In substance, the Act provides:
Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact . . . in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby . . . 815 ILCS 505/2.
To state a claim for violation of the Act, a plaintiff must allege: 1) that the defendant performed a deceptive act; 2) that the defendant intended that the plaintiff rely on the deception; 3) that the deception occurred in the course of conduct involving trade or commerce; and, 4) a consumer nexus.
What follows is an analysis of these pleading requirements. However, this article is not exhaustive of the issues pertaining to pleading a violation of the Act.
1. Plaintiff Must Sufficiently Allege a Deceptive Act
Preliminarily, an action under the Act must be pleaded with the same specificity that has always been a prerequisite to an action for common law fraud, including what misrepresentations were made, when they were made, who made the misrepresentations and to whom they were made.
The statements ascribed to the defendant must qualify as misrepresentations. Not every allegedly untrue statement is a misrepresentation under the Act. For example, puffery fails to qualify. In Breckenridge v. Cambridge Homes, Inc., 246 Ill. App. 3d 810, 616 N.E.2d 615 (2d Dist. 1993), the court held that the builder's statements to new home purchasers that their home would be built with "expert workmanship" and "custom quality," and that the home would be "perfect" and have quality similar to the models that the purchasers had previously seen were "puffing"that did not violate the Act. Similarly, in Zimmerman v. Northfield Real Estate, Inc., 156 Ill. App. 3d 154, at 163, 510 N.E.2d 409 (1st Dist. 1986), the multiple listing service description of a house as "magnificent" and "comfortable" did not qualify as fraudulent misrepresentation.
In addition, because of they cannot be said to have induced reliance, post-sale misrepresentations fail to qualify under the Act.
2. Intent That the Plaintiff Rely on the Deception
Increasingly, plaintiffs are adding claims under the Illinois Consumer Fraud and Deceptive Practices Act (Act) in lawsuits that formerly would have included only contract or warranty allegations. The reason for this is simple: in addition to fraud-related damages, the Act allows for recovery of attorney’s fees and costs by a prevailing party.
It is well established that a litigant may not invoke the Act simply by alleging an intentional or fraudulent breach of a contract. If such practice were allowed, every breach of contract action would be supplemented with an additional and redundant remedy under the Act. Illinois courts have consistently resisted attempts by litigants to portray otherwise ordinary breach of contract claims as causes of action under the Act.
This article generally discusses the pleading requirements of the Illinois Act only. While many states have a corollary statute, such other laws are not specifically addressed here. However, the trend toward pleading fraud with contract claims is not just occurring in Illinois. Since these types of statutes are punitive in nature, consultation with an attorney in your state concerning appropriate defense strategies to any fraud claims is recommended.
3. Trade or Commerce Requirement
The Act prohibits certain acts and practices “in the conduct of any trade or commerce.” The Illinois Supreme Court has confirmed that to adequately plead a cause of action for violation of the Act, a plaintiff must allege, among other elements, “the occurrence of the deception in the course of conduct involving trade or commerce . . . " Oliveira v. Amoco Oil Co., 201 Ill. 2d 134, 149, 776 N.E.2d 151 (2002).
The Act defines the terms “trade” and “commerce” as follows:
(f) The terms “trade” and “commerce” mean the advertising, offering for sale, sale, or distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value wherever situated, and shall include any trade or commerce directly or indirectly affecting the people of this State. 815 ILCS 505/1(f).
Generally, real estate transactions involve trade or commerce. The Act itself draws no distinction between private and commercial sellers of real estate. Interestingly however, Illinois courts have established that the casual sale of a single-family home is not considered conduct involving trade or commerce under the Act.
4. The Claimant Must Either Be a "Consumer," or Satisfy the "Consumer Nexus Test"
Although it has been clear since an amendment to the Act in 1990 and subsequent interpretive cases that a plaintiff suing under the statute can state claims based upon a single, isolated injury, there is still a requirement under the Act that the plaintiff demonstrate an effect on consumers generally. This can be accomplished in two ways. First, a plaintiff alleging a violation of the Act can plead that he is a "consumer" under the Act. The Act defines "consumer" as:
any person who purchases or contracts for the purchase of merchandise not for resale in the ordinary course of his trade or business but for his use or that of a member of his household . . . 815 ILCS5 505/1.
While businesses can be "consumers," where a business makes a purchase for future resale, it is not a consumer. Similarly, where a business purchases component parts for incorporation into a product for later resale, it is not a consumer under the Act. Therefore, material suppliers or sellers of construction assemblies may have good defenses under the Act.
Alternatively, a plaintiff who is not a "consumer" for purposes of the Act can meet the requirement of showing that the defendant's conduct had an effect on consumers by demonstrating how the complained of conduct involved trade practices directed to the market generally or otherwise implicated consumer protection concerns. This is referred to as the "consumer nexus test."
Attorney’s Fees
As mentioned, one major impetus for bringing an action under the Act is the provision in the statute that allows the court to award reasonable attorney's fees and costs to the prevailing party. 815 ILCS 505/10a(c).
The decision to award reasonable attorney’s fees and costs rests in the sound discretion of the trial court. In determining whether to award attorney’s fees and expenses, the trial court may consider the following factors: 1) the opposing party's culpability or bad faith; 2) the opposing party's ability to pay the attorney’s fees and expenses; 3) whether an award of attorney’s fees and expenses would deter others from filing similar claims under similar circumstances; 4) whether the opposing party attempted to benefit all consumers or whether the opposing party was attempting to resolve significant issue relating to consumer fraud; and 5) the merits of the opposing party's position. No single factor is controlling, and the moving party does not need to satisfy every element.
Importantly, either prevailing plaintiffs or defendants may take advantage of this provision. Prevailing defendants are entitled to reasonable attorney’s fees and costs in order to deter basis claims and to protect fair and honest enterprises from abuses of the Act's provisions.
Summary
In summary, while a claim for violation of the Illinois Consumer Fraud and Deceptive Practices Act must be taken seriously, the plaintiff bears the burden of pleading and proving that claims under the statute are something more than ordinary breach of contract claims disguised as claims under the Act. Attorneys defending actions under the Act should scour such claims for noncompliance with the statute’s strict pleading requirements. In the face of frivolous claims, a prevailing defendant should not hesitate to move for attorney’s fees and costs under the Act's fee-shifting provision.
Contact for more information: Cecilia A. Horan
The Effect of Statutes of Repose on Third-Party Actions in Construction Defect Litigation
Statutes of repose have a way of sneaking up on you. Because construction defect litigation is notoriously slow in getting underway, developers and general contractors may want to reexamine their modi operandi with respect to bringing third-party actions against subcontractors.
Multiunit construction defect cases are instructive because they often follow a leisurely pattern. At first, the homeowners deal with their builder in an attempt to obtain warranty repairs on their homes. Frequently, the repairs performed are temporary or cosmetic fixes that may very well ignore the true problem. For example, cracks on the wall are patched when the real problem causing the cracks is ground movement or the use of improper wallboard fasteners. A few years might pass before the homeowners realize that a recurring problem exists and that the problem is prevalent throughout the development.
Sometimes, in the name of customer service and in the hope of avoiding future litigation, recurring problems are addressed by the builder long after the written warranty has expired. Even then, as in the wall-crack example above, the true problem may not be addressed. Or homeowners may know they have a problem but not know exactly what it is. For example, they know that new homes tend to “settle” but do not know how long that process is likely to take.
Eventually, when exasperation with the builder’s repairs sets in, or when the builder finally says that the warranty has expired and no further repairs will be forthcoming, some homeowners may decide that the only way their problems will be addressed is through legal action. Gathering a group of homeowners willing to litigate the matter can take additional time. While locating a plaintiff's attorney is not hard, finding one willing to finance the expert costs to pursue the action might be difficult and time-consuming. In any event, many years after completion of the development might pass before legal action is undertaken.
Accordingly, it is not surprising that the filing of the suit often occurs just before the statute of limitation or repose runs. And, usually, the only defendant named is the builder, with whom the homeowners are in privity. Subcontractors are not named in this initial suit, though all parties involved know that the "cause" of the problem was not created by the builder/general contractor but rather by a subcontractor who worked that trade for him.
The builder may conduct discovery and investigate the “cause of the problems” based on the nature of the damages sought in the complaint before deciding what subcontractors to name in a third-party action. If the general contractor/builder proceeds in this manner, the eight-year statute of repose might pass before the builder properly identifies the responsible subcontractors.
The issue of the timeliness of a contractor’s filing a third-party complaint was addressed in Evans Withycombe v. Western Innovation, 212 Ariz. 462, 133 P.3d 1168 (Ariz. App. 2006). The third-party plaintiff, Evans Withycombe, was served with a construction defect action just prior to the running of the eight-year statute of repose. Evans Withycombe defended the action for twoyears before filing a third-party action against its subcontractors. The third-party action alleged breach of contract, breach of warranty, contractual indemnity, common law indemnity and negligence.
In response to the third-party complaint, one of the subcontractors filed a motion to dismiss based on Arizona's Statute of Repose, A.R.S. § 12-552(A), which provides: "no action . . . based on contract may be instituted or maintained against a person who develops or develops and sells real property, or performs or furnishes the design, specifications, surveying, planning, supervision, testing, construction or observation of construction of an improvement to real property more than eight years after substantial completion of the improvement to real property."
In considering the subcontractor’s motion to dismiss, the court ruled that the plain language of the statute barred any action based on "contract" filed eight years after the “substantial completion” of the project. Evans Withycombe's third-party complaint was filed 10 years after that date. Evans Withycombe argued that the legislature did not contemplate application of the statute where dismissing an action would allow the subcontractor who caused the defect to completely escape liability and oblige the contractor to bear the entire loss. Noting the “apparent purpose of the statute to establish a limit beyond which no suit may be pursued,” the court held that dismissal of the breach of contract, breach of warranty and contract-based indemnity claims was proper. In so ruling, the court also held that the common law indemnity claim was not barred, in that it was not a “contract-based” cause of action. (It also follows that a negligence claim would not be barred by the statute of repose; however, in this case the negligence action was dismissed on separate procedural grounds.)
In addition to upholding the application of the statute of repose, the Evans Withycombe case has several practical implications. First, it should be noted that the court's reversal of the dismissal of the common-law indemnity count was a hollow victory. In Arizona, if a written indemnity clause exists in the subcontractor’s contract, the common-law action is subject to dismissal. Both cannot be pleaded. Further, in order to recover based on common-law indemnity, the builder has to be without fault — any fault on the part of the general contractor prohibits recovery. Thus, the likelihood of a successful recovery based on common-law indemnity is minimal.
Second, the court was quick to point out that as a procedural matter, Evans Withycombe could have avoided the effect of the statute of repose by filing its third-party action at the time it filed its answer. This of course creates a potential ethical issue for the builder in that at the time the answer is due the builder often does not have a "good faith basis" to attribute responsibility to any specific subcontractor. However, the "safest" practice for builders and general contractors when an underlying action is filed at or near the running of the statute of repose appears to be to immediately name all subcontractors. If all contractual causes of actions are to be preserved, third-party actions must be instituted before the eight-year period elapses.
Third, the Evans Withycombe court discussed, but did not rule, on the issue of recoverable damages for tort-based claims. The court noted that under Arizona law, Evans Withycombe would be barred from recovering economic damages in tort under the "economic loss" rule established in Carstens v City of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (Ariz. App. 2003). It appears that unless plaintiffs in the underlying case claimed that the "defective work” caused damage to other property or persons, there would be no basis for recovery in tort.
In short, developers and general contractors must now file their third-party actions in Arizona construction defect cases prior to the absolute bar of the contract-based causes of action imposed by the statute of repose. Since tort-based claims will not allow for recovery of the economic-based damages, which constitute the vast majority of construction defect claims, it is essential that builders preserve all contractual actions that they may have against their subcontractors.
One practical result is that when construction defect actions are filed in Arizona seven or eight years after "substantial completion" of the building, subcontractors can expect to be named as third-party defendants early in the case. Many subcontractors who have no relation to the "damages sustained" can expect to be named and required to participate in early stages of discovery for no other reason than the general contractor’s need to preserve its contract-based action against all of its subcontractors. The practice of some developers and general contractors of defending themselves before identifying responsible subcontractors and filing third-party actions against them may be over in late-filed construction defect cases.
Contact for more information: Darrell S. Dudzik
Landmark Case Clarifies Economic Loss Doctrine in Wisconsin
The Wisconsin Supreme Court recently refined the boundary between the laws of contract and tort, holding that the economic loss doctrine precluded recovery on negligence claims related to an alleged breach of a construction contract. 1325 North Van Buren, LLC v. T-3 Group, Ltd., No. 2004AP325 (Wis. July 11, 2006). The highly anticipated decision was not only a victory for contractors like the particular defendant who was represented by Hinshaw & Culbertson LLP’s Milwaukee office, but also has implications for any parties entering into mixed contracts for products and services.
The case arose out of a March 2001 contract wherein T-3 Group (“T-3”), a construction manager, agreed to convert a warehouse owned by 1325 North Van Buren (“1325”) into a 42-unit condominium complex. Besides furnishing the necessary materials for renovation and construction, T-3 was to provide management services, including the hiring and supervision of subcontractors, and to ensure that the project was completed on time and within budget. Nearly all of the approximately $6 million contract price was allocated to construction costs. Seven months after work began, 1325 terminated T-3 for alleged nonperformance and filed suit against it for breach of contract, negligence and negligent misrepresentation, seeking a total $20 million in damages.
Although the trial court dismissed 1325’s negligence claims under the economic loss doctrine, the court of appeals reversed. According to that court, the doctrine was inapplicable because T-3 had contracted to provide “construction administration and management services,” and Wisconsin courts have long held that the doctrine covers only contracts primarily or predominantly for products. To support its conclusion, the court of appeals stressed that the actual construction work on the warehouse was performed by subcontractors, not by T-3. In the court’s view, the roughly $6 million allocated to construction was used by T-3 to pay the subcontractors it hired as construction manager, not to pay T-3 for any product it was personally building. Characterizing T-3 as a mere “conduit through which the money flowed,” the court held that the contract was actually one for services, not for a product, and reinstated 1325’s negligence claims.
The court of appeals’ ruling raised eyebrows in Wisconsin’s legal and construction communities with its suggestion that parties to certain commercial contracts could choose to seek damages for alleged breaches in tort, rather that through the contractual remedies they bargained for. So-called “construction manager/constructor” or “design-build” contracts similar to the one between 1325 and T-3 are widely used, and the decision caused concern that such agreements could no longer be worth the paper they were printed on.
Unlike the court of appeals, the supreme court held that the contract between 1325 and T-3 was for both products and services and applied the economic loss doctrine to bar 1325’s negligence claims. While its decision was based partly on the language of the contract, the court also considered the agreement in the totality of the circumstances and concluded that the 1325/T-3 dispute was “tailor made for the application of traditional contract law,” not for tort.
According to the court, the contract “clearly discusse[d] both services and products to be furnished.” For one thing, the parties used a standard “construction manager/constructor” form that bound T-3 to provide labor and materials and to assume financial responsibility for the project. Furthermore, the contract defined the “project” T-3 was to oversee as the “total construction” and the “work” T-3 was to perform as “construction and services” (emphasis added). To the court, this language proved that T-3 was not hired only to provide construction management services, but was obligated to deliver the condominium complex regardless of whether its own personnel performed the actual construction work. The fact that T-3 assumed the financial risk of completing the project on budget further showed that is was not the mere cash “conduit” the appellate court thought it was.
Having determined that the 1325/T-3 contract was mixed, the court concluded that it was also primarily for a product. To reach that conclusion, the court applied a “predominant purpose test,” viewing the agreement in the totality of the circumstances, including such factors as the contractual language and the parties’ understanding of the contract and objective in making it. The court found that the “plain language” of the contract described “the project” as the conversion of the warehouse into condominiums. It also noted that, during the bidding process, 1325 awarded the project based on overall contract price. Furthermore, at lease one 1325 employee believed that T-3 was contractually obligated to deliver a fully completed building. As a result, the court held that 1325’s predominant purpose in entering into the contract was to have the complex built, not just to have the work supervised.
The court also held that application of the economic loss doctrine to the 1325/T-3 contract was consistent with principles underlying its use in tort actions between commercial parties. The doctrine maintains a fundamental distinction between contract and tort law, the court explained, and the property damage 1325 suffered consisted only of defects within the subject matter of the contract. Furthermore, the doctrine protects parties’ freedom to allocate financial risk by contract, and the bargained-for nature of the contract, the sophistication of the parties, and the fact that they agreed on warranties, available remedies, and allocation of risk all “weigh[ed] heavily” for application of the doctrine.
Contact for more information: David J. Hanus
Statute of Limitations in Illinois Shortened for Written Indemnity Agreements From 10 Years to Two Years
A recent Illinois Appellate Court decision affects the time period for a surety to bring an indemnity action. (See United General Title Ins. Co. v. AmeriTitle, Inc., 2006 WL 845569 (1st Dist. March 31, 2006)). In its decision, the Court held that the two-year statute of limitations for contribution and indemnity actions arising out of personal injury and property damage claims also applies to actions based upon written indemnity agreements. Arguably, the cause of action begins to run the day a claim is asserted against a bond.
The United General case was brought to our firm’s attention in the course of handling an appeal on behalf of a surety. In our surety client’s case, the indemnitors won on a motion to dismiss at the trial court level by asserting that the four-year statute of limitation arising our of construction contracts governed an indemnity action.
On behalf of our surety client, Hinshaw attorneys have appealed the trial court’s decision, arguing that the 10-year limitation period governing written contracts is the applicable limitation period. In their response to our appeal, the indemnitors argued that notwithstanding the four-year limitation, the two-year limitation period (contribution and indemnity) also barred the surety’s action. In our reply, we have argued that the two-year limitation only relates to tort actions and has no application to contractual indemnity claims.
In support of the indemnitors two-year limitation argument, after the appeal was fully briefed, the indemnitors have cited the recent decision in the United General case as an additional authority. Hinshaw attorneys are responding to the argument, and are taking the extra steps to seek an amicus curie response by the Surety Association of America because of the impact to all sureties with matters in Illinois.
Significance
Until another Illinois Appellate Court decision that differs with United General is issued, a surety with an Illinois matter should either consider entering into a tolling agreement with the indemnitors or bringing a lawsuit before the expiration of two years.
Contact for more information: John E. Sebastian
Indemnity Clauses: Void As Applied
Indemnity clauses in construction contracts are so common that they have become virtually boilerplate. Most drafters of these contracts in Illinois are aware of the fact that indemnity clauses which seek to indemnify a party for its own negligence are void under the Indemnity Act and are against public policy. So most drafters carefully word the contract so that it indicates that the clause only seeks indemnity for the negligence of the other party, and not for its own negligence.
But What Happens When Litigation Ensues?
When the project results in litigation, all of the named defendants immediately send letters to the other defendants asking that the other defendants’ insurance companies provide a defense and indemnity. Even if the indemnity clause specifically states that it does not seek indemnity for the party’s own negligence, the clause is not necessarily enforceable under Illinois law.
The Indemnity Act
The Indemnity Act provides in pertinent part:
§ 1. With respect to contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable. 740 ILCS 35/1 (West 2006).
The public policy reasoning behind this Act is clear. The Illinois legislature did not want parties to be indemnified for their own negligence because allowing so might discourage parties from taking all possible safety precautions. See Jokich v. Union Oil Co. of California, 214 Ill.App.3d 906, 909, 574 N.E.2d 214, 216 (1st Dist. 1991). It is now rare that you would see a contract which would simply state that one party shall indemnify the other. As mentioned above, most contracts today “carve out” a party’s own negligence, while leaving in indemnity for the negligence of others.
Void as Applied
The problem occurs when an entity has a valid indemnity clause on its face, but has direct claims against it in a lawsuit. Before it can seek indemnity under the contract, it must first be found liable on the claims against it. Since the jury will already have made the determination that the entity was negligent, in order to recover under the indemnity clause, it will be seeking indemnity for its own negligence. Since this is precisely what the Indemnity Act sought to forbid, the indemnity clause, although valid on its face, is void as applied.
For example, in Jandrisits v. Village of River Grove, the court found that an indemnity provision was void as applied where the plaintiff made direct claims against the defendant seeking indemnity, 283 Ill.App.3d 152, 669 N.E.2d 1166 (1st Dist. 1996). In Jandrisits, the Village of River Grove was named as a defendant after the plaintiff slipped and fell on a Village sidewalk. The Village filed a third-party action against the contractor who repaired the sidewalk, seeking contribution and indemnity. The plaintiff alleged the Village was negligent in failing to inspect and oversee the repair of the sidewalk. The court held that the Village could not maintain an indemnity action against the contractor because the plaintiff’s theory against the Village was not a derivative theory. The court found that in order for the Village to prevail on its indemnity claim, a jury would first need to find that the Village itself was negligent. The court found that as long as the Village was found negligent, the indemnity clause with the contractor was void as applied.
The Jandrisits Court mentioned a couple scenarios where an indemnity provision would be enforceable. The Jandrisits Court indicated that in the case of vicarious or strict liability, the party seeking indemnification would be held liable even though the jury made no determination that the party was negligent. In cases such as this, where there is derivative liability, courts will enforce an indemnification clause which is otherwise valid on its face.
It is also noteworthy that the Jandrisits Court found that the contractor did not owe a duty to defend the Village. The court explained that the claim of a duty to defend suffered from the same problems as the indemnification claim. As long as direct claims existed against the Village, it was still possible that the Village could be found negligent. The court acknowledged that the duty to defend is broader than the duty to indemnify, but as long as there is some possibility that the Village could be found negligent, the duty to defend clause was also not enforceable.
The Place For Indemnification Clauses and Insurance
Drafters of construction contracts should continue to include an indemnification clause because in some situations the client may still be entitled to indemnity. For example, if your client is found liable under a theory of strict liability or vicarious liability, the indemnity clause will allow your client to seek redress against the wrongdoer.
Another essential lesson from the “Void as Applied” doctrine, is that it is essential for parties entering into a construction contract to include an insurance clause that identifies which party will obtain insurance and that the insurance will name the other parties as additional insureds. Neither the Indemnity Act or the Jandrisits case prohibit contract clauses that require one party to obtain liability insurance for the other. Insurance can fill the gap where indemnity provisions may fail to protect your client.
This newsletter has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.