Spring 2011
Important Illinois Supreme
Court Decision on Duties of
Design Professionals
Lawsuit Challenging
LEED Rating System
Economic Loss Doctrine
A summary of significant recent developments in the law focusing on substantive
issues of litigation and featuring analysis and commentary on special points of interest.
FEATURES
SPECIAL ALERT
3 Important New Decision From The Illinois
Supreme Court For Design Professionals
by P. Scott Ritchie and Michael J. McSherry
GREEN BUILDING
5 The USGBC And The LEED Rating System:
Are They Leading Or Misleading The Way To
Energy Efficiency?
by Christopher R. Henson and Michael J. McSherry
ECONOMIC LOSS DOCTRINE
7 Washington Supreme Court Rejects "Bright-Line"
Application Of The Economic Loss Doctrine
by Margaret Hupp Fahey
9 Arizona Adopts Economic Loss Doctrine To Bar
Tort Actions In Construction Defect Cases But
Only When Contractual Remedy Is Available
by Ryan A. Lee
10 New York Court Applies Economic Loss Doctrine
In Dismissing Surety's Lawsuit Against Architect
by Ryan A. Lee
CONSTRUCTION
11 Illinois Appellate Court Finds No Duty Owed
By Concrete Testing Company To Subcontractor
Responsible For Pouring Concrete
A Letter From The Co-Editors
This issue of CM Report on Construction focuses on how
important it is for the contract documents to express the
scope of the work being performed and the limitations
on any duties undertaken by the parties to the contract.
As the cases discussed in this edition demonstrate, precisely defining the scope of a party’s duties can mean the
difference between protecting yourself from unintended
liability and incurring significant, unexpected costs or
damages. Also, though the economic loss doctrine is often
relied upon by counsel for design professionals to argue
that tort actions against their clients should be barred,
this edition reports on recent decisions where different
courts applied the doctrine with varied results.
Finally, Clausen Miller continues to keep you apprised
of developments on “Green Building” standards with an
article on litigation filed against the United States Green
Building Council (“USGBC”).
We hope you find these articles useful. We want to serve
your needs, so if you have topics of particular interest,
please let us know.
Very Truly Yours,
Margaret Hupp Fahey
(312) 606-7467 | mfahey@clausen.com
by Thomas S. Gozdziak
13 Subcontractor Bound By Scope Of Prime
Contract When Bid Proposal Is Not Attached To
Subcontract
Thomas S. Gozdziak
(312) 606-7853 | tgozdziak@clausen.com
by Margaret Hupp Fahey
14 Illinois Appellate Court Upholds Contract
Limitations On Recovery Against Home Inspector
by Ryan A. Lee
The CM Report on Construction is provided as a general
information source and is not intended, nor should it be
considered, the rendition of legal advice. Please contact us
to discuss any particular questions you may have.
© 2011 Clausen Miller P.C.
2
www.clausen.com
SPECIAL ALERT
Design Professionals
Important New Decision From
The Illinois Supreme Court
For Design Professionals
by P. Scott Ritchie and Michael J. McSherry
On January 21, 2011, the Illinois
Supreme Court issued a significant
ruling in favor of design professionals limiting their tort liability.
In Thompson v. Gordon, et al., 2011
Ill. LEXIS 10 (January 21, 2011),
the court analyzed whether the standard of care provision of a contract
relates only to the express engineering services to be provided. In a
unanimous decision, the court held
that a design professional’s duty is
limited to the terms of its contract.
Facts
On January 16, 1991, Jack E.
Leisch and Associates (“Leisch”)
entered into a contract with Western Development Corporation
(“WDC”) to provide engineering
services in connection with the rebuild of the cloverleaf interchange
and replacement of a bridge deck
at I-94 and Route 132/Grand
Avenue in Gurnee, Illinois. On
November 27, 1998, the plaintiff,
Corrine Thompson, was a passenger
in a vehicle with her daughter and
husband heading westbound on
Route 132/Grand Avenue. Christie
Gordon was driving eastbound on
Route 132/Grand Avenue when her
car swerved, struck the median and
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vaulted into the air landing on top
of the plaintiff’s vehicle, killing her
daughter and husband.
Procedural History and
Holdings
The plaintiff sued Leisch arguing
that had Leisch designed a “Jersey
barrier” over the median, Gordon’s
vehicle would not have become
airborne and struck the plaintiff’s
vehicle. Leisch filed a motion for
summary judgment arguing that it
had no duty to the plaintiff, because
the work it contracted to perform
did not require it to design a median
barrier. The trial court agreed with
Leisch and granted it summary
judgment holding that Leisch’s
duty was limited by the terms of the
contract it entered into with WDC.
In so holding, the court relied on
Ferentchak v. Village of Frankfort,
105 Ill.2d 474 (1985), which
concluded that an engineer’s contractual obligations define his duty.
The plaintiff sought review in the
Illinois Appellate Court where
the court noted that the contract
only called for a replacement of
the bridge deck and median – not
an improved design as the plaintiff
P. Scott Ritchie
is a partner with Clausen Miller P.C. whose
practice deals primarily with products liability and construction litigation. He has
experience in a variety of liability matters
including claims involving wrongful death,
premises liability, professional liability and
business/commercial litigation. Mr. Ritchie
has conducted numerous seminars on construction litigation and products liability, as
well as authoring articles on the same.
pritchie@clausen.com
Michael J. McSherry
is an associate in the Chicago office of
Clausen Miller P.C. He concentrates his
practice in the areas of professional and
products liability, employment law, construction litigation and various commercial
matters.
mmcsherry@clausen.com
3
SPECIAL ALERT
contended. Nevertheless, the appellate court held that the standard
of care clause in the contract obligated Leisch to replace the median
within the prescribed standard of
care for professional engineers.
Consequently, the appellate court
reversed the trial court and held
that the plaintiff’s expert testimony
sufficed to create an issue of fact as
to whether Leisch had breached its
duty. Leisch appealed to the Illinois
Supreme Court, which reversed the
appellate court and held that requiring Leisch to investigate the need
for an improved median barrier
would have imposed an obligation
upon it not included in the contract. In other words, the Supreme
4
Court concluded that the existence
of the defendant’s duty is determined by the terms of the contract,
and not even expert opinion may
expand the scope of the defendant’s
duty beyond those express terms. In
this case, the court determined that
the term "replacement," which the
contract used to describe Leisch’s
services regarding the bridge deck,
did not require the defendants to
design "improvements" that might
have included a Jersey barrier.
Learning Point: This ruling signifies an important victory for
design professionals in Illinois.
Importantly, the opinion bolsters
the Supreme Court’s reasoning in
Ferentchak that an engineer’s duty
is necessarily limited to the terms
or conditions of the contract. Accordingly, plaintiffs attempting to
hold design professionals liable in
tort must prove that a breach of a
contractual duty caused their complained of injuries. More importantly, the Supreme Court’s decision
is significant for design professionals who must carefully define the
scope of their services in contracts.
A clear and unambiguous statement
of the design professional’s scope
of services will be vital to defend
against liability in the event a party
sues for injuries arising out of the
contracted work. t
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GREEN BUILDING
The USGBC And The Leed Rating
System: Are They Leading Or
Misleading The Way To
Energy Efficiency?
by Christopher R. Henson and Michael J. McSherry
Introduction
Facts
In October 2010, a group of design
professionals led by Henry Gifford
(“Gifford”) took aim at the United
States Green Building Council
(“USGBC”) and its founders in a
class action lawsuit filed in federal
court. Gifford v. U.S. Green Building Council, et al., No. 10-cv-7747
(S.D.N.Y. October 8, 2010). Gifford attacked the USGBC’s Leadership in Energy and Environmental
Design (“LEED”) rating system,
which certifies buildings as being
designed and constructed in an
environmentally friendly manner.
Specifically, the lawsuit alleges that
the USGBC deceived consumers by
fraudulently misrepresenting that
LEED certified buildings are more
energy efficient than conventionally-built buildings. On February 8,
2011, in a strategic move, Gifford
amended his lawsuit, removing the
class status and monopolization
allegations and instead focusing
on claims of false advertising and
consumer fraud under both federal
and New York state law. Additionally, Gifford added several design
professionals as plaintiffs whom he
alleges suffered injuries as a result
of the USGBC’s misrepresentations
regarding the energy efficiency of
LEED certified buildings.
The USGBC is a non-profit organization that owns the LEED
certification systems and receives
fees from building owners seeking
LEED certification. According
to the USGBC website, there are
currently approximately 140,000
design professionals accredited by
the USGBC to advise consumers
on how to design LEED certified
buildings.
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In 2008, the New Buildings Institute (“NBI”) and the USGBC
released a comprehensive study
of LEED buildings, asserting that
LEED accredited buildings are, on
average, 25% to 35 % more energy
efficient than non-LEED buildings.
Cathy Turner and Mark Frankel, Energy Performance of LEED
for New Construction Buildings,
NEW BUILDINGS INSTITUTE,
March 2008. Gifford, a mechanical systems designer and President
of Gifford Fuel Saving, Inc., published his own article criticizing the
USGBC and the LEED rating system. Henry Gifford, A Better Way
to Rate Green Buildings, NORTHEAST SUN, Spring 2009. Gifford’s
analysis concluded that the USGBC did not base its LEED rating on
actual measurements of efficiency,
but rather on anticipated energy
Christopher R. Henson
is a partner in the Chicago office of Clausen
Miller P.C. who practices in the areas of
civil litigation involving employment law,
professional malpractice law and general
liability law. Mr. Henson has extensive
trial experience at both the state and federal
level, including several decisions before the
Seventh Circuit Court of Appeals
chenson@clausen.com
Michael J. McSherry
is an associate in the Chicago office of
Clausen Miller P.C. He concentrates his
practice in the areas of professional and
products liability, employment law, construction litigation and various commercial
matters.
mmcsherry@clausen.com
5
GREEN BUILDING
levels. Gifford further determined
that LEED buildings are, in fact,
29% less efficient than non-LEED
buildings. Gifford relies heavily on
this critique to support the allegations contained in his lawsuit.
The Lawsuit
Essentially, the suit alleges that the
USGBC misleads consumers into
paying for a product – the LEED
certification – that is not what
it purports to be. Moreover, the
plaintiffs claim that as a result of
USGBC diverting consumers on
false pretenses to LEED accredited
professionals, they are losing customers who desire design and construction techniques that achieve
energy efficiency. In addition to
money damages, the plaintiffs seek
injunctive relief against the USGBC, enjoining it from promoting
the energy efficiency of LEED certified buildings and compelling it to
disclose the actual energy bills of
existing LEED certified properties.
Barring a settlement or dismissal,
this litigation could force owners and
tenants of LEED certified buildings
to produce their energy bills and
perhaps other highly proprietary
data to determine if LEED certified
buildings are more sustainable and
conserve more energy than nonLEED buildings. However, at this
time, it remains uncertain whether
this lawsuit will even get that far.
On April 6, 2011, the USGBC
filed a motion to dismiss Gifford's
lawsuit for: (1) lack of subject matter jurisdiction; and (2) failure to
state a claim upon which relief can
be granted. Although the USGBC's
6
motion refutes Gifford's allegations
that the NBI study on LEED buildings constitutes false advertising,
the motion primarily contends that
Gifford and the other plaintiffs lack
standing to sue the USGBC. The
U.S. Constitution mandates that a
party must demonstrate to the court
it has suffered an injury-in-fact as a
result of the conduct alleged. The
USGBC challenges whether Gifford
and the other plaintiffs can properly
allege such injury to confer standing
on them. Regardless of whether this
litigation advances past its infant
stages, the plaintiffs' allegations
carry substantial implications for
design professionals.
as the Gifford lawsuit languishes
in federal court, design professionals should act to ensure they
realize the promise of the LEED
rating systems while keeping in
mind their potential pitfalls. t
Practice Point: Gifford’s lawsuit
raises significant issues with the
LEED rating system that all design
professionals must be cognizant of
when contracting with building
owners and developers to design
and construct LEED certified
buildings. First, design professionals can protect themselves from
liability by assuming that LEED
rating systems are imperfect. Seeking an independent opinion from
experts in the energy efficiency field
marks a safe and smart method
to incorporate sustainability into
a building’s design and construction. Second, design professionals
should understand and communicate to their customers that simply
achieving LEED certification may
not automatically guarantee energy
efficiency and therefore cost savings.
Accordingly, design professionals
should avoid contract provisions
that guarantee energy efficiency
and/or cost savings upon reaching LEED certification. In short,
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Washington Supreme Court
Rejects “Bright-Line” Application
Of The Economic Loss Doctrine
ECONOMIC
LOSS DOCTRINE
by Margaret Hupp Fahey
The Supreme Court of Washington
in Affiliated FM Insurance Company
v. LTK Consulting Services, Inc., 170
Wash.2d 442, 243 P.3d 521 (2010)
refused to apply the economic loss
doctrine as a “bright-line rule of
general application” precluding
recovery in tort any time there
is an economic loss. Instead, the
court found that an engineering
firm could assume tort law duties
beyond its contractual obligations
and subject itself to negligence
causes of action for economic damages brought by parties with whom
it did not contract.
Facts
The case involved Seattle’s monorail
system which was operated under a
“concession agreement” by Seattle
Monorail Services Joint Venture
(“SMS”). The City of Seattle hired
an engineering firm, LTK Consulting (“LTK”), to identify maintenance and repair issues, and it was
one of LTK’s recommendations
regarding the grounding system
for the monorail that was allegedly
faulty and resulted in a fire on one
of the trains. Besides damage to the
train on which the fire occurred,
smoke damaged the cars of another
train that assisted escaping passengers. All the damage in question
was to the monorail system itself.
There was no damage to other
property. SMS’ insurer, after paying an agreed-upon allocation of
costs to repair the fire and smoke
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damage, sued LTK for negligent
changes in the electrical ground
system for the monorail. LTK filed
a motion for summary judgment
arguing that the losses were purely
economic because “they stemmed
from business interruptions and
SMS’ contractual obligations to
repair the City’s monorail trains.”
In addition, LTK asserted that SMS
did not have a property interest in
the monorail system. The motion
was granted by the district court.
Question for Washington
Supreme Court
On appeal, the United States Court
of Appeals for the Ninth Circuit certified to the Washington Supreme
Court the following question:
Margaret Hupp Fahey
is a partner with Clausen Miller P.C. who
works in the areas of property insurance,
construction law, design professional liability, and agent/broker liability. She has been
involved in a wide range of alternative dispute forums, such as appraisal and arbitration, as well as more traditional litigation in
jurisdictions throughout the country. Ms.
Fahey has made presentations to a variety
of organizations in the insurance industry
and to design professional and construction
firms.
mfahey@clausen.com
May party A (here, SMS,
whose rights are asserted in
subrogation by AFM), who has
a contractual right to operate
commercially and extensively
on property owned by nonparty B (here, the City of Seattle), sue party C (here, LTK) in
tort for damage to that property, when A (SMS) and C (LTK)
are not in privity of contract?
Safety Interests of Public
Trump “Contractual
Expectancies”
Though acknowledging that it had
previously adopted the economic
loss rule in an attempt to describe
7
ECONOMIC
LOSS DOCTRINE
the dividing line between the law
of torts and the law of contracts,
the Washington Supreme Court
now concluded that “the term ‘economic loss rule’ has proven to be a
misnomer,” because the definition
of economic injuries is “broad and
malleable,” and economic losses are
sometimes recoverable in torts such
as interference with contract. In
determining whether a plaintiff can
seek recovery in tort or is limited
to contract remedies, “the court’s
task is not to superficially classify
the plaintiff’s injury as economic
or non-economic. Rather, the
court must apply the principle of
Washington law that is best termed
the independent duty doctrine.”
The court must determine under
ordinary tort principles whether the
defendant had a tort duty that arose
independently from the terms of the
contract. To resolve the question of
duty, the court makes three inquiries: Does an obligation exist? What
is the measure of care required? To
whom and with respect to what risk
is the obligation owed?
In finding that such a duty arose
from the engineering services provided by LTK, the court had to
distinguish its earlier decision in
Berschauer/Phillips Constr. Co. v.
8
Seattle Sch. Dist No. 1, 124 Wash.2d
816, 881 P.2d 986 (1994), where
the court held that the architect,
structural engineer and inspector
could not be sued in tort by the
general contractor even if the plans
were inadequate and cost the general contractor delays and economic
damages of $3.8 million. In that
ruling, the Washington Supreme
Court found that “the economic
loss rule does not allow a general
contractor to recover purely economic damages in tort from a design professional.” In explaining its
prior decision in Berschauer/Phillips,
the court described its “overriding
concerns” at that time as protecting
“the parties’ contractual expectancies” and allowing the parties to
allocate risk through contract negotiations. The court then contrasted
its concern for maintaining “private
ordering” of risk in complex multiparty transactions with the safety
interests of the public. The existence
of a fire on the monorail system and
the danger it posed to people and
property were particularly influential factors in the court’s reasoning.
The court found that “…engineers
who undertake engineering services
in this state are under a duty of reasonable care. The interest in safety is
significant.” Although the Supreme
Court’s decision suggests engineers
may not have liability in tort for
“some classes of harm,” it refused to
apply the economic loss rule to all
cases of harm and all classes of people, particularly where an innocent
party did not have an opportunity
to negotiate the risk of harm and
would be forced to bear the costs
of a careless engineer’s work.
Applying the independent duty
analysis, the Washington Supreme
Court found that such a duty
existed to use reasonable care in
providing engineering services with
respect to physical damage to the
monorail, and that LTK’s duties applied to SMS’ interests in operating
the monorail system.
Learning Point: In determining
whether a tort claim can be defeated based on the economic loss
doctrine, the law of the relevant
state must be carefully examined,
as many states narrow the rule’s application and carve out exceptions.
This is particularly the case when
the alleged negligence on the part
of the design professional results in
a safety hazard. t
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ECONOMIC
LOSS DOCTRINE
Arizona Adopts Economic Loss
Doctrine To Bar Tort Actions In
Construction Defect Cases But Only
When Contractual Remedy
Is Available
by Ryan A. Lee
In Flagstaff Affordable Housing L.P.
v. Design Alliance, Inc., 223 Ariz.
320, 223 P.3d 664 (Ariz. 2010), the
Arizona Supreme Court considered
the question of whether Arizona
law recognized the economic loss
doctrine as a bar to an owner's tort
action when an architect's negligent
design caused economic damages
but no physical injury to persons
or other property. The project at
issue involved the design of an
eight building apartment complex
and a community center that were
intended to meet Federal accessibility guidelines in order to qualify as a
low income housing project.
After construction was completed,
the owner was sued by the U.S.
Department of Housing and Urban
Development ("HUD") because the
apartments violated federal accessibility guidelines. After settling with
HUD, the owner brought a lawsuit
against the architect and contractor
who built the apartments. In particular, the owner's claims against
the architect alleged professional
negligence "based on the special
relationship between architects
and their clients." The architect
moved to dismiss the owner's professional negligence claims on the
grounds that the owner's remedy
was limited to breach of contract
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because the owner was only seeking to recover economic damages,
which are "pecuniary or commercial
damage, including any decreased
value or repair costs for a product
or property that is itself the subject
of a contract between the plaintiff
and defendant, and consequential
damages, such as lost profits."
After reviewing Arizona law on the
economic loss doctrine in other
contexts, such as products liability cases, as well as the underlying
policies of tort and contract law,
the court held that "a plaintiff who
contracts for construction cannot
recover in tort for purely economic
loss, unless the contract provides
otherwise. The doctrine does not
bar tort recovery when economic
loss is accompanied by physical
injury to person or other property."
However, after holding that the
economic loss doctrine applied in
construction cases, the court limited its application to those plaintiffs
that have contractual relationships
with the defendant. As such, under
Arizona law, the economic loss doctrine does "not apply to negligence
claims by a plaintiff who has no
contractual relationship with the
Ryan A. Lee
is an associate in Clausen Miller's Chicago
office and concentrates his practice in the
area of first-party property and the defense
of designers and contractors against claims
for breach of contract and negligence. Mr.
Lee also has experience in handling commercial litigation matters involving subrogation,
premises liability, intellectual property and
employment disputes. Mr. Lee obtained
a bachelors of science in engineering from
Princeton University and graduated from
Chicago-Kent College of Law with a certificate in Intellectual Property Law.
rlee@clausen.com
continued on page 15
9
ECONOMIC
LOSS DOCTRINE
New York Court Applies Economic
Loss Doctrine In Dismissing Surety’s
Lawsuit Against Architect
by Ryan A. Lee
Ryan A. Lee
is an associate in Clausen Miller's Chicago
office and concentrates his practice in the
area of first-party property and the defense
of designers and contractors against claims
for breach of contract and negligence. Mr.
Lee also has experience in handling commercial litigation matters involving subrogation,
premises liability, intellectual property and
employment disputes. Mr. Lee obtained
a bachelors of science in engineering from
Princeton University and graduated from
Chicago-Kent College of Law with a certificate in Intellectual Property Law.
rlee@clausen.com
In Travelers Cas. & Surety Co. v.
Dormitory Authority-State of New
York, 734 F.Supp.2d 368 (S.D. N.Y.
2010), the United States District
Court for the Southern District of
New York was faced with a dispute
over the construction of a fourteen
story vertical campus for Baruch
College in New York City. The
owner of the project entered into
a contract with an architectural
firm to provide all of the designs
for the project, including contract
drawings, specifications and bid
documents, and to approve all shop
drawings, samples and substitutions
proposed by the contractor. Ultimately, the contractor was unable
to finish the project and its surety
bond holder stepped in to complete
the project. The surety then brought
suit against a number of parties involved in the construction project,
including the designer.
Since the contractor did not have
a contractual relationship with
the architectural firm, the surety's
claims against the architect were
based on professional negligence
for the architect's alleged failure
to provide clear and unambiguous
bid documents as well as failing to
provide timely interpretations of
its designs. The architect moved for
summary judgment on the surety's
professional negligence claims
on the grounds that New York's
economic loss doctrine barred the
surety's tort claims. In response,
the surety argued that New York's
negligent misrepresentation excep-
10
tion to the economic loss doctrine
allowed it to pursue its professional
negligence claims.
Under New York's negligent misrepresentation exception to the
economic loss doctrine:
A defendant is liable where
there is carelessness in imparting words upon which others
were expected to rely and upon
which they did act or failed to
act to their damage, provided
that such information was expressed directly with knowledge
or notice that it will be acted
upon, to one to whom the author is bound by some relation
of duty, arising out of contract
or otherwise, to act with care if
he acts at all.
After reviewing the facts of the case,
the court held that there was not
sufficient evidence of a contractual
relationship or other close relationship between the contractor and
the architect that would support
the surety's claims. In particular,
the court found that the surety had
failed to show that the contractor was known to the architect at
the time it was preparing the bid
documents. Also, the court found
that the surety's failure to identify any specific misrepresentation
prevented its negligence claims.
As such, the court dismissed the
surety's negligence claims against
the architect. t
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Illinois Appellate Court Finds No Duty
Owed By Concrete Testing Company
To Subcontractor Responsible For
Pouring Concrete
CONSTRUCTION
by Thomas S. Gozdziak
In Rojas Concrete, Inc. v. Flood Testing Laboratories, Inc., 2010 Ill. App.
LEXIS 1338 (Ill. App. Ct. 1st Dist.
Dec. 15, 2010), the Illinois Appellate Court found that a concrete
testing company hired directly by
the project owner did not owe a
duty to a concrete subcontractor
hired through one of the owner’s
contractors. The court examined
the possibility of a contractual
duty, a duty based upon the parties’ relationship, or a duty under
the voluntary undertaking doctrine.
Facts
The University of Illinois at Chicago ("UIC") commenced a project
to build the “UIC Forum” at its
Chicago campus. Rojas Concrete
(“Rojas”) was hired by one of UIC’s
contractors to provide the concrete
work for the project. UIC hired
Flood Testing Laboratories (“FTL”)
to monitor and test the concrete
poured on the project to ensure
that it conformed to mix design
and the formula specified in the
project plans.
FTL inspected and tested each
load of concrete delivered by Rojas
and then advised Rojas whether it
passed the inspection. Rojas alleged
that in reliance on FTL’s inspection,
testing and approval of the concrete,
Rojas poured approximately 710
cubic yards of nonconforming concrete. UIC required Rojas to remove
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and replace the nonconforming
concrete, resulting in monetary
damages in excess of $950,000.
Rojas filed suit against FTL asserting the following causes of action:
(1) Negligence – alleging that FTL
owed Rojas a duty to use reasonable
care to adequately test and inspect
the concrete to ensure that it conformed with project specifications,
and FTL breached that duty; and
(2) Negligent Misrepresentations –
alleging that FTL made representations to Rojas that were false in that
certain concrete did not conform to
the project specifications, and Rojas
relied on those representations. The
circuit court dismissed Rojas’ complaint with prejudice on the basis
that FTL owed no duty to Rojas.
Thomas S. Gozdziak
is a partner in the Chicago office of
Clausen Miller P.C. He focuses his practice
on first-party property insurance coverage
and defense matters and is experienced
in litigating complex, multi-million dollar first-party property insurance coverage
disputes. He also practices in the areas of
Construction Litigation and Design Professional Liability.
tgozdziak@clausen.com
The Illinois Appellate Court explained that both causes of action
asserted by Rojas require a duty
owed by FTL to Rojas. The court
then considered whether FTL owed
any such duties to Rojas.
Contractual Duty
The court first looked at whether
FTL owed a contractual duty to Rojas. The court pointed to language
in the contract between FTL and
UIC which states: “Nothing contained herein shall create a contractual relationship with, or any rights
in favor of, any third party, including any Subcontractor.” The court
11
CONSTRUCTION
stated that the FTL contract with
UIC clearly provided that FTL’s
duties did not extend to third parties, such as Rojas. The court then
pointed to language in the FTL/
UIC contract which states: “Inspection and testing services are required
to verify compliance with requirements specified or indicated. These
services do not relieve Contractor
of responsibility for compliance
with Contract Document requirements.” The court stated that the
FTL/UIC contract did not relieve
any contractor at the construction
site of its duty to comply with the
terms of its own separate contract.
The court concluded that the FTL/
UIC contract did not create a contractual relationship between FTL
and Rojas, and that Rojas has not
shown that FTL owed Rojas a duty
to inspect, test, or approve Rojas’
concrete before it was poured.
Duty Based Upon
The Parties’ Relationship
Rojas maintained that a construction professional can be held liable
for negligently causing another contractor to incur additional expenses
to complete a project regardless of
whether a contractual relationship
exists between the parties. Rojas
argued that FTL owed Rojas a duty
of due care because it was reasonably foreseeable that Rojas would
be affected by FTL’s faulty inspection, testing and approval of the
concrete and false representations
as to the concrete’s conformance
with project specifications. In
support of this argument, Rojas
relied on two Illinois cases where a
supervising engineer was found to
12
owe a duty to a general contractor,
even in the absence of a contractual
relationship, to avoid negligently
causing extra expenses for the
contractor in the completion of a
construction project (by failing to
have the project properly staked,
for example). See Normoyle-Berg &
Assoc., Inc. v. Village of Deer Creek,
39 Ill. App. 3d 744, 350 N.E.2d
599 (1976), and W.H. Lyman Construction Co. v. Village of Gurnee, 84
Ill. App. 3d 28, 403 N.E.2d 1235
(1980). Rojas also relied on an Illinois case where, after a warehouse
fire occurred, a fire alarm supplier
was found to owe a duty to a tenant that shared the warehouse space
with the owner of the warehouse
who had contracted with the fire
alarm supplier. The court held that
it was highly foreseeable that a fire
at the owner’s warehouse would
destroy the entire warehouse and
not merely the owner’s portion. See
Scott & Fetzer Co. v. Montgomery
Ward & Co., 129 Ill. App. 3d 1011,
473 N.E.2d 421 (1984).
The court found the cases relied on
by Rojas to be factually distinguishable because Rojas and FTL did
not share a supervising engineer/
general contractor relationship
and they were not adjacent tenants.
The court refused to address the
foreseeability argument beyond the
factual contexts of the specific cases
cited, because Rojas forfeited the
foreseeability argument by raising
it for the first time on appeal.
Duty Under Voluntary
Undertaking Doctrine
Illinois recognizes the voluntary
undertaking doctrine from the
Restatement (Second) of Torts to the
extent that it provides that one who
gratuitously or for consideration
renders services to another is subject
to liability for bodily harm caused
to the other by one’s failure to exercise due care. Because Rojas did not
allege that bodily harm occurred as
a result of FTL’s negligence and has
not argued any reason for extending
the doctrine to what is a purely economic loss, the court did not find a
duty owed by FTL to Rojas under
the voluntary undertaking doctrine.
Learning Point: It is important to
carefully draft contract terms and
conditions which make it clear
that the contract and the services
performed do not give rise to a duty
to anyone other than the parties to
the contract. It is also important
to be aware, however, that in some
circumstances a court could possibly look for or find a duty of care
owed to someone that is not a party
to the contract. The question that
remains is whether Illinois courts
will expand beyond the specific
factual circumstances at issue in the
cases cited above, a duty based upon
foreseeability of injury to someone
not a party to the contract. t
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CONSTRUCTION
Subcontractor Bound By Scope Of
Prime Contract When Bid Proposal
Is Not Attached To Subcontract
by Margaret Hupp Fahey
In a case that underlines the importance of making sure a contract
spells out exactly the scope of a
party’s duties, a subcontractor was
found to owe over $200,000 to
a general contractor for failing to
install a product it never intended
to provide. John T. Jones Construction Company v. Hoot General Construction Co., 613 F.3d 778 (8th
Cir. 2010). Failure to attach a bid
proposal to a subcontract was the
subcontractor’s downfall.
Facts
The Des Moines Metropolitan
Wastewater Reclamation Authority (“WRA”) planned to update its
wastewater treatment facilities and
hired Black & Veatch (“B&V”) as
the engineers on the project. B&V
created a set of specifications requiring the use of a particular liner
system created by a company called
Linabond for the wastewater storage
tanks. Though WRA revised the
specification to include the words
“or equal” after the specified liner
system, it gave Black & Veatch the
discretion to determine what constituted an “equal” liner system.
The general contractor on the project, Jones Construction, sought
bids for the installation of the protective liner in the wastewater storage tanks. Hoot Construction, who
only installed liner systems made by
Linabond’s main competitor, Am-
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eron, submitted a bid proposal after
being informed by Jones that the “or
equal” basis applied to the project
and being assured by Ameron that
its systems had never been rejected
as being less than “equal.”
The subcontract required Hoot to
perform the work as described in the
main contract and incorporated the
main contract as an exhibit. Hoot’s
company policy was to incorporate
original bids into any subcontract
as a means of limiting the scope of
its duties to the work outlined in
the bid proposal. However, on this
project, the bid proposal, which was
to be Exhibit B to the subcontract,
was not part of the signed contract.
When Hoot made its submittal
for the liner based on the Ameron
system, it was rejected by B&V.
Hoot attempted to rely on the
bid proposal for its scope of work.
Jones replied that the subcontract
required the liner to be installed
in accord with specifications under
the main contract. Hoot then sent
a letter terminating the subcontract.
Jones considered the termination
a default and retained a different
subcontractor for installation of
the Linabond system. Prevailing in
its breach of contract lawsuit, Jones
was awarded $241,181 in damages
against Hoot.
Margaret Hupp Fahey
is a partner with Clausen Miller P.C. who
works in the areas of property insurance,
construction law, design professional liability, and agent/broker liability. She has been
involved in a wide range of alternative dispute forums, such as appraisal and arbitration, as well as more traditional litigation in
jurisdictions throughout the country. Ms.
Fahey has made presentations to a variety
of organizations in the insurance industry
and to design professional and construction
firms.
mfahey@clausen.com
continued on page 15
13
CONSTRUCTION
Illinois Appellate Court Upholds
Contract Limitations On Recovery
Against Home Inspector
by Ryan A. Lee
Ryan A. Lee
is an associate in Clausen Miller's Chicago
office and concentrates his practice in the
area of first-party property and the defense
of designers and contractors against claims
for breach of contract and negligence. Mr.
Lee also has experience in handling commercial litigation matters involving subrogation,
premises liability, intellectual property and
employment disputes. Mr. Lee obtained
a bachelors of science in engineering from
Princeton University and graduated from
Chicago-Kent College of Law with a certificate in Intellectual Property Law.
rlee@clausen.com
In Zerjal v. Daech & Bauer Construction, Inc., No. 5-10-0066
(5th Dist. December 1, 2010)
(unreported opinion), the Appellate Court of Illinois for the Fifth
District considered a case where
homeowners brought a lawsuit
against the company they hired
to perform a home inspection. In
the contract between the home
inspector and the homeowners,
the contract limited the inspector's
liability to its fee, which was $175,
and required that the homeowners
bring any claims within 2 years of
the date of the inspection. Over
three years after the inspection, the
homeowners brought suit against
the builder of the home and the
inspector relating to various defects
in the home's construction. In
response, the inspector tendered
the $175 to the homeowners and
moved to dismiss the homeowners' complaint. The homeowners
argued that both the contract's
$175 limitation on liability and
the 2 year limitation on bringing
a lawsuit were void under Illinois
law because the state should protect
homeowners from home inspectors.
The court held that limitation on
liability provisions are "enforceable unless (1) enforcement would
be against settled public policy of
the state and (2) something in the
14
social relationship of the parties
militates against enforcement." The
court disagreed with the homeowners' argument that the limitation
provision was against public policy
because "[i]t takes more than the
legislature's regulation of an industry…for a public interest to be
found." Since there was no special
relationship between the homeowners and the inspector, the court held
that the $175 limitation on liability was enforceable. Similarly, the
court found the 2 year limitation
for the homeowners to bring suit
was enforceable because "parties to
a contract may agree upon a shortened contractual limitations period
to replace the statute of limitations,
as long as it is reasonable."
Learning Point: Based upon the
court's reasoning in Zerjal, Illinois
courts may enforce contractual provisions that limit a client's recovery
to the amount of the fee paid by
the client for the services provided.
Additionally, Illinois courts will allow parties to contractually shorten
the time period for any lawsuit to
be brought, as long as it is reasonable, rather than applying the
normal statute of limitations. We
recommend that professionals in
the construction industry consider
such provisions in their contracts. t
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ECONOMIC
LOSS DOCTRINE
cont. from pg. 9
defendant." Additionally, the court
warned that although it had adopted the economic loss doctrine in
construction defects cases, "it does
not suggest that the doctrine should
be applied with a broad brush in
other circumstances."
Learning Point: Even when adopting the economic loss doctrine in
a construction context, the courts
may be reluctant to apply the
doctrine if no contractual remedy
exists. This makes it even more important that parties to construction
projects carefully allocate the risks
of any project through the use of
contract documents. t
CONSTRUCTION
cont. from pg. 13
On appeal, Hoot argued that there
was no contract between the parties
since there was never an agreement
that the Linabond system would
be installed as Hoot only intended
to install the Ameron system as
set forth in its bid proposal. Alternatively, if there was a contract,
it necessarily incorporated the bid
proposal or Exhibit B, and under
the scope of the contract as defined
by the bid proposal, Hoot did
not have to install the Linabond
system. The court rejected Hoot’s
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argument that it never intended
to be bound by a subcontract
that required it to install anything
but an Ameron liner. Rather, the
court pointed out that the signed
subcontract called for installation
of a liner in accordance with the
requirements in the main contract.
The fact that Jones continued to
transmit submittals after execution
of a contract was evidence that
a contract was in place, and that
Hoot intended to be bound by it.
Learning Point: This case highlights the importance of parties
carefully checking any contract they
execute to make sure it expresses the
intent of the parties and includes all
exhibits and addenda. Often parties
are anxious to have a contract in
place. However, it is important that
the contract reflect what each party
intended, including the scope of
any work to be performed. t
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