Illinois Supreme Court Limits Reach of Implied Warranty Claims Against Contractors

In a recent decision, the Illinois Supreme Court held that a purchaser of a newly constructed home could not assert a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶ 1. The decision overruled Minton v. The Richards Group of Chicago, which held that a purchaser who “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor” could assert a claim of a breach of the warranty of habitability against the subcontractor. 116 Ill. App. 3d 852, 855 (1983).

In Sienna Court Condo. Ass’n, the plaintiff alleged that the condo building had several latent defects which made individual units and common areas unfit for habitation. 2008 IL 122022 at ¶ 3. The Court rejected the plaintiff’s argument that privity should not be a factor in determining whether a claim for a breach of the warranty of habitability can be asserted. Id. at ¶ 19. The Court also rejected the plaintiff’s argument that claims for a breach warranty of habitability should not be governed by contract law but should instead be governed by tort law analogous to application of strict liability. Id.

The Court reasoned that the economic loss rule, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 91 (1982), refuted the plaintiff’s argument that the implied warranty of habitability should be covered by tort law. 2008 IL 122022 at ¶ 20. Under the economic loss rule, a plaintiff “cannot recover for solely economic loss under the tort theories of strict liability, negligence, and innocent misrepresentation.” National Tank Co., 91 Ill. 2d at 91. The Court explained that the rule prevented plaintiffs from turning a contractual claim into a tort claim. 2008 IL 122022 at ¶ 21. The Court further noted that contractual privity is required for a claim of economic loss, and an economic loss claim is not limited to strict liability claims. Id. Because the plaintiff’s claim was solely for an economic loss, it was a contractual claim in nature; therefore, the Court concluded that “the implied warranty of habitability cannot be characterized as a tort.” Id. at ¶ 22.

The Court also rejected the plaintiff’s argument that warranty of habitability should be governed by tort law because it involves a duty imposed by the courts. Id. at ¶ 23. It reasoned that “an implied term in a contract is no less contractual in nature simply because it is implied by the courts . . . .” Id. The Court noted that the warranty of habitability can be waived under Illinois law, but individuals are not able to waive duties imposed upon them by the courts. Id. If the warranty of habitability was a tort claim, it would “raise[] significant practical problems, particularly for subcontractors” given that they “depend upon contract law and contracts with the general contractor to protect and define their risks and economic expectations.” Id. at ¶ 24. Because a subcontractor’s fees, costs, and liability are controlled by his contracts, turning an implied warranty of habitability claim into a tort would make those contracts pointless. Id.

The Court’s decision to overrule Minton rested on three primary reasons: (1) Minton failed to discuss why the economic loss rule did not apply; (2) Minton did not address what effect its holding would have on the contractual relationships of subcontractors and general contractors; and (3) there is “no authority for the idea that a tort duty comes into and out of existence depending on whether another entity is bankrupt.” Id. at ¶ 25. In light of the opinion, a home purchaser’s remedy where there is economic loss is now limited to those parties with whom it has a direct contractual relationship.

Illinois Safe Roads Amendment Could Pave Contractors’ Paths in Gold

Many Illinois contractors, including asphalt companies, engineers, carpenters, excavators, and even labor unions, are hoping Illinois residents get out and vote to approve the Safe Roads Amendment this November. If the proposed amendment to the Illinois Constitution passes, all money collected through fuel taxes, highway tolls, driver’s license fees, and vehicle registration stickers would be placed into a fund that could only be used for transportation-related costs in Illinois. Specifically, the amendment would only allow such state funds to be earmarked for use in road construction, enforcement of traffic laws, mass transit repairs and improvements, and “other statutory highway purposes.”

Historically, Illinois has drawn from its road fund to help address the state’s multiple financial issues instead of using it for the repair or betterment of roads.  Illinois residents, however, appear at odds over whether to vote for its passage. Opponents of the amendment seem primarily concerned with preventing the state from accessing the funds for other uses, even in the most dire emergencies or circumstances; others are strongly against the anticipated windfall for unions. Proponents, on the other hand, support the amendment’s passage as a means of investing in the state’s infrastructure.

If the amendment passes, contractors and unions across Illinois—especially those who focus primarily on transit and roadwork—will certainly reap the benefits in what will essentially be guaranteed funding for roadway construction work throughout the state.

Recent Illinois Decision Fortifies Precedent that Construction Defects Fail to Trigger Occurrence under CGL Policies

A recent decision in the United States District Court for the Northern District of Illinois slammed home standing precedent concerning whether a construction defect triggers an “occurrence” that would be covered under a commercial general liability (“CGL”) policy. In Allied Property & Casualty Insurance Co. v. Metro North Condominium Association, Judge Jorge Alonso granted the plaintiff’s motion for summary judgment and denied the defendant’s motion for summary judgment, essentially rejecting the argument that an underlying construction defect claim was covered under a CGL policy.

Allied Property arose from an underlying lawsuit in Cook County, Illinois, where Metro North Condominium Association (“Metro North”) sued the developer and various contractors and subcontractors of its condominium due to several defects in the construction, including, most notably, water infiltration. As part of its complaint, Metro North alleged that a window installation subcontractor breached its implied warranty of habitability when it defectively and improperly installed windows in the building, which led to severe water infiltration following a large rainstorm in October 2006. Allied Property & Casualty Insurance Co. (“Allied”) had issued a CGL policy to the window installer during the effective policy period, and Allied provided the contractor with an independent defense under a reservation of rights.

During the course of litigation, Metro North entered into a settlement with the window installation contractor for $700,000, the amount of which was to be satisfied “solely through the assignment…of all [its] rights to payment, if any, from Allied” under the applicable CGL policy. The policy required Allied to pay any amount its insured becomes legally obligated to pay “as damages because of…’property damage’…caused by an occurrence.” Allied then filed its motion for summary judgment in the Northern District of Illinois, seeking declaration that there was no coverage available with respect to Metro North’s settlement.

In arriving at its opinion, the Northern District had to delve into Illinois precedent. Specifically, the Illinois Appellate Court in 2011 held that “there is no occurrence when a subcontractor’s defective workmanship necessitates removing and repairing work,” but when the defective workmanship results in damage to something other than the construction project itself, there may be an occurrence (see Milwaukee Mutual Insurance Co. v. J.P. Larsen, Inc., 956 N.E.2d 524, 531 (Ill. App. Ct. 2011)).

Metro North’s claimed damages constituted approximately $2.1 million in damages caused by water infiltration to the common elements of the building, and just under $200,000 in damages to personal or other property. The court, in issuing its opinion, maintained Illinois’ longstanding precedent that a construction defect is not an “occurrence” that would trigger liability under a CGL policy because, here, the damages were the ordinary consequence of the contractor’s defective window installation. Specifically, the Northern District ruled that the severe bulk of the damages sought were not caused by an “occurrence,” but were rather the natural and ordinary consequence of faulty workmanship. In putting the nail in the coffin, the court held: “When a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building. There is no accident, so there is no occurrence, so there is no coverage.”

The Allied Property holding is only the most recent cautionary tale for owners and contractors alike who are parties to a construction project in Illinois and who may not be able to realize coverage under a CGL policy for any resulting defect in the construction.

New Illinois Law Will Allow Parties on Private Projects to Substitute Surety Bonds for Mechanics Lien Claims

As of January 1, 2016, the Illinois Mechanics Lien Act (“Act”) will contain an amendment that allows a property owner, contractor, subcontractor, or other party with interest in real property that is subject to a mechanics lien claim to substitute a surety bond in place for the mechanics lien claim. The procedure, referred to as “bonding off” a mechanics lien claim, will allow an interested party to file a petition with the county where the property is located to bond off a mechanics lien claim filed against the property. Alternatively, if there is already a pending claim to enforce the lien, within five months after the filing of the complaint, the interested party can apply to become a party itself and file a claim to bond off the lien claim.

This new amendment looks to benefit many parties involved in typical claims. For instance, a property owner will now be able to substitute a claimant’s lien on the property with a surety for the claimant in the event the claimant prevails on the claim. The amendment also helps affected parties supplying the construction activities to a project, as the surety bond will easily cover the amount in dispute (as the new law requires that the bond be valued at 175% of the amount claimed).

This new change will help ease the flow and progression of private projects that fall prey to mechanics lien claims, since there will be less likelihood of parties to have to wait out the resolution of the mechanics lien claim itself and final disposition of the subject property.

Illinois Court Keeps with Recent Trend and Affirms Summary Judgment for Contractor in Jobsite Injury Lawsuit

Taking advantage of recent law in favor of contractor defendants in construction negligence lawsuits, Gordon & Rees recently obtained summary judgment in favor of its demolition contractor client in a high-exposure multi-plaintiff lawsuit filed in Cook County, Illinois by a personal injury lawyer.

In the consolidated action, the two plaintiffs were employees of a scaffold erection company hired by Gordon & Rees’ client to erect a scaffold to facilitate the demolition of a Chicago high school gymnasium ceiling. During the erection, the scaffold collapsed, causing the plaintiffs to fall 21 feet to the ground and sustain serious injuries. Both plaintiffs alleged that Gordon & Rees’ client, as the hiring contractor, neglected its responsibility to ensure that plaintiffs worked under safe conditions and failed to properly supervise plaintiffs’ work.

Gordon & Rees sought summary judgment, contending that its client did not assert any control over plaintiffs’ work whatsoever. Relying upon both testimony as well as the contract, Gordon & Rees argued that because there was no control over plaintiffs’ work, it must follow that there was no liability.

The Cook County court agreed with Gordon & Rees, citing to favorable Illinois law regarding Sections 343 and 414 of the Restatement (Second) of Torts. Specifically, the court found that in order for a contractor to be subject to liability, the contractor or employer must have retained at least some degree of control over the manner in which the work was performed; it is not enough that the contractor merely has a general right to order the work stopped or resumed. With respect to the contract, the court agreed that Illinois law is clear that contract language alone is not sufficient to impose liability, nor is the existence of a safety program (citing Martens v. MCL Construction Corp., 347 Ill.App.3d 303 (1st Dist. 2004)).

Here, because the demolition contractor was only on site once—for a half hour—and never observed the scaffolding in the condition that led to its collapse, it could not be found that the contractor controlled the means and methods of plaintiffs’ work sufficient to rise to potential liability.

The Martens case and similar opinions that have since followed are clearly helpful for contractors who find themselves entrenched in construction injury lawsuits filed by personal injury attorney firms. To wit, courts will no longer deny summary judgment just because one party merely contracted with or supplied a safety manual to another party. Rather, there must be evidence of sufficient interaction and control in order to potentially impose liability on the part of a contractor.

Fracking Degree at Illinois Community College Validates Surging Demand and Interest

In what looks to be the first of its kind, a community college in southern Illinois will now be offering students the opportunity to earn a degree in fracking.  Lincoln Trail College in Robinson, Illinois, plans to enroll its first students seeking a fracking degree this fall.

ETT BLOG_frackingAccording to a recent article in the Chicago Tribune, Lincoln Trail College President Kathryn Harris addressed the benefits to students who focus their studies on the evolving practice of oil and natural gas extraction.  Harris acknowledged the fact that southern Illinois has an abundance of oil, and the degree will help prepare students in the pertinent phases of fracking, including the planning, development, and operation of fracking.

Both analysts and general observers alike have fracking forecasted the demand for petroleum workers in the area, and the fracking degree offered by Lincoln Trail aims to arm its students with the educational background and foundation that will help vault them into the fracking workforce.

Just last year, Anthony Carnevale, Director of Education and Workforce at Georgetown University, stated that, in his opinion, fracking would offer the best return on investment in terms of bachelors degrees.  While some engineering programs offer online courses that address better fracking practices, Lincoln Trail College appears to not only be the first “bricks and mortar” school to offer a degree in fracking, but also the first program anywhere—online or otherwise—to provide students the opportunity to earn a fracking degree.

Given the recent and surging trends in fracking as highlighted in a prior Gordon & Rees publication, Lincoln Trail College’s implementation of this degree is a strong validation of the rise in interest—and demand—in the fracking industry, at least as far as southern Illinois is concerned.

Illinois Court Permits Subcontractor to Recover Contract Funds Under Unjust Enrichment Theory for Work Requested by General Contractor

The Illinois Appellate Court found that a party to a contract was able to pursue quasi-contractual relief against a nonparty to the contract if the nonparty had requested and received a benefit of the work but did not pay for that work.

In C. Szabo Contracting, Inc. v. Lorig Construction Co., the Illinois State Toll highway hired Lorig Construction Company (Lorig) to construct certain improvements upon a major state highway. Lorig entered into a subcontract with JLA Construction, Inc. (JLA) to install a sewer system.  Before the subcontract work was performed, Lorig directed JLA to assign its work to JLA & Sons, Inc., a subsidiary that was otherwise qualified to perform the work pursuant to a state government requirement.  Due to concerns Lorig had in regard to JLA’s subsidiary being able to perform its work in accordance with mandated union labor requirements, Lorig advised JLA that it would take over the installation work unless JLA provided the appropriate union labor within five days.

Two days after receiving such notification, JLA subcontracted the work to the plaintiff, C. Szabo Contracting, Inc. (Szabo), which was a separate JLA subsidiary that was able to provide the requisite union labor.  After entering into an agreement with JLA, Szabo advised Lorig—via facsimile—that it was able to comply with the contract terms and ready to proceed with the work.  Szabo eventually proceeded with and completed the work despite never getting a formal response back from Lorig.

After the project was completed, Szabo and JLA filed suit against Lorig under breach of contract and unjust enrichment theories due to non-payment for the sewer installation work.  After sifting through differing testimony from the parties, the trial court found in favor of Szabo, JLA, and JLA & Sons under an unjust enrichment theory for the sewer installation work, rejecting Lorig’s contention that it had paid all invoices and did not believe it owed any additional amounts.  The trial court further found that, through daily jobsite reports and testimony, Lorig was aware that Szabo had performed work.  Lorig appealed the trial court’s decision.

On appeal, the Appellate Court affirmed the lower court’s finding, but did so for different reasons.  Since this specific issue had never been before any Illinois court, the Appellate Court took it upon itself to provide a thorough opinion and analysis.

In arriving at its decision to uphold the trial court’s decision, the Appellate Court—predictably—found that such relief would not have been available to the plaintiffs if Lorig had paid any other party for the work.  Because Lorig had not paid anyone, Szabo and JLA were able to recover under unjust enrichment, despite the lack of contract between Lorig and Szabo.  Most importantly, however, recovery was possible because JLA had dismissed its claims against Lorig, thereby negating any potential of double liability.

If the proposition of paying for work that has been requested and properly completed was not obvious enough before, there is now precedent in Illinois upon which unpaid subcontractors can rely.

Claims for Breach of Express Indemnity Clause in Construction Contracts Subject to 10-Year Statute of Limitations in Illinois

In 15th Place Condominium Association v. South Campus Development Team LLC, the Appellate Court for the First District of Illinois held that a claim for breach of an express indemnity clause within a construction agreement was subject to the 10-year statute of limitations for written contracts instead of the four-year statute of limitations for construction claims.  In 15th Place, the South Campus Development Team, a developer of two condominium towers, contracted with Linn-Mathes, Inc. to work as a general contractor.  The contract between them included an express indemnity clause.  After the condominium project was completed in 2004, the developer turned over control of the project to 15th Place Condominium Association.

In 2008, the association sued the developer for breach of the implied warranty of fitness and habitability, breach of fiduciary duty, and negligence, alleging that it had discovered latent design and construction defects in the condominium towers.  In 2011, the developer filed a third-party complaint against the general contractor alleging breach of express indemnity.  The general contractor prevailed on its motion to dismiss, arguing that the developer’s breach of express indemnity claim was filed more than four years after substantial completion of the condominium project, and thus was barred by the four-year statute of limitations for construction-related claims.

The developer appealed and on June 26, the Illinois Appellate Court reversed the trial court’s decision. The appellate court relied on the Illinois Supreme Court’s ruling in Travelers Casualty & Surety Co. v. Bowman, which reasoned that when determining whether to apply the four-year statute of limitations for construction matters or the 10-year statute of limitations for written contracts, a court should analyze “the nature of the plaintiff’s injury rather than the nature of the facts from which the claim arises,” focusing on whether the plaintiff’s claim relates to the construction activity or to the underlying contract.

The general contractor attempted to distinguish Travelers because it dealt with construction bonds and not with construction contracts with indemnity clauses, thus arguing that the 10-year statute of limitations for written contracts was inapplicable.  The appellate court in 15th Place rejected this argument, concluding that the nature of the developer’s express indemnity claim against the general contractor related to the failure to indemnify rather than to a construction-related activity.  Therefore, the court found that the express indemnity claim must be governed by the 10-year statute of limitations applicable to written contracts, resulting in the claim not being time-barred.

The recent 15th Place decision should serve to put general contractors and developers throughout Illinois on notice that claims for breach of express indemnity clauses — and their exposure to same — go well beyond the typical four-year statute for construction claims.

No Control Equals No Duty in Illinois

The Illinois Appellate Court recently found that where an employer has the power to inspect the work of a contractor, but not to control the manner of such work, that employer does not retain sufficient control over the work to give rise to a duty to the contractor’s employees.

Samuel Escareno v. Terra Cotta Commons Condominium Association, et al., 2014 IL App (1st) 120682-U, involved a construction site injury wherein Escareno, an employee of Sherwin Painters, Inc., was injured after falling off a ladder CONBlog_painterwhile trying to replace a window screen.  The property was owned by Terra Cotta and managed by Kass Management Services, which hired Sherwin to provide paint and labor.  Escareno sued Kass and Terra Cotta for his injuries, claiming that his employer, Sherwin, had sought permission to tie its ladders to the building due to high wind conditions, but the defendants refused, leading to the plaintiff’s eventual fall and injury.

Kass and Terra Cotta moved for summary judgment, arguing, in addition to the plaintiff’s contributory negligence, that because they did not retain control of Escareno’s work, they did not owe him any duty of care.  In support of their motion, the defendants attached deposition testimony supporting the fact that Kass and Terra Cotta, despite their full-time presence on site, never provided Escareno instructions or directions on how to perform his work, nor did they provide him with any equipment.  The trial court granted summary judgment in favor of Kass and Terra Cotta, and the plaintiff appealed.

On appeal, the plaintiff contended that Kass and Terra Cotta retained enough control over the job site sufficient to owe a duty of care to him and his co-workers.  In affirming the trial court’s decision, the Appellate Court cited the Restatement (Second of Torts), which specifies that it is not enough to merely be able to order the work stopped or inspect its progress.  Rather, to retain enough control to owe a duty of care to the plaintiff, Kass and Terra Cotta would have had to supervise the work and Sherwin’s employees — including the plaintiff — would not have had the freedom to perform the work in their own manner.  As such, because no such control was ever exercised by Kass or Terra Cotta, no such duty of care ever arose between the defendants and plaintiff.

The Appellate Court’s April 9 opinion represents a victory for Illinois contractors as it focuses the necessary factors to create a duty of care upon work site conduct as opposed to general — and often boilerplate — language in a contract.

Image courtesy of Flickr by Elvert Barnes

Illinois Court Throws Down Hammer on Contractor’s Ability to Recover Fees

The Illinois Appellate Court recently affirmed summary judgment against a contractor on the validity of its mechanic’s lien, finding that the contractor failed to comply with a simple — but costly — requirement provided for under the Illinois Mechanics Lien Act (770 ILCS 60/1 et seq. (West 2004)).

Cityline Construction v. Roberts, 2014 Ill. App. (1st) 130730 (March 7, 2014), involved construction work performed on a fire-damaged residence owned by Andrew Roberts and Valerie Gherold (owners).  Cityline sued the owners to enforce its mechanic’s lien claim when it was not able to recover $397,302 in fees and costs from the defendants.  While there was no dispute that the work was performed, the owners’ defense was simple: Cityline failed to provide them with an affidavit listing the subcontractors and suppliers performing work and the amounts each was owed and, as such, they were not obligated to pay the fees Cityline sought.

Section 5(a) of the Act specifically provides, “It shall be the duty of the contractor to give the owner, and the duty of the owner to require of the contractor,” a sworn statement listing the subcontractors, suppliers, and the amounts due.  Here, Cityline admitted it had failed to supply the required sworn statement to the owners — despite having received a request from them to provide same.  In affirming the trial court’s decision, the Appellate Court found that the procedural and technical requirements of the Act “must be strictly complied with in order for a mechanic’s lien to be valid.”  Simply, the statute clearly sets forth that where an owner demands a sworn statement, it is the contractor’s duty to provide one to preserve any potential mechanic’s lien claim.

As the attached publication from The CBA Record sets forth from the outset, “While [the Act] may not be as popular or as well-known as other avenues for justice, its bite is certainly worse than its bark.”  After the Appellate Court’s ruling here, it is doubtful Cityline would argue.  Had Cityline complied with the Act in providing the owners with a sworn statement, it undoubtedly would have had an easier path to recovering its unpaid fees.

Because the Act is automatically incorporated into every construction contract in the state of Illinois — regardless of the amount of the contract price — it is imperative that contractors comply with the Act’s stringent requirements to preserve their right to recovery.