't let yourself and your other guests starve merely because there is a slight chance that he will show up days later.”

The recent case of R.R. Donnelley & Sons Co. v. Vanguard Transportation Systems, Inc. (N.D.IL Doc. No 06 C 5837) has ended in an interesting decision based entirely on the failure of one party to affirmatively act to “mitigate” its damages even though the other party breached their agreement and could also just as easily have mitigated the damages.

The opinion has an excellent description of the duty to mitigate:

“The so-called duty to mitigate damages, which is often referred to as a general contractual duty is a principle of ancient vintage.  Referring to mitigation of damages-or as it is called in tort law “avoidable consequences “in terms of a “duty” is somewhat misleading, because a plaintiff incurs no liability for failing to act.  Rather, the amount of loss that could reasonably have been avoided by stopping performance or making substitute arrangements is simply subtracted from the amount that would otherwise have been recoverable as damages.  Phrased differently, the duty to mitigate damages “forbids the victim of a breach of contract, which might well be involuntary, to allow his damages to balloon (when he could easily prevent that from happening), as he might be tempted to do in order to force a lucrative settlement.”

“The victim of the breach must “ ‘exercise reasonable diligence and ordinary care in attempting to minimize the damages after injury has been inflicted.’ “ And while he must act with “reasonable dispatch,” the injured party is not required to take steps that involve “undue risk or burden.”  But there are instances where the victim of the breach might be lulled by the breaching party into inaction because of assurances that all will be well. “[T]o put this differently, the [breaching party] may not insist on mitigation when by its words or deeds it has led the [non-breaching party] to believe that it has assumed what would otherwise be the buyer's burden of mitigation.” While that is going on, the duty to mitigate is suspended.” [Internal citations omitted]

The case involved the shipment of time-sensitive brochures by Vanguard to an R.R. Donnelley facility in Atlanta. The brochures were for a Macy’s after-Christmas sale and needed to be delivered by December 21 in order to be mailed out and received timely by consumers for the December 27^th Sale. 

R.R. Donnelley contracted with Vanguard to deliver the brochures to its facility by no later than 2:00 p.m. on December 16^th. This time was important because the contract between the parties contained a “time is of the essence” clause. Vanguard got to the facility after 2:00 p.m. on the 16^th and delivery was not made. Rather than wait to be able to unload the delivery on the 16^th, the driver for the Vanguard truck took the trailer with the materials to a facility and left them there. The parties contacted each other regarding scheduling a new delivery over the next few days each time a delivery was expected or possible, something occurred to kept that delivery from happening, and ultimately, no delivery was ever made. The brochures did not get mailed in time for the Macy’s sale.

R.R. Donnelley paid the company that printed the brochures $81,650 for damages it suffered because the brochures did not get mailed for Macy’s and then sued Vanguard for the $81,650 in damages for breach of the agreement to deliver the brochures by the 16^th.

The parties completed discovery and had a trial. Of the many findings made by the Court after it heard the evidence one regarded R.R. Donnelley’s failure to take action and mitigate its damages.

In many cases, the steps for mitigation are varied and may not amount to a full recovery of the damages suffered by a party because of the breach, but for R.R. Donnelley in this case the Court decided:

“all that would have been entailed was the minimal cost of renting a truck from a local cartage company and driving the half hour to the Vanguard lot to pick up the load and delivering it to the Atlanta facility.   Mr. Menne, of Vanguard, estimated that the cost would have been about $250. Even if that estimate is low, the cost would have been less than the $750 it cost to haul the load the several hundred miles from Kentucky to Georgia.”

The court found that of the roughly $81,000 in damages claimed by R.R. Donnelly, $80,000 could not be assessed against Vanguard because of R.R. Donnelly’s failure to mitigate. The court held that because the money at issue was only nominal, and R.R. Donnelley didn’t request nominal damages, judgment should be made in favor of Vanguard due to the failure of the plaintiff to mitigate.

This same duty to mitigate applies to construction. It is best to understand that you cannot sit around and wait for something to happen thinking you have a remedy at law when some action on your part could completely alleviate your damages.

Tomorrow we will discuss Part 2 – The reason R.R. Donnelley wasn’t entitled to enforcement of its indemnity provision for attorney’s fees.

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Take a look at this chart:

The different colored sections represent the jurisdictions of the different appellate court districts in the state. The answer to the question is “yes” if you’re in the green, “no” if you’re in the tan, and “undecided” if you’re red, blue or orange. It’s a split between the districts that just occurred.

In the case of K. Miller Construction Company, Inc. v. McGinnis (1^st Dist. Doc. No. 1-08-2514) the first district appellate court (the green one) has recently decided that a claim for quantum meruit (unjust enrichment) can be made against a home owner by a contractor even if the contractor failed to comply with the Illinois Home Repair and Remodeling Act (815 ILCS 513) which requires that contracts for more than $1000 on home improvements be put in writing or they are deemed “unlawful” by the statute.

As a side note, the 4^th District (the tan one above) has ruled that such a claim cannot stand if the requirements of the act are not met in Smith v. Bogard (2007)

In McGinnis, Miller was a contractor that worked on the renovation of McGinnis’ house. After some work was performed, but before it was all completed, the McGinnis refused to continue paying Miller’s invoices which by then were more than $123,000 and demanded that he finish the job before any more payments occurred. Miller took out a $150,000 line of credit to complete the project and when he was done, the McGinnises approved of his work. The opinion notes that the project’s construction price increased to more than $500,000 by the time of completion.

The McGinnises, however, refused to pay more than $177,580.33, and Miller filed suit to recover payment. The opinion notes that Mr. McGinnis is no ordinary consumer, but that as a lawyer, he is a “sophisticated consumer”. The district court dismissed claims made by miller for a mechanics lien and breach of a time and materials oral contract because the terms of the Act provide that such contracts are unlawful if not in writing for home repair. The appellate court agreed. What the appellate court did not agree with was the district court’s interpretation that a claim for unjust enrichment was not available to a contractor who had actually performed the work where that work was accepted.

Noting that the 4^th District reached a different conclusion, the 1^st District found that where the work was accepted, the availability of an unjust enrichment claim was not quashed by the use of the term “unlawful” in the Home Repair and Remodeling Act.

Where no party disputed that a trial on the unjust enrichment claim would render “justice” to both parties, the appellate court found that because the Act did not expressly repeal the quantum meruit claim the “unlawful” nature of contracts that are not in writing did not preclude the cause of action and such a claim would likely not “reward deceptive practices” or violate public policy.

The court also noted that a real estate attorney like Mr. McGinnis might well utilize his expertise in the field to exploit the 4^th District’s interpretation by keeping any contract for home renovation oral in order to deprive a contractor of the reasonable value of his services.

Interestingly, a concurrence by Justice Gordon notes, as several others have contended, that the Home Repair and Remodeling Act was not intended to provide either a cause of action or an affirmative defense to any private party, but rather, the sole remedy under the act is through action by the Attorney General’s Office.

The lesson for all home contractors is to get the agreement in writing. There likely wouldn’t be an appeal if the contract was in writing because the lien claim and the breach of contract claim would have remained as well as the alternative theory of unjust enrichment. However, even if a contractor fails to comply with the law, there is still a possibility that he could receive justice if his intentions and actions are honest.

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In Burke v. 401 N. Wabash Venture, LLC (N.D. Ill, Doc No. 08 C 5330) a prospective purchaser of a condominium at the new Trump Tower brought an action against the LLC selling the units when they kept his earnest money deposit after he failed to close on the unit.

Reading the opinion, its apparent that the alleged reason for failing to close on the unit, with a purchase price of over $2 Million, was that an additional floor of parking was added after the initial earnest money deposit was tendered. The plaintiff’s argument was that the addition of parking made the price he had paid for his parking spot unfair given that the additional parking reduced the value of the spots. He also alleged that the additional floor of parking increased the maintenance fees for the association.

The plaintiff brought a class action lawsuit against the LLC alleging that a liquidated damages provision in the sale agreement violated the Illinois Consumer Fraud and Deceptive Trade Practices Act (815 ILCS 505) because it gave the LLC the choice between liquidated damages or actual damages.

The provision at issue read:

“In the event of a default or breach of this Purchase Agreement by Purchaser, Seller shall notify Purchaser of such breach or default and of the opportunity, which shall be given the Purchaser, to remedy such breach or default within twenty (20) days after the date such notice was received. If Purchaser fails to remedy such breach or default within twenty (20) days after receipt of Seller's notice, then, subject to the limitations set forth below, Seller may terminate this Purchase Agreement and, as its sole and exclusive remedy upon termination, retain as liquidated damages from Purchaser an amount equal to the sum of (i) the amount set forth in Paragraph 1(b) hereof required to be paid as an Earnest Money deposit and (ii) all amounts paid or to be paid by Purchaser to Seller for any other services or work performed or to be performed by Seller. In collecting such liquidated damages, subject to the limitations set forth below, Seller shall be entitled to retain all monies paid by Purchaser to Seller hereunder; to keep, retain, or take any security or other instrument either evidencing Purchaser's obligation to pay any sums hereunder Or given by Purchaser to Seller to secure payment of such sums; and· to pursue any other appropriate lawful process. In accordance with Section 1703(d) of the Interstate Land Sales Full Disclosure Act, if Seller is otherwise entitled to the liquidated damages described above, Seller shall return to Purchaser amounts paid to Seller (excluding interest paid under the Purchase Agreement) in excess of: (x) 15% of the Purchase Price (excluding any interest owed under the Purchase Agreement) or (y) the amount of Seller's actual damages, whichever is greater.”

The court’s opinion is instructive to anyone faced with contractual situations including multiple remedies that include liquidated and actual damages. Here, because the provision at issue included language that the Interstate Land Sales Full Disclosure Act authorizes and even encourages developers to include in the contracts, the express exceptions of the Consumer Fraud Act allowed the provision. Because the provision was allowed, the Court dismissed that count in the complaint with prejudice.

In recent years a large portion of suits brought on behalf of plaintiffs against developers and even others involved in the construction process have begun to include counts for Consumer Fraud. It is best to make sure your contracts comport with the act in order to eliminate the possibility that a class action could be brought by individuals for a simple error in contracting.

 

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For those of you faced with any attempt by a plaintiff to claim that the implied warranty of habitability can be extended to a design professional, relief has been afforded.   This recent order authored by The Honorable Dennis J. Burke offers some profound insight regarding such a fallible argument.

In the opinion, Judge Burke addresses the contention that an exception to the judicially created doctrine of the implied warranty of habitability can involve design professionals. The exception, briefly stated, is that the case of Minton v. Richards, 116 Ill.App.3d 852, allowed a cause of action against a subcontractor who built part of the structure once, when the builder-developer was insolvent, and that this should create an exception which would allow for a suit against design professionals when no relief can be had against a builder-developer.

The opinion obliterates the argument and correctly holds that the doctrine cannot be extended in such a manner.

Obviously, other courts may disagree with the conclusion but they are unlikely to given the unassailable reasoning.

 

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Not if it’s against the express language of a statute or the contract requires written modification.

With all the public projects coming on-line thanks to the stimulus package it is time to make sure that you understand the contractual limitations and requirements for getting add-services paid for under your contracts.

The recent case of U.S. NeuroSurgical, Inc. v. City of Chicago (7^th Cir., Doc. Nos. 07-3520 and 08-2851) is an express warning to anyone thinking about performing additional services based on an oral or written representation that they'll be paid for from a municipality’s representative.

In NeuroSurgical, an entity that NeuroSurgical is the successor to, GHS, had a 1995 contract with the City of Chicago’s Department of Health to design and implement a computer information system for use in its clinics. The information system agreement contemplated a system that would accept entries of patient information that were made by input from a keyboard and the possibility of extending the system to include patient information entered by scanning in a form document that would automatically be placed in the system without the need for keyboard input.

The contract between GHS and the City contained a section requiring that no changes to the contract were valid unless they were in writing and signed by the parties.  The contract also had a provision governing the procedure for requesting additional services from GHS which included an obligation that after such a request GHS submit a written work plan and project estimate and description and then, if approved by the City, the agreement was to be codified in a formal “work order” and submitted for approval in accordance with the contractual provision requiring that it be signed by both parties.

During contractual performance, the City requested that GHS implement a system capable of scanning data forms at one of the clinics. Scanning is a difficult process and implementing such a system required what GHS felt was additional service work. GHS claimed it had been given oral authorization to perform the additional work by the City employee responsible for monitoring the project. After the scanning system was implemented, GHS billed the City for the additional work which amounted to $532,033.35. The money wasn’t paid and in 2002, a suit was brought by GHS’ successor against the City for payment of the $532,033.35.

After a bench trial, the district court denied any relief to GHS. In addition to determining that the work was part of the contract, the district court also found that even if the work had been outside the scope of the contract, the fact that the contractual modification wasn’t executed by the City’s chief procurement officer and wasn’t in writing as required both by the City’s municipal code and the contract precluded recovery.

GHS appealed and the Seventh Circuit rendered an opinion upholding the verdict.

So, what’s important for the industry?

The Seventh Circuit held that anyone contracting with a municipality is presumed to know that both the Illinois Municipal Purchasing Act (65 ILCS 5/8-10-16) and any Municipal ordinances pertaining to the contract (in this case Chicago Municipal Code 2-92-050) are in effect. The contractor is also presumed to understand that the authority conferred by such statutes may not confer the authority to authorize payment or alter agreements to the city official who is dealing with the contractor – even though that person may be stating that the additional services are authorized and that payment will be maid.

The appellate court agreed that pursuant to the acts, GHS wasn’t entitled to payment because the procurement officer for the municipality had not approved of the additional services and signed an agreement approving those services, the City was not bound by any agreements to pay for those services. Additionally, because the contractual process for altering the contract was not followed, the City did not have a duty to pay for those additional services. Also, the fact that the city did pay for a small portion of the additional services did not mean that the City could be legally obligated to pay for the rest of the services.

The contractor cannot expect the municipality to pay for the services if the statutes are not followed and the process for amending the contracts isn’t adhered to. A contractor performs additional services at its own peril if the conditions are not met.

On the flip-side, a municipality may find a method through this decision for challenging the additional services performed by a contractor.

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It’s a long time to wait to get paid, but a new Northern District decision has held that the 10-year Statute of Limitations contained at 735 ILCS 5/13-206 governs an engineer’s claim for non-payment of invoices issued pursuant to work performed under a contract.

It’s a debate you may see quite often for construction work given that there is a separate statute in this state that applies a four-year statute of limitations for claims based on many acts or omissions in construction work:

“(a) Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.” 735 ILCS 5/13-214(a).

But that statute does not apply to claims made by a design professional for the owner’s breach of contract by failing to pay invoices.

In Burbach Aquatics, Inc. v. City of Elgin (N.D. Il. Doc. No. 98 CV 4061) an engineer brought a breach of contract action against the City of Elgin for the City’s failure to pay invoices it issued for work it performed under the contract. The complaint can be found here and a copy of a modified 1985 AIA B141 entered into in 1995 between the City and the engineer is attached.

Pursuant to the contract, Burbach alleges that it rendered services for the renovation/replacement of municipal swimming pools and bathhouses owned by the City.

The work was performed and on June 13, 2001; August 9, 2001; and July 2, 2002, the engineer issued invoices for the work. Section 11.5.2 of the contract stated that the invoices were due and payable 20 days from the date on the invoices.

The complaint alleges that Elgin never paid the invoices and on July 17, 2008, Burbach brought suit to collect the $135,559.72 owed under the contract along with the interest owed at 18% per section 11.5.2. (That’s $24,400.75 per year in interest and over the six years is $146,404.50 in interest – more than the amount owed on the contract.) No claim was also brought for the additional interest that also might be owed this engineer under the Local Government Prompt Payment Act (50 ILCS 505/1).

The City filed a motion to dismiss the case saying that the four-year statute of limitations applied and that even if the 10-year statute applied it ran in 2005 because the contract was signed in 1995.

The court disagreed and issued this opinion. In the opinion, the court found that the activity complained of by Burbach giving rise to the breach of contract action was the City’s failure to pay the invoices, and not an activity enumerated in the 13-214 statute. The court cited to two familiar cases, Prate v. Thomas, and Paschen v. Kankakee, both cases involved a breach of contract claim for the failure to pay a contractor for work performed under a contract, where the 13-214 statute was found inapplicable, and held that the 13-206, 10-year statute of limitations applied.

The Court also held that the claims did not arise until 20 days after the date on the invoice since that was how long the City had to pay the invoice and it breached its contract when it failed to do so. The statute of limitations would not expire until 10-years from the 20-day date.

This is yet another reminder that paying attention to these dates in the contracting process, as well as having a decent percentage fee for failure to pay can amount to, as here, a hefty sum if the failure goes on long enough and decreasing the amount of interest may be in the best interest of others.


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The recent case of Peregrine Financial Group, Inc. v. TradeMaven, LLC, has at least offered some guidance.

In Peregrine, both the plaintiff and the defendant had been sued in another action over a patent dispute. The initial action had been resolved by a federal court through a settlement between the parties and the plaintiff in the patent action and  a consent judgment had been entered.

The indemnity provision in the TradeMaven contract stated that it agreed to hold Peregrine harmless from any claims for “expenses and costs (including any reasonable legal fees and expenses related to [Peregrine’s] defense) arising from any claim of infringement of any trademark, service mark, trade name, copyright, or other proprietary right.” In the patent suit, the parties placed a provision in the consent judgment that each party would bear its own costs and attorneys fees. 

After the federal suit, Peregrine sent a letter to TradeMaven’s counsel requesting the $416,081.22 in attorney's fees. TradeMaven didn’t indemnify Peregrine for the fees so Peregrine filed the indemnification claim in state court for recovery of those fees. The state district court ruled that the claim was precluded by res judicata.

One of Peregrine’s arguments on appeal was that even if Peregrine could have brought its claim for indemnity in the federal suit, it didn’t need to because a previous Illinois Supreme Court Case, Guzman, held that the claim for indemnification did not accrue until after the patent dispute concluded and TradeMaven rejected Peregrine’s written demand for indemnification. 

Guzman ruled that the 13-204 statute of limitations was applicable in construction defect contract dispute for indemnification between a defendant and a third-party in a situation where the third-party suit had been brought with three counts – implied indemnity, express indemnity, and breach of contract – and the opinion was rendered without an express statement of which theory the Court was considering.

The Appellate Court in Peregrine rejected Peregrine's argument and said that Guzman involved an “implied contract of indemnity” and a third-party complaint and that the instant case involved no third-party action where both parties had been named as defendants in the federal action and that the parties had an express contract of indemnity.

Peregrine then argued that the more recent Illinois Supreme Court decision in Travelers extended Guzman to express indemnity agreements. The Appellate Court said that because the indemnity provision in Travelers contained the words “on demand” – “Payments of amounts due Surety hereunder together with legal interest shall be payable on demand” – the express terms of the indemnity agreement in Travelers implied that the indemnity action did not accrue until demand was made and therefore, the instant action was different because the indemnity provision at issue in Peregrine contained no language providing that payment was triggered by demand for payment. 

In Travelers the Supreme Court apparently determined that the fact that the Guzman did not especially state whether it was addressing the nature of the indemnity claim on a breach of contract, implied indemnity or express indemnity basis meant that Guzman did not provide enough guidance to aid in the assessment of a suit based on express contractual indemnity.

Travelers also held that implied contractual indemnity is only available in tort. Which makes it odd that the court in Peregrine could say that the claim in Guzman was about implied contractual indemnity because it was a construction defect case and not one about a tort. 

Travelers also didn’t offer guidance on whether carefully constructed indemnity provisions in regular construction contracts could serve as the basis for a claim for breach of contract premised upon the breach of an indemnity provision thereby making them claims regulated by the ten-year statute of limitations addressed in Travelers,  or whether a claim for "express contractual indemnity" was different than a breach of contract claim and in construction defect case which could be brought as a third-party action (the commercial equivalent of contribution).  In the second type of claim, the defendant is basically saying “if I’m liable to the plaintiff, it is because this third party made a mistake.”  In the latter instance, Travelers would seem to imply that the four-year 13-214 statute of limitation would apply because the claim was based on the construction defect, in the former, because the claim is actually for failure to indemnify after a demand, it would appear that this is a 13-206 matter as discussed in Travelers.

By distinguishing the Travelers case based on the demand language the Appellate Court in Peregrine has created an interesting distinction and not resolved the issue created in Travelers regarding how and under what theory a defendant should sue a third-party in a construction dispute not based on negligence such as one where the party is looking to pass-through any potential economic damages.   Another question raised by these line of cases:

• Is the claim properly one for "express contractual indemnity" because there is an indemnity provision of the contract and the third-party contract was breached, or is it a claim for breach of contract for breach of the indemnity provision or both?

We know that professionals and contractors should arguably include indemnification for “economic damages” in their indemnification provisions if they want to attempt to recover those forms of damages at a later date. Friedman, Alschuler & Sincere v. Arlington Structural Steel Co., Inc., 140 Ill.App.3d 556, 489 N.E.2d 308 (1 Dist., 1985). Friedman and a line of cases following it support the contention that the indemnity provision needs to be specific as to the type of damages the parties will be able to seek, but nothing has settled the question raised by Travelers about where and when, if the provision is drafted properly, a party, if at all, must seek this contractual indemnity and what the cause of action actually is in third-party claims for construction defect where someone is looking to pass-through the claims of another.

For now the best practice seems to be to ensure that the contractual indemnity provisions include the “on demand” language in an effort to preserve a claim and to assert both a claim for express contractual indemnity and a claim for breach of that provision as a breach of contract.

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It’s a case worth parsing through if you have the time because the Municipalities you deal with could be exacting costs from you that are not allowed under State law and that you could recoup.

In Raintree Homes, Inc. and Raintree Builders, Inc. v. The Village of Long Grove (2^nd Dist. Doc. No. 2-06-1105) the second district appellate court was faced with the review of a district court’s determination that the provisions of the Village of Long Grove’s “impact fees” that were assessed on those applying for building permits were void under the Illinois Municipal Code (65 ILCS 5/1-1-1 et seq.)

The Village had been assessing “impact fees” which had increased in cost over the years from 1993 to 1997 against anyone applying for a building permit pursuant a village ordinance (Section 4—1—4 of the Long Grove Municipal Code which was repealed in 2003 and new “fees” have since been implemented). A statement contained in the “impact fee” provision of the code contained a description regarding the purpose of the fee as being for parks and schools, but the application of the money showed that some went to the Village, some went to the schools and parks for different purposes, and the district court found that none of the uses comported with what was allowed under the Illinois Municipal Code.

The appellate court upheld the ruling and the court’s order that the Village pay back to Raintree some $114,700 in impact fees that it had paid from 1993 to 1997.

The appellate court’s decision found that because the funds from the impact fees were put into a general operation fund rather than being used for the purpose of improving/funding or having to do with “school grounds” which is a term elaborated upon by a 2002 opinion (Thompson v. Village of Newark) and augmented by a 2003 amendment to the code to include “land or site improvements, which include school buildings or other infrastructure.”

The appellate court also held that the portion of the fee attributed to the parks and other various land improvements or “open space” was not tailored pursuant to the Illinois Municipal Code to limit the use of the fee to “only newly acquired open space.”

The opinion also contains a lengthy analysis and discussion of “duress” concerning a business’ need to pay for a fee given the need to have the license or benefit conferred by paying the fee for the operation of the business and its later ability to contest the fee without losing that right under the voluntary payment doctrine.

The important part here is that Raintree got the fees back. This was in large part due to the specific manner in which the purpose portion of the municipal code was drafted and the distinct method in which the funds were distributed and used. It is likely that a statute that was more vague and less accurate testimony regarding the application of the fees would have offered a different result even if the fees were applied the same.

For contractors and developers forced to pay such fees, the lesson is to find out what they’re for and how they’re being used. The lesson for municipalities is the craft the statutes correctly to make sure the money is being used properly.

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Over the past two years we’ve seen quite a few Acts from the Illinois legislature regarding the industry and its operations. We’re still waiting on good case law interpreting the contractor prompt payment act. We saw the downfall of the attempt to reintroduce the structural work act. And now we have our first case regarding the act that many parties tried to defeat – the Illinois Employee Classification Act (820 ILCS 185/1 et seq.) (the ECA).

The ECA is a must-know for any contractor in the state that wants to classify the people working for it as an “independent contractor.” Prior to the act, we all know that it was common practice, for whatever reason, to call many employees independent contractors. Pay scales, union dues, liability issues, insurance rates and coverage, even labor laws played a part in the decision to classify someone working for you as someone working for you or someone you’ve contracted with to perform work for you.   The purpose of the act was to allow a statutory remedy for the widespread practice of employing laborers as independent contractors in a manner that circumvented many other obligations someone who was an employer would otherwise have.

The ECA invokes penalties and offers both public and private rights of action for those effected by their misclassification as “independent contractors.” This Synopsis of the ECA is available from the legislature’s website:

“Creates the Employee Classification Act. Provides that an individual performing services for a contractor is deemed to be an employee of the employer. Provides that an individual performing services for a contractor is deemed to be an employee of the contractor unless it is shown that: (1) the individual has been and will continue to be free from control or direction over the performance of the service for the contractor, both under the individual's contract of service and in fact; (2) the service performed by the individual is outside the usual course of services performed by the contractor; and (3) the individual is engaged in an independently established trade, occupation, profession or business; or (4) the individual is deemed a legitimate sole proprietor or partnership. Provides that subcontractors or lower tiered contractors are subject to all provisions of the Act. Provides that he Department of Labor shall post a summary of the requirements of this Act in English, Spanish, and Polish on its official web site and on bulletin boards in each of its offices. Provides that it is a violation of the Act for an employer or entity not to designate an individual as an employee under the Act unless the employer or entity satisfies the provisions of the Act. Provides for civil remedies and civil penalties.”

The ECA was introduced in February of 2007, passed both houses that May and was signed into law by the Governor in August of that year. The ECA took effect on January 1, 2008. 

Up through now, a majority of the claims made under the ECA have fallen by the wayside or been resolved in other venues and usually on other grounds. That looks like it may be changing given that on June 3, 2009, in the case of Chicago Regional Council of Carpenters et al v. Joseph J. Sciamanna, Inc. et al (N.D. IL – Doc No. 08 C 4636), a Northern District of Illinois court denied several parties motions to dismiss the amended complaint (a copy of the amended complaint can be found here) in favor of allowing the action to continue.

The action in Sciamanna was brought by the Chicago Regional Council of Carpenters and several other parties against a contractor and others seeking monetary, equitable and declaratory relief for the alleged misclassification of employees as independent contractors at construction sites building the Hilton Garden Inn hotels in Warrenville and Schaumburg.

Originally filed in state court, the action was removed to federal court by the defendants. In the amended complaint, plaintiffs allege that two of the workers on the site were misclassified under the act by Sciamanna and suffered because of that misclassification by not having been paid wages, employment benefits, proper payroll tax withholdings, FICA payments, Workers Compensation Insurance and payments under the Illinois Unemployment Insurance Act. The amended complaint seeks redress for the failure to properly post notices regarding the ECA at the site and for retaliation against the workers after they filed the suit seeking to exercise their rights under the ECA. Relevant to many employers, the union is also seeking classification as an interested party under the act and that it be granted monetary damages and attorneys fees. This is important given that individual employees may not always have the money or resources to obtain counsel to enforce their alleged rights, but suits brought by their unions for such practices could profoundly change the playing field for contractors practicing in violation of the ECA under the assumption that a single employee – contractor – may not have the ability to enforce their rights.

The opinion rendered by the District Court can be found here.

Parties should be paying attention to this and any other similar cases given that the actual allowance of a per-day fine for violation of the act to the union, or for damages and attorneys fee awards may start to make it incredibly costly for contractors to classify workers as independent contractors without first making sure that the classification comports with Section 10 of the act:

§ 10. Applicability; status of individuals performing service.

(a) For the purposes of this Act, an individual performing services for a contractor is deemed to be an employee of the employer except as provided in subsections (b) and (c) of this Section.

(b) An individual performing services for a contractor is deemed to be an employee of the contractor unless it is shown that:

(1) the individual has been and will continue to be free from control or direction over the performance of the service for the contractor, both under the individual's contract of service and in fact;

(2) the service performed by the individual is outside the usual course of services performed by the contractor; and

(3) the individual is engaged in an independently established trade, occupation, profession or business; or

(4) the individual is deemed a legitimate sole proprietor or partnership under subsection (c) of this Section.

(c) The sole proprietor or partnership performing services for a contractor as a subcontractor is deemed legitimate if it is shown that:

(1) the sole proprietor or partnership is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result;

(2) the sole proprietor or partnership is not subject to cancellation or destruction upon severance of the relationship with the contractor;

(3) the sole proprietor or partnership has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle;

(4) the sole proprietor or partnership owns the capital goods and gains the profits and bears the losses of the sole proprietorship or partnership;

(5) the sole proprietor or partnership makes its services available to the general public or the business community on a continuing basis;

(6) the sole proprietor or partnership includes services rendered on a Federal Income Tax Schedule as an independent business or profession;

(7) the sole proprietor or partnership performs services for the contractor under the sole proprietorship's or partnership's name;

(8) when the services being provided require a license or permit, the sole proprietor or partnership obtains and pays for the license or permit in the sole proprietorship's or partnership's name;

(9) the sole proprietor or partnership furnishes the tools and equipment necessary to provide the service;

(10) if necessary, the sole proprietor or partnership hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees' income to the Internal Revenue Service;

(11) the contractor does not represent the sole proprietorship or partnership as an employee of the contractor to its customers; and

(12) the sole proprietor or partnership has the right to perform similar services for others on whatever basis and whenever it chooses.

(d) Where a sole proprietor or partnership performing services for a contractor as a subcontractor is deemed not legitimate under subsection (c) of this Section, the sole proprietorship or partnership shall be deemed an individual for purposes of this Act.

(e) Subcontractors or lower tiered contractors are subject to all provisions of this Act.

(f) A contractor shall not be liable under this Act for any subcontractor's failure to properly classify persons performing services as employees, nor shall a subcontractor be liable for any lower tiered subcontractor's failure to properly classify persons performing services as employees.

Another interesting point is that the private right of action accrues at the final date of the provision of services and lasts for 3 years. The ECA defines both “construction” and “performing services”:

“Construction” means any constructing, altering, reconstructing, repairing, rehabilitating, refinishing, refurbishing, remodeling, remediating, renovating, custom fabricating, maintenance, landscaping, improving, wrecking, painting, decorating, demolishing, and adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement, or to do any part thereof, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise. Construction shall also include moving construction related materials on the job site to or from the job site.

“Performing services” means the performance of any constructing, altering, reconstructing, repairing, rehabilitating, refinishing, refurbishing, remodeling, remediating, renovating, custom fabricating, maintenance, landscaping, improving, wrecking, painting, decorating, demolishing, and adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement, or to do any part thereof, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise. Construction shall also include moving construction related materials on the job site to or from the job site.

With the ECA’s broad classification of both “construction” and “performing services” everyone thinking about calling someone an independent contractor should revisit the issue in light of the ECA and the potential for a cause of action brought by multiple worker or the union.

 

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In Linhart, (1^st Dist. Doc. No. 1-07-2712) the plaintiffs were the purchasers of four connected townhomes, pictured via satellite from Google at the left. The townhomes shared a common foundation and adjoining walls. Plaintiffs sued the developer individually, his construction company, and two other entities for fraud, breach of the implied warranty of habitability, and consumer fraud.

The evidence showed that the developer was aware of cracks in the foundation of the homes prior to their sale, that a village inspector had told the developer about the cracks and the need for an engineer and the developer did nothing about the problems, that there had been no follow-up soil testing on the property after the engineering company recommended it to the developer, and that developer and his son had denied that the cracks were a problem when asked by the plaintiff’s prior to purchasing. The developer’s son told the plaintiffs that the cracks were normal and the natural result of settling and even made the comment, “it’s not like the house is going to sink or anything.”… which was before the house started to sink.

Faced with this evidence, the jury found the defendants guilty of fraud for making the false statements about what they knew to the purchasers. The appellate court found that this determination was reasonable and upheld the verdict noting:

The jury heard evidence sufficient to conclude that defendants knew these statements were false at the time they were made because a village inspector informed them that the foundation was sinking and they should consult an engineer. C.J. Johnson testified that he was aware of the cracks prior to October 1997. Preconstruction soil testing was conducted in the area and revealed significant water content. The company retained by Carriageway to conduct the preconstruction soil testing recommended further testing, especially in the lower areas of the subdivision. C.J. Johnson testified that when construction on the foundation began at the property in question he added stone to the soil because of the soil conditions, but never ordered soil testing at that specific location. A rational jury could find that defendants' statements to plaintiffs were to reassure them and assuage their concerns so that they would proceed with the purchase of the townhomes.

Plaintiffs each testified that they relied on those statements and purchased the homes. The damage to the foundation and the structure of the building was established by plaintiffs' testimony regarding all of the defects now prevalent in their homes. Plaintiffs had three experts testify to the damage and the cost of repairs. Moreover, defendants did not contest that the structure is damaged, but provided their own expert to estimate the cost of repairs.

The jury also found for the plaintiff’s on the implied warranty of habitability. The defendants objected to the fact that the term “latent” had not been included in the jury instruction, however, because the trial court had noted that the defects were latent, the appellate court found that the failure to include the term “latent” with the term “defect” in the jury instruction was harmless error and did not merit reversal of the jury’s verdict.

The jury also awarded $1,380,781 in damages based on the testimony of plaintiff’s expert that the homes were uninhabitable and would need to be demolished and rebuilt at that cost. Defendants objected to this valuation method and argued that the proper method for such a catastrophic loss would be the difference in value rather than the cost of repair, but the appellate court found that the defendants failed to introduce proper evidence of the diminution in value and could not raise the issue on appeal when they had failed to present evidence of the loss at trial.

The jury’s verdict was affirmed.

 

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It’s New Suit Friday and this week we have some new cases that just about every reader will be interested in. From attorneys looking at sample complaints and causes of action to design professionals, owners and contractors wondering what issues they might face and what could give rise to liability, this week’s spot is interesting.

In Erickson v. 2678 Orchard LLC, the plaintiff is alleging that the defendant violated several building code regulations after the plaintiff’s property became infested with rodents shortly following the beginning of excavation of the defendant’s property. The complaint also alleges that plaintiff’s tenant vacated the rental property due to the infestation and plaintiff had to reimburse pre-paid rent and incurred a revenue loss. The plaintiff seeks a permanent injunction forcing defendant to remove materials from plaintiff’s property, an end to the trespassing, correction of damages to the property and compliance with the building codes along with counts for trespass, negligence and nuisance.

In Phillips v. Savino, the plaintiffs allege that defendant, contractor, breached its contract when it failed to complete home renovations it had been paid to perform. The complaint states that the plaintiffs purchased their home and contracted with Savino for construction work, the purchase of construction materials, and services as a general contractor. The plaintiffs allege that they paid Savino for work, materials and services approximately $250,000 and that defendant did not complete and/or deficiently completed excavation of the patio, interior and exterior calking, roof flashing, floor resanding, driveway damage and siding work they also seek damages for work performed to fix work that defendant performed, and other out-of-pocket expenses they were asked to pay by the defendant during the term of the job.

In K-Mart Corp. v. Menard, Inc., a sublessor is suing a sublessee for damages which allegedly incurred during the sublessee’s 18 year tenancy in a building in Hanover Park. The complaint seeks damages for monies K-Mart says it had to/ or will have to expend to replace a parking lot a drainage system, a building roof, exposed wiring and many other problems that it claims the sublessee had a duty to maintain and keep in good repair under the lease.

In McWalters v. Lee and GLP, Inc., a partner in a design firm is suing another partner alleging that the partner and the company have damaged him by breaching their shareholder agreement which required that his shares be purchased back at a price described in a specific formula, that the defendant partner breached fiduciary duties to both the plaintiff partner and the company and the because of the breach, the shares are worth less than what they would be worth had the breach not occurred, and that the plaintiff partner was fraudulently induced into purchasing his shares of the company based on the defendant’s false representations that the shares would be redeemed at the price derived through the specified formula. As a shareholder, the plaintiff partner also asserts causes of action against the defendant partner on behalf of the company. The allegations include claims that the defendant partner used company money for personal travel and renovation of his private residences, to pay himself an undeserved salary, to start up a publishing company, and offered a rent-free sublet to a friend.

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Those of you follow our blog know that we've been waiting for the Illinois Supreme Court's Weather-Tite decision for quite some time. The facts of Weather-Tite were undisputed.  The University hired a general contractor who hired subs for the renovation of a residence hall. On five different occasions, the general contractor submitted sworn statements in accordance with the Illinois Mechanics Lien Act to the University requesting payment.

After receiving monies for each of the first four sworn statements, the University paid the general contractor the amount listed on each statement. For the last statement, the University paid the money to the general contractor but the bank where the funds were deposited exercised a right of set-off and took the money from the account of the general contractor before the subcontractors were paid the amounts reflected in the general contractor's last sworn statement.

Several of the subcontractors including Excel filed mechanics lien claims against the University for payment. The University was awarded summary judgment on the Excel claim in the trial court, following a determination that Excel did not have a valid lien pursuant to Section 5 of the Mechanic's Lien Act, the appellate court reversed and the decision was appealed to the Illinois Supreme Court.

In the Supreme Court, the University argued that section 5 of the Mechanics Lien Act only required it to pay the amount listed on the general contractor's sworn statement to the University. Excel argued that under section 5, and in conjunction with other sections of the Act, the university was required to withhold the amounts listed on the general contractor's sworn statement shown due to Excel.

The Illinois Supreme Court has agreed with arguments contrary to those of the University advanced by Excel and the opinion is informative to anyone working on a construction project. The Illinois Supreme Court has ruled that Section 5, read in conjunction with sections 27 and 32 of the Illinois Mechanics Lien Act, requires that any owner receiving a contractor's sworn statement withhold the funds noted on the statement for payment directly to the subcontractor(s). Failure to withhold the funds subjects the owner to the possibility of a mechanics lien against its property if payments are made to the contractor and the contractor in turn fails to pay the subcontractor. The opinion is not only well written, it is extremely informative and delineates certain guidelines a party should follow when paying for work.

As delineated by the court, it was the intent of the Illinois legislature that there be an orderly method for conducting construction transactions to protect subcontractor claims: (1) The owner and general contractor enter into a contract for the construction work; (2) as the work is completed, the general contractor submits a section 5 sworn affidavit that must list all subcontractors and the amount due, or to become due, or advanced; (3) when the section 5 sworn affidavit lists an amount due or to become due a subcontractor, section 24 requires the owner retain sufficient funds to pay the subcontractor; and (4) section 27 requires the owner to make subcontractor payments upon receiving notice of a subcontractor claim pursuant to a section 5 sworn statement. To protect itself an owner can require a lien waiver be provided by a contractor when the subcontractor is paid and the owner can require a lien waiver by every subcontractor when paying the contractor.

In supporting its opinion, the court looked to the Knickerbocker decision of 1914 in the Luczak Brothers decision of 1983.

The Weather-Tite opinion represents sound guidance that the general contractor's sworn statement provides the owner notice of subcontractor claims and imposes a duty on the owner to retain funds sufficient to pay those subcontractor claims. Owners should be aware that if the contractor's sworn statement shows monies owed to the subcontractor the owner should withhold those funds for payment directly to the subcontractor or wait to release those funds until a waiver is provided.

The delineation of construction project payment procedures along with a sound interpretation of section 5 and the requirements given to owners should provide a decent path for anyone to follow regarding when payments can be made to a contractor and what should be requested of the contractor when the owner believes that there may be subcontractors on the project. For subcontractors, in order to avoid an owner's claim that it had no knowledge that a subcontractor was performing on the project, the subcontractor's 60 day notice of performing work on the project should probably be sent at the beginning of the project. Once all parties have knowledge of who is working on the project and who is responsible for payment, the current problem of the possibility of a contractor failing to pay the subcontractors and liens being placed on the premises or the possibility of a contractor going bankrupt before subcontractors are paid funds advanced by the owner can ultimately be lessened or done away with entirely.

 

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We've warned before about the recent dangers of relying on a certificate of insurance as proof of your coverage as an additional insured. In the United Underwriters article, we wrote about the exclusionary language contained in a certificate insurance and its interpretation. In the recent case of Nautilus Insurance Co. v. Mona Fabrication et al., we again find the issue of a policy's interpretation regarding additional insured coverage.

In Nautilus, the court was confronted with the issue of whether or not a party not named as an additional insured in an endorsement could nonetheless be included as an additional insured where the endorsement also stated that additional insureds are those “as required by written contract and per certificate of insurance as approved and on file with the company” and a contract existed requiring the company be named as an additional insured but no certificate of insurance was on file with the insurance company.

Mona, along with the Muslim Community Center and others were sued in a personal injury action that occurred during construction on the Muslim Community Center. The Muslim Community Center along with others tendered to Mona's insurance company and the insurance company filed a declaratory judgment action seeking a ruling that it did not owe Muslim Community Center and others coverage or defense.

In assessing the policy language cited above, the court found that where there was no evidence that both an insurance certificate was on file with the insurance company and Mona was required to name the Muslim Community Center as an additional insured by contract, therefore the policy precluded coverage for the Muslim Community Center.

As we said before it's likely that the best policy is to make sure you're named in the endorsement. However, if the endorsement requires something as simple as contractual language stating that you should be named as an additional insured along with making sure a certificate is on file with the company, you should also ensure that a certificate is on file with the company and make sure your contractual language is sufficient.

It is becoming increasingly rare that an insurance certificate is found to be proof that one is actually covered as an additional insured under a policy.  With a small amount of due diligence, this problem can be alleviated.

 

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For those of you following the Illinois Supreme Court's decisions regarding mechanics liens, you will be happy to know, that the Court, will be releasing its Weather-Tite  decision on May 21, 2009. We will update you when the opinion arrives, for now, you can follow these links to our last posts, regarding the Weather-Tite case.

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There haven’t been very many interesting cases for this week’s New Suit Fridays here are the few we’ve pulled for you:

In Stone, DDS v. Franzia, MD a dentist has filed this complaint against a doctor who leased medical office space from the dentist. It’s alleged that after failing to pay rent and being served with a notice of default on this commercial lease, the doctor vacated the property and the dentist discovered broken windows, holes in the drywall, exposed wires along with missing molding. The dentist seeks damages for the failure to pay the rent, real estate taxes, utilities, failure to keep the property in good repair and the attorney’s fees. A copy of the lease is attached to the complaint along with the notice sent from the attorneys for the dentist.

In First American Title Insurance v. LaSalle Title Company, the complaint alleges that its agent failed to investigate a suspicious mortgage release before issuing a title commitment. This case will be of interest to any title company or its insurer. The allegation is that a release recorded on the property in 2005 for a mortgage recorded in 2003 should have been a red flag to the title searcher where there was no record of a refinancing. After a title policy was issued the previous lender moved to foreclose and confirmed that the release and property deed for the sale were forgeries and plaintiff ended up paying $288,000 in settlement damages to the lender. The counts are for professional negligence, and breach of contract seeking indemnity.

In Cuchetto v. Bilecki et al., a complaint alleges damages against an appraiser, a mortgage company, an attorney, and real estate agents involved in a real estate purchase for a civil conspiracy regarding representations made about the value and zoning classification of the property that the plaintiff purchased. Similar to the complaint above, this one is also alleging that the title company should have noticed inconsistencies in some of the documents that arguably should have alerted them to the alleged fraud. The complaint alleges fraud, breach of fiduciary duty, negligence, civil conspiracy and constructive trust.

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We first wrote on the travails and accomplishments of Mr. Schultz back in 2008. The case involves the Illinois Drainage Code and will be important to any land owner, particularly farmers.

The case was granted leave to appeal and has now been argued in front of the Illinois Supreme Court.

As in the previous court, Mr. Schultz argued the case himself. Video of the argument can be found here. 

If you listen to the argument, you'll see that the attorneys for the Halpin's are arguing that the appellate court essentially re-tried the case at the appellate level and that the appellate decision was against the manifest weight of the evidence and that the appellate court abused its discretion.

This will be an important decision for developers and those who represent them.  We may end up seeing confirmation of the appellate court's constitutional concern:

"The law does not favor the expropriation of private property for the public good without just compensation.  Even less attractive is the expropriation of private property for the private benefit of an adjoining property owner."

 

 

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There are a few interesting cases for today.

In what is sure to be a case you’ll want to follow… the complaint in Weatherguard Construction Company, Inc. et al. v. John Does 1-18 is brought by construction companies against posters to a comment section on the website Topix.com for allegedly defamatory remarks and postings about the companies. The complaint includes the comments as well as the IP addresses of many of the posters. In a count for interference with a prospective business relationship, the complaint sets out other comments from the thread which allegedly show people indicating they would not be using the services of the companies after reading the website. The Cook County Clerk of Court’s website lists another case between Weatherguard and Topix.

This complaint in Burns v. GFGR, Inc. et al, alleges breach of contract, professional negligence, consumer fraud and conspiracy arising out of a transaction for the purchase of property. The plaintiffs, real estate investors, are suing, among others, an engineering firm and a real estate agent after they had to pay money to repair a building they bought that had allegedly been inspected at plaintiffs’ request by the engineering firm and found “structurally sound.” Plaintiffs claim they relied on the report prepared by the engineers when they agreed to purchase the building and later were cited by the City of Chicago for code violations including “an unstable West wall structure, rotting columns, beams and insufficient structural support of the rear porch and a front balcony lacking sufficient structural support.” The docket is here. The breach of contract claim seeks damages that include reimbursement for the “lost market opportunity in that Plaintiffs was [sic] unable to take advantage of selling 1619 West Carmen in a favorable real estate market due to delays caused by remediation of the material structural deficiencies mandated by the City of Chicago.”

The complaint in American Builders and Contractors Supply Co., Inc. v. Singles Roofing Company, et al, is brought by a supply company that was charged a $132,752.99 restocking fee by a third-party vendor when a roofing company allegedly cancelled its order. The supply company received a refund, but the restocking fee was a cost they apparently had to pay. The complaint contains counts for fraud, breach of contract and detrimental reliance.

Alleged construction defects led to the complaint in Sundararaj v. Kot. Plaintiffs claim they hired the defendant to build them a $930,000 house in accordance with “certain plans and specifications” and closed on the home in October of 2005. In 2006 and 2007 some leaks were noticed and the leaks were taken care of, in 2008 the plaintiffs noticed “a musty smell in multiple rooms” and had the property evaluated, the result of the evaluation: an allegation of “serious problems” with the construction of the property and are listed in the complaint at paragraph 15. They include the lack of a vapor barrier behind the drywall for the exterior walls, lack of proper flashing at parts of the roof, elevated mold levels and top floor bedrooms with a +20% moisture reading using a TRAMEX moisture meter. The complaint is for breach of contract.

The complaint in Studio D Architecture LLC v. Maresso et al alleges that a former employee of the architecture firm set up a competing company before he ceased working for the plaintiff. Plaintiff claims that the defendant misappropriated proprietary information including computer files, created false files on the plaintiff’s computer system and disabled their website. The trade secret count alleges that several other defendants used the proprietary information and that they knew it was proprietary since the defendant was not an architect.

 

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Answer: When your contract obligates you to do so.

We’ve all seen the terms in our contracts, this one is particular to leases:

INSURANCE. (a) Tenant shall, at its sole cost and expense, maintain at all times with responsible insurance carriers acceptable to Landlord licensed to do business in the State of Illinois, insurance covering the premises for the mutual benefit of Landlord and Tenant as follows:

*** (v) Comprehensive General Liability Insurance, with such limits as may be reasonably requested by Landlord from time to time, but not less than a $5,000,000.00excess liability for bodily injury and property damage;

*** (c) All insurance policies shall name Landlord *** [and others] as additional insureds, as their respective interests may appear. Landlord may, by written notice to Tenant, designate other parties as additional insureds. All such insurance shall provide that:

(i) The coverage provided includes the premises;

***(iii) All losses shall be payable notwithstanding any act or negligence of Tenant or Landlord or the occupation or use of the premises for purposes more hazardous than permitted by terms of such policy.

That last part is important. In Illinois, most agreements to indemnify someone for their own negligence are void as a matter of public policy, however, agreeing to obtain insurance to cover someone’s negligence is not void. In fact, it creates an enforceable contract and if you fail to obtain it, even by way of your insurance company providing a policy that excludes it, you’ve breached the lease (or any contract with such a provision for that matter) and can be held liable for the damages that result from failing to obtain the insurance.

In Clarendon America Insurance Co. v. Prime Group Realty, Inc. (1^st Dist., Doc. No. 1-08-0791 & 1985 cons.) that’s exactly what happened. The facts are that Prime Group was the lessor to an entity named Ala Carte Entertainment that ran a restaurant on the property. The lease between the two included the provision above as well as multiple provisions stating that Ala Carte was not indemnifying Prime Group for Prime’s own negligence (something caused by Prime).

A worker was injured fixing HVAC units on the roof of the building. Fixing the HVAC saw Ala Carte’s responsibility, maintaining the rest of the roof was Prime’s. After the worker sued Prime, Prime sued Ala Carte and tendered the defense of the claim to Clarendon, with whom Ala Carte had the policy that was required under the INSURANCE clause. Clarendon filed a declaratory action to have a court find that it had no duty to indemnify Prime and later agreed to defend Prime under a reservation. Prime then sued Ala Carte for breaching its contract because there was a clause in the Clarendon policy to Ala Carte that read:

Policy Change No. 8 Endorsement

If liability for injury or damage is imposed or sought to be imposed on the additional insured because of: (a) Its own acts or omissions, this insurance does not apply.

The circuit court found in favor of Ala Carte and Prime appealed. On appeal, the appellate court found that the anti-indemnity provisions of the contract (those stating that Ala Carte was not to indemnify Prime for Prime’s negligence) did not contradict the insurance provisions because Illinois law has found that you can contract to get insurance for your negligence acts even if you could not be indemnified by a party for them.

Importantly, the court also held that the Endorsement’s negation of coverage for Prime was a breach of the contract provision between Prime and Ala Carte and remanded the case for a hearing on the damages resulting from that breach.

Make sure you read the contract language and either insert or remove this language depending upon your needs… and always read the policy once you get it to make sure it is in compliance with such a provision. A little double-checking in the beginning could have saved everyone this headache later on.

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It’s Friday, so you know what that means, we bring you a collection of the complaints in some of the latest suits filed regarding matters touching on the industry:

• Sure to be of interest to Chicago White Sox fans, Pacific Construction has brought a  breach of contract claim against Maverick Pools. The complaint alleges that Maverick breached the contract by “refusing to unload and install” two pre-manufactured pools and to construct a thermal pool. The damages sought are in excess of $107,496.00.

• The complaints and allegations regarding the current mortgage crisis and the industry are likely just beginning. In this suit, a class action suit for federal securities violations is brought against Corus Bank and several others. The allegations are that Corus failed to tell investors that it was buying condominiums at prices that were inflated in developments financed by Corus and that the purchases caused inflated appraisals which led to inflated values on Corus’ books… So the bank allegedly didn’t actualize the proper losses on the loans it had made for the condominiums.

• In one of the weirder suits we’ve seen over the past year, some owners allege that a building was built on their land without their knowledge. Gavric v. Brosna Construction alleges that the defendants owning a parcel adjacent to the plaintiffs’ constructed “a three story, sub-standard, apartment building” on their property illegally. The complaint alleges trespass, conversion, negligence, seeks termination of a lien placed on their land by the contractor who built the project, a count for slander of title, and seeks remedy under Illinois Forcible Entry and Detainer Act. (735 ILCS 5/9-101 et seq.)

• In a home defect case, Rangel v. Jumic, et al, alleges that defendants failed to disclose material defects that they were aware of prior to the sale of a home to plaintiffs. The defects complained of include problems with the heat distribution system, water infiltrating through the masonry, cracks in portions of the home and problems with the hardwood floors. The suit contains counts for breach of contract, breach of the implied warranty of habitability and fitness for a particular purpose and violations of the Illinois Residential Real Property Disclosure Act. (765 ILCS 77/1 et seq.)

• Finally, a condominium association has brought a suit against the developer of its property at 1255 South State Street as well as the owner of the garage in which residents of the condominium park. The complaint alleges that the developers deal with the owner of the garage and the effect of forcing a fee for parking in the garage that a recorded Declaration had on the plaintiffs was not disclosed to the plaintiffs. Prior to November of 2007, the residents had access to the garage and their parking spaces by use of “a remote clicker” provided by the garage owner and that in November of 2007, the garage owner installed a parking “toll system” that restricted the residents ability to come and go from their parking spaces.  There are several problems with the transponders alleged in the complaint among them, that the new parking system is not a benefit to the users of the property, that the residents were not properly informed of its installation, and that the owner has improperly requested that the residents pay for a portion of the new system. The residents seek a declaratory judgment regarding the new parking system and their rights granted by easement, and allege breach of fiduciary duty, fraud and consumer fraud.

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The first district has upheld an arbitrator’s decision regarding the implication of an indemnity provision and given us a useful reminder that some rote contract language is actually important.

Undoubtedly in your contracts you’ve seen language binding or implicating those subsidiaries, affiliates, successors and assigns – some have argued that the language be removed from agreements or given their own clauses. In Rexnord Industries, LLC v. RHI Holdings, and The Fairchild Corporation (1^st Dist, Doc. No. 1-08-0562) it turned out to make quite a bit of difference.

In Rexnord, two parties agreed to an arbitration of the percentage of a $1.8 million settlement each was responsible for. The settlement was for an environmental claim against Rexnord. Rexnord had previously been owned by RHI, was sold to another company (A), which was acquired by yet another company (B) and was sold before the arbitration to yet another company (C).

The original sale agreement between RHI and company A obliged RHI to indemnify:

“[company A] its affiliates, subsidiaries, successors and assigns from "any and all losses, liabilities, claims, damages, *** costs, etc." relating to RHI's ownership and operation of the property before the spinoff date, "so long as these ‘Losses' arise out of or are in any way related or connected to any Environmental Law; result from any claim by any governmental or private party arising out of or in any way related or connected to any Environmental Law; or result from the generation, use, handling, storage, transport, disposal, release or threatened release of any Materials of Environmental Concern." The indemnity obligation created by the agreement applied "only to the excess of (x) Losses over (y) the sum of amounts collected by Purchaser or Rexnord from third parties." (Slip Op. at 2. emphasis added.)

An arbitrator determined that RHI was responsible for 90% and ordered that it pay Rexnord for that 90% and some other damages. It also determined that company B was an indemnitee under the agreement between RHI and company A. RHI asked a circuit court to vacate the award and the circuit court declined to do so. RHI then appealed.

On appeal, RHI argued that because company B had paid the $1.8 million it was not obliged to pay because company B was a “third party” by virtue of being a subsequent purchaser of company A and by having sold to company C prior to the arbitration. RHI also argued that the arbitrator should not have considered the position of company B as an indemnitee because company B was not a party to the arbitration.

The appellate court disagreed and upheld the award. In doing so, it found that:

• The arbitrator was correct in considering company B as an affiliate or successor.
• The clause for indemnification did not exclude amounts reimbursed by owners or affiliates.
• The arbitrator had the power to consider company B’s status because the issue was raised by Rexnord and RHI in the arbitration.
• Company B was a “successor” under the agreement even though it had subsequently sold Rexnord to company C.

This is a lesson for contracting parties. Even though some language may appear rote or inapplicable, understanding the effect of that language in the context of the deal and knowing the obligations it imposes may help in your transactions and knowing what a court will do can add certainty to the language you are choosing. The inclusion or exclusion of any contractual clause is a determination best made by the parties after considering the eventualities, risks and obligations they wish to plan for.

 

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It's called piercing the corporate veil and the case of Fontana v. TLD Builders, Inc. (2^nd Dist. Doc. No. 2-05-0045) is a simple lesson in what to watch out for when you’re running a small business. It is also an excellent read for anyone wanting to know about the factors a court will look to in determining whether or not your choice of operating as a corporate entity will limit your liability.

In Fontana, the Fontanas sued TLD Builders after TLD defaulted on a contract to build the Fontanas' a home in Clarendon Hills, Illinois. The Fontanas had signed a contract for TLD to build the home and TLD started and apparently didn’t finish the project. As a result the Fontana’s had to demolish the partially constructed home because the damage caused by the work stoppage made the cost of completion well in excess of the $2.2 million the home would be worth if it was completed.

The Fontanas also sued the architect who settled with them prior to trial.

The Fontanas sought not only to be reimbursed from TLD, but recognizing that TLD was an underfunded corporation that would likely not have the ability to satisfy the $2 million judgment they were seeking, they also filed an action against TLD’s president seeking to hold him personally liable for any damages – even though his wife was the sole owner of the company and he only ran it.

The Fontanas won their case and the court determined that the president was liable and that the corporation, even though it was properly incorporated, was used as nothing more than a shell where the president ran the operation.

The appellate court upheld the decision… The factors the court looked to in determining whether or not liability would be limited to the corporation or passed on to the president are important factors to watch for in your operations to make sure that the corporate designation you’ve paid for is actually going to protect you:

• The fact that the president didn’t own the company but that all the shares were in his wife’s name was not a factor that would protect him – he ran the business and acted as though its assets were his own.
• There was no record of the initial $1000 check purported to be paid by the wife for the 1000 shares ($1 per share) when the corporation was created.
• The corporation had little to no money in its accounts and even made loans after it was sued – an alleged attempt to divert the assets to try and avoid having any money to pay in satisfying a possible judgment.
• The corporate minutes did not reflect resolutions or votes authorizing some of the loans made to various people and entities.
• The corporate minutes did not attach legal descriptions to resolutions to sell properties.
• The director (owner) had no real decision making power and/or did not exercise it.
• Even though by-laws, resolutions, shareholder actions, and tax returns were filed with the state and a separate bank account and financial records were kept, there were many corporate records that were not kept, like the resolutions regarding loans, notes or claims of indebtedness, nor records of repayments.
• The company never actually paid a salary to anyone, and the tax returns did not show payment to corporate officers – funds were transferred from the corporate account into personal checking accounts.
• Monies were transferred after the suit was filed and the corporation was left with little money at the time of judgment - salaries were paid and monies were loaned when a suit was in place (this was read as an apparent attempt to transfer assets before a judgment was rendered).

For both people going after a corporation that has been less than honest, and for those looking to use their corporate status in order to keep from being held personally liable, paying attention to these formalities is important.

The corporation, or LLC exists as a method of helping us all come together to create more wealth and to take chances on creating capital that we might otherwise not take. Not keeping up the requirements imposed by states for operating those entities will result in losing the protections they offer.

On a different note, this opinion also contains a section on awarding attorneys fees pursuant to a contractual provision that read:

"To the extent Builder or Purchaser fails to comply with provisions of this Contract, the other party may retain an attorney to assist it in the enforcement of the provisions of this Contract, and the party at fault (i.e., not in compliance with the provisions of this Contract), shall pay any and all reasonable expense relating to the enforcement of the provisions of this Contract."

While the court did find that reasonable attorney's fees were recoverable under the contract, the opinion does note that it may be better practice to include the term “attorney’s fees” when drafting a provision for a party to bear the costs of another’s attorney.

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Without extrinsic factors altering the situation, generally only the people in possession and control of a property are liable for its negligent maintenance. Most often, the lessee who is in possession is liable for injuries sustained by third-parties and caused by a failure to keep the property in good repair.

This is usual in most cases, since a lease is traditionally a conveyance of property which ends a lessor’s control over the premises (for an interesting article on the evolution from leases as property interests to more contractual arrangements, see Orth, John, “Leases: Like Any Other Contract”, Green Bag, Autumn 2008).

However, in the recent opinion of Fan v. Auster Company, Inc. et al (1^st Dist. Doc. No. 1-07-2604) ambiguity in the language of a lease has created confusion that could be detrimental to an otherwise protected landlord.

You don’t need to consult the Manual of Style for Contract Drafting to know that ambiguity can cause uncertainty in a contract and that sometimes more particularity is required in your agreements – although Ken Adams has written plenty of informative posts about the topic.

The Fan case raises some interesting issues and is worth the read.  Pertinent to our discussion about lease language, the facts of the case are that a worker was killed after he fell into an open elevator shaft. His widow sued and the case was dismissed by the trial court which found that the lessor of the building had no duty to repair the defects in the elevator that caused the fall because it had no obligation under the lease to do so. The widow appealed.

The lease agreement between the lessor and the lessee said that the lessor was “solely responsible” for maintaining the “structural elements” of the premises and that the lessee was responsible for keeping nonstructural elements “in good repair.”

“Paragraph 14 of the primary lease was entitled “Repairs and Maintenance,” and it described the lessee and the lessor’s respective obligations for both “non-structural” elements and “structural elements.” It stated, in full, as follows:

“A. Lesee shall keep all non-structural portions of the Leased Premises and appurtenances thereto in a clean, sightly and healthy condition, and shall maintain all portions of the Leased Premises (except to the extent the Lessor is obligated to maintain the same, as provided in Section 14.B) in good repair, all according to the statutes and ordinances in such cases made and provided, and the directions of public officers thereunto duly authorized, all at its own expense, and shall yield the same back to Lessor upon the termination of this Lease, whether such termination shall occur by expiration of the term, or in any other manner whatsoever, in the same condition of cleanliness, repair and sightliness as at the date of the execution hereof, loss by insured casualty and reasonable wear and tear excepted. Lessee shall make all necessary non-structural repairs and renewals upon Leased Premises and shall replace broken globes, glass and fixtures with material of the same size and quality as that broken.

“B. Lessor shall be solely responsible, at Lessor’s sole cost and expense, to maintain the roof, foundation and structural elements of the building in which the Leased Premises is located. Notwithstanding the foregoing, Lessee covenants, throughout the term of this Lease, to take good care of all portions of the Leased Premises’ interior and exterior, structural and non-structural, including without limitation, all gas, electric and plumbing fixtures, systems or equipment, other equipment and/or fixtures located upon the Leased Premises, motors, machinery, roof, ceiling and parking lot, and shall promptly repair at Lessee’s sole cost and expense, any damages to the Leased Premises or the building in which the Leased Premises is located, which is caused by Lessee or Lessee’s agents, representatives or contractors. The term ’repairs’ shall include replacements or renewals when necessary, and all such repairs made be Lessee shall be equal in quality and class to the original work and/or item being repaired. At the termination of this Lease, Lessee shall surrender the Leased Premises in the same condition as when received, reasonable wear and tear excepted.”

While the parties to the case had not addressed the issue in their briefs, the Court held that there was an actual issue as to whether or not the cause of the accident was or was not “structural,” e.g. that the failure to have a sliding – interlocking – mechanism in front of the shaft was a “structural” defect. The appellate court remanded the case for a determination regarding whether the cause of the accident fit the definition.

You can see in the language that the lessor’s obligation in Paragraph 14(B) starts to enumerate things like the roof, the foundation and then includes “structural elements,” rather than continuing to define the elements, or than having a “definitions” section at the beginning of the agreement that would elaborate on such a term. If the term were defined, the lessor may have avoided liability (or it could have kept the original summary judgment from happening.) In any event, the lesson is to keep an eye on your contract terminology and make sure the terms you’re using have the meaning and specificity you intend, without ambiguity.

Of note to practitioners is a portion of the opinion in which the court upheld the contractual obligations of the handwritten language “The Lessee assumes all payment and performance terms of the lease attached hereto. In the event, there is an inconsistency between this and the attached, the attached shall control”  which had been added as an afterthought to a sublease – and which made all the difference in this matter by enforcing the terms of the original lease against the sublessor.

 

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Last week we brought you the complaint against Castle Construction. This week, we feature another move by Attorney General Lisa Madigan on behalf of home-owners across the state.

With the spring remodeling season underway and construction beginning for many, Madigan addressed the issue – from her press release:

“Home repair, remodeling and construction complaints consistently rank among the top that my office’s Consumer Fraud Bureau receives each year, especially during the warmer months,” Madigan said. “Consumers need to make sure to ask questions before choosing a contractor so that they can avoid the types of companies we have sued today.”

To that end, the Attorney General’s office brought several suits against:

• Boss Construction, Inc., a New Lenox, Ill., based company that sells and installs gutters, downspouts, roofing, siding, doors and windows, and its President Steven R. Smith,
• Alpine Glass & Window Co., a Wilmette, Ill.-based window and door installation company, and its President Carol L. Bernahl,
• John M. Burow, doing business as John’s Home Repair, a Willow Springs, Ill.-based home repair service,
• Shane Rasmussen and Paul Haley of 123 General Construction, Inc., a Frankfort-based remodeling company,
• American Dream General Construction Company, based in Berwyn, Ill., and its President Carlos Villalvazo.

We have the complaint against American Dream and Villalvazo here.

The acts alleged in the complaint are important for home-owners and can act as a guideline or at least offer some insight about things to look for when contracting for repair and remodeling work:

 

 

• Make sure your contractor is licensed as a roofing contractor if they’re doing roofing work for you;
• Don’t let payments in advance of work get too costly, you should see some performance before they start taking your money, and then payments should be made incrementally, but not without a waiver (see below);
• Ask for your consumer rights pamphlet on home repair “Home Repair: Know Your Consumer Rights” made public by the Attorney General’s office;
• Check the construction permits to make sure they’re accurate and valid;
• Get a full accounting and demand a written sworn statement and waiver of lien before you make any payments… do not give over any form of large down-payment;
• Know about your three-day right to cancel;
• Do your research – How was this company recommended? Are they a company? Are there online comments about the company or its work? – Is a license required for their specialty?
• If you’re having trouble getting in touch with your contractor, or your phone calls aren’t being returned, you may think about contacting someone who can help;

Protecting yourself and your rights is the first step in making sure you don’t get taken for a ride.

                The Southtown Star has also published an article on this matter.

 

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When the inferences reasonably drawn from the circumstances lead to only one probable (as opposed to possible) conclusion.

In Majetich v. P.T. Ferro Construction Company, the defendants were charged with negligently reconstructing a parking lot, which alleged caused Edythe Majetich to fall and sustain injuries that led to her death.  

P.T. Ferro was in the process of resurfacing the parking lot at the Town and CountryPlaza in Joliet, Illinois. The old pavement had been removed, but the parking lot had not yet been repaved. 

 

Edythe Majetich, who was approximately 89 years old at the time, fell while attempting to step up from the parking lot to the cement sidewalk in front of the plaza stores. She sustained injuries to her head and died 11 days later.

 

Allegedly, the step up from the parking lot onto the sidewalk was one-to-two feet in height where a handicapped ramp was previously located. There were no eyewitnesses to the fall. However, after the fall, several workers from the adjacent stores came to Ms. Majetich’s aid. The store workers provided testimony based on their observations and conversations with Ms. Majetich after the fall. Ms. Majetich reportedly stated that the step was too big. Further, she stated that she was reaching for a pole to help herself up the step when she fell. Significantly however, Edythe Majetich did not tell anyone what actually caused her to fall.

 

The decedent’s physicians testified that she suffered from transient ischemic attacks, which involve blurred vision and dizziness. Additionally, the decedent suffered from macular degeneration, which causes progressive vision loss. Furthermore, Ms. Majetich’s ability to walk was impaired by arthritis. Two years prior to her accident, Ms. Majetich was seen by a neurologist for tremors in her head and hands. Ms. Majetich reported a history of falling and difficulties with balance to the neurologist. 

 

The defendants (contractor and premises owner) moved for summary judgment claiming that the plaintiff could not establish the proximate cause of decedent’s fall. The trial court granted the motions and the plaintiff appealed.

 

Appreciably, a plaintiff need only present some evidence creating a genuine issue of fact to defeat a motion for summary judgment. Accordingly, the plaintiff argued that the circumstantial evidence was sufficient to raise a question of fact respecting the cause of the decedent’s injuries/death (i.e. creating and maintaining a dangerous condition). As support, the plaintiff cited the statements made by the decedent to the store workers that she fell while attempting to step up onto the sidewalk where a handicapped ramp was previously located. 

 

The Appellate Court held that the evidence failed to establish causation. Majetich v. P.T. Ferro Construction Co., No. 3-08-0104, p. 16 (April 1, 2009). The court explained that in order to defeat a motion for summary judgment, circumstantial evidence must make the conclusion more probable rather than merely possible. Id. at 10. The court concluded that the decedent’s post-fall statements provide only circumstantial evidence that the defendants’ negligence was a possible cause as opposed to a probable cause of the accident. Id. at 11. In its reasoning, the court noted the considerable evidence concerning the decedent’s prior medical conditions, including tremors, macular degeneration and history of falling. Id. at 15. Furthermore, while circumstantial evidence may be sufficient when an inference may be reasonably drawn from it, a proper inference cannot be based on speculation as to what possibly caused the injury. Id. As explained by the court, the evidence only establishes that Ms. Majetich (1) noticed a high step, (2) reached for a pole, and (3) fell. Id. Such evidence is insufficient to rule out countless other possible reasons people fall. Id. at 15-16. 

 

The Majetich decision illustrates how important affirmative evidence concerning proximate causation is to a plaintiff. Circumstantial evidence alone cannot establish proximate causation where more than one conclusion can be drawn from the circumstances. 

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The situation is common… You’ve decided to build, there’s a building on the site and you need to tear it down and excavate in order to construct your project. You get a policy for the work, but you’re not performing it – you’ve hired a contractor who’s hired a sub to do the tear-down and excavation. Something goes wrong during the excavation and the building next to your site is damaged, or collapses… sometimes beyond repair.

You are sued, and beyond looking to your contractor and the subs for indemnification and possible coverage under their policies, you figure, “no sweat, I’ve got my own policy,” so you tender the complaint to your own carrier expecting coverage under a policy that you’ve paid for… but your insurance company says “sorry, you’re not covered here… take a look at the exclusions.”

They point you to a standard comprehensive general liability policy (CGL) exclusion that continually has varying application:

EXCLUSION - CONTRACTORS AND SUBCONTRACTORS

The following exclusion is added to Paragraph 2. Exclusions of SECTION I - COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY, COVERAGE B - PERSONAL AND ADVERTISING INJURY LIABILITY and COVERAGE C - MEDICAL PAYMENTS:

This insurance does not apply to "bodily injury", "property damage", "personal and advertising injury" or medical payments arising out of operations performed for you by contractors or subcontractors you hire or your acts or omissions in connection with your general supervision of such operations.

Your carrier feels so right about the determination that they file suit seeking a declaration that there is no coverage under your policy, a court agrees… and just like that, you’re back to hoping that your contract with your GC has an indemnity provision and requires that someone name you as an additional insured.

The recent, Seventh Circuit case of Nautilus Ins. Co. v. 1452-4 N. Milwaukee Ave. LLC, has done a good job in both analyzing this matter and making it understandable for owners who find themselves in this predicament. 

The situation in Nautilus is that described above. The owner/developer was sued under multiple theories including negligence and liability under the Adjacent Landowner Excavation Protection Act (740 ILCS 140/0.01 et seq.) after the work of its GC/subs caused damage to building next door that required the demolition of the neighboring building.  A copy of the original complaint filed by the insurance company with the policies attached is here.

Here’s what was at the spot:

Here’s what it looked like after it was demolished:

View Larger Map

 

The insurance company moved for a determination that there was no coverage under the policy based on the Contractors and Subcontractors exclusion (along with another exclusion – which was not terribly relevant to the appeal). The district court found that there was coverage and the company appealed - on appeal the court held that the exclusion applied and there was no coverage given that the policy’s exclusion was clear and that all the theories for recovery advanced against the owner were directly caused by the work of the GC/subs… to which the exclusion applied.

The theories of liability directly attributed to the damage cause by the GC/subs made for an easy determination under the policy language, but the owner raised an interesting argument with respect to the statutory claim:  it was the failure of the owner to give the required notice to neighboring owners under the act that gave rise to liability under the statute… so the statutory claim should be covered because liability under it was directly caused by the owner.

The court said that the statutory claim against the owner was also not covered because it sought “recovery for the same loss as all the other claims – the property damage arising out of the faulty excavation performed by [the owner’s] contractors and subcontractor – and coverage for that property damage is excluded by the contractor-subcontractor exclusion.”

In normal situations there would be other opportunities for coverage or indemnification by contract. An owner would likely have included the indemnity provision in its contract with its GC as well as a provision requiring indemnity or that it be named as an additional insured on the GC/subs policies.  

 

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Mr. Wescott over at the Electronic Discovery Blog has posted about an opinion in a construction delay case from New York involving the parties poor creation of search terms in their attempt to get electronically stored information (in this case – e-mails) from the owners construction manager.

The search terms provided by the owner were too vague and narrow and the search terms provided by the party seeking the company were too broad and would have resulted in the production of almost the entire email database of a company involved in the construction industry… imagine what a search for “change order” would produce in your system if not properly tailored to the suit at hand.

The court admonished the parties and crafted its own terms… an on an interesting note, stated that the problem of turning over e-mails not related to the project in dispute could be avoided if the company producing the emails [Hill] had used a standard “Re:” line for discussing the project.

“Hill's only contribution to the discussion was to agree that DASNY's search terms were probably too narrow but the other parties' terms were overbroad, and that Hill did not want to produce emails that did not relate to the Bronx Courthouse project. This problem would have been avoided, of course, if Hill used a standard "Re" line in its Bronx Courthouse emails to distinguish that project from its other work. It did not do so, however. Moreover, while Hill was in the best position to explain to the parties and the Court what nomenclature its employees used in emails, Hill did not do so -- perhaps because, as a non-party, it wanted to have as little involvement in the case as possible.”

The point is not lost, with a policy or standard in place not only are the irrelevant emails left out of the search, but a party could have the court look to the policy to say that it had produced the relevant documents and possibly avoid a costly electronic discovery dispute.

The fact that everyone communicates with e-mail these days should get you thinking about putting a document retention policy in place and having company policies for the use of all your electronic media. The Illinois State Courts are far behind the Federal Courts in addressing the issue of electronically stored information and how to handle it in discovery. However, it is not unlikely that you could find yourself in Federal Court or that the Illinois State Court’s could implement their own plans and procedures regarding this information.

 

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Check your bids… Double-check your bids… Triple-check your bids.

In a suit over a $244,600,000 project, the Appellate Court ruled in this case that the failure to include a copy of the MWRDGC’s Affirmative Action Ordinance’s required “Utilization Plan” with the bid is a material failure which allowed the rejection of the applying joint-venture’s low bid and the award of the contract to the next-highest bidder.

That’s right. The opinion again reemphasizes the law that a minor variance between the submitted bid documents and what is required will not require the rejection of the proposed bid but a “material” variance will require rejection.

The elaboration on what is material is best left to the circumstances of each case, but we know from this opinion that leaving out a signed form that would bind the bidder to its listed subcontracts allowed for an unequal bargaining power between bid-submitters that was material. The argument is that without the signed form, a bidder could try to walk away from its contracts with the subs or renegotiate them – an option that those bidders signing and submitting the form with the entire contract would not have.

Interestingly, the court also noted that the failure to submit the form created an issue about whether a contract was even formed given that there would be no acceptance of the offer put forth by the MWRDGC when the offer included the need to submit the form. The court found that the failure to comply with all the terms of the offer was not an acceptance of the offer but rather, technically, a rejection of the offer and submission of the bid without the required form was the proposition of a counter-offer.

The first justification for upholding the award of the contract to the next-lowest bidder (one that did comply with the contract terms and submitted the proper forms) is one we’ve all seen before. The second justification is a bit different. It relates to the law of actual contract formation and brings into the arguments over the rejection of public-bids an entirely new justification, that, while always present in contract law, is not the limited notion of “material v. minor” that we are used to in bid disputes.

In any event – making sure you’ve complied with the full terms of the bid process is always a good idea.

The opinion can be found here.

 

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It’s a lesson we should all have picked up in kindergarten, but in your business it's even more important now that the Illinois Supreme Court has rendered its decision in Newton Tractor Sales, Inc. v. Kubota Tractor Corporation (Docket No. 106798).

In Newton, the Kubota tractor corporation was sued by the Newton dealership. The dispute centered on Newton’s decision to purchase a Vandalia tractor dealership. Kubota had a deal with the Vandalia dealership where it was the exclusive Kubota dealer in the area and Newton wanted to be sure that if it bought the Vandalia store, it wouldn’t lose the Kubota line.

Newton allegedly met with representatives of Kubota to make sure that after the purchase of the Vandalia store, they would still be the Kubota dealer. In order for the new store to get the Kubota deal, the old store owner had to sign a termination agreement with Kubota to end the sale of the Kubota line and the new store – now owned by Newton – would have to apply for permission to sell. A Kubota representative allegedly told the parties that “They [Newton] would be the dealer” which induced the old owner of the Vandalia store to sign an agreement terminating the Vandalia store’s then existing right to sell Kubota.

You’re reading this, so you can guess that Newton’s application to sell the line at the recently purchased Vandalia store was denied.

Newton went to court to enforce its rights and sued under a theory of promissory estoppel… which is why the opinion is important. When there is no contract or someone relies on your promise to their detriment, this cause of action may be available. In order “to establish a claim, the plaintiff must prove that (1) defendant made an unambiguous promise to plaintiff, (2) plaintiff relied on such promise, (3) plaintiff’s reliance was expected and foreseeable by defendants, and (4) plaintiff relied on the promise to its detriment.”

The trial court ruled that Newton couldn’t maintain this cause of action because it wasn’t recognized as such in Illinois. The appellate court affirmed…. and the Illinois Supreme Court corrected their mistaken impressions. The cause of action does exist in Illinois and people can use it to sue when they’ve relied to their detriment on someone else’s promise. (see the factors we listed above).

The Supreme Court also addressed and rejected an argument made by Kubota that allowing people to sue under this doctrine would wreak havoc on our industry:

“With respect to the first issue, Kubota points in particular to relationships in the field of development and construction. In construction, before a general contractor is awarded a bid, it must approach one or more subcontractors for their respective bids on specific parts of the overall project. Kubota expresses concern that promissory estoppel, as an affirmative action, would “erode the incentives for parties to carefully consider and detail the contractual terms and obligations in their relationships, and it would unfairly and unnecessarily expose one of the parties to unilateral obligations.” Citing a North Carolina case, Kubota argues that promissory estoppel would “force[ ] the subcontractor to be bound if the general contractor uses his bid, even though the general contractor is not obligated to award the job to that subcontractor.”

“We note that the scenario envisioned by Kubota is not the scenario presented in this case. Newton and Kubota did not have a general contractor-subcontractor relationship. However, we also note that our own appellate court has addressed the particular issue of subcontractor bids and has applied the promissory estoppel doctrine. See Pickus Construction & Equipment, 326 Ill. App. 3d at 523-27; Illinois Valley Asphalt, 90 Ill. App. 3d at 770-71; S.M. Wilson & Co. v. Prepakt Concrete Co., 23 Ill. App. 3d 137, 139 (1974) (“The doctrine of promissory estoppel is recognized in Illinois”). Given the appellate court’s experience and familiarity in addressing this scenario, we remain convinced that allowing promissory estoppel as a cause of action will not affect the existing relationship between general contractors and their subcontractors and suppliers. Therefore, we reject Kubota’s first public policy argument.”

The lesson here is no joke. Be careful what you’re promising and when you’re promising it in a transaction.

 

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We’ve been following this mechanic’s lien case for you and wrote about the appellate court opinion here, and the decision to allow appeal here. Now that oral argument has occurred, we can soon expect the opinion, but before that happens, here’s something you’ll want to watch… the video of the oral argument. (.wmv file new window)  A link to just the Audio is available as well. (new window)

 

 

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In Dorris v. Baxter & Woodman, the plaintiff, Leon Dorris, filed a lawsuit seeking damages for personal injuries sustained when he fell from a metal-grated walkway (air  bridge) that collapsed while he was working on the renovation of a wastewater treatment  plant owned by the City of Woodstock. In his lawsuit, Plaintiff named Baxter & Woodman, Inc. (“Baxter & Woodman”), Joseph J. Henderson & Son, Inc. (“Henderson”)  and Enviroquip, Inc. (“Enviroquip”) as defendants claiming the negligence of each entity proximately caused his injuries. Baxter & Woodman, an engineering firm, was retained by the City of Woodstock to provide engineering services and serve as the City’s representative on the construction project. Henderson was the general contractor for the project and Enviroquip was the manufacturer of the air bridge[1]. Plaintiff worked for Fischer Mechanical Group (“Fischer”),  the plumbing subcontractor on the project. 

As part of the construction project, Henderson erected/constructed a metal-grated platform as part of an air bridge that was to provide access to the center of a digester (large concrete tank used to treat wastewater). Two weeks after Henderson had installed the metal- grated platform, Plaintiff was walking on the platform when a portion of the metal grating collapsed causing him to fall into the digester. At the time of the accident, the metal grating was not secured with banding at the edges or with attachment clips at the ends as specified in the manufacturer’s installation instructions. The specification for the metal grating, included in the construction documents, required that the edges of the grating be secured with banding bars and that the metal grating be installed in accordance with the manufacturer’s installation instructions and approved shop drawings. The manufacturer’s instructions, which stated that the  grating should be banded at the edges and secured with at least four attachment clips at each end, were contained in a shop drawing approved by Baxter & Woodman and included as a  specification in the construction documents. 

The duties and responsibilities of Baxter & Woodman were defined in the contract documents. Specifically, Baxter & Woodman contractually agreed to act as the City’s on-site  project representative during the construction. Baxter & Woodman agreed to enforce the plans, drawings, and specifications and to “provide full and complete construction supervision  services.” The construction supervision services included “daily inspection” to ensure that all work was performed “in conformity with the Contract Documents.” Baxter & Woodman was further required to review and approve shop drawings, manufacturer’s literature and other submittals for compliance with the drawings and specifications. Significantly, this review and approval included the means and methods of construction that were “specifically and expressly called for by the Contract Documents.” Further, Baxter & Woodman had the authority to reject work that did not conform to the contract documents. 

Baxter & Woodman’s contract obligated it to provide a resident project representative to  observe the work in progress and assist the engineer in determining if the work is “proceeding in  accordance with the Contract Documents.” The resident project representative was required to report any work that “does not conform to the Contract Documents.” Per it contract, Baxter & Woodman had the authority to direct or assume control over “any aspect of the means, methods, techniques, sequences or procedures of construction [where] such advice or directions are specifically required by the Contract Documents.” 

Prior to trial, Baxter & Woodman was granted summary judgment as the court determined that it did not owe a duty to Plaintiff.  This decision was based on the court’s belief  that any duty Baxter & Woodman had to inspect the air bridge for compliance with the plans and specifications had not arisen as of the time of Plaintiff’s accident since the construction of the air bridge was not complete when Plaintiff fell. However, the trial court later reversed itself based on the fact that Baxter & Woodman’s contract did not require it to inspect the construction for compliance with the plans and specifications only after the work was complete. There was also deposition testimony indicating that Baxter & Woodman’s resident project representative had the authority to inspect the work whenever he chose. Further, it was Baxter & Woodman’s job to make sure that the work was performed in accordance with the plans and specifications and the construction documents expressly provided that the metal grating for the air bridge be banded and clipped before the platform was assembled over the digester. As such, the trial court reinstated the case against Baxter & Woodman. 

At trial, Baxter & Woodman’s resident project representative, Kevin Hinderliter, testified that he inspected ongoing work for defective materials and to enforce the contract specifications throughout the course of the project. Mr. Hinderliter acknowledged that he had at times discovered work that did not meet the specifications, and in those instances, he directly advised the contractor of the variance so the defect could be corrected. Mr. Hinderliter testified that, at time, he specifically insisted that certain work be redone in a manner that complied with the specifications. Additionally, Mr. Hinderliter discussed safety issues at Baxter & Woodman’s progress meetings and dealt with safety concerns. Furthermore, Mr. Hinderliter testified that on the day of Plaintiff’s accident, he knew that the grating did not have the banding along the edges or the attachment clips at the ends as required by the specifications.

At the close of the evidence, the jury found that Baxter & Woodman was 70% liable for Plaintiff’s injuries and returned a verdict of $11 million in favor of Plaintiff. Judgment of $3,675,000 was entered against Baxter & Woodman after the set off from the Henderson/Enviroquip settlement.

Baxter & Woodman appealed claiming, in part, that it owed no duty to Plaintiff.

The First District Appellate Court held that Baxter & Woodman had a duty to exercise its supervisory authority to ensure that the air bridge’s metal grating was secured by banding bars and attachment clips. Dorris v. Baxter & Woodman, No. 1-07-3126, p. 13 (December 2, 2008). In its reasoning, the Court cited various portions of Baxter & Woodman’s contract which obligated it to enforce the specifications, including the means and methods of the work that were expressly provided for by the contract documents, and provided authority to reject work that did not conform to the plans. Id. As such, the Court stated that Baxter & Woodman clearly and specifically agreed to this duty by the terms of its contract. Id. Further, the Court concluded that the contract documents required Baxter & Woodman to inspect the work for compliance with the specifications on an ongoing basis and to reject work that did not comply with the construction document. Id. at 14. Accordingly, the Court cited Putman v. Village of Bensenville, 337 Ill. App. 3d 197, 208, 786 N.E.2d 203 (2^nd Dist. 2003) in stating that a claim of negligence may be based upon the failure to perform an act required by contract. In such circumstances where the duty of care arises out of a contract, the scope of such duty is defined by the terms of the contract. Putman, 377 Ill. App. 3d at 208-09; see also Ferentchak v. Village of Frankfort, 105 Ill.2d 474, 482, 475 N.E.2d 822 (1985). 

In Illinois, a design professional has a duty to protect a subcontractor’s employee from injury on a construction site where the design professional undertakes significant supervisory responsibilities or agrees to ensure that the work is performed in accordance with the contract documents. Dorris v. Baxter & Woodman, No. 1-07-3126, pp. 12-13 (December 2, 2008); see also Miller v. DeWitt, 37 Ill.2d 273, 284-85, 226 N.E.2d 630 (1967). 

This duty will not be charge of a design professional where the contract provides that the design professional (1) has no supervisory responsibility, (2) has no control of or responsibility for the means, methods, techniques, procedures or sequences of construction, (3) has no responsibility for the failure of any contractor to perform the work in accordance with the contract documents, and (4) has no responsibility to devise, implement or enforce any safety precautions or programs for the project. Dorris v. Baxter & Woodman, No. 1-07-3126, pp. 12-13 (December 2, 2008); see also Putman, 337 Ill. App. 3d at 208-09; Ferentchak, 105 Ill.2d at 480-81, 475 N.E.2d 822 (1985).

Some pointers:

• In order to avoid claims and the liabilities as incurred by Baxter & Woodman, it is very important for design professionals to take certain precautions in drafting their contract. A design professional’s contract should explicitly detail the scope of services it is providing. The contract should unambiguously state that the design professional (1) has no supervisory responsibility, (2) has no control of or responsibility for the means, methods, techniques, procedures or sequences of construction, (3) has no responsibility for the failure of any contractor to perform the work in accordance with the contract documents, and (4) has no responsibility to devise, implement or enforce any safety precautions or programs for the project. As part of a design professional’s construction administration services, the designer often reviews the general progress of the work and may certify that work was performed in accordance with the contract documents. However, if this service is to be included in the design professional’s scope of services, the contract should explicitly state that the designer is not required to make an exhaustive or continuous inspections of the work and that the designer is not required to ensure proper construction methods or safety precautions or to see that construction documents are followed. Rather, the design professional may provide opinions or recommendations to the owner, which the owner need not necessarily follow. 
• Additionally, it is equally important for design professionals to strictly adhere to their contract and not assume any additional duties by their conduct. The design professional should also avoid maintaining a continuous on-site presence so as to avoid any inference that it is supervising the construction or in control of the premises. Further, the design professional should avoid holding or attending jobsite safety meetings or inspections so as to avoid any inference of control or supervision over safety. If the design professional becomes aware of a variance from the construction documents or any potential safety hazard, the designer should report the issue to the owner and qualify its report as an opinion or suggestion for consideration by the owner. The designer should not directly stop any contractor’s work or issue any directive based on the construction work. Again, reporting opinions for consideration to the owner with a qualifier (i.e. this report is only the opinion of the designer and does not constitute a directive of action or in any way modify the designer’s responsibilities or duties under its contract) is the most prudent course of action. 

Following these recommendations does not guarantee that the design professional will not be sued or even found liable; however, these tips are provided to help reduce the risk of exposure associated with design professionals’ services.

 

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A good document retention policy is a must and tailoring it to anyone involved in Illinois’ construction industry is an important part of its creation. With the advent of electronic discovery we all need to be aware of just how much we’re deleting when we erase files. In a fun article over at Law.com, Craig Ball has challenged the Gutmann method (that you need to overwrite your hard drive 35 times to completely erase data). The reality will be fascinating to those of you interested in making sure erased files stay erased.

In a suit filed in Cook County, the developer of the Palmolive Building (seen below) has sued its architecture firm for money that it may be forced to pay in arbitration with Pepper Construction in an arbitration action brought by Pepper against the developer. A copy of the complaint is here.

For those of you wondering why those forum selection clauses are so important, given that Illinois law mandates that construction contracts for project in Illinois be litigated in Illinois under Illinois law… Here’s a complaint filed by FC Stone against former clients who brought a suit in California despite a forum selection clause in their contracts. The suit is for the monies FC Stone had to expend to enforce the forum selection clause in the California court. Paying attention to both the Illinois law and the forum selection clause in contracts can help avoid such a challenge.

The Hartford is suing Grace Electrical Construction for close to $1.8 million that it had to pay out on bonds because Grace allegedly failed to perform. Under the Illinois Public Construction Bond Act (30 ILCS 550) Grace was required to obtain the bonds, but Hartford alleges that it has received more than $2.5 million in claims on the bonds that Grace was responsible for and has paid out the $1.8 million to settle those claims. The complaint can be found here.

 

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Apparently defendants in an action brought against them by a condominium association can now challenge the ability of the board to bring the action even if the entity named in the suit is just the association.

We haven’t seen the pleadings, and the opinion only states that the “complaint was filed by the Association’s board of directors.” However, the named plaintiff in the caption is the association and not the board of directors on behalf of the association and the trial court docket reflects the association as the party as well.

In River Plaza Homeowner’s Association v. Healey et al. (1^st Dist. Doc. No. 1-07-1281), The suit was brought to stop the proposed construction of a multi-unit condominium by an existing multi-unit condominium building next door to the construction site. As we said, the opinion states that the named plaintiff is the association for the existing condominium, but the board of directors brought the suit. The defendants challenged the standing of the board of directors to bring the suit because the board had not gotten the 2/3’s vote of the association’s members required by the condo’s by-laws for the board to bring suit on behalf of the association. The trial court dismissed the case and all the parties apparently agreed that the suit could be brought if the vote were taken and 2/3 majority voted to sue. The plaintiff appealed the issue. (other issues were also raised by defendants on appeal based on the trial court’s dismissal, but they are not the topic of the opinion nor the topic we are addressing).

The opinion is about the standing of the board to bring the suit, but another word is used once in the opinion to describe the case. On page 12 of the opinion the court says “In the case at bar, the trial court dismissed the complaint due to the board’s legal incapacity to bring this suit on behalf of the Association.” (our emphasis). Again, this leads us to believe there was something in the pleadings that led to this result, but the Association is the only named entity and the board is not implicated by the caption.

In addressing the issue of whether or not defendants had the ability to challenge the standing of the board, the court cited a case about the exclusive authority of the board to bring a suit in a case where unit owners had attempted to intervene and bring their own suit when a condo board was already bringing a suit on behalf of an association. Board of Directors of Kennelly Square Condominium Ass'n v. MOB Ventures, LLC, 359 Ill.App.3d 991, 836 N.E.2d 115 (1 Dist. 2005).

However, in Kennelly, the matter raised by defendants was the impropriety of the unit owners individual suits when Section 9.1(b) of the Illinois Condominium Property Act (765 ILCS 605/1 et seq.) gave the Association the right to bring the action and the ability to enforce the rights of the unit owners exclusive of the unit owners individual suits. The court reasoned that this was proper given the language of 9.1(b) and the public policy result that no defendant should be made to defend piecemeal litigation if suits could be maintained by every unit owner and the Association.

There appears to be no such implication in this suit, rather, the court has allowed defendants who are neither parties to a contract (the condo declaration and its by-laws), third-party beneficiaries of a contract or who have been given a statutory right, to enforce the terms of the agreement. 

This doesn’t seem right. If ABC corporation’s rights have been infringed and a suit is brought in which ABC is the named plaintiff against a defendant -- would the defendant in such a case have a right to say that because ABC’s corporate by-laws contain a provision that requires that before a suit be brought in the name of ABC a 2/3 vote of the shareholders must be obtained and the 2/3 vote has not been obtained therefore a suit cannot be filed against the defendant? Aren’t the shareholders of ABC the only parties who have the ability to challenge whether or not the conditions of the by-laws have been met. How could a third-party, without any stake in ABC contest whether or not ABC followed the by-laws.

Again, the use of the term “incapacity” on page 12 is interesting. Black’s law dictionary defines “representative capacity” as “The position of one standing or acting for another, esp. through delegated authority.” The laws give the condo association the status of a not-for-profit entity and it must be registered as such, it has the ability to sue and be sued, but the court here looks to the fact that the board of the association seems to have directed that the association bring suit without attaining a 2/3 vote. It appears that what the court is doing is stating that because the authority was not given, the association has no capacity to bring suit... but standing is the doctrine that they invoke when the board apparently directed that suit be brought and even though the association has standing and it is the named entity, not the board.  Perhaps some strange application of the ultra vires doctrine is being applied stating that unlike other corporations, a condo association must show that it complied with its by-laws before asserting the rights that any other corporation would have... but that's not addressed in the opinion.

Apart from the idea that we do not know what was in the pleading that brought the issue of the board bringing the suit on behalf of the association into question, or why, when the association is the named party, a capacity/authority/standing issue can be raised about the board not achieving a 2/3 vote, some real issues arise from this opinion:

• Does it only apply to associations or will defendants be allowed to challenge the standing of a corporation if the corporation has a rule in its charter or operating agreement that contains a clause stating that before an action can be brought on behalf of the corporation, a vote of the shareholders must be taken? 
  
• Does this mean that in pleadings both corporations and associations must state that authority has been granted to bring the suit or that no such clause requiring authority exists or does the burden first fall to the defendants to discover such a provision and attempt to enforce it? – if so, is Illinois at odds with Federal Rule 9(a)(1) which specifically addresses the capacity/authority argument apart from rules regarding standing.

The lack of information in the opinion leads us to the narrow conclusion that from now on in condominium cases it may be best to plead that the condo association’s by-laws for bringing suit have been met or to challenge standing based on such a requirement if you are defending against such an association

 

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It’s no surprise that we expect the government to treat us fairly.  Not to simplify the founders' intents; it was unequal treatment at the hands of another government that sparked the American Revolution. You might think the facts of the instant case are a far cry from the issues leading to the Boston Tea Party, the Civil War and Women’s Suffrage, but the notion of equality… our expectation of it… is pervasive.

In 2007, LaBella Restaurant sued the Village of Winnetka.  Oddly, a picture of some form of construction at the site been preserved by Google:

View Larger Map

The amended complaint alleged that:

LaBella had a problem with its roof leaking. From 2006 through 2007 the restaurant informed the village that the landlord of the building failed to maintain the roof and the village never required the landlord to bring the roof into compliance with the village ordinances. The restaurant alleged that the landlord hired roofers who then worked without work or building permits from the village and that a fire accidentally happened in 2007. The restaurant was forced to close by the damage.

In the aftermath the restaurant applied for permits to repair the fire damage to the restaurant’s interior and the village refused to issue permits until the landlord replaced the roof. The restaurant claimed in its complaint that while it was closed and the village was denying it permission to make repairs until and unless the roof was fixed, the village met with competing restaurants in the same building and that the village approved permits and designs for those competing restaurants to occupy portions of the building that LaBella leased from the landlord.

LaBella claimed that the denial of its permits and the selective enforcement of other building ordinances in the city (not citing a competing restaurant for having an exhaust fan that was non-compliant and allowing another restaurant to keep its cooking operations going even though a portion of its restaurant had been partitioned off for building renovations) amounted to unequal treatment by the village.

Now, you do have a right to bring suit when you are not being treated by the government as other similarly situated people are being treated… however, the in deciding the motion brought by the defendants to get rid of the case against them, the Court found that LaBella was in a different situation from the other restaurants.

The Court ruled that the fire damage implicated structural concerns for the building. The damage and contemplated repair was not the same as partitioning off a portion of a restaurant to make renovations nor was forcing it to close the same as not forcing a restaurant with a non-compliant exhaust fan to close. The Court dismissed the claim based on the unequal treatment at the hands of the village because LaBella had not sufficiently shown that the other restaurants were similarly situated.

LaBella’s may not be out though. The Federal Court refused to hear the counts of its complaint that weren’t based on alleged constitutional violations… it could still decide to litigate those in state court.  

You shouldn’t be afraid to speak up and assert your rights when you think you’re not being treated fairly, but you need to know that sometimes a Court will decide that not all projects are the same.

 

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The Skyline is posting on the City’s appeal of the First District’s recent decision regarding the City of Chicago’s Landmarks ordinance in Hanna v. City of Chicago (Doc. No. 1-07-3548).

This case will go to the Illinois Supreme Court and Illinois towns are lining up to join in the appeal. Student’s at Northwestern’s Medill School of Journalism have put together an informative article and interview regarding this case.

Quite a lot of commotion has been tossed around regarding the opinion of the appellate court. Some people see it as declaration that the landmarks ordinance is unconstitutional, but the truth is that the appellate court seemingly went out of its way in the opinion to say that they were simply stating that the plaintiffs had put enough information in their complaint to state a claim against the city on the grounds that the ordinance is unconstitutional.

The Court agreed that the terms in the ordinance could be construed as vague and that the provision of the act which allows the landmarks commission’s recommendation to become enacted if the city council does not take final action within 365 days of the recommendation.

We will follow up on this case as it progresses, but it does not appear to be the windfall for the plaintiffs that some of the articles are making it out to be.

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It’s a good feeling when we’re able to show you just how important following through on protecting your rights can be… not to mention the smug satisfaction of being able to say we told you so. 

Warren Freedenfeld Associates, Inc. v. McTigue D.V.M., which the South Carolina Construction Law Blog has posted on, is a case that should have design professionals thinking twice about doing anything with the ownership of their creations other than granting a limited license to an owner.

The architect was retained by a client and drafted plans for a veterinary clinic. The parties executed and AIA standard form agreement, likely the B151-1997 because the opinion references an Article 6 that deems the architect the author of the plans and drawings and this all took place in 1998.

The relationship went south over disputes about payment and budgeting. The architect sent the vet a letter warning that all the plans they had produced were proprietary and that no one could use them to complete the project and demanded return of the plans. The vet responded that the plans were useless and that they had been “rolled up and discarded.”

Shortly thereafter, the architect took the step securing a copyright over the plans by filing an application with the United States Copyright Office.

In September of 1999 the parties formally terminated their disputes over payment with a written Termination Agreement and the agreement stipulated that Article 6 remained in full force and effect. The agreement also said that neither the vet nor his proposed hospital would use any of the work solely produced by the architect.

The vet hired a different architect to complete the hospital and in June of 2000, the veterinary hospital opened for business.

In 2004, the architect came across an article in Veterinary Economics featuring a drawing of the floor plan of the veterinary hospital at issue… and that the design had won a merit award. The architect went to city hall and got a copy of the building plans and concluded that his copyright had been violated.

In September of 2005, the architect filed suit in federal court against the hospital, the vet and several other parties alleging copyright infringement and other violations.

The defendants moved to dismiss based on the three-year statute of limitations contained in the copyright act. The district court granted the motion to dismiss ruling that any reasonably diligent person would have learned of the copyright infringement when the hospital opened, so the copyright claim’s three-year statute of limitations ran from that date in June of 2000. The architect appealed.

The appellate court analyzed the lower court’s determination about when a reasonable person would have been aware of the infringement and found that the availability of the plans on file and the fact that the hospital was open for a time did not amount to notice that would start the limitations clock:

“Architects have no general, free-standing duty to comb through public records or to visit project sites in order to police their copyrights.”

The court held that the record in front of them did not compel a finding that the architect had not been vigilant or that the architect had been on notice since 2000 and reversed the dismissal of the copyright claim.

The architect now has the ability to prosecute his copyright claim and if he prevails, he may ask for his attorney's fees as well. For the small cost of filing the copyright he gained this added protection… not to mention, since he retained the rights to the plans, he had the ability to request them when something went south on the project… in Illinois, if one adds these remedies to the contractor prompt payment act and the mechanics lien act - a design professional’s ability to obtain payment is drastically strengthened.

 

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We know that client satisfaction has to be a priority on anyone’s list. Just imagine the number of projects you’ve been included on or gotten thanks to one happy customer recommending you to another.

But we need to be careful in how far we’re willing to go to satisfy a client because those measures could create liability we didn’t have before and could erase protections we contracted for.

Take the case of Senior Housing, Inc. v. Nakawatase. Nakawatase was the architect on a project to build a multiunit residential building for the elderly. The contract for this project included the AIA standard form language stating:

“8.2 As between the parties to this Agreement: as to all acts or failures to act by either party to this Agreement, any applicable statute of limitation shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than the relevant Date of Substantial Completion of the Work, and as to any acts or failures to act occurring after the relevant Date of Substantial Completion, not later than the date of issuance of the final Certificate for Payment.”

The project was substantially completed on September 1, 1983. In 1984, the building owners found moisture problems leading to water and air leaks every time it rained or the wind blew.

Rather than telling the owner that this was not a design issue and that the owner should contact the contractor directly, Nakawatase conducted an on-site inspection and sent a letter to the owner advising that the contractor had been instructed to re-caulk the windows and that the building would be watched to determine if the re-caulking fixed the problem. In 1985 the owner told Nakawatase that the problem had not been fixed. Nakawatase was asked, and did, prepare bids for the application of a water repellant sealer to the entire building.

We don’t know if that work was ever done, but in 1986, with the problems persisting, the owner hired an independent engineer to inspect the building and find out what was wrong. The engineer concluded that the drawings had a flashing design that didn’t properly allow water drainage. The owner had the problems corrected and sent a demand for payment to Nakawatase in September of 1986. Nakawatase never responded to the demand and in March of 1987, the owner sued Nakawatase.

An important thing to remember at this point is that back then, the applicable statute of limitations was two years.

Nakawatase convinced the trial court that Section 8.2 (which the parties contracted for) was applicable and that since the suit was filed over two years from September 1, 1983, the court should dismiss the matter. Senior Homes appealed.

The appellate court held that Nakawatase could not use the statute of limitations as a defense because it did not deny responsibility for the moisture problems, because it instructed the contractor on the course of action to take in correcting the damages, and acted in apparent acknowledgment of its responsibility by making representations that remedial measures would be taken, observed, and further corrected if necessary.

We know there’s a desire to keep the customer satisfied. We need to balance that desire with its ramifications for post-project remedial work and communications when problems arise. We can end up creating new problems and accepting new liabilities depending on the actions we take when we attempt to investigate or correct a potential defect. You wouldn’t attempt a marathon without warming up, so why would you try to handle a potential conflict without first understanding what your rights and liabilities might be.

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Once someone files suit or makes a claim against you, just how long do you have to tender it to your insurance company… and how does that tender have to happen?

This issue is addressed in West American Insurance Co. v. Yorkville National Bank (Doc. No. 3-07-0104, 3^rd Dist.). While the case involves matters relative to coverage for defamation suit, the principals are ones we should be aware of.

The policy involved in this case had a notice provision that you are likely to see in many policies:

"If a claim is made or ‘suit’ is brought against any insured, you must:

(1) Immediately record the specifics of the claim or ‘suit’ and the date received; and

(2) Notify us as soon as practicable.

You must see to it that we receive written notice of the claim or ‘suit’ as soon as practicable."

Although the defendants in the action had known that a suit had been filed against them on September 24, 2001, and although they had allegedly had conversations about the suit with their insurance broker, they waited until January 19, 2004 – over 27 months – to tender written notice of the suit to their insurer. The case had been ongoing for over two years and was set to go to trial in March of 2004.

They were likely a bit surprised when their insurer filed an action against them seeking a court’s declaration that the insurer had no duty to defend or indemnify their insured given the 27 month lack of notice. The insureds argued to the trial court that the conversations should be enough to trigger coverage, and the trial court agreed. The insurer appealed and the appellate court found that the conversations didn’t matter.

Where the contract was specific in requiring written notice, the decision by the trial court that the conversations were enough effectively read the “written notice” requirement out of the agreement… and that’s not correct. 

The appellate court reversed and found that failure to provide written notice for 27 months was a breach of the policy and therefore, the insureds were not entitled to coverage.

Coverage they would probably otherwise have had if they just sent the written notice when they were informed about the suit. Don’t forget to follow the letter of the contracts. Insurance is a necessity and it's there to protect you, but you need to make sure you’re upholding your end of the agreement if you expect that protection.

 

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When the parties to a real estate contract know that the buyer intends to raze the only structure located thereon and redevelop the property, is the Illinois Residential Real Property Disclosure Act applicable to the transaction?

Yes, according to Skarin Custom Homes, Inc. v. Ross (Doc. No. 02-08-0061, 2^nd Dist.).

In Skarin, the parties entered into a residential real estate contract and the sellers checked the box on the disclosure form showing they were aware of flooding or recurring leakage problems in the basement of the property. They explained the leakage as “some seepage in the basement during heavy rains.”

The parties closed on the contract. Sure enough, the buyers soon found out that there was a history of severe flooding in the basement. Arguably, it could have been worse:

 

The buyers sued for breach of contract and breach of the Disclosure Act. The trial court dismissed the claims based on the buyers admission during the case that their original intent in purchasing the property was to tear down the house, build a new house, and sell the property for profit. This is likely what they had in mind.

The trial court found that the intent of the buyers to raze the property removed the transaction from the Disclosure Act. The buyers appeal and the appellate court disagreed.

The appellate court found that the act applied because the house was being used as a residence at the time of the sale, was fully functional, and none of the nine exceptions listed in the act were met.

These nine exceptions are:

Sec. 15. The provisions of this Act do not apply to the following:
    (1) Transfers pursuant to court order, including, but not limited to, transfers ordered by a probate court in administration of an estate, transfers between spouses resulting from a judgment of dissolution of marriage or legal separation, transfers pursuant to an order of possession, transfers by a trustee in bankruptcy, transfers by eminent domain, and transfers resulting from a decree for specific performance.
    (2) Transfers from a mortgagor to a mortgagee by deed in lieu of foreclosure or consent judgment, transfer by judicial deed issued pursuant to a foreclosure sale to the successful bidder or the assignee of a certificate of sale, transfer by a collateral assignment of a beneficial interest of a land trust, or a transfer by a mortgagee or a successor in interest to the mortgagee's secured position or a beneficiary under a deed in trust who has acquired the real property by deed in lieu of foreclosure, consent judgment or judicial deed issued pursuant to a foreclosure sale.
    (3) Transfers by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust.
    (4) Transfers from one co‑owner to one or more other co‑owners.
    (5) Transfers pursuant to testate or intestate succession.
    (6) Transfers made to a spouse, or to a person or persons in the lineal line of consanguinity of one or more of the sellers.
    (7) Transfers from an entity that has taken title to residential real property from a seller for the purpose of assisting in the relocation of the seller, so long as the entity makes available to all prospective buyers a copy of the disclosure form furnished to the entity by the seller.
    (8) Transfers to or from any governmental entity.
    (9) Transfers of newly constructed residential real property that has not been occupied. (765 ILCS 77/15)

The court made specific note of the fact that “a buyer’s intent to tear down a residential structure and rebuild on the property is not listed as an exception.”

We wonder why they would bother filling out the form in the first place if they didn’t think the act applied. The better question is why they would down-play the amount of the flooding if they figured the house would be torn down. We realize this is a punt… but the lesson here is “don’t lie” and don’t assume that someone’s representations are true… get it in the contract.

 

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There’s a fun idea that I’ve always attributed to Bob Balaban that I first encountered it in an interview he gave on Fresh Air back in 2002.   Unlike some of his other interviews discussing his family’s history in the movie business, he was a little more descriptive about his silver screen pioneering ancestors.

In talking about his grandmother’s decision to want to get into the movie business he said that she left the theatre one day after seeing a movie for the first time and decided it was the business for the family because it was the only time she remembered anyone paying full price for something before they knew what they were going to get.

Don’t worry, this isn’t an article about putting an attorney on retainer. 

It’s about a recent case from the fourth district that has enforced a standard for properly allowing commercial tenants to set off rental payments in an amount equal to what they’ve paid in repairs for something the Landlord was liable to replace under the lease.

The case involved a damaged roof at a movie theatre in Quincy, Illinois. The theatre rents space from the mall.

In 2003 the theatre had the roof inspected because it had been leaking. Shortly after the inspection, the theatre sent the mall a letter requesting that the mall replace the roof. The mall did not respond and the theatre had its attorney send another letter that said:

"As it is the [Mall's] responsibility to replace the roof, [Theatre], by this letter, is making demand upon the [Mall] for reimbursement of the replacement cost. [Theatre] is willing to advance the cost of the replacement to be set off against future rents. If [the Mall] prefer[s], [it] may reimburse [Theatre] directly. The replacement will occur as soon as weather permits. Upon completion of and payment for the replacement,[Theatre] will initiate the setoff unless you wish to reimburse [Theatre]in a lump sum or pay the contractor directly."

The mall responded saying that the lease included the following provision which the mall interpreted to mean that the theatre was responsible for replacing the roof:

"Tenant agrees during the term hereof to keep and maintain in good condition and repair, the demised premises and every part thereof, including without limitation the foundations, exterior walls, roof, exterior and interior portions of all doors, windows, plate glass, etc."

The theatre replied that since the correspondence from the mall did not mention the need to replace the roof, nor the estimated cost to fix the roof, the theatre would go ahead with the replacement and that the theatre was not waiving any of its rights to reimbursement or damages relative to the mall’s duty to repair the roof.

The mall didn’t respond to the letter and the theatre had the roof fixed and sent the mall notice that the repairs were contracted for and that they would be setting off the entire cost of the roof repair from the rent obligation. The cost to repair the roof was $79,298 and the work was finished in March. 

Between June and December, the theatre set off $79,298 from the rent it owed the mall. In December, the mall sued the theatre to recover the rent. The theatre denied that it owed the mall rent and requested that the court make a determination that the theatre had satisfied its contractual obligations when it replaced the mall’s roof.

The trial court agreed with the theatre and entered a judgment stating that they had satisfied their rent obligations through payment for the roof and were entitled to set off the rent.

The appellate court agreed. It distinguished the clause for “repair” of the roof in the theatre’s contract with the mall from one in which “replacement” would be required. The court also held that the set off was proper.

In holding that set off was proper the court looked to the history of the law governing lease agreements and reasoned, in a similar fashion to the article from John Orth in the latest issue of the Green Bag, that the historic trend in real estate law that has transformed the lessor’s interest in land from a property right to a right under contract. This transformation, the court opined, has not changed the former covenants between the landlord and lessor, which allow for the lessor to set off rent in the amount equal to repairs the lessor made that the landlord should have made.

The court concluded:

“Thus, when a commercial landlord fails to replace a critical component of the leased premises, which is vital to the operation of its commercial tenant's business—in violation of the landlord's duty to do so, as previously discussed—the commercial tenant may set off such replacement cost, provided that (1) the tenant has informed the landlord of the need to replace the necessary component; (2) the landlord failed to replace the necessary component in a timely manner; and (3) the tenant informed the landlord of its intent to set off the reasonable costs of the necessary replacement.”

It’s a valuable lesson in drafting the lease agreement with particularity if there’s something that should be included in the agreement, and for a procedure to make sure set off is proper.

The opinion can be found here.

 

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Here’s another for your files on the Illinois Consumer Fraud Act and Deceptive Business Practices Act (815 ILCS 505/1 et seq.) and its application in matters relative to the Construction Industry in Illinois.

The Kunkels hired PK to build a new roof for their home. The contract price plus extras came to $5,623. After the contract was entered into, PK never furnished the Kunkels with the required: “Home repair: Know Your Consumer Rights” pamphlet that the Illinois Attorney General’s Office publishes for contractors to give to home-owners pursuant to the Illinois Home Repair and Remodeling Act (815 ILCS 513/1 et seq.).

To their surprise, the Kunkel’s new roof leaked. They requested that PK fix the problem several times. PK came out and attempted repairs, but the repairs did not alleviate the leaking. The Kunkels documented the leaks and their conversations with PK. They even took pictures of the pots and pans they used to catch the water.

Finally, the Kunkels filed suit in court alleging breach of contract, warranty and breach of the consumer fraud act. The case went to trial and the Kunkels prevailed. The trial court found that PK breached the contract and warranty (the contract contained a provision for a five-year warranty) and awarded $6,725 to the Kunkels based on their estimator’s uncontradicted testimony that $6,725 would be cost of a new roof.

The circuit court also awarded $6,161.50 in attorneys’ fees based on the allegation that the failure to provide the pamphlet amounted to a violation of the consumer fraud act.

PK appealed and the appellate court upheld the award for $6,725. The appellate court struck down the attorneys fees – finding that the consumer fraud act required a “knowing” violation and that the Kunkels never introduced evidence that PK “knew” it was required to turn over a copy of the pamphlet. The court went on to address the issue of damages… stating that even if the failure to turn over the pamphlet did amount to a violation of the consumer fraud act, the violation Kunkels failed to produce any evidence that they were damaged in not receiving the pamphlet.

This reasoning is a far cry from many of the other cases we see where parties are presumed to know the law at the time of contracting. One could even go so far as to say that so long as a contractor hasn’t read the Home Repair and Remodeling Act, they could always use their ignorance and this case as an excuse to avoid liability any time liability is attached to a “knowing” violation of the statute… which is a little ridiculous. The damages issue is correct. The failure to turn over the pamphlet shouldn’t entitle anyone to a windfall. We weren’t talking about a windfall here though, we were talking about the $6,161.50 in attorneys’ fees the Kunkels had to expend on a full trial just to get the money back for their leaky roof.

Additionally, the lessons learned by those involved in litigation over small projects is a powerful one. Payments of $5,623 for the original roof, and $6,151.50 to the attorneys netted the home-owners $6,725… which they still have to collect and then apply to getting a new roof that doesn’t leak, leaving an unpaid balance … of $5,059.50. That’s hardly worth it.

The opinion can be found here.

 

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It’s another great day for the AIA. In this case, Federal Insurance brought a claim against Konstant after Federal paid out over $300,000 to its insureds - a couple who had mold damage in their house.

Konstant had a contract with the home owners to design a home in Winnetka, Illinois. The contract (likely the B141-1987 since the work was completed in 1997, and since the B151-1997’s addition of “In no event shall such statutes of limitations commence to run any later than the date when the Architect's services are substantially completed” is not included in the provision contained in the Court’s opinion – but reference to §9.3 of a standard form AIA agreement is) had the following provision:

“Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.” 

The home owners found water and mold damage in their home in November of 2002, well after the 1997 date of substantial completion. Federal paid under the home owners policy and was subrogated to their rights and in turn, brought an action against Konstant for breach of contract in September of 2005.

Konstant’s attorneys moved to dismiss the action claiming it was time-barred under the Illinois four-year statutory limitations period governing the construction of improvements to real property (735 ILCS 5/13-214(a)) which states:

“(a) Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.”

In the circuit court, the designer’s lawyers argued that the contract provision at issue meant that the four-year statute of limitations period began to run in 1997 thanks to the AIA contract provision. The trial court agreed and dismissed the action. The owners appealed and argued that a different section of the statute of limitations provisions (735 ILCS 5/13-206) – a 10 year limitations period – applied to the instant case. The appellate court agreed with the trial court and made two important findings, one obvious and one not:

1.       The construction statute (13-214(a)) applies when a defendant is being sued for its act or omission of one of the statute’s enumerated construction-related activities. i.e. - the design, planning, supervision, observation or management of construction, or construction of an improvement to real property. (obvious)

2.       the extended 10-year statute of limitations which runs from the “discovery” of an act or omission under 13-214(b) is superseded by a parties contractual provision – like that of §9.3 – and will be viewed as an agreement between the parties to shorten the statute of limitations period so long as the agreed time-period is not in violation of public policy. (not obvious)

The lesson here is to make sure that as an engineer, architect, contractor or anyone in a contract with the owner, that you get that provision in your contract. There’s no reason to be carrying a ten-year risk when you can shorten it to, at least, 4 years… as an owner, you will want to make this provision a negotiating point that can impact the cost of your project given that you are now giving up something substantial when you agree to such a provision.

The full opinion can be found here.

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It’s not every day that we get to scoop the Train Law Blog, so today is special. With the economic stimulus package passed and the potential for infrastructure projects moving in Illinois… albeit slowly… we are pleased to report on a little known law that could generate some revenue and increase safety for those building and working in train switching yards.

An Illinois statute (625 ILCS 5/18c-7401.1) in effect since July of 2004 that allows for the Illinois Commerce Commission to enact standards for safe walkways in areas around railway yards (which they’ve done) has been upheld by the 7^th Circuit.

In Norfolk Southern Railway Company v. the Illinois Commerce Commission (Doc. No. 08-116), the railway argued that the state laws and requirements for standards in the construction of walkways between tracks at switching areas was preempted by a federal statute. It’s important to first look at how railway tracks are usually built:

The railway claimed that not only did the federal law cover the standards the Illinois law sought to impose (it didn’t) but also that the changes Illinois required for worker safety would, in fact, worsen the safety of the workers and the trains by allowing drainage that could damage the layers of ballast and sub-ballast under the tracks.

It is important so something like this doesn’t happen:

But the argument went nowhere with the court. Absent some showing of evidence that the walkways, as required by the state, would cause the damage, or that the federal statute somehow did discuss the matters involved the railway’s argument was unfounded given the language of the federal statute.

So, let’s hope that some jobs can be created bringing railyards up to code.

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It’s not always true that there’s no point to beating a dead horse… The horse might have insurance.

In this recent action (link goes to the complaint) filed by the University of Chicago Medical Center against HLM Design, Inc. (N.D. IL, Case No. 2009 cv 730)  The University is suing HLM for breaching its contract for the design of the UofC’s Comer Children’s Hospital. The allegations are that HLM’s designs “failed to include important elements, failed to incorporate value engineering opportunities that would have saved UCMC money, and were inconsistent with applicable codes and regulations.”

The problem is that HLM filed for Bankruptcy in 2004.  HLM was purchased by Heery International at auction. The University had to go to the bankruptcy court in North Carolina where HLM filed in order to get permission to sue HLM in the hopes that HLM’s insurance carrier would have the money to satisfy the damages (in excess of 2 Million according to the complaint) allegedly caused by HLM’s breach of contract.

Oddly, the way the complaint reads, you can tell that the problems HLM was having in fulfilling their end of the deal were the result of the impending bankruptcy, and yet the University alleges that it didn’t learn of the bankruptcy until “well after the filing.”

We will continue to keep you posted as this case develops. It’s going to be interesting to see the if the University can get from the insurance carrier what it cannot obtain from HLM.

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The litigation involved the foreclosure of a mechanic’s lien by a HVAC and plumbing subcontractor. The general had hired the sub based on a contract for $465,000 to perform work on a property in Chicago commonly known as 3947-55 King Drive and 401-415 E. Oakwood.  As noted in the Google street map below, this location was home to Chicago's Rosscoe's which was the subject of a suit in 2008 (the Chicago IP Litigation Blog's Entry on the subject can be found here) and has since changed its name to Chicago's Home of Chicken and Waffles.

View Larger Map

The sub performed $289,302 in work before the relationship went south and it terminated its relationship with the general. The sub filed liens for the full amount – because the property was on two different parcels, it apparently recorded two separate liens against the properties, each for the full amount, rather than just recording a single document that listed the multiple properties.

Four days after the liens were filed, the sub sued to foreclose its lien and brought two extra counts, one for unjust enrichment and one for quantum meruit (two equitable claims alleging that even if there was no contract with the property owner, the owner benefited from the work the sub did, so the sub should be paid).

After multiple motions, the trial court dismissed all the claims made by the sub. The trial court found that the fact that two liens were recorded for a total that was in excess of the actual amount owed was constructive fraud on the part of the sub requiring dismissal of the foreclosure action. The court also found that the equitable claims were not available because the sub had no contract with the land owner.

The appellate court reversed finding that the duplicative filings did not amount to a showing of constructive fraud where the defendants could not show there was an intent to defraud and even the Illinois Mechanic’s Lien Act stated that the misstatement of the amount required a showing of intent to defraud before the misstatement could be used to defeat the lien. The appellate court upheld the trial court’s determination that the equitable claims were unavailable to a subcontractor that only had a contract with the general.

While no one is going to recommend filing a lien that hasn’t been proofed and double-proofed, it’s nice to see the intent of the law given form here to help people get paid even if a small technical error arises.

The opinion can be found here.

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Here’s an opinion from the Northern District, Blythe Holdings, Inc. v. Flawless Financial Corp., et al. (Doc. No. 06-C-5262, 2009), that should serve as a reminder to keep your registration as a professional design firm current.

The plaintiff’s sued numerous individuals and corporations over a complex real estate transaction in connection with redeveloping multiple vacant lots in the City of Chicago’s 16^th Ward. As part of the transaction, plaintiffs entered into an agreement with a defendant architecture firm. The agreement, which contained an arbitration provision, was signed by a principal of the firm who was a licensed architect. A $25,000 retainer was paid to the principal.

Soon enough, the deal went south and the plaintiff was involved in litigation when it believed that many of the lots involved in the transaction were completely unsuitable for development and that no work had been performed to secure the lots they had been promised.

In addition to suing the developers and the attorneys representing them, the plaintiffs sued the architect on the project to get their money back. The architect defendants moved to dismiss the complaint, or to stay the proceedings pending the arbitration they were entitled to under their contract. The plaintiffs responded that the contract was void and could not be enforced, because at the time they entered into the agreement, the architecture firm was no a registered professional design firm with the state of Illinois. (We’ve written about this before.) Alternatively, the plaintiffs argued that because the contract didn’t use the full name of the architecture firm, the contract should be declared void.

Neither of these arguments is very good. The second is laughable. While it is true that the Illinois Supreme court has yet to specifically address this issue, many courts have already reasoned that because the work is performed by a licensed architect, it is the licensure – which is proof that standards are met through the design professional’s credentialing process -  that keeps the public safe, which is the point of the process. The fact that an entity may register as a professional design firm has nothing to do with public safety; public safety is the policy behind the act that requires registration.  The court upheld the contracts and their arbitration provisions and allowed the action against the design professionals to proceed in arbitration against the desires of the plaintiffs.

Note, however, that there are criminal penalties for the failure to register your design firm. While the arguments may not be persuasive to a court in determining whether or not to uphold a contract… people doing business with you may report you to the Illinois Department of Professional Regulation for the failure to register your firm.

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Deciding how you’re going to structure your business and with whom you want to work is an important aspect of any transaction in this industry. Partnering up with someone in a joint-venture is a common arrangement - whether it be to gain better footing in a bidding scenario, or to accomplish a task that you couldn’t take on alone. But apart from increasing profits and minimizing loss, did you know it could eradicate a liability? Well, this case will be of interest:

Two companies came together in the summer of 1999 to form a joint venture in connection with an IDOT project to repair the McCluggage Bridge over the Illinois River in Peoria. The terms of their joint venture were set forth in a written agreement that stated the two were joint venturers for bidding, performing under the contracts and completing the project. If the bids were awarded, they were to be entered into in the names of the parties as joint venturers. They were to share losses and profits. Party A would provide all the labor and payroll and taxes and worker’s compensation and was entitled to reimbursement for those expenses from the JV before it and Party B split profits. IDOT awarded the JV the contract and in 2000 an accident occurred at the project where employees of Party A, employees of Party A and whose worker’s compensation premiums were paid by Party A were injured. The injured workers filed for and received their workers’ compensation benefits through Party A’s workers’ compensation insurer. This was their sole remedy against Party A under the Illinois Workers’ Compensation Act (820 ILCS 305/5(a)). With the help of attorneys they then sued Party B, the JV and a whole host of other entities.

The attorneys for Party B and the JV moved for and won their motion which argued that they had the same immunity afforded to Party A under the Workers’ Compensation Act because they were joint venturers. The injured workers appealed and the appellate court reversed the decision so the JV and Party B appealed to the Illinois Supreme Court. The SC found that because joint ventures are governed by the principals of partnerships and because in partnerships, the partners are agents of the partners and of each other, and because the immunity afforded by the Workers’ Compensation Act applies to the agents of the employer there was immunity for Party B and for similar reasons for the JV. So they couldn’t be sued for the injuries to the workers.

So, what the injured workers wanted, which was more money from Party B and the JV even though half of the JV – Party A, was immune, was not available because the parties had a written joint venture agreement where the JV reimbursed the expenses for the workers’ compensation insurance and the principals of partnership applied.

This decision opens the door to some interesting questions regarding the collaborative processes proposed by certain standard form agreements. Could this be a lesson that the drafters of the Integrated Project Delivery contracts should learn from? Would an IPD between entities that created a separate LLC (the AIA-C195 for example) for the project be able to offer the same immunity from suit by an injured worker to its members as a joint-venture could under this structure?

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An important lesson in asserting a claim for a lien is elaborated in Inter-Rail Systems, v. Ravi Corp. Determining whether your work is maintenance or lienable work that has improved the property as part of an overall plan for improvement, and whether you can and have provided proof of the overall value added to the land because of your work is important where the statute doesn’t explicitly describe your work as an improvement. (See the Mechanic’s Lien Act – 770 ILCS 60/1(b))

In Inter-Rail, the plaintiff was contracted by the land owners to clean up a portion of a site containing drums and waste in a warehouse and an adjacent parking lot deemed hazardous by the U.S. EPA.

Specifically, the plaintiff was contracted for the removal and disposal of drums from both the parking lot and the warehouse. The cleanup also required the plaintiff to scrape, sweep and decontaminate or remove any areas of the site or trailers in the parking lot where spills of the hazardous materials had occurred. The plaintiff completed its cleanup work and the defendant failed to pay the balance due – the plaintiff filed a lien and sued to enforce the lien and for other causes of action.

The defendants moved for summary judgment (a finding that they should win without a trial based on the evidence) and the trial court granted their motion finding that part of the work was non-lienable and that the plaintiff’s failure to apportion the lien amount in order to allow the court to distinguish between the amounts owed for lienable and non-lienable meant that the lien failed. The trial court did allow the plaintiff 30 days to re-plead its causes of action on the lien to include apportionment, but when the plaintiff failed to do so, the court entered judgment for the defendants.

The plaintiff appealed and the appellate court upheld the judgment. In its finding, the court noted that the purpose of the Mechanics Lien Act is to “require a person with an interest in real property to pay for the improvements or benefits which have been induced or encouraged by his or her own conduct.” “The focus of the inquiry to determine whether a mechanic’s lien should be granted is whether the work performed has enhanced the value of the land to be charged with the lien.” This notion of “enhanced value” appears to necessitate that the work be part of an overall plan to improve the property. The court cited cases it distinguished from this one by noting that in all the other cases involving debris clean-up where removal of debris/contamination was concerned, the removal was also part of other work in a plan to improve the property, whether it be the removal of debris from a demolition site, or removal of debris after storage tanks are taken out of the ground, such removal is part of an overall plan to improve the property and thus, not similar to the present case where the plaintiff cleaned up the site. 

The court even went so far as to say that the plaintiff had not filled the contaminated drums with the hazardous waste, did not change the structure of the site… “It merely removed and disposed of the drums, already filled with the waste, and performed incidental cleaning activities. None of these activities were shown to be part of an overall plan to improve rather than simply maintain the property.”

Surprisingly, the court went on to distinguish this case from a case of asbestos removal where the removal of asbestos was found by a federal court to have improved the premises where the plaintiff in that case had provided expert testimony that the value of the asbestos contaminated property was significantly less with the asbestos inside of it than without the asbestos – and a trial was held where that information was provided… Here, as the court points out, the plaintiff failed to offer evidence that its work improved the property, “such as evidence of the value of the site prior to and after the work it performed.”

The golden ruling:

“We conclude that the activity of removing and disposing of drums containing hazardous waste, in and of itself, does not constitute an improvement to real property so as to be a lienable activity under the Act. As there was no evidence that plaintiff’s work was part of an overall plan to improve the property, its work was not a lienable activity under the Act.”

The court went on to note that even if some of the work were lienable the failure of the plaintiff to apportion its lien and subsequently amend its complaint meant that the plaintiff had waived the argument.

A lesson in defending against the liens for owners should be obvious… look for a way to argue maintenance. For those looking enforce a lien, apportionment and characterization of the work and proof of an enhanced value should be paramount.

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As we’ve said before, making sure your covered under some policy of insurance requires a bit of attention to the details in your contract and the details in the policy language. Our last installment regarding this issue involved the ability of a certificate of insurance to stand alone as evidence of coverage.

In this installment, the opinion in United States Fidelity and Guaranty v. Shorenstein provides an additional bit of policy language to be aware of.

The plaintiff, an insurance company, sought a declaration that it had no duty to defend and indemnify the defendants to a lawsuit under a policy issued to a non-party for an accident at a construction site involving a scaffolding collapse in 2002. The entities seeking indemnification and defense owned the building and had entered into a construction contract with a non-party to the underlying suits in 2000 and the insurance coverage required by that agreement lasted into the time of the accident.

The construction contract required the construction company to name the defendants as additional insureds on its policy. The policy also included language stating that if someone was to be added to a policy as an additional insured by another written contract (i.e. the construction contract) then if a certificate of insurance had been issued naming that person, the person would be an additional insured.

The plaintiff argued that because a certificate of insurance had not issued until after the time of the accident, coverage did not exist where the existence of the certificate was expressly required by the language of the policy. The court found otherwise.

The court held that where the construction company and the defendants had specifically contracted for additional insured coverage, and the certificates had all the limiting language we saw in our previous entry on this topic, the interpretation that there was no coverage until the certificate issued would limit the term of the coverage to something other than the entire year it provided for. Reasoning that the certificate could not change the terms of the coverage given the clauses printed on the certificate specifically disclaiming that it modified any contract, the court in essence found that the date of the certificates issuance was a nullity, despite the language requiring that a certificate be issued in the actual policy.

Again, don’t just rely on the certificates. No matter what your position under the certificate, it’s becoming unlikely that they will afford you relief or protection apart from the policy and your contract.

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On November 25, 2008, in Ready v. United/Goedecke Services, Inc., Docket No. 103474, the Illinois Supreme Court, in a plurality decision, held that section 2-1117 of the Code of Civil Procedure does not apply to tortfeasors or defendants who have settled before judgment.   As a result, the Court found that settling defendants should not be included in the apportionment of fault for the purposes of determining relative liability pursuant to section 2-1117.

In doing so, the Illinois Supreme Court ostensibly resolved a conflict among the Illinois Appellate Courts.  Justice Freeman construed the statutory language "defendants sued by the plaintiff" to be ambiguous, citing the diverse appellate holdings and the majority's disagreement with the dissenting opinion. The plurality relied upon:  (1) the Legislature's failure to amend the statute after it was first construed not to apply to settled parties in Blake v. Hy Ho Restaurant, Inc., 273 Ill.App.3d 372 (5^th Dist. 1995); and (2) the 1995 tort reform amendments (deemed unconstitutional in Best v. Taylor Machine Works, 179 Ill.2d 367 (1997)) which had included settling defendants in the apportionment of fault as evidence that section 2-1117, as enacted in 1986, was never intended to include settling tortfeasors in the allocation of fault.  In a special concurrence that supplied the fourth vote to reverse, Justice Kilbride agreed that section 2-1117 was unclear but concluded that the meaning was clear from an examination of the statute as a whole.  Justice Thomas took no part in the decision. Justice Garman, in a dissent in which Justice Karmeier concurred, would have found the plain meaning of section 2-1117 to be unambiguous based on dictionary definitions of the word "sued" and disagreed with the plurality's reliance on certain tools of statutory construction. The dissent concluded that the result reached by the plurality was contrary to the goals of the legislature in striking a balance between fully compensating injured parties and fair imposition of liability upon tortfeasors. 

As a result of this decision, a minimally responsible defendant may not be allowed to present evidence of the fault of settled parties or other tortfeasors who might have been responsible for the plaintiff's injuries.   A lone defendant, which may be only 1% at fault, could be liable for 100% of the judgment, less the amount of the settlements with the more culpable defendants.  Similarly, defendants confident that they are less than 25% at fault in comparison to other parties may find themselves jointly and severally liable because the more culpable defendants settle at the eve of trial.  On the other hand, plaintiffs benefit from only needing to present their cases against defendants at trial rather than having to deal with the empty chairs of the settling, and potentially more culpable, defendants.  While the non-settling defendants are entitled to an offset of any settlement amount, it appears from this decision that the fault of the settling defendant is not to be considered by the jury in allocating fault.  It is unknown at this time whether the legislature will address this ruling through an amendment to section 2-1117.

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The Illinois Supreme Court has granted leave to appeal in Weather-Tite, Inc. v. University of St. Francis. The case involved whether a subcontractor could recover money from an owner when the owner had not complied with the withholding provisions of the mechanic’s lien act once it received the final notice from the GC and did not withhold the funds stated in the notice for the subcontractor.

We previously covered and discussed this opinion here. 

The Court’s determination that it will accept briefing on the matter means that it could address issues related to striking a balance between the statute and the reality that payments are often disbursed to a GC by an owner without meticulously following the act and withholding payments when a balance is owed to subs.

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The laws applying to personal guarantees have been shifted a bit by the recent case of JP Morgan Chase Bank, NA v. Earth Foods, Inc. (2^nd Dist. Doc No. 2-07-0045). In JP Morgan, a defendant who had signed a personal guarantee to a bank for loans advanced to a business wanted to avail himself of a statute that specifically referenced sureties and not guarantees. The business he guaranteed had defaulted in its principle contract with the bank and the bank sought to get the money through the guarantee since no money could be had from the now defunct business. Prior to the business getting a notice of default, the guarantor sent a letter to the bank that warned the business was depleting its inventory which was collateral for the loan and demanded that the bank take action. If the statue applied, then he would potentially have a defense to the bank’s suit against him on the note where he had arguably complied with the statute. If the statute didn’t apply, he would have no defense to the bank’s demand that he honor the guarantee. 

The dispute centered around the interpretation of the Sureties Act (740 ILCS 155):

Sec. 1. When any person is bound, in writing, as surety for another for the payment of money, or the performance of any other contract, apprehends that his principal is likely to become insolvent or to remove himself from the state, without discharging the contract, if a right of action has accrued on the contract, he may, in writing, require the creditor to sue forthwith upon the same; and unless such creditor, within a reasonable time and with due diligence, commences an action thereon, and prosecutes the same to final judgment and proceeds with the enforcement thereof, the surety shall be discharged; but such discharge shall not in any case affect the rights of the creditor against the principal debtor.

The guarantor argued that the sureties act applied to his personal guaranty and that he had an arguable defense to the bank’s attempt to collect on the guaranty because he had complied with the statute and sent the note. The trial court disagreed and denied him this defense in granting summary judgment for the bank on the grounds that the defendant was a guarantor and not a surety. The guarantor appealed and the appellate court issued its determination and after a long recitation of the possible differences between the both guarantors and sureties (an history and discussion worth reading), held that a guarantor was the same as a surety for the purposes of the act and that the defendant could assert the defense. 

While the question didn’t seem to hinge on too many specifics in the actual contracts between the two parties, the court did take time to note that any legal distinction between the two was nullified by the terms of the contract at issue which allowed that the creditor could pursue the guarantor without first pursuing the principal. (This is important given that the classical difference between a surety and a guarantor involved the surety’s obligation as joint and several and the guarantor’s obligation as derivative and actionable only when the principal cannot pay). 

The lesson is to know your rights and make sure you’re on top of them in sending the right messages to your creditors if you are a guarantor and in protecting yourself by trying to contract around this statute if you are a creditor. 

Additionally, the application of the Act to guarantees raises a few more questions than answers, for instance, does the case apply only to personal guarantees, or can we extend the act to multiple types of sureties from people and from corporations? What about in the construction context? Does this change the nature of surety bonds in the state? Can we apply this case to those who contract to ensure the work of another? Has the distinction between these two words been done away with? 

With all this in mind, we thought it might be worthwhile to see where some other statutes have made or obviated the distinction and if it becomes a functioning rule, where the Illinois legislature might need to clean house a little: 

Section 49 of the Illinois Credit Union Act (205 ILCS 305) lists the terms as separate and distinct when defining a “security” under the Act but does not explain that distinction:

Security. In addition to generally accepted types of security, the endorsement of a note by a surety, comaker or guarantor, or assignment of shares or wages, in a manner consistent with the laws of this State, shall be deemed security within the meaning of this Act. A credit union shall give each surety, guarantor or comaker a copy of the instrument evidencing the indebtedness. The adequacy of any security shall be determined by the Credit Committee, credit manager or loan officer, subject to this Act and the bylaws of the credit union. The surety, guarantor or comaker may, but need not, be a member of the credit union making the loan.

In defining the operations of certain insurers and companies, the Illinois Insurance Code (215 ILCS 5) notes the distinction at Section 4 Class 2 (g) and at Section 121-3(b):

(g) Fidelity and surety. Become surety or guarantor for any person, copartnership or corporation in any position or place of trust or as custodian of money or property, public or private; or, becoming a surety or guarantor for the performance of any person, copartnership or corporation of any lawful obligation, undertaking, agreement or contract of any kind, except contracts or policies of insurance; and underwriting blanket bonds. Such obligations shall be known and treated as suretyship obligations and such business shall be known as surety business.

(b) The making of or proposing to make, as guarantor or surety, any contract of guaranty or suretyship as a vocation and not merely incidental to any other legitimate business or activity of the guarantor or surety.

Article XV part 12 of the Mortgage Foreclosure Act (735 ILCS 5/15‑1204) defines a “Guarantor” in terms that include a surety agreement:

Sec. 15‑1204. Guarantor. "Guarantor" means any person who has undertaken to pay any indebtedness or perform any obligation of a mortgagor under a mortgage or of any other person who owes payment or the performance of other obligations secured by the mortgage, which undertaking is made by a guaranty or surety agreement of any kind.

The General Definitions and Principles of Interpretation Section of the Uniform Commercial Code (810 ILCS 5/1-201(39)) settles the matter within the code by defining the two congruously:

(39) "Surety" includes a guarantor or other secondary obligor.

However, it is likely that you can still waive the provisions of this act through language in your surety/guarantee. City National Bank of Murphysboro, Il. v. Reiman, 236 Ill.App.3d 1080 (5^th Dist., 1992). You’d just want to make sure you’re doing that explicitly. And if you find yourself as a surety or guarantor, you may want to take a stab at complying with the provisions of the Act when you become aware that the entity you’ve vouched for will be running into financial troubles in the immediate future. Who knows, maybe some clever attorneys with willing clients might see if the act could be extended to other types of financial backing. 

As always, having a surety or personal guaranty gets you one step closer to an actual payment, especially in a market where shell LLCs are created and dissolved for the simplest of transactions… and being aware of this new information should help you negotiate a better deal.

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Pepper Construction Company is being sued for its work constructing the high-rise condo building over at 720-726 Randolph in Chicago.  The complaint alleges multiple counts including:

• Delays on the project
• Faulty workmanship
• Slandering the title to the land
• Breach of warranty
• Breach of their contract with the owner
• And fraudulent concealment of defective work
  

This may be the first in a series of suits over this property, the City View Tower. 

Starting on page 23 of the complaint, you’ll see an interesting claim regarding the mechanic’s lien and its something worth noting if you’re either involved in the construction of condominium projects (high-rise or not) or if you’re developing them.  There are multiple cases presently before the courts regarding this issue.  The Condominium Property Act requires that mechanic’s liens be apportioned – Section 9.1.  So, in addition to making sure the strict timing requirements of the Mechanic’s Lien Act are followed, anyone seeking to file their lien against a condominium property (any property where the condominium declaration has been recorded) should familiarize themselves with Section 9.1 before filing.

 

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The Skyline is reporting that Sunday’s anticipated capping of the Trump Tower has been postponed, indefinitely.

 

Chicago Real Estate Daily is reporting on the new mortgage foreclosure rates and figures for October.

 

For those of you involved in contracting for snow and ice removal on residential properties:  In a case from the First District, Divis v. Woods Edge Homeowners’ Association (Doc. No. 1-08-0411), the court has held that the Snow and Ice Removal Act (745 ILCS 75/1) applies to a company that contracted with the condominium homeowners association for the removal of ice and snow and that the company could assert the act as an affirmative defense to a suit brought by a condominium resident against the association, the management entity and the company that was contracted to remove the ice and snow for a fall that he suffered when he slipped after exiting his unit.

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Any discussion of your project is going to involve insurance.  Whether you’re naming someone as an additional insured or being named as one is a part of every construction project.  Making sure that you get what you want is not as easy as you might think.  And the recent case of United Stationers Supply Co. v. Zurich American Ins. Co. et al, (Illinois, Doc. No. 1-07-2779) is proof that you need to pay attention to what you’ve contracted for and what you’ve received as proof that those obligations have been fulfilled.

In this case, the plaintiff sought a declaration from the court that the insurance company for its general contractor was required to defend and indemnify it after an employee of the company was injured while working on a construction project to replace a roof at the plaintiff’s plant.  The injured worker alleged he was supervised and managed by the general contractor and injured while using the general contractor’s equipment.  The employee had sued the general contractor and the general in turn had sued the plant owner (the plaintiff in this action) for contribution.  The plaintiff requested that the insurance company that supplied a commercial general liability policy to the general contractor defend and indemnify the plaintiff in the underlying injury action and the insurance company denied that it had any obligation to do so.  The parties filed an action seeking a declaration that their version of the obligations of the insurance company was the correct one and the lower court found that the insurance company had no duty to defend or indemnify the plaintiff.

The reasons for that lack of duty are important to anyone entering a contract related to a construction project.  The general contractor and the plaintiff had entered into a contract which had terms that required the general contractor to obtain specific types of insurance, i.e. Workmen’s Compensation, Contractual Liability Insurance, Automobile Liability Insurance, and Hazardous Materials Insurance.  Nowhere in the contract was the general contractor required to obtain Commercial General Liability insurance.  In fact, the contract only required that the general obtain Contractual Liability Insurance with the requirement that it be endorsed to cover the indemnity agreement (a standard indemnity agreement) between the parties which required the general to indemnify the plaintiff.  The contract also required that the general contractor furnish a certificate of insurance that named the plaintiff as an additional insured and did not require or specify which type of insurance the plaintiff was to be named as an additional insured.

The manner in which the First District made its findings is attributable to the vague nature of the contract.  As is usually the case, that ambiguity provides a learning point.

 

With regard to the fact that the plaintiff was named on the certificate of insurance for the CGL policy, but not on the actual endorsement to the policy or required by contract to be named as an additional insured for the policy, the court pointed out something you will likely see on all your certificates.  Take a look at this sample certificate, particularly the language in the upper right hand corner:

This certificate is issued as a matter of information only and confers no rights upon the certificate holder.  This certificate does not amend, extend or alter the coverage afforded by the policies below.

The court looked to that language and applied it to the coverage in this matter finding that the certificate did not alter the coverage and that the specific language put the plaintiff on notice that coverage is governed by the terms of the insurance policy and not the certificate.  Remember, the certificate isn’t the policy and the endorsement needs to be clear.

Second, the court found that none of the contractual language implied that the plaintiff would be added as an additional insured to the CGL policy. 

With this reasoning in mind the court found:

Based on the foregoing, we find as a matter of law that United Stationers is not an additional insured under the CGL policy because: (1) United Stationers is not specifically listed as an additional insured in the policy; (2) the construction contract requiring D.C. Taylor to purchase insurance on behalf of United Stationers did not specifically require the purchase of a commercial general liability policy; (3) there is no evidence of intent by the parties that United Stationers was to be added as an additional insured; and (4) the disclaimer language in the certificate of insurance put United Stationers on notice that the CGL policy language governed coverage of additional insureds.

 

Because the contract was not clear, and the certificate disclaimed any change to liability, the plaintiff was not covered under the policy.

As a side note, this is a small difference between the new ConsensusDocs and the AIA 201 – 2007 general conditions.  The ConsensusDocs 200 uses specific names for the types of policies required by the contract, i.e. CGL, Employer’s Liability, Business Automobile Liability, and does not require that the parties name anyone as an additional insured, but offers the option of selecting additional insured coverage in Section 10.5.  The AIA 201 identifies the types of claims against which the contractor should have coverage (Section 11.1.1) and requires that the owner be named in the commercial liability coverage as a default (Section 11.1.4).  Both contracts require that certificates be furnished to the owner, but under the present case, a certificate may not be enough.

The lessons are simple for a company looking to ensure legally binding coverage on their construction project in Illinois, there are two lessons from this case:

1)       Contracts should mandate that every type of insurance required is named in the contract, including terms like “commercial general liability” or others describing the coverage needed with specificity.

2)      Request that you be named on the endorsement and get a copy of the endorsement or make sure it has language sufficiently broad enough to include you as someone who has required the insured to name them as an additional insured – not just requesting a certificate of insurance.

 

 

 

 

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The law provides creators a myriad of opportunities for protecting themselves and their innovations.  We’ve written before and kept our readers abreast of the opportunities to copyright work and the steps the U.S. Copyright Office is taking to ensure an easy process for engineers, architects, and other design professionals to protect their rights.  Having a registered copyright on your design opens the door to protections under the federal copyright act which ads another option that you and your attorney have in case someone uses your design without permission.

We realize that harping on this matter likely won’t convince you that it is in your best interest, which is why we are happy to be able to provide you with proof that it may become necessary.

This recent complaint, filed on October 24, details an interesting scenario.  The plaintiff is an architect who designed a single family home in connection with a sub-division development in the Chicago suburbs.  The general contractor allegedly then took those plans and used them on a house in a different subdivision without the plaintiff’s approval.  The plaintiff brought a cause of action for statutory damages against those believed to be infringing his copyright and has requested an injunction from the court to stop the practice.

The lesson is especially important for those drafting plans for use on projects that could easily be turned around and built somewhere else such as single-family homes and smaller condominium projects.  With the minimal fee for filing and obtaining copyright, it makes sense to pay the fee and get this added protection.

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            Any business engaged in the construction industry in Illinois should be aware of the rules and requirements for filing a mechanics lien, or at least have someone they can reach out to in order to answer those questions.

            The statute is possibly the best method available to any contractor, architect, sub any other person working on a project for ensuring payment.  It creates an encumbrance on the land that allows not only for foreclosure, but also forces subsequent buyers to deal with the encumbrance before moving forward by either bonding around the lien or attempting to extinguish it.  Whether the claim is for $1,000 in work or for $10,000,000, no matter what the amount, if the requirements are met, you can avail yourself of the act and pursue payment.  Depending on the exact situation, the act may force you to get something filed and deliver notice anywhere from 90 days to four months after your last date of work, and knowing and complying with the act’s guidelines helps ensure another method for getting paid (the act also allows for attorney’s fees).  If you don’t you will lose your rights and while the amounts of each account receivable may not seem like a lot, if everyone starts to skimp on the receivables, the effect of non-payment can become calamitous to your business.  In the current economic climate, even if you know that payment is down the road, it’s best not to sit on these rights and lose them… talk to someone and get it done right.  Because if its not done right, you could end up like the plaintiff in Speedy Gonzalez Landscaping, Inc. v. O.C.A. Construction, Inc., (1^st Dist., Doc. No. 1-07-2370).

The plaintiff was a sub-contractor hired to perform services for the removal, hauling and disposal of rock and gravel from a site for the construction of a new school.  The plaintiff performed its work and sought payment for some $637,382.53 that it was owed.  Because the project was for a public building improvement built with public funds, section 23 of the Illinois Mechanics Lien Act applied.  The plaintiff complied with the applicable notice required by the section for delivering notice of its lien to the Public Building Commission of Chicago.  The plaintiff then properly filed its complaint against the defendants asking for an accounting within the applicable 90-day time limit from the filing of the notice, but failed to abide by the statute and also deliver a copy of the complaint to the public body within the time limits.  The GC filed a motion to dismiss the claim based on the failure of the plaintiff to follow the applicable time requirements and the court granted the motion, thereby barring the plaintiff from its count for a mechanics lien.  The appellate court upheld the decision of the trial court. 

For the simple failure to provide a copy of the complaint to the right person, the plaintiff has lost its mechanics lien claim.

 

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Michael Downs v. Rosenthal Collins Group, LLC, (Ill. App. 1^st, Doc. No. 1-08-0636) will be of interest to anyone reviewing their own contracts.  The case involves a contract's indemnity provision and whether or not it included an indemnification for attorney’s fees.

In a prior action, the plaintiff, a CEO and Member of a limited liability company, had been sued for breach of his fiduciary duties and breach of contract.  He successfully defended those claims and then filed a separate action against the corporation for breaching their agreement to indemnify him by not paying him for the attorney’s fees he expended in the prior case.

The agreement’s indemnification provision read:

“21.2  The Company shall indemnify each Member for any act performed by such Member with respect to Company matters permitted by this Agreement and/or Majority Approval, but in no event for fraud, willful misconduct, negligence or an intentional breach of this Agreement.”

The plaintiff argued that because only the word indemnify was used, it should be interpreted to have a broad meaning that included attorney’s fees.  The court analogized this case to a case where the word “defend” had been used in the indemnification agreement… “to protect, defend, indemnify and hold harmless” and noted that the agreement in this matter failed to use such language.  Combining the contract’s lack of specificity regarding attorney’s fees and noting that the American system of jurisprudence favored parties bearing their own costs and attorney’s fees unless otherwise agreed, the court found that attorney’s fees were not included in the agreement.  The court went on to state that a well-settled bright-line rule on the issue provided certainty in the law and would put parties on notice to include precise language on attorney fees when negotiating their contracts.

The lesson is to ensure that you’ve included or at least considered whether you want an attorney fee provision in your indemnification clause.  Although the court in this case seems to agree that the word “defend” added to the word indemnify may have made things come out differently, it would be best to specifically request the fees and/or costs that you want.

 

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    Chances are that if you’ve been through an arbitration you’re going to have a strong opinion about it.  It’s even likely that your experience has influenced you enough to include or delete arbitration clauses from your contracts.  Splitting the baby in two is a normal result and the parties are expected to air their grievances up front - it is, after all, an alternative to the litigation process, and should not be treated as a precursor to some other form of conflict resolution, and the opinion in the matter of  Environmental Barrier Co., LLC v. Slurry Systems, Inc. (7^th Circ. Doc. No 06-3910) is no exception.

    An arbitration claim was filed by a company that had purchased some of the assets of a subcontractor during the subcontractor’s bankruptcy.  The original arbitration claim was for $657,273.50 against the general contractor by the company that had purchased the sub’s contract in the bankruptcy (the “sub-purchaser”), and the final arbitration award was $388,919.88.  After the sub-purchaser moved to confirm the award in court, the general raised a new issue:  that there had been no agreement to arbitrate between the parties.  The seventh circuit addressed the issue and found in favor of the sub-purchaser.  The court raised policy concerns about allowing a party to sit on the issue of arbitrability throughout an arbitration and then to raise it after the parties have completed the arbitration process and have moved on to court.

“This is not a tactic we can accept, for sound policy reasons.  It is terribly wasteful of the arbitrator’s time, the parties’ time, and the court’s time.  Anyone who wants to object to arbitrability is entitled to make her position known to the arbitrator and the other party; the other party may then, if it wishes, respond with a petition for an order to compel arbitration under the Federal Arbitration Act…and obtain a judicial determination on arbitrability.  In addition, keeping the arbitrability card close to the chest would allow a party like [the general contractor] to take a wait-and-see approach: if it had liked [the arbitrator’s] decision, it would have remained silent, but since it did not, it is now complaining about arbitrability.”

    The court is correct, and this is a lesson for anyone getting ready to participate in an arbitration, or considering the merits of not participating.  The time to object is in the beginning.  The legal process, including arbitration, is about the resolution of disputes and not tactical gamesmanship.

 

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In another development in the area of job site safety in Illinois, a Cook County trial Judge has found that a construction manager cannot be held liable for an injury suffered by a worker when he fell into a trench.  The opinion is attached here.

The court reasoned that the construction manager, Ambitech Engineering, did not have sufficient control over the plaintiff's work to create a duty to him despite contractual language obligating Amitech to motinor job site safety.  The court also found insufficent evidence of knowledge of any dangerous conditions on the part of Ambitech.  This case, like dozens of others like it, demonstrate that the courts will continue to scrutinize personal injury claims against construction managers and general contractors on a case by case basis.  We will continue to monitor this developing area of law and expect that sometime soon the Illinois Supreme Court will speak on the topic. 

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Larger projects tend to offer better protections to contractors and owners through the issuance of sureties and bonds and the design professional is often left with the court system as the sole remedy for recouping payment either through an action for breach of contract, or to foreclose on a lien.  Smaller projects offer similar pitfalls for design professionals… and depending on the amounts owed, recouping the money can seem daunting.

 

In situations where the fee is a fraction of the total project cost, consider the personal guarantee.  It’s an additional agreement signed by an individual, not an LLC or a Corporation obligating the person to the debt owed.   

A recent case from the Northern District, Kawasaki Motors, deals with these types of guarantees (albeit in a motor vehicle financing setting) and is illustrative of the shorter method recoupment on the guarantee can take.

 

In Kawasaki, two individuals had signed personal guarantees for the debts of a corporation that had contracted with the plaintiff.  The corporation defaulted on its obligations and ended up owing roughly $76,000 to the plaintiff.  The plaintiff had a judgment against the corporation and then sought the money from the guarantors that had signed agreements with the plaintiff guaranteeing the debts of the corporation.  The defendants failed to contest the validity of the guaranties and the court ruled in favor of the plaintiffs on summary judgment finding that no issues of fact existed for trial where the contract for they guaranties was not contested and the defendants failed to put forward any reason to contest the amount claimed by the plaintiff.

 

Someone financing a project should be able to personally guaranty the 7% to 10% fee that the design professional will earn… especially on smaller commercial projects or residential ones.  Given that the design professional usually will have completed the majority of its work before financing problems arise, an extra guaranty for those taking such a risk is a welcomed safety net.

 

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Recently, we have reported on cases related to claims arising out of construction regarding converage under a CGL policy.  Here is another that found no coverage under a standard CGL policy.  These cases emphasize the need to evaluate their risk allocation and coverage needs for claims arising out of claims stemming from faults with the work that’s performed.

 

In Auto-Owners, the CGL carrier filed a declaratory action asserting that it did not owe coverage under a standard CGL policy to a subcontractor.  The subcontractor wanted coverage in a suit filed against it for breach of contract, defective workmanship and negligence.  The sub’s work on the project that led to the underlying dispute stemmed from the sub’s attempt to fix the sill plate at the top of the foundation.  The sub was lifting the existing structure to get at the plate and the building slid off its foundation.  The damage to the building was extensive and the city of Chicago ordered the building demolished.  The GC sued the sub and the sub looked to its CGL carrier for coverage.

 

The court did not address the question of the accident’s categorization as an “occurrence” or as “property damage” under the policy.  Instead, it looked beyond any argument that the action fell under the policy as both an “occurrence” and “property damage” (a contention not assumed in our previous entry on Lyerla) and found that two exclusions in the policy barred coverage:

“Even if the home sliding off of its foundation constitutes “property damage” resulting from an “occurrence,” Auto-Owners is not obligated to defend or indemnify Defendants for the resulting damage because any such damage fell under exclusions j(5) and j(6) to the policy. Exception j(5) excluded damage to the “particular part” of property on which Chorak was “directly or indirectly” performing operations if the damage arose from those operations, and exclusion j(6) excluded damage to the “particular part” of property that must be restored because Chorak's work was incorrectly performed on it.”  Slip Op. at 2.

 

The court granted summary judgment to the plaintiff and found that no coverage existed due to the exclusions.  Again, while no one plans on an accident affecting the project, or expects damage to occur, having coverage for this kind of event should be considered.

 

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The background and facts of this matter can be found at our previously reported entry on the Kirkpatrick v. Strosberg opinion when it was handed down in April.  On August 8, the Appellate Court released a modified opinion in the matter and withdrew the previous opinion.

Of note, the new opinion adds an issue previously unaddressed by the court and changes the appellate court's ruling on a previous decision about punitive damages in the case.

1)       Upholding the trial court’s finding that the difference between the square footage depicted in their sales contracts and the square footage of the units as built did not amount to a breach of contract.   Contract language indicating that the floor plan measurements were approximations was included in a rider to the sales contracts that stated:

“All dimensions on the attached marked-up floor plan dated __ are approximate and subject o adjustments due to the actual location of piping, electrical, studs, steel bar joists, and other building components.”

The court also found that the architect’s construction drawings were incorporated into the contracts another provision in the agreement and used that fact to bolster the determination that the plans attached to the sales contracts were approximations.

2)       The Appellate court reversed its previous opinion that the plaintiffs were not entitled to the trial court’s award of $300,000 in punitive damages where the plaintiffs did not establish a basis for computing compensatory or actual damages.  The court revised its opinion and stated that where the trial court expressly found that the plaintiff’s proved actual damages punitive damages would be allowed.  It then addressed the issue of the excessive nature of the $300,000 in punitive damages where no compensatory damages were awarded and held that the damages were not excessive and cited several cases including the Illinois Supreme Court’s Lowe decision (225 Ill.2d 456, 870 N.E.2d 303) encouraging courts to keep the ratio of punitive damages in the single digits.  Although the court had no compensatory damages to create a ration, the court found that an award of $83,000 in attorney’s fees in this matter compared in a 3.5 to 1 ration with the damages and was not excessive.

 

The court then affirmed the rest of the trial court’s determinations thus modifying its previous opinion to a full affirmation of the trial court’s findings by changing its decision about the award of punitive damages.

 

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In a recent case from the Seventh Circuit the court found that no coverage existed in a CGL policy for a contractor sued by homeowners for breach of contract. (The opinion can be found here.)

 

The contractor had performed work on a residential project and the owners of the project sued him for breaching his construction contract by failing to complete the punchlist, and for liquidated damages guaranteed to them under the contract ($100 per day for every day the project went over the date required for completion of the punchlist items for the first 14 days and $150 for every day thereafter).  The contractor tendered the claim to his insurer and coverage was denied.  The contractor settled the suit with the owners for $53,000 and brought an action against the insurer for breach of contract and for violating the Illinois Insurance Code.  The insurer and the contractor both moved for summary judgment on the matter and the district court concluded that the underlying breach of contract claim filed by the owners had not alleged either an “occurrence” or “property damage” as defined in the contractor’s CGL policy.

 

The definitions in the policy were:

That insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy:

applies to “bodily injury” and “property damage” only if:

1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”; and

2) The “bodily injury” or “property damage” occurs during the policy period.

“Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Property damage” is defined as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

 

 

Lyerla v. AMCO Ins. Co., at 2 - 3.

 

 

The Seventh Circuit agreed with the District Court’s decision and went on to note that Illinois law was replete with cases holding that allegations for breach of contract against an insured do not trigger coverage where the alleged defects resulting from the breach are considered the natural and ordinary consequences of the improper construction techniques of the contractor or its subs and therefore do not constitute “occurrences” within the definitions of most CGL policies.

The court also held that the damages alleged by the owners against the contractor for the costs they were forced to pay to complete the construction and the liquidated damages did not amount to “property damage” under the policy where they could not be considered damage to tangible property or damages resulting from “loss of use” by the owners.

 

The opinion serves to reaffirm the principal that the CGL policy doesn’t provide coverage for breach of contract claims and should put designers, contractors, and subs on notice that different policies should be procured if they would have coverage for these allegations.

 

 

 

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    A surety issues performance bonds to a contractor.  A third-party signs an indemnification agreement with the surety, agreeing to indemnify the surety for the payments made on the bonds.  The contractor breaches its contract for construction services and the surety pays out on the bonds.  The payments were made between 1994 and 1996.  The  surety demands payment, the third-party refuses and in 2004, the surety sues for breach of contract stating that the third-party has breached the indemnity agreement.

    That’s the start of the situation in Travelers Casualty & Surety Company v. James Bowman et al. (Ill. Sup. Ct. 2008, Doc. No. 103759).  The trial court dismissed the action of the surety, Travelers, finding that section 13-214(a) which applies a four-year statute of limitations to certain construction actions applied.  Travelers appealed and the appellate court held that the section 13-206 10 year statute of limitations applied to the action.

    For those interested, section 13-214(a) and 13-206 read in relevant part as follows and are important to anyone contracting in the construction setting as they are the statutes of limitations usually found applicable to actions arising from disputes over construction agreements:

• 13-214(a)

“Actions based upon tort, contract or otherwise against any person for an act or omission of such person in the design, planning, supervision, observation or management of construction, or construction of an improvement to real property shall be commenced within 4 years from the time the person bringing an action, or his or her privity, knew or should reasonably have known of such act or omission. Notwithstanding any other provision of law, contract actions against a surety on a payment or performance bond shall be commenced, if at all, within the same time limitation applicable to the bond principal.”

• 13-206

“[A]ctions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing … shall be commenced within 10 years next after the cause of action accrued…”

    Travelers asserted in the Supreme Court that the appellate court was right and that a 10 year statute of limitations was correct since they had brought a claim for breach of contract based on the indemnity agreement with the third-party.  The third-party claimed that either the four-year statute of limitations applied, or that an even shorter two-year statute of limitations for contribution and indemnity expressed under section 13-204 applied.

     The Supreme Court agreed with Travelers.  The court noted that it is the nature of the liability to which a person is subject and not the nature of the relief sought by a party is the test for determining the character of a cause of action.  In other words no matter what an attorney might call an action, it is the underlying nature of the action and the facts of the dispute that will determine what kind of action it is.

    Here, although construction omissions had led to the payment by Travelers on the bonds, the payment on the bonds triggered obligations under the separate indemnity agreements with the third-parties and when the third-party refused to pay under the indemnity agreements, Travelers had a cause of action against them for breach of contract.

    With regard to the second theory of a two-year statute of limitations, the Supreme Court held that the third-party was incorrect in claiming that any of its cases had ever held that a two year statute of limitations would ever apply to actions based on written indemnification agreements.  The court stated that the claims of indemnity and contribution addressed under the section 13-204 addressed “cases involving the allocation of damages in connection with an underlying tort claim for injury to person or property.”  It went on to state that such a claim based on indemnity was only for “implied indemnity” (where the law offers indemnity) not for the express indemnity (where the indemnity claim is based on an agreement providing that one party will indemnify the other). 

“In sum, section 13–204 is applicable to claims for implied indemnity involving allocation of damages in connection with an underlying tort claim for injury to person or property, regardless of whether subsection (a) or (b) is at issue. Section 13–204 is not applicable to claims for express indemnification based on a written contract. Because the claim at issue is based on a breach of express indemnification provisions in a written agreement, it is subject to the10-year limitations period in section 13–206.”  Slip. Op. at 12.

The court then held that the 10 year statute of limitation applied to the indemnity agreement.

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Malec v. City of Belleville (5^th Dist., Doc. No. 05-07-0456) is a case worth noting.  The City of Belleville adopted a group of ordinances in 2006 that provided for the formation of a tax-increment-financing district (TIF) pursuant to the TIF Act.  The city also adopted an ordinance creating a business district, approved a redevelopment plan, tax increment allocation financing for the Developers, a tax within the created business district and authorized the use of general sales tax revenues to reimburse the Developers for project development costs.  A complaint filed by the plaintiff alleges that these ordinances were to help finance a Wal-Mart, Lowe's, housing development and some other businesses.

Plaintiff, a taxpayer, brought suit challenging the city's enactment of the taxes under the TIF Act.  The district court dismissed the plaintiff's claim, finding that he lacked standing to bring his action as a taxpayer.  The 5^th District reversed and found that if the actions of the city in creating the TIF and business district did affect the general revenue of the city, then a taxpayer would have standing.  The court also held that the taxpayer could challenge the creation of the TIF through claiming that the areas that had been created did not meet the criteria of being "blighted" as the Act required (under the act "blighted" is a term of art that requires a area meet a myriad of factors in order to qualify for the TIF districting).  See 74.4-3(a) of the Act.  The argument was that the areas would have developed as business districts on their own, and as such, the creation of the special districts to generate revenue that would be paid to the developers affected the general revenue of the city because the city would have generated the revenue for itself and would therefore have no need to pay developers to do it.  (No mention of the timing was made, i.e., whether an argument that a development district would create business in a matter of a year as opposed to a naturally occurring district developing over, say, ten years).

While the case is not a blow to the creation of the districts for development, it does lend individuals another form of suit which could be used to slow down any form of development relying on TIF funding and is a case we'll keep an eye on.

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            There's an interesting This American Life episode about the current mortgage crisis entitled "The Giant Pool of Money" (the link lets you listen for free).  It's a primer on the current mortgage crisis and how we got into the mess that's currently being reported on across the internet.  The effects are varied and will continue to expand, today's Wall Street Journal has a page one piece on the mortgage insurance industry and its own response to the crisis.  The TAL is a must-listen and takes you through the history about how the financial industry's craving for investment instruments led to brokers offering mortgages with no money down to individuals without verifying salary histories.

            While the spot is an introduction, it gives context for a recent case that should pique the interest of financers.

            In First Franklin Financial Corporation v. Amerihome Mortgage Company (IL N.D. Doc No. 08 C 1089) we find First Franklin (a financer) suing Amerihome (a company acting as an independent mortgage broker for First Franklin) to recoup the monies from defaulted mortgages.  Amerihome entered into an agreement with First Franklin to act as a mortgage broker.  The agreement contained an indemnification provision and a provision requiring Amerihome to investigate and verify the information about an applicant's creditworthiness by asserting that the information contained in the application and supporting documentation for the loan was true.  Sure enough, some of those applications were for borrowers who later defaulted on their loans.  First Franklin filed an action against Amerihome alleging that Amerihome breached its agreement with First Franklin by submitting loan applications with false information and alleging that Amerihome has a duty to indemnify First Franklin for the losses incurred because of the breach.

This case is unique in that Amerihome is solvent.  For too many lenders, the mortgage brokerages they have dealt with have since gone out of business, or have filed for bankruptcy.  It is also unique in that Amerihome may be able to pay the amount First Franklin alleges it is owed, while smaller mortgage brokers would have a harder time coming up with the cash to satisfy a judgment for the amount of an entire mortgage deficiency.

Amerihome filed a motion to dismiss the action for indemnification claiming that the indemnity provision which the court denied and the case will now go forward.  If you've heard the TAL piece, then it should come as no surprise that a company is going after the individuals that procured the investment for it in the first place, and of course it doesn't hurt that First Franklin apparently insisted on the indemnification provision in the first place.  It will be interesting to see how actions such as this one continue to develop as institutions investigate ways to recoup their losses. 

[UPDATE]:  Bill Henderson, professor at Indiana University School of Law is also asking some questions about this debacle today on the Legal Profession Blog.

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The First District has filed a new opinion relating to control exerted over an independent contractor by a GC in Gregory v. Beazer East, et al., (Doc. No. 1-06-3597).  The court held in an asbestos related action that the facts surrounding the worker's employment in the construction of a facility back in 1970-71 did not give rise to a finding of liability in a construction negligence action.  While the defendant (the facility owner) had the ability to stop work, monitor work, and control access to the site "these were simply general rights it had as the ultimate employer on the construction project."

 

Periodically, we see cases in which an owner will assert a claim against a design professional pursuant to the consumer fraud act.  In an interesting case initiated pursuant to an act with similar provisions, the Second District has held that a corporation in the business of restoring vintage cars can qualify as an "Automotive Repair Facility" under the Automotive Repair Act.  In Montgomery v. Nostalgia Lane, Inc., (Doc. No. 2-07-0661) this finding required reversal of a summary judgment in favor of the repair facility after the plaintiff sued for damages where the facility allegedly low-balled its bid and then ended up over-charging.

 

The tenants of a commission run trailer park were allowed to keep their claims against the commission for an unlawful taking and for inverse condemnation and beat a dismissal motion.  In Mester v. Otter Lake Water Commission, (C.D. IL, Doc. No. 08-3080) the court found that there were facts and allegations sufficient to preclude a determination that the actions of the commission in limiting and restricting tenants rights and their ability to sell their lots or transfer ownership did not amount to an unlawful taking or condemnation.

 

In DOT v. Anderson, et al. (Doc. No. 3-07-0877), the Third District found that despite the private claims of an individual to ownership interest in a parcel, where the recorded documents showed title was vested in another, and that the common law requirement of possession use or control had not been met, the plaintiff was not an owner under the Eminent Domain Act.

 

Shari Shapiro, over at Green Building Law, has an article published at Green Buildings about an action filed by some HVAC providers against the City of Albuquerque to stop regulations passed by the city requiring higher efficiency heating and cooling units from going into effect.

 

BLAWG REVIEW #168 is up over at West Virginia Business Litigation and provides some interesting diversions.  Notably, a few great links discussing legal writing and some entries about topics that came up in blogs last week.  In general, this posting does not center around a theme as most of the review's tend to; it sums up some postings that were interesting to the author.

 

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In Stewart v. Gino's East, et al. (N.D. IL, Doc. No. 07 C 6340), the defendants, restaurants that accept credit cards for payment, were sued under the Fair and Accurate Credit Transactions Act (FACTA) in a class action alleging they violated the FACTA by not removing the expiration dates of credit cards from their customer's receipts.  One of the defendants brought a third-party action against a company that installed the software and hardware used for the credit card transaction for breach of contract.  The third-party complaint attaches the contract.  It is a short agreement entitled "Construction Contract" and appears to be a standard contract used by the defendants for the contractor installing the equipment and allows the architect final approval on the remediation of unsatisfactory work.

The third-party complaint alleges that the description of the services provided in the contract meant that the contractor would assure that the software and hardware were in compliance with all applicable laws, including FACTA.  The contractor brought a motion to dismiss and argued that nothing in the contract obligated it to make sure the system was in compliance with FACTA and pointed to provisions of the contract arguing that they were not ambiguous and precluded a complaint against the contractor. 

The court found that the provisions pointed to by the contractor were silent about the system or hardware complying with FACTA (after all, it reads like a contract for the installation of the machines):

• "You do hereby warrant, that all material and equipment supplied for this job shall be new and free from faults and defects, and standard written equipment warranties shall be included and delivered to owner and also included is an one year warranty (from completion of the contract work) on all workmanship and materials."

The court went on to hold that other provisions could be interpreted to mean that compliance with FACTA was included in the contract:

• [the contractor] is "authorized to furnish all labor and equipment to do the POS set up for the building"

• "[t]he work is intended to be complete and fully useable as a finished product or system."
  
• "that all material and equipment supplied for this job shall be new and free from faults and defects."

Finding that these contractual provisions might be interpreted to require the system, as installed, would be compliant with FACTA.  The court denied the motion to dismiss, pointing out that these ambiguities created a question requiring future litigation.

Now, obviously, the court, and we, don't have all the facts about the nature of the agreement, but if it was just an agreement for the work on the installation of the equipment, then the ambiguities have created an issue and possible liability in a situation where absolutely none was intended.  Again, it might seem like a pain to have lawyers reviewing your agreements and helping negotiate even something as small as this contract must have seemed, but there is a reason such a big deal is made over contractual language.

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We've been undergoing some changes  recently and within the next few weeks, the Illinois Construction Law Blog will have a new address at http://www.illinoisconstructionlawblog.com courtesy of the fine people over at Lexblog.

Getting back into the swing of things, there are several noteworthy opinions that have come down in the past week:

• TSP-Hope, Inc. v. Home Innovators of Illinois, LLC (4^th Dist. Doc. No. 4-07-1028)  In this case, the plaintiff had contracted with the defendant to build residential units.  The contract contained an arbitration clause and although the defendant answered the complaint and filed a counter-claim and affirmative defenses, the court found that it had not waived its right to arbitrate the contract dispute.  Additionally, the plaintiff had served the defendant with a §34 notice under the Mechanic's Lien Act (requiring the lien claimant to file a complaint within 30 days or lose the lien rights).  The court found that because the §34 notice required the filing of a foreclosure claim in court, taking the action did not amount to a waiver of rights under arbitration when the defendant would arguably have been forced to lose its rights if it had not filed the foreclosure claim.

• In Winnebago County Citizens for Controlled Growth v. County of Winnebago (2^nd Dist. Doc. No. 2-07-0362) the court found that a not-for-profit association may have standing to challenge the county's decision to grant a planned community development special use permit.  Although the association was formed, arguably, in response to the development, the fact that some members may have to participate in the litigation did not preclude the association from bringing suit.  The court reversed a trial court's decision to dismiss two counts of the association's complaint where it found that a clearer understanding of the potential nature and involvement of certain members of the association could only be developed in litigation.

Also, we would like to take a moment to recognize that 100 years ago today one of the greatest Justices in modern times was born.  On July 2^nd 1908, in Baltimore, Maryland, the once Chief Counsel to the NAACP, 2^nd Circuit Judge, U.S. Solicitor General and Supreme Court Justice Thurgood Marshall came into the world.  In honor of this event, we present this interesting article from Mary L. Dudziak published in the Spring 2008 issue of the Green Bag which is a short testament to the work Marshall did in helping to craft the Kenyan Constitution.  "Reflecting on this episode in later years, Marshall would express great satisfaction: "That, to my mind, is really working toward democracy, when you can give to the white man in Africa what you couldn't give the black man in Mississippi. It's good."

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Here's something you're sure to be interested in.  We had previously discussed an order in Vancil v. Tres Amigos (C.D.IL, Doc. No. 06-71254) regarding Tres Amigos attempt at attaining summary judgment to extinguish two mechanic's liens filed by former subcontractors of Vancil in a bankruptcy proceeding initiated by Vancil.  That entry is here.

Today, the court denied Tres Amigo's motion for reconsideration.  Of note to everyone working in the industry and dealing with mechanic's liens, this order, holds that section §60/9 of the mechanic's lien act, which allows the parties to an Illinois mechanic's lien foreclosure to contest each other's rights without the need for multiple pleadings between all of the parties, is a procedural statute and not a substantive right given to the parties.  Because the federal court is not bound by state procedure, but rather, by state substantive law, in order to maintain an action against the other lien claimants, a party must file pleadings against the other parties in order to contest the issues between them.  Given this assessment of the nature of the rights granted under §60/9 the court denied Tres Amigo's motion for reconsideration and held, again, that it needed to have pleadings on file against the lien claimants it was contesting, or no remedy was available from the federal court.

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In this opinion, the plaintiff, Lumbermen's filed for a declaratory judgment against the defendant, Gloria Sykes, seeking a coverage determination regarding a policy that Sykes had in 2001.

Some time in early 2001, Sykes discovered water entering her house and submitted a claim for water damage under the homeowner's policy with Lumbermen's.  Lumbermen's paid the damages and closed their file, but in November 2001, Sykes reported toxic mold growth in the home and alleged that the mold was the result of the prior occurrence.

Lumbermen's investigated the later claim and sent several letters to Sykes.  In the meantime, Sykes was forced to leave her home while Lumbermen's undertook construction and because Lumbermen's and their contractors left in July, 2002, when it denied the claim, work was not finished and Sykes was never able to move back into her residence.  Lumbermen's complaint alleged that after the investigation and a proper reservation of rights, a letter denying coverage was sent to Sykes on July 24, 2002.  Sykes countersued and alleged multiple claims, the two at issue in the appeal argued that Lumbermen's breached its contract with Sykes and that Lumbermen's was estopped from denying coverage because letters sent to Sykes from Lumbermen's where several letters - importantly, one on March 14, 2002, admitted that the mold in her house was covered by the policy, but affirmatively stated that if damage to the home was not caused by the ice/water damage from the previous claim, then there would be no coverage.  Sykes moved for summary judgment and attached an affidavit declaring that she was told on February 19, 2002, by representatives of Lumbermen's that her claim was covered by the policy.  The affidavit was never contradicted by Lumbermen's.

The trial court awarded summary judgment to Sykes on her coverage/breach of contract claim and granted an injunction forcing Lumbermen's to turn over some $11,000 that was left on Sykes' policy to Sykes for the costs she had incurred by being forced out of her home and unable to move back in.

Lumbermen's appealed and the appellate court held that the trial court properly granted summary judgment for damages from February 19 to March 14.  Specifically, the court looked to the communications between the Lumbermen's the Sykes and found that assertions made in Sykes' affidavit regarding representations of February 19 were never contradicted by Lumbermen's.  Holding that those non-contradicted assertions must be assumed true, there was evidence was put forth showing that any denial or explanation that coverage would be provided for damages that did not result from the prior occurrence until Lumbermen's March 14 letter.  Therefore, Lumbermen's was estopped from denying coverage for damages prior to March 14.

The court then found that the March 14, 2002, letter was sufficiently worded so as to arguably inform Sykes that claims may not be covered by her policy, and that any reasonable person could possibly understand the subsequent letter to mean that there might not be coverage for certain mold and water damage.  Because a reasonable person could interpret the letter differently than the plaintiff claimed she interpreted the letter, the appellate court found that an issue of fact existed sufficient enough to preclude the grant of summary judgment for damages incurred by the plaintiff subsequent to the March 14, 2002, letter, but upheld the trial court's grant of summary judgment for the damages suffered between the February 19, 2002, letter and the March 14^th letter.

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In this case, the plaintiff, M&K Chemical Engineering Consultants, Inc., an engineering firm from Illinois bid a project to perform design work to replace a cooling system for a chemical reactor in St. Louis, Missouri.  Before submitting the bid, the plaintiff asked the defendants, Malinckrodt, Inc., and TYCO Healthcare Retail Group, a series of questions about the project.  After getting the answers back, the plaintiff submitted a bid, based, in part, on the answers that the defendants had given, of $99,500.

The defendants accepted the bid and sent plaintiff an email containing a six-pages of the first sides of a double-sided purchase order, a second email containing the second sides of the pages, and mailed a copy of the purchase order to the plaintiff as well.  The purchase orders second side contained a forum selection clause stating that the laws of the State of Missouri would apply to any disputes and the Missouri Courts would have exclusive jurisdiction over any action arising out of the contract.  The purchase order, and subsequent purchase orders for changes the plaintiff wished to make on the project all contained the forum selection clause and a clause indicating that the initiation of performance under the purchase orders constituted acceptance of the terms of the orders.  The plaintiff's president asserted that he never read the second side of the purchase orders in either the email or the mailed copy.

The requirements of the project did not turn out as the plaintiff expected and the plaintiff sued the defendant in federal court in the Southern District of Illinois alleging that the answers the defendants had provided to the plaintiff's original questions (prior to the bid) were false and misleading, and requested a rescission of the contract, and restitution from the defendants for the $162,004 that it went over budget on the project.

The defendants requested that the complaint be dismissed pursuant to the forum selection clause contained in the purchase orders, and the plaintiff argued that the clause could not be part of the contract between the parties because the plaintiff was unaware of the clause when it commenced and performed work under the purchase orders and requested a jury trial on the issue of whether the terms of the contract between the parties included the forum selection clause.

The court held that the clause was part of the contract.  Citing several of the cases we have blogged about before, the court held that performance under the purchase order constituted acceptance of its terms regardless of a parties reading or negotiation of those terms.  We have seen this issue come out both ways for plaintiffs and defendants in the past and it is hard to divine from the courts a standard rule for when terms of an non-negotiated and unread contract will be held to apply and when they will not.  Suffice it to say that apart from the uneven bargaining positions of a consumer and a corporation, it is likely that ignorance of the terms of a contract will not preclude enforcing its terms.

The court also found that the plaintiffs claims of fraudulent inducement to the contract (for defendants answers to the pre-bid questions) would not operate to invalidate the forum selection clause.

The court took special care to note that the likely reason there was such a fight over the issue of venue and applicable was the plaintiff's status as a licensed engineer in Missouri where the project was located.  With only Illinois licensure, Missouri law, the court pointed out, can be more unforgiving toward an engineer than Illinois law.

The Court's original order can be found here.  The first judgment dismissed this matter with prejudice and the court subsequently modified that decision and dismissed the matter without prejudice.

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The Mechanics Lien is a testament to the fact that the same problems have been occurring in construction projects since construction began.  The concept behind the act is rooted in equity - a person puts time and effort into improving something and has a right to remuneration for those improvements.  Usually, the improvements cannot be removed from the thing, so justice requires some remuneration, either by getting to sell the thing for the money owed on the improvement or by having a right in any eventual sale.  Many state's have lien laws similar to Illinois' that can cover a multitude of types of work, from car, boat and horseshoe repair to construction work, mining work, and liens for judgments awarded to parties in litigation.  What those state laws have in common for the most part, is the creation of a system for conducting affairs in that trade or business that, when followed, can grant parties rights they would otherwise not have outside of the statute.

In the case of the Illinois Mechanics Lien Act, compliance with the provisions of the act can protect the owners of property from subcontractors' liens when the owner complies by requesting statements from the general regarding amounts owed to subs and then withholds the amounts owed the subs from payment to the general for their benefit.  Subs and generals can protect themselves by providing the proper documentation required under the act to the owner and will have a claim for unpaid monies that attaches to the land and allows them to foreclose on the lien and the possibility of selling the property to satisfy that judgment.  The important point is that the parties need to follow the letter of the act or problems (the same old problems that were cause for the creation of the act in the first place) will arise and they will not have the protections that they thought they did.

Depending on your viewpoint, a comedy of errors came together and an owner's problems were exacerbated for not following the act, forcing the Third District to reverse a Will County trial court decision in favor of an owner (University St. Francis) against an electrical subcontractor (Excel Electric, Inc.) in this case.

St. Francis hired a general contractor to renovate a residence hall at the university.  The GC hired Excel as the sub.  Work was performed and up to the final invoice, the GC submitted invoices showing the subs and the amount due to the subs.  The original invoices were all paid.  The final invoice was sent to St. Francis by the GC showing the amount of the final payment as $458,237.56 and stating the $130,948.48 was due to Excel.  St. Francis transferred the full amount to the GC (which included the 130k for Excel) to the GC's Harris Bank account, but instead of having access to the money, Harris Bank took the funds pursuant to its right of set off for a debt that the GC owed Harris Bank.  Excel and other subs never got their money.

Excel filed its claim for a lien and noticed St. Francis that it was owed $140,547.09 (likely the amount plus interest, but the opinion is silent regarding the discrepancy).  Another sub that had a lien filed a foreclosure action and pursuant to the statute, Excel joined in that action and filed a counter-complaint to foreclose on its lien.  The university and Excel both filed motions for summary judgment.  Excel argued that it had a valid and enforceable lien in the amount of $130,948.48 and St. Francis argued that the lien was not enforceable.  The trial court agreed with St. Francis and based its opinion on an understanding that because Excel did not file its notice of lien until after St. Francis had made final payment to the GC.

The appellate court reversed.  The opinion is worth reading for anyone in the industry who is interseted in either enforcing liens or trying to get out of them.  The court cited the notice provisions required in §5(a) and §24(a) of the Act and noted that the final invoice from the GC put the university on notice that Excel was owed money.  Under the act, St. Francis should have withheld the funds for the benefit of Excel (possibly paying them directly to Excel, or at least waiting to obtain a final lien waiver from Excel before transferring payment).  It is interesting that if the final statement from the GC had been fraudulent, and listed the amount as $60 or that no money was owed Excel and then St. Francis did, in fact either retain the $60 or make payment, Excel's claim against the university would not stand.

Owners should note that they need to request that final statement of subcontractors and amounts due and owing to be protected under the Act.  Contractors should note that they need to get their notices and billings to the owner in a timely fashion under the act to preserve their rights.

 

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The Illinois EPA asked the State Attorney General's office to seek an injunction and civil penalties against the defendant for operating a "construction or demolition debris" landfill without a permit.  The defendant, a company operating a landfill in the Village of Ford Heights (a village the court describes as "an economically depressed community south of Chicago"), argued that the debris (a mound 70 feet tall spanning 26 acres) would be "waste" and therefore in violation of the Illinois Environmental Protection Act (415 ILCS 5/21(d)(2)) but for the fact that the landfill was the proposed site of an all-seasons downhill skiing facility which placed it under an exception to the act.

The question was certified:

   "Whether clean construction and demolition debris deposited onto the land for the purpose of providing the infrastructure for a recreational facility to be built at the site and to be used for snow skiing/snow boarding (facts which are undisputed for purposes of the August 4, 2007 partial summary judgment order) constitutes 'waste' under the Illinois Environmental Protection Act and requires a permit in compliance with the Act's waste disposal requirements including but not limited to 415 ILCS 5/3.305, 415 ILCS 5/21 et seq., 415 ILCS 5/21.1 and 35 Ill. Adm. Code 812.101(a)."

The court put aside the question regarding whether the debris deposited by the defendant was, in fact, "clean construction or demolition debris" reserving the issue for trial.  Assuming that the debris was "clean" the court found that there was nothing in the actions of the defendant by leveling the debris once it reached the site, demonstrating that it "separated or processed" the debris.  The court also found that the planned ski hill did not create an exception amounting to "returning [the debris] to the economic mainstream in the form of raw materials or products."  (415 ILCS 5/3.160)  The court reasoned that accepting the claim that the future use created an exception would negate landfill regulation by allowing any landfill operator with a future intention to avoid meaningful regulatory oversight.  The court additionally dismissed the defendants argument that an exception for using the debris as fill material was met - stating that the fill material exception was negated when the debris reached a height (70 feet) well above the adjacent land as the exception stated.

Answering the certified question in the negative, the court remanded the case.  The opinion is here.  For more information on what to do with construction debris, the IL EPA maintains this construction debris website.

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Given the glut of Bankruptcy cases we have been seeing over the past four months where differing lien matters are being resolved over limited funds in bankruptcy actions, it's refreshing to see an interpleader action.  (An action filed by a party that has control or possession of property that should go to some other party, but first it needs the court to determine which party is the correct party.  In the context of this action, which involved a developer in control of funds that would have been paid to a general contractor but for the fact that the contractor was no longer in business.)  The reason this is refreshing is that lately we have been seeing cases where the GC gets behind and starts using all kinds of funds from different projects to pay its bills.  Often, the GC does not reveal its financial state to the parties it contracts with know of its financial state until it is too late.  The GC goes bankrupt, which consumes the remaining monen that was to be paid out to its subs and other creditors... resulting in a GC that can't pay and multiple liens filed against property owners who had no idea that the payments they were certifying weren't getting to the subcontractors and creditors.

In this action, the company that went under had also failed to make its FICA payments to the IRS.  At the time the interpleader action was filed, the developer was still in possession of some money that it intended to use to pay the GC.  This money was put forth in the interpleader action with a request to adjudicate a settlement of the pending mechanic's lien claims in state court.  The developer also added the US as a party because of the lien the US had on the missing FICA tax payments.  The US then filed a motion to remove the case to federal court to which the mechanic's lienors and other creditors objected.  The court denied the motion to remove the case back to state court finding that the interpleader action had properly consolidated all the cases, and that venue was correctly in federal court under the US Code.

The case is also a reminder that one quick way to federal court when you can't get diversity jurisdiction is to join the U.S. Government as a party.

The case is available here.

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This is a case from the first district about the collapse of a building in Chicago.  The Chicago Province of the Society of Jesus (a Jesuit organization) had a building and demolition work adjacent to the building went awry causing the collapse of the Jesuit's structure.

The parties (and there are many) sued each other and some of the defendants decided to settle.  In total, the Jesuits sought close to $3 Million in damages from the defendants on theories of negligence, violation of the Adjacent Landowner's Excavation Protection Act and violation of the Illinois Municipal Code.  Six of the defendants offered a total of $1,185,000 to settle the claims made against them.

In Illinois, parties can seek a "good faith finding of settlement" under the Illinois Joint Tortfeasor Contribution Act allowing a party that settled to be discharged not only in settlement with the plaintiff, but also from all liability to any other party that might be pointing a finger in their direction.

Here, some of the parties that did not settle objected to the attempts by the settling defendants to obtain a good faith finding because that finding would mean that the non-settling defendants could not seek any more contribution from the settling defendants and would be left paying for whatever damages might be assessed down the road.

In addressing the matter, the court provided a decent summary of the relevant case law and standards regarding "good faith" findings of settlement and upheld the trial court's determination that the settlements were made in good faith.  Effectively allowing the settling defendants to have their liability capped and be removed from the case.

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Here's an interesting case about a pipeline that de-coupled after a weld failed.  The pipe's owner, had a continuing services agreement with the defendant regarding the installation of the pipe.  The agreement included warranties, representations and guaranties about the quality, workmanship and fitness for a particular purpose for the work done in connection with the pipe.  The pipe de-coupled roughly two months after its installation was completed.

Plaintiff brought a suit against defendant under breach of warranty and negligence claims.  The court, in the opinion, denies the defendant's motion to dismiss both claims notably holding that the complaint contains enough information to state a cause of action for both the "sudden and dangerous event" and "damage to other property" exceptions to the economic loss doctrine.  Finding that the pleadings were sufficient to state the claims, the court noted that discovery was needed to determine if the event would hold up to the standards for the exceptions, but that in pleading, the Plaintiff's papers were sufficient.

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The internet's record of history regarding the revolving door is a bit murky.  For some reason, Answers.com informs us that the revolving door was in use somewhere in Chicago in 1790, and then, in an entry regarding the happenings of 1888 insists that 1888 was the year that Theopholis Van Kannel gave it to the world by installing the first revolving door somewhere in Philadelphia.  We know that Van Kannel received a patent for the door, after a German, H. Bockhacker, but Wikipedia says it was U.S. Patent 387,571, and invent.org insists it was # 641,563 and makes no mention of Bockhacker.  (There were multiple patents awarded to Van Kannel, both are for doors, but 387,571 was the first). 

The purposes listed for the thing involve every intent from controlling crowd capacity to keeping the windows from blowing out of skyscrapers and rarely mention that the fine folks at MIT have definitively stated and proven that the door saves energy and should probably be considered a sustainable instrument... and if you have a greater interest, you can always pick up Beardmore's "The Revolving Door Since 1881."

Whatever the use and history, our interest stems from a case recently decided by the Illinois 1^st District Appellate Court called Britton v. University of Chicago Hospitals.

The plaintiff was attempting to enter the Hospital through a revolving door when the door jammed and he decided to give it a "shove."  After he pushed, the door didn't move and next, the outer glass surrounding the door broke and injured the plaintiff's left shin and knee.

Plaintiff sued the University of Chicago Hospital alleging that it was careless in its management of the revolving door alleging that the Hospital had a duty to maintain a proper ingress and egress from the premises and stating that the Hospital failed to make a reasonable inspection of the entrance and that the failure amounted to constructive notice that the door was defective - he also argue that whether the Hospital made a proper inspection was a question of fact.

The trial court granted summary judgment for the Hospital.  The appellate court affirmed the decision for the Hospital noting that the plaintiff was required to have some evidence tending to prove that a specific condition under the Hospital's control caused the glass to break.

"There is nothing in the record regarding any defect in the glass or the revolving door.  There is nothing in the record regarding maintenance of the revolving door.  Further, there is nothing in the record to indicate that the hospital had actual or constructive notice of any defect in the revolving door.  Here the record merely contains general allegations against the defendant but no evidence creating any issues of material fact."

The court also addressed the plaintiff's contention that the door's breaking constituted evidence of negligence in-and-of itself under the legal doctrine of res ipsa loquitor (the thing, for/to itself, speaks).  The court rejected this argument stating that the plaintiff was operating the door and caused it to revolve and... "where a structure not obviously dangerous has been in daily use for an extended period of time" [note that they didn't resolve the 1881/1790/1888 issue] "and has proven adequate, safe, and convenient for the purposes to which it was being put, it may be further continued in use without the imputation of negligence."

That last language is important.  The court came to that reasoning through its understanding that the plaintiff (or anyone) was using the door and taking a distinct part in the operation of the door and thereby, the person is chargeable with the exercise of due care as well.

The case isn't earth-shattering, but it is a good one that people operating a building should have in the deck for premises liability claims.  And, if nothing else, noting the name of Van Kannel could get you another role of the die in trivial pursuit.

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These are all a bit too short for full entries, but they are important.

The deadline on HB 2094 (The Structural Work Act) has been extended to May 31.

A bill relating to the Notary Public Act, that would lessen fraudulent transfers in Cook County by requiring the thumbprints of grantors as well as sufficient descriptions of those transferring property has been amended.  The bill had been sitting in the judiciary committee since December but has been revitalized.  Important to those concerned about records keeping - the bill requires new records under the amendment to be kept for seven years by title companies and attorneys.

Mostly Memories, Inc. v. For Your Ease Only, Inc. (7th Circ. Doc. No. 06-3560)
The Seventh Circuit has reversed a denial of attorney's fees under the prevailing party statute contained in 17 USC 505.  The plaintiff had dismissed its own case as baseless and the district court had denied the defendant's motion for fees under the act.  The appellate court found that fees were proper and that under the circumstances, a dismissal with prejudice did entitle the defendant's to attorney's fees.  For those concerned about their copyright in designs, this is a boon and another reason to follow through on protecting your work through proper registration.  The opinion is here.

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We have seen this before, and will likely continue to see it.

A party sits on its rights a little too long.  During the initial phases of litigation it replies and responds and files motions to dismiss and a year goes by.  Sometime, somewhere, someone reads the agreement again and says: "hey, maybe we should arbitrate this under the arbitration provision in our contract."   Their motion to remove the case to arbitration is denied by a judge finding that their answers and motions to dismiss, along with active participation in litigation amounts to waiver. 

They spent time and energy drafting their contract, negotiating its provisions, sometimes in the context of a project or development that amounts to hundreds of millions.  And now, they cannot avail themselves of the benefits of their negations.  Arbitration was chosen as a provision and likely negotiated on, and if it's the method you choose for the resolution of your dispute, you need to remember to act on it.

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In this case, the original easement, granted in 1939 contained terms authorizing the holder to "the right to lay, operate and maintain a pipe line for the transportation of oil, gas, gasoline and/or other fluids, the grantee selecting the route, upon, over and through the following described land..." and further authorized "the right to lay, operate and maintain, adjacent to and parallel with the first, a second pipe line,..." and the easement would exist "so long as such pipe lines or other structures are maintained;..."

Over the years multiple companies became holders and transferred their holding in the easement to others until the defendant, Enbridge, LLC, became the current holder.  Enbridge desired to build a second pipeline and continue use of the first pipeline.  The plaintiff's owned the land that the easement ran on.  Plaintiff's brought suit to stop the building of the second pipeline seeking to extinguish the easement by proving that the easement had been abandoned.  A previous order discussing the testimony allowed by the plaintiff's expert and applying the standards of the federal rules of evidence to his testimony can be found here.

The parties moved for summary judgment against each other and the court rendered an opinion which is instructive for any company that may have particular easement that they are not using, but that may want to preserve the easement as an asset for a future conveyance.  The court found that the easement was still in place and that Enbridge had the right to full use of the easement.

• The court noted that abandonment of an easement "requires proof of non-use plus some affirmative act that manifests an intent to abandon the Easement.  The affirmative act must destroy the object for which the Easement was established or the means of its enjoyment."  It then went on to find that there was no evidence of abandonment on these terms.  The fact that the pipeline had laid unused for a period was not an affirmative act, and the plaintiff's presented no evidence of an affirmative act of destruction.  Although previous entities entitled to the easement had not used the pipeline, they had never moved or destroyed the pipes, they had taken measures to determine that the pipeline was in good condition and they had maintained the signs around the pipeline - expending funds to maintain the pipeline.

A large portion of any particular right in an easement and its abandonment will depend on the language in the conveyance.  In this case, and in others, checking the easements that a company holds even if they date back to 1939 could turn out to be profitable with just a little maintenance.

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Here's an interesting case about the award of attorney's fees in a dispute between an Irish architectural firm and an Illinois builder of medical care facilities for work done on projects in Ireland.

The architect brought an action under the contract's arbitration provision and subsequently prevailed on a good portion of its claims in front of an Irish arbitrator.  The builder brought a suit in federal court in Illinois seeking a declaratory judgment ordering that the arbitration awards were invalid; that the architect had repudiated the contract and waived its right to arbitration; and that the architect had to initiate any legal proceedings against the builder in Illinois.  The district court found that it lacked jurisdiction to award the builder the relief and also affirmed a portion of the arbitration award.  The architect then sought attorney's fees and costs.

The opinion will be of interest to anyone faced with the issue of attorney's fees both in federal court under diversity jurisdiction and in state court.  The court held that attorney's fees in Illinois are a procedural matter and not a substantive matter under Illinois law, consequently, because no provision existed in the contract shifting attorney's fees and because the law of Illinois applied, attorney's fees were not available to the architect for prevailing in the district court matter.

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For those involved with suppliers of steel tubing... In United Star Industries Inc., v. Plastech Engineered Products, Inc. the Seventh Circuit issued an opinion upholding a trial court's determination that a commercial contract for supplying steel tubing did allow for passing the costs of a surcharge on the cost of steel from the manufacturer on to the end purchaser. 
The court also allowed sanctions to be imposed by the trial court against a law firm (not individual lawyers) under Federal Rule 11(c)(3) where the trial court found that the law firm had brought unsupported claims on behalf of the defendant in the nature of a counter-claim against the plaintiff.

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In Stoneridge, the court addressed the issue:  Whether an insurance company needs to provide coverage to its insured as well as to an additional insured under the policy.

A company had built townhomes and sold one to the Walskis.  Six years after the Walskis bought the home, they sued Stoneridge, the home company, because structural problems in the compaction of the soil underneath the home had cased the home to move, crack and fail.  Claims were filed against Stoneridge and an additional warrantor as well as several other parties.  Stoneridge tendered the complaint to its insurer and the insurer defended under a reservation of rights.  An arbitration award against Stoneridge and in favor of the Walskis, afterward Stoneridge pursued an action for declaration that its insurer had a duty to indemnify it which had been pending.

The parties to the declaratory action all filed motions for summary judgment.  Stoneridge and those arguing on its behalf (it has since gone insolvent) argued that the insurer was estopped from denying coverage where it had arguably accepted that coverage for an implied warranty of habitability claim may exist by failing to explicitly deny such coverage in its reservation of rights letter and where the appointed counsel for Stoneridge had sought to have that claim dismissed in the arbitration seven separate times while not failing with such vigor to motion for the dismissal of the uncovered breach of contract claim.  The trial court agreed and found that the insurer was estopped from denying coverage to Stoneridge under the policy.

The insurer appealed and the appellate court reversed the trial courts estoppel decision and also found that there was no coverage under the CGL policy for the damage caused to a house by the settling of a house due to improper compaction of the soil.

In the first portion of the opinion regarding estoppel the court determined that the insurer was not estopped from denying coverage because it had never said there would be coverage.  The letter had properly categorized both the breach of contract claim and the implied warranty of habitability claims as being contractual in nature and expressed doubt as to the existence of coverage under the policy in its reservation of rights letter.

Note that in reaching this opinion, the court reaches two others:

• A trial court may properly examine a reservation of rights letter in determining whether there is a conflict of interest between an insured and an insurer and is not relegated solely to considering the policy and the underlying complaint.

• The implied warranty of habitability is a contractual claim under Illinois law.

In determining that no coverage existed under the policy the court cited to several other opinions holding that the damage caused directly to a project by faulty work was not an "occurrence" as defined in the policy because it was not accidental in that it could be foreseen that cracks and failures in the project would be the necessary result of faulty workmanship and improper construction techniques.  In defining "property damage" the court also held that there was not property damage in this instance that would be covered by a CGL policy because the clause did not apply to damage to the project, but to damage to other property which was not the project.  (i.e., if the townhouse fell onto someone else's house or their car, that would be "property damage" as defined under the policy).  The court also reiterated the holdings of several other Illinois opinions finding that CGL policies do not include coverage for damage to the project by faulty workmanship and that contrary to other jurisdictions, an exception for subcontractors to an exclusion for faulty work in the standard CGL policy that, in other jurisdictions has been interpreted to provide coverage for damage to the project when the fault work was performed by a subcontractor, is not applicable in Illinois because in Illinois, there is no coverage under a CGL policy for damage to the project from faulty work, period.

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Takings are a fact of our constitutional system.  Often, they're the method for beginning any public improvement or development.  Construction lawyers frequently come across the issue in highway expansion or stadium projects.  The results are mixed, and the topic can lead to some harsh rhetoric from critics.  One only has to remember the Kelo v. City of New London opinion and the ensuing humorous attempt at establishing the "Lost Liberty Hotel" in place of Justice Souter's house, to understand just how much people can get worked up.  Few things can have as much sentimental value as someone's home - or in the case of a farmer, as land.  (For an interesting discussion of the Kelo decision and the ensuing problem of the "holdout" owner in takings actions, read this entry by Judge Posner at the Becker-Posner Blog)

Guardian Pipeline v. 950.90 Acres is an opinion about the attempts of farmers to overturn a commission's decision regarding the value of their land.  Guardian Pipeline was authorized by the FERC to construct a pipeline that included the necessary condemnation of portions of more than 100 parcels of land in northeastern Illinois in order to put the pipeline underground.  A commission was appointed by the district court to receive evidence and propose findings to the district judge.  The proposed findings and resulting offers for the land or damage to the land during construction were accepted by all but three defendants.  Those defendants challenged the commissions findings which were adopted by the district court.  The defendants then appealed and the seventh circuit delivered an opinion upholding the decision.

The decision, written by Judge Easterbrook, presents an interesting solution.  Takings of partial portions of land in Illinois are governed by the "unit rule."  (Read the concurring opinion in the cited case to see that the method has its critics.)  In actions involving such takings, the unit rule means that the property subject to taking must be valued as a whole and the owner given the benefit of its assessment at the "highest and best use" of the property at the time of the taking.  Often, comparable parcels of land are sought out by the parties "experts" for evaluation and assessment.  Normally, three to eight parcels (five to seven in most cases) are compiled in a report.  An average value per square foot is assessed for the exemplars.  That value is applied to the total square footage of the proposed portion of the parcel to be taken and the result is the amount of compensation offered by the taking  entity, or the value between the parcel before and the parcel after the taking is assessed with the same per-square-foot methodology being used.  Sometimes assessments include the cost of work to bring the land back into a usable fashion (for instance having to repave a portion of a parking lot that has been decreased in size by a taking).  But often, any such arguments about external factors which the owner feels will require extra compensation are not included in the appraisal and must be argued over in court.

These types of appraisals caused the court in Guardian to wonder:

• "What puzzles us is why both sides were fixated on pairwise comparisons--that is, matching each subject parcel with a supposedly "comparable" parcel that does not have a transmission-corridor easement (whether for oil, gas, or water underground, or rail or electricity above ground), appraising that parcel, and then comparing the appraised value of the "matched" parcel with appraised values of the subject parcel with a pipeline easement. That process is full of problems. No other parcel will be identical to the subject parcel except for its lack of a transmission corridor easement. Location and other attributes always differ, setting the stage for debate about whether an appropriate comparison has been selected. And even if very similar parcels can be found for comparison, the appraisals are just estimates. Each of these comparisons requires two appraisals: one of the "matched" parcel, and one (informed by the comparison) of the subject parcel with the easement."

Suggesting a different approach, based on regression analysis and citing the FJC's Reference Manual on Scientific Evidence, the court opined that:

• "A different approach would be to gather data about the actual selling prices of real estate with and without transmission-corridor easements and use these data to determine how much the easement reduces the value of real estate in real transactions. The law of large numbers would make up for the lack of closely matched comparison pairs. How many feet of transmission easement encumbers a parcel is a continuous variable and could be one independent variable in a regression. Daniel L. Rubinfeld, Reference Guide on Multiple Regression, in Reference Manual on Scientific Evidence 179-227 (Federal Judicial Center 2d ed. 2000), provides a good description. Using real transaction prices reduces the role of guesswork. Although no one suggested such an approach in this proceeding, litigants (and district judges) should keep it in mind for the future, as it has the potential to be faster, less expensive, and more accurate than a parade of witnesses offering estimates that cannot be verified."

This method not only makes sense, it seems to be a more scientific and mathematically sound strategy than a method based on comparative appraisals and should be considered by the Illinois Supreme Court and lower courts as a substitute for the unverifiable method in use today.  Such a method often has "experts" applying "principles" and coming out miles apart in their appraisals depending upon which party to the litigation they represent.

 

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In this case, subcontractor brought a suit against the Illinois Department of Transportation (IDOT), and the general contractor on a project.  The bid on the project was to perform services for the general to excavate a trench, install a sewer pipe, and supply backfill.  The contract required that the parties abide by the IDOT Standard Specifications and the plans specified in the general contract.  The suit alleged a claim for foreclosure under the mechanics lien act, in which IDOT was named a party, a claim for breach of contract, and a claim that the GC had violated the State Prompt Payment Act (30 ILCS 540/0.01 et seq.)  The trial court dismissed IDOT from the case, and found that the IDOT specs precluded the breach of contract and lien actions.  The trial court then determined that retaining payment was improper and awarded interest under the State Prompt Payment Act.  The parties appealed.

Here, the appellate court concluded that the trial court was right in dismissing IDOT given that the mechanics lien act authorizes the funds to be set aside before resolution of the issue, but does not authorize making a state agency party to a foreclosure action. The opinion discusses a topic that should be of interest to those contracting with the state when it considers payment under the mechanics lien act.  §23 of the act authorizes subcontractor remedies through liens against public funds for state projects, but the act has never applied to contractors.  Additionally, suing pursuant to this section means that a subcontractor will be bringing an action for an accounting within 90 days of providing the required notice, and the only way to bring in an officer of the state under the act is in an action claiming they failed to comply with §23 of the statute.

The breach of contract claim filed against the GC was premised on an interpretation of IDOT Standard Specifications.  (This may bore some of our readers, but it is actually pertinent to anyone looking for courts to favorably interpret government specs.)  §208.03(b) governs methods of measurement quantities for trench backfill, and contains a clause stating that any backfill required in excess of the maximum quantity as calculated but he specs "shall be furnished by the Contractor at his/her own expense."  The plaintiff argued that there was no established width to the trench and tried to say that use of the word "shall" in §550.04 (the IDOT spec which states exactly how wide a trench should be on such a project) didn't really mean shall, but meant something like "shall not be less than," which, you don't have to be Bryan A. Garner to understand, is bad form in just about every school of legal interpretation... especially when the court can read other sections of the IDOT specs and see that when IDOT meant to set a minimum limit on something, it used some variant of "shall not be less than" and not just "shall."

Utilizing this reading of §208.03 the court upheld the trial courts determination that the plaintiff was not owed monies for the excess it was required to provide and the dismissal of the breach of contract claim was proper.

With regard to the final argument, the court held that it was IDOT that failed to make prompt payments to the GC who, pursuant to provisions of the contract and federal regulations was then to turn around and hand the money over to the plaintiff.  Contrary to the trial court's opinion, the GC was not in error when it did not turn over monies that had not been forwarded by IDOT.  The GC would only be in error if IDOT had turned over the funds and then the GC failed to pay them to the subcontractor.  The appellate court also said that the trial court had properly interpreted the State Prompt Payment Act, but because the GC did not owe money to the plaintiff, there was no violation of the act.

[NOTE: In addition to the State Prompt Payment Act, there are other prompt payment acts that can be alternative sources for causes of action regarding getting paid such as the Contractor Prompt Payment Act, the Local Government Prompt Payment Act, any of which, along with a host of other methods, can be utilized under the law in securing payments owed.]

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In McGrath, et al. v. American Family Mutual Ins. Co. (N.D. IL, 07 C 1519) the court has delivered some poignant remarks concerning both the standard under Daubert for expert engineer testimony as well as provided some issues to think about regarding the "latent defect" and "construction design defect" exclusions issued under all-risk insurance policies.

The plaintiffs submitted a claim to their insurance company for water damage inside their home.  The insurance company denied coverage based on two exclusions in the policy, one for construction or design defects and one for latent or inherent defects.  The plaintiffs sued, and the insurance company hired an engineer to provide an opinion regarding the cause of the water damage.  Motions for summary judgment and for judgment under Federal Rule 56(d) limiting the issue of liability were cross-filed.

The engineer had found that external water or moisture from humidity, ice, snow and rain had penetrated the exterior brick walls of the plaintiffs' home due to construction or design defects. 

The plaintiffs moved to have portions of the testimony of the defense expert stricken by questioning his methodology.  Plaintiffs asserted that the expert needed to perform in depth testing of the humidity levels to provide precise calculations regarding his opinions.  The court ruled that the pictures examined by the expert provided enough information for someone with his experience to reach an acceptable opinion regarding the intrusion points of the moisture and that in-depth analysis was not necessary.

The court then went on to interpret the policy exclusions for construction and design defects and latent defects against American Family and in favor of the plaintiffs.  In assessing the nature of the water damage, the court found that because the exclusion failed to include language addressing exclusions for losses resulting from ancillary damages caused by a design or construction defect, that the exclusion only applied to the actual defect and not to the water damage to other portions of the home caused by the defect.  In assessing the latent defect exclusion, the court found that the latent defect exclusion applied to "a hidden defect other than a construction or design defect."  The court analogized latent defects to hidden defects that are unrelated to construction or design such as finding lead paint under layers of previous coats.

Given its conclusions that no exception applied, the found that liability under the policy was established and that the only issues for trial were the amount of damages.

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