Waivers Will Bar Second Purchaser Claims for Breach of the Implied Warranty of Habitability
The Illinois Supreme Court has ruled that the implied warranty of habitability may not be extended to a second purchaser of a house when a valid, bargained-for waiver of the warranty was executed between the builder-vendor and the first purchaser. In Fattah v. Bim, 2016 IL 119365 (May 19, 2016), plaintiff purchased the home built by the defendants from the original purchaser under an “as is” contract.
Three years earlier, defendants sold the house pursuant to a sales contract which included a waiver and disclaimer of implied warranty of habitability in exchange for a one-year express warranty. (Id. ¶ 5.) No incidents occurred until a year after the second purchaser owned the home, when a retaining wall built around the patio to retail supporting fill gave way, and a portion of the patio collapsed. (Id. ¶ 7.) After a trial, the court found that the accident was due to latent defects in construction, but denied recovery based on the initial waiver. (Id. ¶ 9.) The appellate court reversed this judgment, stating that the implied warranty of habitability extends to the second purchaser of the home under Redarowicz v. Ohlendorf, 92 Ill. 2d 171 (1982). (Id. ¶ 11.)
Finding that Fattah presented a question left unanswered by Redarowicz, the Illinois Supreme Court went back to the reasons for its holding in that case for the answer. (Id. ¶ 18.) The critical factor in Redarowicz, was that the home was sold by the original purchaser in such a short time that extending the implied warranty of habitability to the second purchaser would not alter the builder-vendor’s reasonable expectations. (Id. ¶¶ 25-26.) Here, the Court found that the plaintiff’s demand for damages would upset the builder-vendor’s reasonable expectations because he was seeking damages which the original purchaser had waived. (Id. ¶¶ 28.) Permitting such suits would also, the Court held, effectively ensure the end of waiver agreements, due to their futility, which have been in use for the 40 years since they were approved in Petersen v. Hubschman Constr. Co., 76 Ill. 2d 31 (1979).
Your company may be subject to class action law suits if your site does not meet prevailing legal standards for securing the purchaser’s assent to mandatory arbitration by clicking “I agree” to the terms and conditions containing this provision. In a recent Seventh Circuit decision, Sgouros v. Transunion Corp., the court sustained a class action against Transunion, finding that its site failed to convey to the user that purchasing his credit score entailed consent to the Service Agreement containing the mandatory arbitration clause.
In Sgouros v. Transunion Corp., 2016 U.S. LEXIS 5648 (7th Cir. Mar. 25, 2016), plaintiff filed a consumer class action when the credit score he purchased from TransUnion’s website was 100 points higher than the score provided to the car dealer from whom he hoped to obtain a loan. The Seventh Circuit affirmed denial of Transunion’s motion to compel arbitration, finding that it had failed to satisfy the following standard for web-based assent: “Translated to the Internet, we might ask whether the web pages presented to the consumer adequately communicate all the terms and conditions of the agreement, and whether the circumstances support the assumption that the purchaser receives reasonable notice of those terms.” Id. at *8.
Here, Transunion claimed that the plaintiff signified his assent to the the Service Agreement which contained the mandatory arbitration clause by clicking on a button that said "I Accept & Continue to Step 3." In Step 2, the user was prompted to set up an account by creating a user name and password and was shown a scroll window containing the Service Agreement. Visible within the window were the words, “This Agreement . . . contains the terms and . . . conditions upon which you . . . may access and use . . .,” but the court held that this language did not put the user on notice that he was agreeing to these terms as a condition of purchase. Id. at **4-5. Step 3 stated that by clicking on the "I Accept & Continue to Step 3" button: “‘you are providing "written instructions" to TransUnion Interactive, Inc. authorizing TransUnion Interactive, Inc. to obtain information from your personal credit profile from Experian, Equifax and/or TransUnion.
You authorize TransUnion Interactive, Inc. to obtain such information solely to confirm your identity and display your credit data to you.’” Id. at 4. The court found that by suggesting that the purchase of the credit report only required the user consent to the use of his information, Transunion had failed to convey to the user that he was also consenting to the Service Agreement. Id. at *13.
Certificates of Insurance Provide No Rights to Additional Insured Coverage
In construction contracts, general contractors must generally name the owners as additional insureds in their insurance policies and subcontractors must likewise name the general contractors as additional insureds in their policies. Industry practice has been for the parties to document compliance with these terms with certificates of insurance (“COI”), rather than by sharing their policies. In a recent Illinois appellate court decision, however, the court held that a subcontract requiring the subcontractor to provide a certificate of insurance naming the general contractor as an additional insured was not sufficient evidence of an undertaking to actually purchase such a policy. Lesson: Always require the right to review the policy making you an additional insured. The certificate of insurance is unenforceable and gives you no rights to insurance.
In this March 16, 2015 decision, West Bend Mut. Ins. Co. v. Athens Constr. Co., 2015 IL App (1st) 140006, the general contractor had contracted with a tenant of a high-rise luxury apartment building for a renovation and build-out. The general contractor had also entered a subcontract with a plumber who was later responsible for an incident that caused damage to the building and to property of owners of other units. The building owner and another tenant sued the general contractor for damages, and the general contractor tendered his defense to the subcontractor’s insurer, thinking the subcontractor had named the general as an additional insured.
The court in West Bend held that a subcontract requiring the subcontractor to purchase and maintain the type of insurance whereby the COI would contain a clause naming the general contractor as an additional insured did not require the plumber to actually purchase such a policy, but only to provide a COI saying this was so. Id. ¶ 28. The court relied on the disclaimer in the COI, which stated that it conferred no rights upon the certificate holder, and did not amend, extend or alter the coverage afforded by the policies described therein. Id. The unambiguous language of the subcontract did not, in the court’s view, require the subcontractor to purchase a CGL policy naming the general contractor as an additional insured, leaving the general contractor without recourse for vicarious liability losses to the policy of the subcontractor, who was at fault for the accident.
Beyond its impact on the 5.25 million residents of Cook County, Illinois, the decision in West Bend has broad implications, given the court’s interpretation of standard American Institute of Architects (“AIA”) form contracts used throughout the country in construction, rehab and development projects. The court’s analysis of AIA contracts began with the general conditions in the contract between the general contractor and the owner, titled, “AIA Document 201-1997: General Conditions of the Contract for Construction.” Id. ¶ 20. Under these general conditions, the court found that the general contractor was required to purchase CGL insurance. Id. The subcontract contained a provision incorporating these same general conditions, taken from “the edition of the AIA Document 201, General Conditions of the Contract for Construction, current as of the date of this Agreement.” Id. ¶ 21. Additionally, the subcontract included a “flow-down” provision, referring to these AIA general conditions, and stating that:
the Contractor shall assume toward the Subcontractor all obligations that the Owner assumes toward the Contractor, the Subcontractor shall assume toward the Contractor all obligations and responsibilities which the Contractor assumes toward the Owner. The Contractor shall have the benefit of all rights, remedies and redress against the Subcontractor which the Owner has against the Contractor, and the Subcontractor shall have the benefit of all rights, remedies and redress against the Contractor which the Contractor has against the Owner, insofar as applicable to this Subcontractor.
Id. ¶ 22. The court agreed with the general contractor that under this provision the plumber had promised the general contractor it would procure CGL insurance, just as the general contractor promised the owner that it would purchase CGL insurance. Id. ¶ 24.
An “additional insured” was defined under the plumber’s CGL policy as “any person or organization whom you are required to add as an additional insured on this policy under a written contract or written agreement.” Id. ¶ 26. Looking to the subcontract, the contractor argued that this definition was satisfied by a provision stating that:
The Subcontractor shall purchase and maintain insurance of the following types of coverage and limits of liability:
Type of insurance Limits of liability ($0.00)
The following clause should be $1,000,000.00
provided on the Subcontractor’s
Certificate of Insurance
Athens Construction Co., Inc.
Additional insured, on a primary
and non-contributory basis
(Emphasis in original). Id. ¶ 26. While former cases have found that a COI saying the contractor was an additional insured were not sufficient if not supported by language in the policy itself, these were cases where the policy contained no language even remotely suggesting coverage should be obtained for the contractor. The closest prior Illinois case cited by the West Bend court in support of its decision was Clarendon America Ins. Co. v. Aargus Security Sys., Inc., 374 Ill. App. 3d 591 (1st Dist. 2007). But in Clarendon, the court held only that where a COI provided that the general contractor was an additional insured, but the subcontract did not even require the subcontractor to purchase insurance, the general contractor was not covered by the subcontractor’s policy as an additional insured for an accident. The COI could not be viewed as evidence of the parties’ intent because the subcontract was not unambiguous, leaving this issue open for future negotiation: "All insurance that may from time to time be required shall be obtained in such manner as the parties hereto agree." Id. at 596.
In West Bend, however, the policy referred to the contract for the definition of “additional insureds,” and the contract said that the type of insurance the subcontractor must purchase was that for which a COI may be issued stating that the general contractor is an additional insured. This is the only description in the subcontract of the type of insurance the subcontractor must purchase besides the policy limit of $1 million. Other than this, the contract referred to the insurance obligation only indirectly by saying the subcontractor must take on the same obligations to the contractor which the contractor took on to the owner, thereby incorporating the general conditions, and their insurance requirement. Thus, the court essentially interpreted the subcontract to mean that the general contractor was asking the subcontractor to purchase the type of insurance whereby it would issue a fraudulent COI describing insurance, falsely, as insurance that named general contractor as an additional insured. This issue was raised by the lower court, but the appellate court never addressed the question.
Owner/Developers: Prevent Your Risk of Double Payment
To prevent the risk of double payment, owners and developers should pay subcontractors and suppliers their progress payment either (a) directly or through the general contractor with a separate check for the amount due for their completed work or deliveries on the Section 5 general contractor’s sworn statement, or (b) in a payment to the general contractor only after receiving a sworn partial lien waiver from the subcontractor/supplier stating that they have already received payment from the general contractor for the completed work or deliveries.
In 2009, the Illinois Supreme Court issued a decision, Weather-Tite, Inc. v. Univ. of St. Francis, 233 Ill. 2d 385 (Ill. 2009), holding that the owner was wrong to rely on the general contractor’s sworn statement that it would pay the subcontractors the amount they were owed from the payment it received from the owner. When the general contractor’s bank exercised its right of set-off, leaving insufficient funds in the contractor’s account to pay the subcontractor, the subcontractor filed a mechanics’ lien case against the owner under the Illinois Mechanics Lien Act, 770 ILCS 60/1, et seq. (the “Lien Act”). The Illinois Supreme Court reversed summary judgment that had been entered for the owner, and held that the owner would have to pay the subcontractor a second time for its work.
To avoid the risk of paying twice for subcontractor/supplier bills, the Court in Weather-Tite described a proper payment system that owners would have to follow under the Lien Act. After the owner enters a contract with the GC, “as the work is completed, the general contractor submits a section 5 sworn affidavit that must list all subcontractors and the amount due, to become due, or advanced.” 233 Ill. 2d at 393. For each amount listed in this affidavit/statement that is due or to become due to a subcontractor, the owner has a duty to retain sufficient funds to pay the subcontractor, and upon notice, to pay the subcontractor. Id. If the owner wants to pay the GC instead, the GC must pay the SC first, and give the owner a lien waiver: “Additionally, a lien waiver can be provided to the contractor when the subcontractor is paid, and the owner can require a lien waiver by every subcontractor when paying the contractor.”
The owner cannot pay the GC based on a conditional waiver, but must instead withhold funds in this case (“Funds subject to a lien waiver are required to be held by the owner in trust for the subcontractor. See 770 ILCS 60/21.02 (West 2004)”).
Post-Judgment Attorney’s Fees Awarded for Separate Veil Piercing Suit
Judgment creditor was entitled to recover attorney’s fees incurred in pursuing judgment creditor’s sole shareholder in a separate action to pierce the corporate veil based on the fee recovery provision of the contract giving rise to the judgment.
In what it described as a case of first impression, Steiner Elec. Co. v. Maniscalco, 2016 IL App (1st) 132023, ¶¶ 40, 54-55, an Illinois appellate court reversed the circuit court’s ruling refusing to award the judgment debtor attorney’s fees expended in its suit to pierce the corporate veil where the attorney’s fees provision was contractual in the underlying, ancillary suit.
Plaintiff had obtained a default judgment against the defendant for the cost of products sold on credit, plus finance charges, attorneys fees, expenses and costs. Id. ¶ 2. Before the judgment was entered, however, the defendant had been dissolved. Id. ¶ 1. After pursuing postjudgment proceedings in which it collected extensive discovery of the dissolved defendant’s financial records, plaintiff filed the veil piercing suit against the defendant’s shareholder and an affiliated company. Id. ¶¶ 43-44. The lower court denied plaintiff’s request for post-judgment attorney’s fees on the grounds that there was no contractual agreement or statutory basis for such fees. Id. ¶ 45.
The appellate court disagreed, finding sufficient for this purpose the reference in the parties’ underlying purchase agreement to “‘all reasonable costs of collection including attorney fees and expenses.’” Id. ¶ 40. And while there was no Illinois state case law on point, the court relied on the reasoning in the Seventh Circuit’s decision granting post-judgment attorney’s fees for a veil piercing action in Centerpoint Energy Services, Inc. v. Halim, 743 F.3d 503 (7th Cir. 2014). Id. ¶¶ 49-50.
Finally, the court noted that the merger doctrine does not bar post-judgment attorney’s fees, since the claim for fees is ancillary to the underlying cause of action. Id. ¶ 54 (citing Poilevey v. Spivack, 368 Ill. App. 3d 412, 415 (1st Dist. 2006)).
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