Illinois Construction Law Blog

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

Garrett Kern — Wed, 11 Jan 2012 10:32:55 -0600

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

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

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

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

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

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

More Hurdles for Subcontractors that Perform Work on Public Contracts

Garrett Kern — Wed, 12 Oct 2011 09:07:58 -0600

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

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

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

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

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

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

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

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

FGPP Construction Group — Tue, 28 Jun 2011 08:28:03 -0600

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

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

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

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

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

Subcontractors As Additional Insureds: Check the Contract!

Robert Boylan — Wed, 08 Jun 2011 09:37:59 -0600

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

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

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

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

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

Garrett Kern — Thu, 10 Feb 2011 09:26:40 -0600

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:

When contract terms are unambiguous, they are given their common meaning without outside evidence;
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;
Just because parties disagree as to a term's meaning does not make it ambiguous.

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

First District Leaves Questions Unanswered in Construction Contracting Case

Robert Boylan — Mon, 10 Jan 2011 11:27:57 -0600

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

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

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

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

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

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

Surety v. Guarantor Revisited by Illinois Supreme Court

Garrett Kern — Thu, 11 Nov 2010 09:51:05 -0600

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

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

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

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

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

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

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

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

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

Implied Warranty of Habitability: Are Design Professionals At Risk?

Garrett Kern — Thu, 28 Oct 2010 16:22:59 -0600

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

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

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

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

Illinois Supreme Court Considers Amended Home Repair Remodeling Act

Garrett Kern — Fri, 08 Oct 2010 12:56:07 -0600

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.

Will a Court Grant Contract Rescission Because of Global Recession?

Garrett Kern — Fri, 17 Sep 2010 14:41:25 -0600

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.

Chicago Hotels in Litigation Over Construction Nuisance

Garrett Kern — Thu, 09 Sep 2010 07:19:48 -0600

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

In August 2006, Golub and Company LLC served as the real estate developer and project manager for the construction of an upscale hotel located at 11 East Walton called the Elysian. The Elysian shares an alley located at 20 East Delaware Place with the Talbott Hotel. Construction of the Elysian was completed in or about early 2010. Attorneys for the Talbott Hotel have filed suit against Golub, First Elysian Properties (the owner of the hotel), and the general contractor, James McHugh Construction Company. The complaint at law asserts five causes of action: res ipsa loquitur, negligence, nuisance, trespass, and tortuous interference with prospective economic advantage. The Talbott Hotel is requesting damages in excess of $50,000 plus costs of suit.

The complaint alleges that the construction of the Elysian Hotel forced Talbott Hotel to abandon its use of the delivery dock located in the alley between the hotels due to falling debris from the construction project. There is an allegation that in one instance a Talbott Hotel employee was struck by falling wet cement. The loading dock was used for vendor deliveries and pick ups. As a result of the abandonment of the loading dock, the Talbott Hotel was required to use the main lobby entrance (utilized by guests) for deliveries. In addition, it is alleged that construction of the Elysian Hotel proceeded prior to 8:00 a.m. and continued unabated past 8:00 p.m. and it caused excessive vibration and noise that was detectable to guests residing in the north side rooms. The Talbott Hotel has alleged that it had to not only move guests to different rooms away from the north side, but that guests canceled reservations and cut short scheduled stays as a result of the excessive vibration and noise generated from the Elysian Hotel construction. Finally, it is alleged that the Talbot Hotel itself was physically damaged by falling debris that struck the hotel property.

The lawsuit was filed on August 12, 2010. We will continue to monitor this case and report on any developments.

Indiana Supreme Court Unequivocally Endorses The Economic Loss Doctrine

Doug Allen — Mon, 23 Aug 2010 10:11:12 -0600

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.

Class Certification Granted Against Pella

Doug Allen — Tue, 03 Aug 2010 06:44:23 -0600

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

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

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

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

First District Addresses Home Repair and Remodeling Act in Advance of Amendment

Garrett Kern — Tue, 13 Jul 2010 08:15:50 -0600

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.

Surety bonds provide legal protection for construction projects

FGPP Construction Group — Wed, 07 Jul 2010 12:06:10 -0600

We are pleased to present as a guest author, Danielle Rodabaugh, an authority on surety bonds. Ms. Rodabaugh is a principal for Surety Bonds.com and can be reached through the Surety Bonds.com website:

Financing a construction project motivates a proprietor to consider effective ways to protect the investment. Surety bonds provide legal protection for those backing a construction project in Illinois, especially if the project requires considerable funding for a high-end remodel or an entirely new structure. When working on such projects, utilizing construction bonds ensures stabilization for a project's contract from beginning to end, which is why the terms "construction bond" and "contract bond" are used interchangeably.

Legal bonding requirements for construction in Illinois

United States law requires each state to set bonding regulations for its many industries. The regulations vary depending on how the particular law outlines bonding requirements for the industry. In construction, the Miller Act requires contract surety bonds to be utilized for all federal projects involving the construction, alteration, or repair of any building or public work project in an amount exceeding $100,000. This law also requires a contractor working on such a project to post two bonds: a performance bond and a labor and material payment bond.

The Illinois Public Works Act requires a bond for any person who enters into a contract in the amount of $100,000 or greater with any political subdivision. This includes contractors working with government entities such as cities, housing districts or federally-funded colleges, just to name a few. The state's Bond Act mandates that contractors must secure a labor and material payment bond in the project's full amount, listing the public body as the bond's obligee. Furthermore, the Bond Act requires its provisions to be incorporated into every bond issued in Illinois.

Functionality of Illinois surety bonds

Oftentimes even those required to be bonded by law get confused as to how an Illinois surety bond works. Essentially, a surety bond is a legal agreement between three parties to help ensure the fulfillment of a contract:

The principal performs a service and secures a bond to guarantee his work according to the contract.
The obligee receives the work performed by the principal and is protected by the financial security of the bond.
The surety issues the bond as a neutral third party to ensure that all work done by the principal is completed on time and according to the contract. The surety is also responsible for overseeing obligations on the part of both the principal and the obligee.

Since bonds are legally binding documents, they encourage the principal to follow the contract's terms or else face financial retribution. The obligee can make a claim on the bond if the principal fails to fulfill some part of the contract, such as completing the project on time. Depending on the bond type and its specific language, the surety bond company can be held fully accountable for the principal's faults. This encourages surety bond specialists take great care in completing thorough financial reviews before issuing the bond.

Surety bonds in construction

Most public contracts are required by Illinois state law to incorporate bonding of some sort. Surety bond agencies generally issue various types of construction bonds for large projects that involve in-depth, provisional contracts. Nearly all construction bonds fall into one of three major subcategories:

Bid Bonds primarily assure that the bidder will enter into a contract with the client for the price quoted in its bid. They also confirm that the bidder will secure other appropriate performance and payment bonds necessary throughout the project.
Performance Bonds simply guarantee that the contractor will fulfill his contract, performing all duties as outlined. Should the contractor fail, the surety company becomes solely responsible for all contractual obligations.
Labor and/or Material Payment Bonds protect those who provide labor and/or materials for public projects.

Although each of these bonds functions in a different way, they work together to produce a solid foundation for a construction project.

Federal District Court Quashes Subpoena of Non-Party Deposition, Cites FAA

Bryan Johnson — Wed, 23 Jun 2010 14:05:46 -0600

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

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

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

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

SB 2540 Headed to Governor's Desk for Signature

Garrett Kern — Mon, 14 Jun 2010 07:51:01 -0600

We have been following Senate Bill 2540. The bill was sent to Governor Quinn for signature on May 14, 2010. The bill eliminates an ongoing issue prevalent in some recent judicial opinions and dissents regarding a private right of action under the Illinois Home Repair and Remodeling Act.

As we have discussed, recent opinions like K. Miller Constr. Co. v. McGinnis, 394 Ill. App. 3d 248, 913 N.E.2d 1147 (1st Dist. 2009); Smith v. Bogard, 377 Ill. App. 3d 842, 879 N.E.2d 543 (4th Dist. 2007); and Central Illinois Electrical Services, LLC v. Slepian, 358 Ill.App.3d 545, 831 N.E.2d 1169 (3rd Dist. 2005) have resulted in different conclusions about the rights and remedies asserted under the Act. The Illinois Supreme Court has yet to rule on the matter, although Artisan Design Build v. Bilstrom remains on the Leave to Appeal Docket for this term.

Senate Bill 2540 will entirely replace Section 30 of the Act to clarify and more accurately identify the remedies available to private parties under the Act. Specifically, it replaces a portion of the Act that declared a contractor’s practice of performing work without a contract or an informed rejection or acceptance of an arbitration provision with a clause that provides a direct private right of action for actual damages against the contractor under the Consumer Fraud Act.

Even with the Governor’s signature on Senate Bill 2540, the Illinois Supreme Court should weigh in by accepting the Artisan case and clearing up the confusion and settling these issues and giving guidance to home-repair and remodeling contractors.

News & Notes -- April 28, 2010

Garrett Kern — Wed, 28 Apr 2010 07:17:12 -0600

As we noted here, as of April 22, 2010, federal law requires contractors performing renovation, repair and painting projects that disturb lead-based paint in homes, child care facilities, and schools built before 1978 to be certified and must follow specific work practices to prevent lead contamination. The requirements apply to renovation, repair or painting activities.

We have been monitoring Illinois SB 2540, introduced by Senator Wilhelmi, which will address at least part of the confusion regarding the remedy associated with the Home Repair Act. SB 2540 passed the Illinois Senate on April 15, 2010, and appears to be headed to the Illinois General Assembly. 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. The Home Repair Act has the laudable goal of making sure that a contractor utilizes a written contract and provides a Consumer Rights Brochure to home owners who engage them to undertake home remodeling work valued in excess of $1,000. As a consumer protection oriented statute, the intended remedy for a violation of the Act was to be found under the Consumer Fraud and Deceptive Business Practices Act. However, the Act does not sufficiently spell out this remedy, and the Illinois Appellate Courts have been inconsistent in applying it. The goal of the bill is to clarify the confusion that now exists among the courts. We will continue to keep you advised.

We are also happy to report that the Illinois Construction Law Blog is now available to iPhone and iPad users through the AEC Info iPhone App. This is a free iPhone/iPad app available in the iTunes store in the Law category. You may access the website through your iPhone/iPad web browser, make posts, send them through email, or even share them on Twitter. The app offers the latest industry headlines and insight from across the web.

First District Rules on Block 37 Receivership

Garrett Kern — Mon, 19 Apr 2010 08:03:48 -0600

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

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

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

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

Second District Reverses Ruling on Injunctive Equitable Attachments

Garrett Kern — Wed, 07 Apr 2010 07:35:01 -0600

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

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

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

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