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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

 

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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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On June 30, 2010, the First District Appellate Court of Illinois reversed the decision of the trial court and remanded the case of Universal Structures, Ltd. v. Dr. Alan Buchman, et al. The trial court had dismissed the plaintiff general contractor’s mechanic’s lien foreclosure action claiming that the general contractor had failed to procedurally comply with the Home Repair and Remodeling Act (815 ILCS 513/20) by not obtaining the homeowners’ signatures on work orders and failing to furnish the homeowners with a Consumer Rights brochure. The First District reversed the finding of the trial court finding that the general contractor was not precluded from asserting mechanic’s lien rights upon the homeowners’ property even though it had failed to comply with Sections 20 and 30 of the Act.

The First District surveys recent opinions we have discussed throughout our dialogue on the Act. Relying predominantly on Fandel v. Alan, 398 Ill.App.3d 177, 188-189 (3d Dist. 2010), the First District found that the general contractor’s procedural errors in not securing the homeowners’ signatures on work orders prior to beginning construction and failing to provide the homeowners with the Consumer Rights brochure, even though unlawful violations under the Act, did not invalidate an otherwise enforceable agreement. 

“Nothing in the Act provides that a contractor who fails to get a signature on a written work order or provide the homeowner with a Consumer Rights brochure cannot collect for his or her work and that the homeowner is entitled to receive a valuable benefit without paying for it. . . . Merely because a contract may violate some law or some regulation does not necessarily make that contract unenforceable. Rather, contracts are unenforceable when the subject matter of the contract where the purpose of the contract violated the law.”

Federal Land Bank of St. Louis v. Walker, 212 Ill.App.3d 420, 422 (1991). The Appellate Court found that the underlying agreement between the parties was valid and that the general contractor’s procedural violation under the Act did not bar it from asserting a mechanic’s lien or breach of contract claim. 

This opinion also references the amendment to language in Section 30 of the Act (to be discussed in detail as it was signed by the Governor on July 12, 2010) as support for its decision in this case. The First District notes in a footnote that it believes that Artesan Design, Behl and Fandel are better reasoned than the Third District’s opinion in Roberts v. Atkins, 397 Ill.App.3d 858 (3d Dist. 2010). It also distinguishes the Roberts case based on the fact that the plaintiff in that case never provided a written contract or work order to the defendant. 

The Universal Structures strengthens the long line of cases which focus on the law of contracts and a contractor’s right to recover pursuant to contract theories despite the fact that the contractor has failed to comply with procedural aspects of the Home Repair and Remodeling Act.We will have a thorough discussion of the Amendment to the Act as in the very near term.  Please stay tuned.  

 

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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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From time to time we will report on new cases that have been filed that are related to the construction industry. 

Walsh Construction has filed suit against the City of Chicago requesting that the court declare that bids submitted by two other contractors for the Congress Parkway Interchange Improvements project are non-responsive and that its own bid is responsive.  In addition, Walsh is seeking an order enjoining the City from accepting either of the two bids.

Walsh, along with Paschen/Cabo and James McHugh, submitted a bid for the Congress Parkway Interchange Improvements project.  It is Walsh's contention that the City of Chicago violated its own Municipal Purchasing Act by even considering the other bids because they were non-responsive to the Bid Deposit specification.  Paschen/Cabo is alleged to have filed to include a bid deposit of any kind and McHugh is alleged to have provided the bid deposit in the form of a company check rather than the required certified check, cashier's check or money order.  Walsh alleges that it complied with the specification and, therefore, submitted the sole responsible and responsive bid.  It should also be noted that the Paschen/Cabo and McHugh bids were lower than Walsh's bid for the project.

We will continue to monitor this litigation and report on any important details.   

Just last week, a personal injury complaint was filed in the Circuit Court of Cook County against unknown architects, engineers, and designers of Golf Road in Des Plaines, Illinois.  The complaint, filed on behalf of Plaintiff Magdalena Walus, alleges that she was injured in a motor vehicle accident caused by an icy roadway on Golf Road near the Des Plaines River.  Specifically, the complaint alleges that Golf Road, where it meets the Des Plaines River, regularly floods with river water and freezes, causing dangerous conditions.  Furthermore, the complaint alleges that defendants had knowledge that such flooding took place at the time of designing, engineering, planning and constructing Golf Road and willfully disregarded said knowledge.

The complaint includes the City of Des Plaines, Cook County, and the State of Illinois as respondents in discovery and seeks discovery from those entities regarding similar motor vehicle accidents in the past in the same area.

The case presents interesting issues regarding the standard of care applicable to design professionals.

 

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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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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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 Maybe…maybe not. Typically, a party will invoke an indemnity provision to seek protection from claims made by some third party. 

However, consider a situation where an owner files suit against its architect alleging certain errors and omissions. In the Complaint, the owner cites the indemnity provision contained in the Owner-Architect Agreement and alleges that it is entitled to damages associated with the retention of experts to investigate the claimed defects and attorneys’ fees and expenses to prosecute the lawsuit against the architect. 

 

Is the owner’s indemnity claim viable? Not surprisingly, the answer depends on the particular language of the indemnity provision. In Illinois, courts interpret indemnification agreements like any other contract clause – a court must give effect to the intention of the parties as determined from the language of the agreement as a whole. See Zadak v. Cannon, 59 Ill.2d 118, 319 N.E.2d 469 (1974) and McRaith v. BDO Seidman, LLP, 391 Ill. App. 3d 565, 577-78, 909 N.E.2d 310 (1^st Dist. 2009).

 

Recently, we successfully defeated an indemnity claim similar to the hypothetical above. Essentially, the owner was seeking indemnification from its own claim against the architect. In the case against our client, the Owner-Architect Agreement contained the following indemnification provision:

 

Notwithstanding any other terms and conditions stated herein, including any obligations regarding insurance coverage, Architect agrees to defend, indemnify, keep, save and hold harmless fully the Owner, its agents, officials and employees, against all claims, suits or judgments, costs or expenses, including attorneys’ reasonable fees, that may be based on or the result of any error, omission, negligence, or any willful or intentionally tortious conduct of Architect or of any person employed or engaged by Architect to perform Services under this Agreement. 

 

The Architect shall promptly provide to the Owner copies of such notices as it may receive of any claims, actions or suits as may be given or filed in connection with Architect’s performance or the performance of any person or entity employed or engaged by Architect to perform Services under this Agreement.

 

In response to the Owner’s Complaint, we filed a motion to dismiss arguing that the Owner’s indemnity claim does not exist in the absence of a claim or judgment against the Owner. To support this argument, we cited Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 466 N.E.2d 1313 (1^st Dist. 1984). In Open Kitchens, the indemnity clause in the contract between the plaintiff and Gullo provided:

 

To the extent permitted by law, [Gullo] shall indemnify and hold harmless the [plaintiff] and their [sic] agents and employees from and against all claims, damages, losses, expenses, liabilities, and demands, including attorneys' fees, of whatsoever kind or nature, arising out of, resulting from or connected with the performance of the Work by the Contractor or any Subcontractor for and in behalf of the [plaintiff] or Architects. The Contractor shall defend at its own expense, any actions based thereon and shall pay all attorneys' fees, costs and other expenses arising therefrom.

 

Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 63-64, 466 N.E.2d 1313 (1^st Dist. 1984). 

 

The First District Court held that Gullo’s obligations under the indemnity provision did not arise until a third party asserted an action against Open Kitchens. Open Kitchens, Inc. v. Gullo International Development Corp., 126 Ill. App. 3d 62, 65, 466 N.E.2d 1313 (1^st Dist. 1984). The Court explained that in reading the indemnity provision as a whole, including the last portion of the subject provision requiring Gullo to defend actions arising out of its performance of the contract, the agreement indicated that the indemnity was only intended to apply to matters involving losses incurred by third parties. Id. 

 

As in Open Kitchens, where the indemnity provision contained language referencing actions by third parties, the indemnity provision contained in our client’s Owner-Architect Agreement refers to claims filed by others (i.e. “The Architect shall promptly provide to the Owner copies of such notices as it may receive of any claims, actions or suits as may be given or filed in connection with Architect’s performance”). Accordingly, we argued that the First District’s analysis in Open Kitchens applied and the language of our client’s indemnification clause indicates that the indemnity was only intended to apply in the context of losses incurred by third parties. 

 

The court agreed with our analysis and dismissed the Owner’s indemnity claim with prejudice. In her order, the judge relied on the language contained in the second paragraph of the indemnity provision stating that “this language immediately follows the indemnity language, making it clear the intent of the parties was to limit the indemnification to instances where third party claims are raised.” 

The lesson here is that not all indemnification provisions are created equal. The specific language must be reviewed so that risks are allocated as intended.

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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 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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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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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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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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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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Joshua Glazov over at the Construction Law Attorney Blog has an April 23, 2009, posting about Illinois House Bill 344 which, as introduced, would amend the Illinois Contractor Prompt Payment Act to limit, on a percentage basis, the amount of retainage legally allowed under construction contracts to contractors and subs.

The bill passed the house with the percentage provisions intact and the Illinois Senate now has amended the bill to include a definition of retainage:

(d) "Retainage" means funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job.

The senate amendment also eliminates the percentage restrictions on outright retainage and instead has proposed making this bill a restriction on retainage for materials:

(b) Under a construction contract, it is unlawful to withhold retainage on materials required for completion of the construction contract that are delivered to a job site and are billed in accordance with the periodic payments in the construction contract.

This  provision is interesting given that the bill could alter the general nature of invoices by allowing those parties that do not distinguish between materials and labor in their payment applications to parse out the two and demand payment for the materials listed in the  payment applications leaving the owner without recourse to its contract's retainage provision for those payments.

CLAB’s posting lists and links to some advocacy groups that can be contacted to comment on the bill.

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O'Connor Construction Company v. Belmont Harbor Home Development is a classic case in construction dispute damages. The plaintiff filed a mechanics lien against a condominium project after the developer refused to let it complete the project. O'Connor had been the carpentry subcontractor responsible for blocking and for trim finishing. It completed most of its work under its contract and had been asked to work, contrary to the contract, to finish the units as units were sold rather than finishing the project as a whole.

After a dispute over payment applications, O'Connor requested that the developer deliver the materials it needed to complete the project in a timely fashion, and the developer failed to supply the needed materials in a timely way. O'Connor then filed a mechanics lien for the amount it was owed under its contract and refused the developer's demand to rescind the lien. When O'Connor would not rescind its lien, the general contractor terminated the contract with O'Connor.

The facts in the trial court showed that O'Connor's contract price plus extras was $351,989.00. This is what O’Connor would have been paid under its contract if the contract had been completed. It also showed that O'Connor had been paid $175,189.50. The trial court found that O'Connor had substantially completed its contract and that the cost to finish the contract for work that was not performed after O’Connor was let go was $41,200. Using a method of calculating damages that would award damages for the benefit received by the developer from O'Connor's work, the trial court found that O'Connor was owed $50,876.50. On appeal, the appellate court found that this was the wrong measure for damages in both a mechanics lien action and a breach-of-contract action.

The appellate court found that the proper measure of damages owed to O'Connor would be $351,989.00 O'Connor would have received had it been allowed to finish the project minus the $175,189.50 that O'Connor had been paid, and also less the $41,200 it would cost the defendants to finish the work O'Connor was in not allowed to complete. This is in stark contrast with the $50,876.50 figure the trial court had awarded. The appellate court also found that under the mechanics lien statute O'Connor was allowed its attorneys fees where a portion of the payment that O'Connor was owed had not been turned over, and the defendants testified that it was due to O'Connor.

Also worth noting in the opinion is the fact that the mechanics lien statute provides interest at 10% per annum, which was greater than the 5% per annum O'Connor could expect under its contract. As we’ve said before, along with the Contractor Prompt Payment Act the mechanics Lien act provides any party who has not been paid a powerful tool and obtaining payment for services rendered. Knowing that in a fixed-price contract, there is a certain expectation you may have when someone else breaches your contract, using the mechanics in statute to get that payment back allows you a remedy that you otherwise might not have… and awards damages in a manner similar to contractual damages and possibly not just for damages in line with the benefit someone has received from your work.

In a day and age when attorneys fees can become a considerable hindrance to the prospect of recovering on low-cost contracts – it is worth noting that payment held without just cause can  entitle someone to remuneration for the fees of having to bring a court action under the statute.

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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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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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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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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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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 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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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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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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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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As we wrote about before, the new AIA BIM and IPD documents have now been released and are available for download.  The new documents are:

• E202-2008 - A New Building Information Modeling (BIM) Protocol Exhibit
• C196 and C197 – 2008 - Two New Integrated Project Delivery (IPD) Agreements
• A441 and C441 – 2008 - Two Additional Design-Build (DB) Agreements
• B207 – 2008 - An On-Site Project Representation.

The documents are available at the AIA website.  They will be of interest to anyone participating in BIM projects and looking for a comparison or alternative to the ConsensusDocs BIM forms.

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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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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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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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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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The Moorman Doctrine has been applied to those providing professional services since Anderson Electric, Inc., v. Ledbetter Erection Corp. 115 Ill. 2d 146 (1986).

The Doctrine has several exceptions but often forces parties to a contract for services to seek redress for damages they have incurred by suing on the terms of the contract rather than in tort.  The Moorman decision has long been a tool of attorneys representing construction clients for limiting the issues and available remedies of different parties to construction disputes.

In designing a building or performing work under contract on a structure, the doctrine often operates in limiting the manner in which a professional can be sued unless some error has resulted in damage to other property or personal injury or property damage resulting from a sudden and calamitous or dangerous occurrence.

In Loman v. Freeman, (Doc. No. 104289, April 17, 2008), the Illinois Supreme Court had occasion to visit the "sudden or dangerous" exception to the doctrine in the scintillating context of veterinary medicine... and, sadly, decided against addressing the merits of the topic in favor of a procedural rule that bars consideration of arguments not adequately defined or argued in the briefs.  In Loman, the plaintiffs' race-horse required surgery.  Plaintiffs claimed they only authorized the vet to perform two procedures, and that a third procedure performed by the vet, was unauthorized and did irreparable damage to the horse, rendering it unfit for racing.  Plaintiffs sued on two theories, one in negligence claiming that the vet performed unauthorized surgery on the animal, and secondly on a count of conversion, claiming that the unauthorized surgery amounted to an unauthorized assumption of the right to possession or ownership of the horse.  We are concerned only with the first claim in negligence.

The defendants claimed that the Moorman Doctrine applied and that the plaintiffs were barred from bringing suit in negligence.  The district court agreed and dismissed the plaintiffs' case, the appellate court reversed the matter stating that the unauthorized surgery amounted to a sudden and dangerous occurrence under the Moorman Doctrine's exception; the defendants appealed to the Illinois Supreme Court.

The Supreme Court noted that the application of the "sudden and dangerous" exception to the conduct of the professional and not to the failure of a product contracted for was an awkward one, also pointing out that the application of the exception to veterinary surgery under this sort of theory could lead to the absurd result that veterinary surgery would fall under the exception, but veterinary practices resulting in, for example, misdiagnosis, would not.  The Court then went on to state that it would not consider the issue since it was not adequately briefed.

In his dissent, Justice Freeman pointed out something we often see in economic loss cases --confusion -- with half the opinion of the majority referred to the count as one in negligence, and half the opinion referred to a "contractual" relationship between the parties.  In providing assistance Justice Freeman pointed to the possibility that the court could reclassify the action as a contractual issue of bailment and proceeded to discuss the law of bailments and their contractual nature along with the bailment theory's ability to provide negligence-theory based relief in the contractual setting.  The issue is particularly interesting in that Justice Freeman argued that under a bailment scenario, a professional contracting to perform services is held to "exercise the proper degree of care and diligence about the work" (Slip Op. at 22) and notes that "generally, the bailee will be liable for losses that are proximately the result of the bailee's own negligence."

"Under the bailment, the bailee has a duty to exercise the skill or knowledge pertaining to the "nature of the business... Bailees will be liable for losses that result from their negligence or, more precisely, for their failure to exercise the skill or knowledge pertaining to the nature of their business."  (Slip Op. 23-24).

Justice Freeman went on to state that addressing the claim at issue under the bailments theory would arguably resolve every issue in the case.

Unfortunately, the Court decided not to address the "sudden and calamitous" issue.  Additionally, failing to fully flesh out the dicta concerning applying the exception to the acts of a person and not to something happening with the product will doubtlessly need to be addressed at some point.

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John Parnass over at Washington Construction Law, an excellent Washington State Construction Law resource, is reporting on this article from the Law Blog of the Wall Street Journal.  The Donald is suing his attorneys over the fees they billed in representing him in a construction matter.

Great quotes from Trump regarding the underlying dispute and legal case over the breach of the earth-moving contract in the construction of a Golf Course:

"I have a Ph.D. in legal fees. I know when fees are fair and when they are not."

"Ninety percent of the conversations I had ... were about legal fees, not the case,"

"We won the case because I'm a great witness."

Whether or not they've got their own TV Show, clients should work with attorneys to establish a beneficial fee structure and ensure that they're getting value for their money.

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In Cincinnati Insurance Company v. Taylor Morley, Inc., (Doc. No. 06-cv-1035-MJR, S.D. Il, 2008) the Southern District of Illinois has issued a coverage opinion reaffirming the substantive Illinois law.   Construction defects alleged by a buyer against a builder and claims by buyers against a builder for diminished property values because of the builders failure to fulfill its contract and construct a "championship golf course" around which their homes were to have been built, are not afforded coverage under a CGL policy. 

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    A case from the Northern District (Smith v. The Village of Norridge), involving actions brought by an individual against the police, a landlord shopping center and its tenant, emphasizes the significance of indemnity provisions in a contract.

   At issue are cross-claims filed by the landlord of the facility arguing that the tenant is required to indemnify the landlord under a paragraph of the lease which reads that the tenant must:

"[i]ndemnify and save Landlord ... harmless from and defend against any and all demands,claims, actions, damages, costs and expenses, including [costs and attorneys' fees] arising from the conduct or management of the business conducted by Tenant."

  The lease contained a similar provision requiring the tenant to procure insurance for such acts and that the insurance was required to cover the landlord as well.  The cross-claims are pled as breach of contract actions stating the because the contract contains the indemnity provisions, the tenant's failure to indemnify (and obtain insurance in the second claim) amounts to a breach of the contract.

  The court disagreed with the tenants' argument that the Illinois Landlord-Tenant Act (765 ILCS 705/1(a)), which provides:

"(a) Except as otherwise provided in subsection (b), every covenant, agreement, or understanding in or in connection with or collateral to any lease of real property, exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his or her agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable."

would bar this action.  The Court found that the provision would apply if the claim against the tenant had been one for indemnity for the negligent acts of the landlord.  However, the landlord pled an action for breach of contract, and the acts alleged as the root of the claims were intentional, so under two separate rationales, the ILTA did not apply.

 
  Accordingly, the court denied the tenant's motion to dismiss the cross claims.

 

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SWPlaza III, LLC v. TSA Stores, Inc., is a Central District opinion dealing with the termination of a lease in a shopping center after a tornado damaged the tenant's commercial store.  The lease contained a provision allowing the tenant to terminate the lease if the damage reached a specific percentage of the total reconstruction cost (35%); the tenant's estimate exceeded the percentage limit and it terminated the lease.  The landlord sought to enforce the lease and claimed that the estimates provided by the tenant were made in bad faith.  The Court held that a significant issue of fact existed regarding the propriety of the estimates.

• In what will undoubtedly become a cited case should House Bill 5293 be passed amending the requirements and standards in Illinois for expert testimony, the Court went through an extensive analysis of the qualifications of a construction contractor providing estimates and his ability to offer testimony as an expert under Daubert.

Illinois Construction Blog

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In an interesting case which has applied the Illinois Supreme Court's recent Buenz decision, the appellate court found that an ordinance which included an indemnification provision would be read to apply against Nicor in favor of the Village of Wilmette where the ordinance the city passed granting a fifty year easement to Nicor to "place, maintain and operate its gas pipes under the streets of Wilmette, in consideration for which Nicor would provide gas for use by the Village."  While the court properly applied Buenz, it summarily dismissed an issue that likely should have garnered more attention:  The Illinois Construction Contract Indemnification for Negligence Act (740 ILCS 35/1 et seq.)  The court simply states that Nicor's authority for the proposition does not apply, but fails to offer any merit to the idea or state why it doesn't apply. 

By invoking Buenz, using the term "consideration" and even allowing the Village to argue that "its contract with Nicor included a provision indemnifying" the village for its own negligence...  (See page 3 of the opinion) certainly we have a contract.  Whether it's a contract for an easement or whether the contract can be said to touch on issues implicated by the anti-indemnification statute should have been explored by the court.  Or, if the court wanted to say that a contract for an easement, no matter what the activities allowed under the easement are, should not be construed as a contract or agreement for construction... then it should have done so.  Instead, we are left to wonder exactly what the rational for not applying the statute to the agreement between Nicor and Wilmette that includes maintenance of the wires was, when Section 1 of the anti-indemnification act states that it applies to contracts or agreements:



• "With respect to contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person's own negligence is void as against public policy and wholly unenforceable."

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The concept of having to obtain a surety bond shouldn't be of any new relevance to anyone doing public work.  Knowing the full extent of the provisions in the surety instrument and having a chance to properly negotiate might not seem all that important to a contractor who plans on completing its obligations.   Negotiating those terms or being aware of the full force of any personal indemnity provisions could be the difference between large-scale financial ruin and being able to get out of trouble with your reputation and bank account in tact.  On the flip-side, knowing whom you're granting surety to, and whether or not they're worth it is equally important.

The recited facts in United Fire v. Bartlett Bituminous should allow everyone to understand that the plaintiff will likely never see its money. (The defendants didn't even bother to respond to a motion for summary judgment.)  With the amount in controversy close to exceeding six million dollars, the point well taken is actually two-fold; one, sometimes you should cut your losses and know when you're sunk and two, performing research on the assets and background of the company you're dealing with is research worth doing.  A little foresight can go a long way.

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In a decision sure to be pertinent to landlords and honing their pleadings in disputes with tenants, the First District has decided that attorney's fees should not be awarded in breach of contract actions against tenants.  After reading Willis v. NAICO Real Estate, perhaps landlords will want to consider exactly how and under what statutes/agreements they look to recoup money from tenants.

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©    Maintaining the copyright in a design can give an architect or engineer another tool in ensuring payment and completion of the contract.  The right to come in and take back the designs or to seek an injunction has teeth and copyright is a limited issue in most standard form contracts.  While disputes based on the licenses and the copyright terms of the contract carry meat, the A/E might consider registering their plans with the US Copyright Office prior to turning them over to other parties.

        Having the protection of the registered copyright allows for the statutory provisions of US Copyright law to be used as well as seeking the remedy under the contract and can offer the added benefit of allowing the A/E to seek to recoup statutory damages as well as legal fees.  A short primer is available from the office, and the limited fee, especially on designs that may be used multiple times can offer an added assurance that payment in full will occur.  

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The new ConsensusDOCS forms were published late last year and will be the subject of the ABA Construction Industry Forum's 2008 Fall Meeting.  With all the buzz we thought it would be pertinent to sit down and read these documents.  This posting is one of many expected to come regarding the new ConsensusDOCS.

            The language implying a fiduciary duty hasn't changed much over the years and is often described by the courts as a "relationship of trust and confidence" between parties.  With that definition entrenched in case law we thought it a bit peculiar that the normal contracting relationship between an architect and an owner would be particularly described as one of "trust and confidence" in ConsensusDOCS 240 section 2.2. 

In the construction setting, plaintiff's with claims have been seeking to impose a fiduciary relationship in one form or another on contractors and architects to gain more damages and a heightened standard of care for some time.  Thankfully, many courts have often struck down the concept of parties contracting for construction services as entering into a fiduciary relationship thus allowing plaintiff's to bring causes of action outside the normal breach of contract claim or based on a heightened standard of care.  (See, 262 F. Supp. 2d 1004; 812 F. Supp. 72)

With the concept of "trust and confidence" and its implication of a fiduciary relationship in mind, it's odd that the ConsensusDOCS Guidebook from October 31, 2007, would explicitly delineate that the contracting parties should not be agreeing to a heightened standard of care:

• "Standard of Care (Section 2.1): A definition of the standard of care applicable to architectural and engineering services performed under this Agreement is not included in this Agreement (previous additions of AGC contracts did include such a definition). The drafters of the new Consensus documents determined that it would be better for the design professionals to be held to a standard imposed on them by their own profession, rather than one defined by this Agreement.

• "Contractors and Owners should not modify this Agreement by adding language that would hold any design professional to a standard of care that is above that which is customary and normal for design professionals in the same time and location, because that might result in the unintended consequence of voiding errors and omissions coverage available to the respective design professionals."

 
But then go on to say that the A/E is accepting a relationship of trust and confidence in Section 2.1 of document 240:

 

• "Relationship of the Parties (Section 2.2): This provision requires the Architect/Engineer (A/E) to accept the relationship of trust and confidence in exercising its skill and judgment in furthering the interests of the Owner and expressly affirms the A/E's representation that it possesses the requisite skill, expertise, and licensing to perform the required services. The new language is preferable, but it should be noted that it was not included in the previous AGC 240 Owner-Designer professional Agreement, no longer published."

       It is also a bit boggling that understanding the implication of the "trust and confidence" language, that no other provision in the document would specifically state that nothing in the contract should be construed as creating a fiduciary relationship between the parties.  Perhaps the authors just thought such a provision unnecessary given the lack of case law supporting a fiduciary relationship in such a setting.  But why then be specific as to the language of "trust and confidence" between the parties?  Why not just state that the parties agree to "good faith and fair dealing" or accept a "contractual relationship for the provision of A/E services"?  And, even if a standard of care is not affected by the language, could "trust and confidence" through its fiduciary implications mean that there are now added duties that the A/E must be aware of?

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            This is an interesting decision from the Northern District, the plaintiff, a surety company paid out on bonds to subcontractors when the bank that a general had deposited the money into took the funds the general had for payment to the subs to satisfy the general's obligations to the bank.

            The surety had three theories, conversion, a claim for a trust under the mechanic's lien act, and constructive trust.  The court found that because the surety was not suing as subrogee to the general, but rather as subrogee on the funds it paid out to the subs and because it had failed to allege that the bank had knowledge that the funds were for the subcontractors none of the counts could lie.  The Court also held that the bank was not implicated or obligated under the terms of the mechanic's lien act.

            While it initially looks like the failure of the plaintiff to properly plead the facts necessary to maintain the claim resulted in the dismissal, much of the language used implied that in order to maintain the actual claims, the surety should step in as subrogee to the general and not to the sub. 

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    These pesky forum selection clauses keep popping up, but in this interesting twist, the court is now enforcing them when they're not part of the original contract or negotiations with someone, but arrive after work has been started on the back of a purchase order.  In Compass Environmental, Inc. v. Polu Kai Services, LLC, it was Polu Kai's fault for not objecting to or raising an issue about the forum selection clause printed on the back of a purchase order.  But, even if they had, what were they to do when they had already started work on the project?  Would it be an actionable repudiation if Polu Kai had just walked, four days into its job, after it received its purchase order and didn't like the terms printed on the back... terms which weren't negotiated between the parties beforehand and now appear to be deemed accepted unless action is taken?

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            We haven't seen as much discussion as would seem to be merited by the provisions of the Illinois Contractor Prompt Payment Act (815 ILCS 603/1 et seq.).   This act has written itself into every construction contract in the State of Illinois (excepting public works, single family homes and buildings with fewer than 12 family units, of course).  This lack of constructive commenting is likely because the Act didn't become law until August 31, 2007.  However, from the comments and criticisms we have seen, there's an extremely important and sure to be contested issue that needs to be addressed:  Is it possible to "opt" out of the provisions of the Act?

The original version of the House Bill (HB 0743) that introduced what later became the Act included language at the beginning of Section 10 which read:

• "Construction contracts.  All construction contracts shall be deemed to provide the following unless they expressly exclude the provisions of this Act"

            This provision was the sole subject of Senate Committee Amendment No. 1, which was adopted by the Senate and the House and incorporated into the Act and struck the "unless they expressly exclude the provisions of this Act" language from the Act.

            This creates a strong argument for anyone wishing to claim that it was the express intent of the legislature to not allow parties to "opt" out of the act.  Combine this with the ideas that the public policy of the act was to ensure prompt payment to contractors and subs as defined by the Mechanic's Lien act; to allow contractors and subs an additional recourse should payments not be forthcoming; to shorten the time it takes for payment and approval of work, and we end up with a decent case that parties could end up contracting around the act for naught.

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            For those out-of-state contractors, architects, and builders working on projects in some other place for Illinois' residents, there are some interesting lessons in the Fourth District's Isringhausen v. Prime Contractors and Associates, Inc., opinion regarding keeping yourselves from being subjected to Illinois law.

            It should come as no surprise that a Florida company working on building a house in Florida that was contacted and did no business in Illinois was not subject to Illinois jurisdiction.  But, what if the Florida contractor was advertising here in Illinois, or had made a few trips to Illinois to complete the contract?  What if the escrow or some other portion of the contract were to be completed in Illinois so that the contractor, although minimally, were availing itself of Illinois law?  It would be wise to work out the full details for out-of-state construction both for owners in Illinois and contractors elsewhere, lest the parties find themselves in costly litigation hundreds or even thousands of miles away.

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    Yesterday's Seventh Circuit opinion, IFC Credit v. United Business, should be of interest to anyone out there contracting and agreeing to waive a trial by jury.  The Court found that state law will control a determination about the validity of bench-trial agreements (jury-waiver clauses) in federal cases brought under diversity jurisdiction. 

    Apparently, it may create a possible circuit split between the Courts as well. 

    The failure to have an attorney review or negotiate the terms of a contract appear to no longer be a decent defense to jury-waiver clauses.

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