author: PRESIDING JUSTICE JOHNSON

text:
    ILLINOIS HOUSING DEVELOPMENT AUTHORITY et al., Plaintiffs-Appellants, v. M-Z CONSTRUCTION CORP. et al., Defendants.—(Seymour S. Goldstein, Ltd., et al., Defendants-Appellees.)
    First District (4th Division)
    No. 81—1974
    Opinion filed September 2, 1982.
    Rehearing denied November 18, 1982.

      Alan S. Ganz, Stephen D. Sharp, and Richard L. Ingram, all of Rooks, Pitts, Fullagar & Poust, of Chicago, for appellant Illinois Housing Development Authority.
    Carol A. Kipperman, of Wilson & Mcllvaine, of Chicago, for appellants Schaumburg Green Associates and Chicago Title and Trust Company.

      Stephen J. Feinberg, of Asher, Goodstein, Pavalon, Gittler, Greenfield and Segall, of Chicago, for appellees.
   PRESIDING JUSTICE JOHNSON

delivered the opinion of the court:

Plaintiffs, Illinois Housing Development Authority (IHDA or Authority), Schaumburg Green Associates, and Chicago Title and Trust Company, appeal an order of the trial court dismissing counts I, II and III of their fifth amended complaint against defendants, Seymour S. Goldstein, Ltd. (Architect), and Seymour S. Goldstein, an individual (Goldstein). The issues raised for review are (1) whether the 6-month period for submission of disputes under the construction contract between the owner and the general contractor to IHDA for arbitration is a period of limitations for a lawsuit by the owner and IHDA against Architect and Goldstein; (2) whether IHDA is a third-party beneficiary of contracts executed by the owner and Architect; (3) whether IHDA is subrogated to the owner’s rights in its contract with Architect; (4) whether Architect and Goldstein owed IHDA a duty of care in the design and construction supervision of the development; and (5) whether Illinois law recognizes a cause of action in negligence to recover economic losses for professional malpractice.

We affirm with respect to IHDA, and we reverse and remand with respect to Schaumburg Green Associates and Chicago Title and Trust Company.

The Illinois Housing Development Act (Ill. Rev. Stat. 1979, ch. 67x/2, par. 301 et seq.) declares that “there exists within Illinois a serious shortage, of decent, safe, and.sanitary housing available at low and moderate rentals to persons and families of low and moderate income.” (Ill. Rev. Stat. 1979, ch. 67x/2, par. 303.) The Illinois Housing Development Authority was created as “a body politic and corporate with power to issue notes and bonds in order to make loans for the construction and rehabilitation of housing and community facilities, acquire and develop land for large-scale planned developments and new communities and, as a means of encouraging home ownership, make loans to and purchase residential mortgages from private lending institutions.” Ill. Rev. Stat. 1979, ch. 67x/2, par. 303.

On March 16, 1972, IHDA agreed to loan to Chicago Title and Trust Company, as trustee, $6,895,000 for the construction of eight buildings containing 367 apartments to be located in Schaumburg, Illinois. Schaumburg Green Associates, an Illinois limited partnership, was the sole beneficiary under the trust. The loan was increased to $7,300,000 on April 11, 1975, and to $7,977,000 on October 18, 1978. Several documents were executed in connection with the loan, among' them the construction contract, the owners-architect agreement for preconstruction services, and the owners-architect agreement for construction services. These three documents were executed on April 14, 1972.

The parties to the construction contract were- the Chicago Title and Trust Company, the owner, and M-Z Construction Corp., the contractor. The contract itself defined “parties” as the owner and contractor, and “Authority” as the Hlinois Housing Development Authority.

The arbitration clause provided as follows:

“5. Arbitration:
(a) Between Parties
Parties agree that all disputes between them concerning matters arising out of the Contract and any other matters directly or indirectly concerning the Development and Work shall be arbitrated and decided by the Authority pursuant to the Uniform Arbitration Act (Chapter 10, Section 101 et seq., Hlinois Revised Statutes). Parties, either jointly or individuaUy, shall promptly notify Authority in writing of a dispute setting forth the alleged facts and issues. Parties shall cooperate with Authority to aid its decision making. A reasonable time after receipt of the foregoing writing, Authority shall conduct a hearing and thereafter render a binding written decision. No dispute shall be considered or decided if it is not submitted by a Party within six months after the Completion Date listed in Contract Document 1 or any authorized extension thereof.
(b) Concerning Authority’s Rights and Obligations
Parties and Authority agree that any disputes between them concerning Authority’s rights including, but not limited to, those under Section 27 hereof and obligations arising out of the Contract shall be decided and" arbitrated pursuant to the Uniform Arbitration Act (Chapter 10, Section 101 et seq. Illinois Revised Statutes) in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association, effective March 8, 1966, which are by reference incorporated herein. The arbitration proceedings shall take place in Chicago, Illinois.”

The remedies clause of the construction contract provided as follows:

“23. Remedies:
Authority’s and Owner’s remedies are cumulative and the exercise of one shall not be deemed an election of remedies nor foreclose the exercise of Authority’s or Owner’s other remedies.”

The parties to the owners-architect agreement for preconstruction services were the Chicago Title and Trust Company, as owner, and Seymour S. Goldstein, Ltd., architect. The agreement provided in pertinent part as follows:

“4. Work
(a) Professional Services
The Architect will supply all professional services, including but not limited to architectural, engineering, consulting and, field engineering, necessary for the architectural planning and designing of Development, including but not limited to architectural planning, site planning, structural engineering, mechanical and electrical engineering, civil engineering, landscape architecture, and other services required for the complete performance of this Agreement (hereinafter called Work’), provided however, that no portion of the Work may be delegated to any person or entity not acceptable to Owner and Authority.
(b) Responsibility
Architect shall be responsible for the Work and payment of any persons or entities performing services which are incorporated in the work hereunder.
(c) Standard of Performance
The Work performed hereunder by Architect shall be of the highest professional standards.
***
(e) Specific Work Requirements
Without limiting the scope of the Work set forth in (a) above, Architect shall specifically:
* * *
(v) order a subsurface soil investigation required for proper planning of Development, including the design of foundations, surface improvements, and underground piping and distribution systems.
* * *
(vii) make such changes in the documents due to deficiencies for which he is responsible.
(viii) furnish the following:
outline specifications
floor plans (full scale and suitable for advertising reproductions)
architectural planning
elevations
sections
complete architectural working drawings complete specifications
land and site planning including layouts of parking areas, planting areas, sidewalks, grades, earth sculpture, building locations, building grades, exterior lighting, storm water retention, curbs, carriage walks, refuse storage areas, swimming pool area, utilities (water, gas, electric, sewer) etc.
civil engineering and drawings for the Development including water distribution and storm and sanitary sewer collection
structural engineering and drawings
mechanical and electrical engineering and drawings.”

The parties to the owners-architect agreement for construction services were also the Chicago Title and Trust Company, as owner, and Seymour S. Goldstein, Ltd., as architect. The agreement provided in pertinent part as follows:

“WHEREAS, Owner and Seymour S. Goldstein, Ltd. entered into an agreement dated April 14, 1972 for preconstruction service ***; and
WHEREAS, Owner and M-Z Construction Corp. (hereinafter called ‘Contractor’) entered into an agreement dated April 14, 1972 for the construction of Development (hereinafter called ‘Construction Contract’) ***.
* * *
NOW, THEREFORE, the parties agree as follows:
* * *
6. Work
(a) Professional Services
The Architect shall supply all professional services, including but not limited to architectural, engineering, consulting, field engineering, necessary for the supervision of the construction and completion of Development in accordance with the Work, as defined in the Preconstruction Architectural Agreement and the Construction Contract (but Architect is not a guarantor of Contractor’s Obligations thereunder) and other services required for the complete performance of this Agreement (herein called ‘Work’); provided, however, that no portion of the Work may be delegated to any person or entity not acceptable to Owner and Authority.
(b) Responsibility
Architect shall be responsible for the Work and payment of any persons or entities performing services which are incorporated in the Work.
(c) Standard
The Work performed hereunder by Architect shall be of the highest professional standards.
(e) Specific Work Requirements
Without limiting the scope of the Work set forth in (a) above, Architect shall specifically:
(i) Review all drawings and specifications, including shop drawings for completeness and adequacy and promptly give written notice to Owner and Authority of any inadequacies and inconsistencies, make revisions or notations in the drawings and specifications made necessary by conditions in the field or corroborate Contractor’s field dimensions as necessary.
(iv) Make periodic visits, as many times as Owner or Authority shall request, to the construction site of Development and promptly report in writing to Owner and Authority on progress, problems and deficiencies observed in the Work, but such visits shall be not less than weekly for the duration of the active construction period. In addition, Architect shall be present at the Construction site when the following are performed: Setting lines and basic levels; completion of excavation; erecting forms and reinforcing, pouring of concrete and setting openings, sleeves, inserts; work of mechanical trades; before work of mechanical trades is covered up with walls and partitions; installation of utilities service entries, testing and use; installation of machinery and equipment, testing and use.”

On September 26, 1979, the Illinois Housing Development Authority and Schaumburg Green Associates (Partnership) filed a complaint against the contractor M-Z Construction Corp., Seymour L. Goldstein, individually and as architect, M. Myers Associates, Inc., and Marvin B. Myers. Amended complaints were subsequently filed. The fifth amended complaint is the subject of this appeal. Plaintiffs in that complaint are IHDA, Partnership, and Chicago Title and Trust Company (Trustee). Defendants are the Contractor, Architect, Goldstein, M. Myers Associates, Marvin M. Myers, and numerous subcontractors.

The fifth amended complaint alleged that IHDA has disbursed $7,977,000 for construction of the development, that the completion date was January 28, 1975, and that IHDA has performed all terms and conditions necessary under agreements executed in connection with the construction loan.

Count I of the complaint was brought against Architect under the owner-architect agreement for preconstruction services. IHDA alleged that it was a direct beneficiary of this agreement. It charged that Architect had breached the agreement in the following respects: failure to design roofs, landscape, plumbing and sewer lines, wooden balconies and exterior lighting in accordance -with the highest professional standards; failure to order a subsurface soil investigation; failure to select and design the mechanical equipment in accordance with the highest professional standards; failure to supply the proper elevations, land and site planning drawings, civil engineering drawings, mechanical and electrical engineering drawings; and failure to design the window ledges so that they slope away from the buildings.

Plaintiffs alleged that as a result of these breaches, the roofs completely deteriorated and had to be replaced; the development experienced continual flooding and water leakage problems; the wooden balconies rotted and had to be replaced; and the mechanical equipment experienced frequent breakdowns and required frequent replacement.

Plaintiffs further claimed that Trustee and Partnership expended funds for repair, lost revenue, and incurred excess costs; and the development experienced general deterioration, causing a substantial impairment of IHDA's security interest. Plaintiffs asked damages of $1,900,000 plus costs.

Count II was brought against Architect under the owners-architect agreement for construction supervision. Plaintiffs alleged the following breaches by Architect: failure to review plans and specifications to determine their adequacy; failure to properly observe the work and inform IHDA of any deficiencies; failure to require the proper tests; and failure to check the surveyed lines and grades of building foundations, grades, and underground utilities.

Count III was brought against Goldstein under a negligence theory. Goldstein personally prepared plans and specifications and supervised the construction of the development. Plaintiffs claimed Goldstein performed the negligent acts alleged in counts I and II. In counts II and III, plaintiffs reiterated the injuries alleged in count I and asked the same amount of damages.

A hearing on the motion to dismiss counts I, II and III of the fifth amended complaint began on April 6, 1981. After argument, the trial court stated:

“The Court finds specifically that the action brought is subject to the arbitration requirements, was not timely brought, that there is not a third-party beneficiary status to be considered here, that the 98-pereent funding, accepting that figure, is not a reason to allow these counts to stand, and that the Resnik case is not controlling because of the difference between the State being a user in the Resnik case and not being one here.”

The court also found that Goldstein had no tort duty to the IHDA and that a suit for economic loss was barred under Album Graphics, Inc. v. Beatrice Foods Co. (1980), 87 Ill. App. 3d 338, 408 N.E.2d 1041. The order dismissing counts I, II and III was entered on May 27, 1981. Plaintiffs appeal.

The first issue we shall consider is whether IHDA has standing to sue Architect and Goldstein. IHDA advances several theories for bringing suit against these defendants: (1) that it is a third-party beneficiary of the two contracts executed between the owner and Architect; (2) that it is subrogated to the owner’s rights in those contracts; (3) that the Architect and Goldstein owed it a duty of care in the design and construction supervision of the development; and (4) that Illinois law recognizes a cause of action in negligence to recover economic losses for professional malpractice.

Third-party beneficiary theory

In counts I and II of the fifth amended complaint, IHDA alleged that it is a direct beneficiary of the owners-architect agreement for preconstruction services and the owners-architect agreement for construction supervision. The parties to these agreements are Chicago Title and Trust Company, as owner, and Architect. In support of its argument that it is a third-party beneficiary of these contracts, IHDA explained its position as mortgagee.

IHDA as mortgagee

IHDA makes “assisted mortgages” to fulfill its statutory purpose of making “decent, safe, and sanitary housing available at low and moderate rentals to persons and families of low and moderate income.” (Ill. Rev. Stat. 1979, ch. 67V2, par. 303.) It issues revenue bonds, the proceeds of which are used to finance mortgages of its developments. IHDA receives no tax funds, and its bonds are not backed by the credit of the State of Illinois. Bonds are repaid from income of the development and, in the absence of such income, from assets of IHDA. A regulatory agreement between IHDA and the owner restricts the use of the development’s income and the owner’s economic return and governs the types of eligible tenants. To make sure that developments are not converted to nonsubsidized housing, IHDA, as mortgagee, prevents prepayment of the mortgage for 20 years.

IHDA argues that it is not the normal bank or savings and loan mortgagee for the following reasons: (1) IHDA provides mortgage funds solely in furtherance of its statutory purpose. (2) Its loans are thin-equity loans. In the instant case, the owner’s cash investment at the initial loan closing was $129,588, whereas the loan was $6,895,000. (3) Its loans are long-term and cannot be prepaid in order to assure that IHDA’s social purpose is carried out. (4) The mortgage and mortgage note are signed by a trustee, and for tax reasons must also be nonrecourse with respect to the beneficial owners. (5) There is often an identity of economic interest between the beneficial owner of the development and the general contractor or architect. IHDA claims that in the instant case there was an identity of interest between the beneficial owner and the general contractor which was severed after completion of construction when there was a substitution of Schaumburg Green Associates.

IHDA contends that these factors make a well constructed development essential. Improper construction not only frustrates its statutory purpose of providing decent housing but also may lessen income received from the development to pay off revenue bonds, thus threatening IHDA’s ultimate security in the event of a future financial default. IHDA argues that it has injected itself into the construction process by making itself a third-party beneficiary of contracts with the general contractor and the architect.

IHDA cites Altevogt v. Brinkoetter (1981), 85 Ill. 2d 44, 421 N.E.2d 182, and People ex rel. Resnik v. Curtis & Davis, Architects & Planners, Inc. (1980), 78 Ill. 2d 381, 400 N.E.2d 918, as authority for the proposition that it is a third-party beneficiary of contracts with Architect. In Altevogt, our supreme court stated that “a third party is a direct rather than an incidental beneficiary only if the contracting parties have manifested in their contract an intention to confer a benefit upon the third party.” (85 Ill. 2d 44, 54.) “[I]f the purchaser predicates his suit upon his status as a third-party beneficiary of the contract, he must allege facts which show an intent on the part of the developer to confer the benefit, which normally would be expressed in the agreement between the promisor and promisee.” 85 Ill. 2d 44. 56.

Resnik

In People ex rel. Resnik v. Curtis & Davis, Architects & Planners, Inc. (1980), 78 Ill. 2d 381, 400 N.E.2d 918, the State of Illinois brought an action for breach of contract against architects and contractors. In 1966, the Illinois Building Authority (IBA) and joint venturers Curtis & Davis Partnership and Samuel E. Sanner & Associates entered into a contract for services related to the construction of the Vienna Correctional Center. The circuit court dismissed the amended complaint, holding that the State was not a proper party. The appellate court reversed, holding that the State was a third-party beneficiary. On appeal to the supreme court, an issue was whether the State was a proper party. Our supreme court held that the State was a third-party beneficiary of the contract properly bringing suit in that capacity. (78 Ill. 2d 381, 384.) The court examined provisions" of the contract and found that the parties intended the State to be more than an incidental beneficiary or a mere tenant, stating:

“Section 1(A)(1) provides that ‘Associate’ (C & D Partnership) must consult with the ‘User’ as well as ‘Owner’ (IBA) ‘to ascertain the requirements of Project.’ In section 1(A)(3), the ‘Associate’ must ‘revise the drawings, specifications and estimate in manner satisfactory to Owner and User.’ Section IV(B) states that ‘Associate warrants and represents that it is free to enter into and fully perform this agreement, and that it has the right to grant the rights herein granted to Owner and User.’ In section IV(D)(1), ‘Associate hereby indemnifies and holds harmless Owner, User ***.’ Finally, in addition to the signatures of the representatives of IBA and the joint venturers (Samuel E. Sanner & Associates and ‘Curtis & Davis’), a representative of ‘User/Supv. A & E’ (supervising architect) has affixed his signature. (These are only some of the examples of the contract’s reference to User, i.e., the State.)
The contract demonstrates that the parties — certainly the promisee, IBA [citations] — intended the State or ‘User’ to be more than an incidental beneficiary or a mere tenant [citation]. Moreover, the surrounding circumstances [citations] show this intention. Construction of the prison would directly benefit the State, the ‘User’ — not the parties; the State possessed the expertise, not IBA, necessary for the construction characteristics of a prison. The IBA and the State agreed to a construction lease for the Vienna facility in 1965. And the relationship between the State and IBA was an ongoing one which was dictated, in 1966, by the limitation placed on the State’s budget deficit by the 1870 Constitution. IBA was the mechanism formed by the General Assembly to circumvent this limitation. Yet, we repeat that it is the contract which is controlling and is persuasive here; and on that basis we limit our holding: the State is a proper party plaintiff because it is a direct beneficiary clearly identified and intended in the contract before us.” 78 Ill. 2d 381, 386-87.

The architectural agreements

IHDA compares provisions of the preconstruction services contract in the instant case with similar provisions of the contract cited by the supreme court in Resnik. According to IHDA, its rights are nearly as great as the owner’s rights. IHDA shares ownership of the work. Decisions such as payment, delegation of work, and assignment and modification of the contract can only be made with IHDA and the owner’s joint approval. Decisions such as Architect’s attendance at conferences, what drawings should be prepared and what changes should be made in plans and specifications can be made irrespective of the owner’s wishes. Finally, professional liability insurance which the Architect must obtain need only insure IHDA.

IHDA also compares the construction supervision contract with the Resnik contract. According to IHDA, its rights were at least as great as those of the owner. IHDA had a greater interest in ownership of the work — it had at least equal ownership and under some circumstances owned the work exclusive of both contracting parties. It could terminate the contract regardless of the owner’s wishes, but the owner could terminate only with IHDA approval. IHDA’s greater interest was also shown through Architect’s duties. Architect owed to IHDA and the owner such duties as notice of illegality or inadequacy of design, submission of weekly reports, recommendations of changes and maintenance of professional liability insurance. The duty of post-construction inspection was owed only to IHDA. Duties such as making visits, attending conferences, and whether to do such things as did not substantially alter the contract, could be made by IHDA independently of the owner. Finally, modification and assignment of the agreement required IHDA and the owner’s joint approval.

IHDA concludes that these provisions in both contracts show an intent to confer a direct benefit upon it, and that therefore, it is a third-party beneficiary of the architectural agreements. We disagree.

Sjostrom

This contention was rejected by the appellate court in Illinois Housing Development Authority v. Sjostrom & Sons, Inc. (1982), 105 Ill. App. 3d 247, 433 N.E.2d 1350. In Sjostrom, IHDA appealed the dismissal of its 13-count complaint against various defendants involved in a construction project for which it was mortgagee'. The court stated:

“Although many provisions in the Resnik contract and the contracts at bar are similar, there is a significant difference in the role of the State in the Resnik contract and the role of the IHDA in the instant contracts. Under the Resnik contract, the party asserting third-party beneficiary status was to be the ultimate user of the structure. Here no such status exists. The IHDA is no more than a regulatory authority and a mortgagee.
A reading of the contracts in question indicates that as a mortgagee the IHDA was granted certain rights to supervise and to control specific aspects of the planning and construction of the development. The contract provisions which gave the IHDA these rights were apparently designed to insure that the development would be well built at the lowest possible cost, and that the opportunity for fraudulent business dealings and for the exercise of poor business judgment would be kept to a minimum. However, most, if not all, of these rights granted to the IHDA were to be exercised before and/or during the performance of the contract. Moreover, these rights are unrelated to the provisions with the IHDA presently asserts as breached.
The IHDA, nonetheless, concludes that because of its unique statutory role, the thin capitalization of the project and these other rights granted under the contract, they should be deemed a direct, third-party beneficiary to all of the provisions. However, under Carson Pirie Scott & Co. v. Parrett (1931), 346 Ill., 252, 258, the liability affirmatively arising from the contract language cannot be extended or enlarged on the sole ground that the situation and the circumstances demand further or other liability.
Here, unlike Resnik, the development is not being constructed to directly benefit the IHDA. The beneficial owner, Valley View, is the user; the IHDA is merely a mortgagee. In its entirety the contract directly benefits only the parties, and the contract provisions which the IHDA seeks to enforce only incidently [sic] and collaterally benefit the IHDA, as a mortgagee.” 105 Ill. App. 3d 247, 258-59.

In accordance with Sjostrom, we hold that the trial court did not err in holding that IHDA was not a third-party beneficiary of the architectural agreements.

Subrogation theory

IHDA next contends that it is subrogated to the owner’s rights under the architectural contracts, and cites National Cash Register Co. v. Unarco Industries, Inc. (7th Cir. 1974), 490 F.2d 285, as authority. In that case, a building owner sued a subcontractor for breach of the subcontract to provide materials for a building. The court of appeals held that the building owner was a subrogee of the contractor’s cause of action for breach of contract and had standing to sue. (490 F.2d 285, 287.) The doctrine of subrogation is designed to place the ultimate responsibility for a loss upon the one on whom in good conscience it ought to fall, and to reimburse the innocent party who is compelled to pay. (490 F.2d 285, 286.) Under this doctrine, a person who pursuant to a legal liability has paid for a loss or injury resulting from the negligence or wrongful act of another, will be subrogated to the rights of the injured person against such wrongdoer. (490 F.2d 285, 286.) In its fifth amended complaint, IHDA does not allege that under a legal obligation it has paid for the loss or injury incurred by the owner as a result of defendant’s negligence or wrongful acts, nor does IHDA allege that it has paid the claim of the owner. (Illinois Housing Development Authority v. Sjostrom & Sons, Inc. (1982), 105 Ill. App. 3d 247, 259, 433 N.E.2d 1350, 1359.) Therefore, we hold that IHDA is not a subrogee of the owner under the architectural agreement.

Negligence theory

IHDA argues that Architect and Goldstein owed it a duty of care in the design and construction supervision of the development. It asserts that under Rozny v. Marnul (1969), 43 Ill. 2d 54, 250 N.E.2d 656, and Normoyle-Berg & Associates v. Village of Deer Creek (1976), 39 Ill. App. 3d 744, 350 N.E.2d 559, the negligent performance of a contract can give rise to a tort action in favor of someone who could not sue for breach of contract. In Rozny, purchasers of a house were allowed to recover damages from a surveyor who had inaccurately surveyed the property. Our supreme court stated that the lack of a direct contractural relationship between the parties is not a defense in a tort action in Illinois. Tort liability is measured by the scope of the duty owed rather than artificial concepts of privity. 43 Ill. 2d 54, 62.

In Normoyle-Berg & Associates v. Village of Deer Creek (1976), 39 Ill. App. 3d 744, 350 N.E.2d 559, plaintiff alleged negligent supervision of a sewer project by defendant engineers. Plaintiff contended that privity of contract was not required in order to impose a duty upon defendant engineers. The court agreed. It concluded that a supervising engineer owed a duty to a general contractor to avoid negligently causing extra expenses for the contractor in the completion of a construction project even in the absence of a direct contractual relationship. 39 Ill. App. 3d 744, 746.

IHDA’s negligence theory was extensively discussed and rejected in Illinois Housing Development Authority v. Sjostrom & Sons, Inc. (1982), 105 Ill. App. 3d 247, 433 N.E.2d 1350. The Sjostrom court stated that allowing direct action would give every holder of a security interest a right to bring a suit against one who negligently injures the secured property and would unduly multiply and complicate litigation. (105 Ill. App. 3d 247, 262.) Therefore, in accordance with Sjostrom, we hold that defendants owed IHDA no duty of care in the design and construction supervision of the development.

Recovery of economic losses for professional malpractice theory

IHDA!s final argument is that Illinois courts have allowed recovery for economic losses in professional malpractice cases and, thus, Architect is liable for economic damages caused by its professional negligence. It contends that the trial court erred in holding that the Album Graphics case barred its economic loss arguments.

In Album Graphics, Inc. v. Beatrice Foods Co. (1980), 87 Ill. App. 3d 338, 408 N.E.2d 1041, plaintiff, Album Graphics, ordered glue for use in the assembly of newly designed cosmetic packages from defendant, Beatrice Foods Co. After plaintiff sold a number of the new cosmetic packages to its customer, they fell apart and plaintiff had to recall and remake the packages with a different glue. Plaintiff sought damages on four counts: counts I and II were based on contract; count III was based on negligence; and count IV on fraud. With regard to count III, the court defined the issue as whether a plaintiff can recover purely economic losses for the failure of a defendant to carefully perform duties imposed upon that defendant by a contract entered into between plaintiff and defendant. (87 Ill. App. 3d 338, 349.) The court stated:

“Plaintiff should have his remedy for breach of contract, but he should not be allowed to recover under tort law that which he may or may not be entitled to recover under the.contract or under contract law. Hence, we necessarily hold that plaintiff in this case has failed to state a cause of action in negligence to recover purely economic losses.” 87 Ill. App. 3d 338, 350.

Album Graphics, Inc. is inapposite in the instant case because there was no contractural relationship between IHDA and we have held above that IHDA may not sue in contract as a third-party beneficiary or subrogee. Therefore, the trial court was incorrect in holding that Album Graphics, Inc. barred IHDA’s arguments of economic loss. Nevertheless, IHDA is precluded from suing defendants on a negligence theory because, as we have also stated above, defendants owed no duty of care to IHDA.

Therefore, we affirm that part of the trial court’s order dismissing IHDA as a party.

Owners’ cause of action

The final issue raised by this appeal is whether the parties to the architectural agreements are bound by the arbitration provision of the construction contract. The trial court held that the lawsuit by owners and IHDA was not timely brought against Architect and Goldstein because of that provision. Defendants argue that since the construction contract and the architectural agreements were signed on the same day they are to be construed together. According to defendants, the clear intent of the parties was to provide for arbitration to resolve any disputes concerning the agreements. We disagree.

In the interpretation of contracts, the courts cannot make a new contract by supplying provisions nor give plain and unambiguous language a distorted construction. (Whaley v. American National Insurance Co. (1975), 30 Ill. App. 3d 32, 34, 331 N.E.2d 571, 572.) The construction contract provided that “[n]o dispute shall be considered or decided if it is not submitted by a Party within six months after the Completion Date ***.” “Party” is defined in that contract as owner, Chicago Title and Trust Company, and contractor, M-Z Construction Corp. There is no arbitration provision in either of the architectural agreements signed by the parties, Chicago Title and Trust Company and Architect. A “disputes” provision indicates that “[a]ny disputes concerning this Agreement shall be decided by Authority.”

The owners-architect agreement for construction supervision provides as follows:

“WHEREAS, Owner and M-Z Construction Corp. *** entered into an agreement dated April 14, 1972 for the construction of Development ***, a copy of which has been furnished Architect and which is incorporated herein by reference.
* * *
NOW, THEREFORE, the parties agree ***.”

In our opinion, this provision is a recital, an explanation of the circumstances surrounding the execution of the contract. Preliminary recitáis of an agreement do not become binding obligations unless so referred to in the operative portion of the instrument as to show a design they should form a part of it. (Wall v. Chicago Park District (1941), 378 Ill. 81, 92, 37 N.E.2d 752, 757-58.) We find no evidence in the architectural agreements of an intent to incorporate into them the arbitration provision of the construction contract.

Finally, we note that in a case similar to the instant case the court, while denying IHDA’s standing, acknowledged owner’s standing to sue. It remarked that the owner had sued most defendants named by IHDA, and, if successful, would have sufficient funds to make needed repairs. (Illinois Housing Development Authority v. Sjostrom & Sons, Inc. (1982), 105 Ill. App. 3d 247, 260, 433 N.E.2d 1350, 1360.) Therefore, we hold that owners may sue Architect and Goldstein, and their suit is not barred by the 6-month limitation period in the arbitration provision of the construction contract.

For the foregoing reasons, we reverse and remand for further proceedings that part of the trial court’s order dismissing for untimeliness owner’s suit against Architect and Goldstein.

Affirmed in part, reversed and remanded in part for further proceedings.

JIGANTI and ROMITI, JJ., concur.


source: Caselaw Access Project

author: JUSTICE WILSON

license: Public Domain

text:
    EXCHANGE NATIONAL BANK OF CHICAGO, Plaintiff-Appellant, v. MELVIN DeGRAFF et al., Defendants-Appellees.
    First District (5th Division)
    No. 81—0285
    Opinion filed September 29, 1982.
    Rehearing denied November 17, 1982.

      Carmel, Baker & Marcus, Ltd., of Chicago (James E. Carmel and Randall A. Spencer, of counsel), for appellant.
    Howard M. Hoffman, John P. C. Duncan, and Norman Hanfling, all of Chicago (Holleb & Goff, Ltd. and Swanson, Ross, Hanfling & Block, of counsel), for appellees.
   JUSTICE WILSON

delivered the opinion of the court:

Plaintiff, Exchange National Bank of Chicago (Bank), appeals from a judgment entered against it upon a jury’s verdict that found defendants not personally liable for certain loan guarantees. The Bank contends that: (1) the trial court erroneously admitted parol evidence regarding conversations between the parties prior to defendants’ execution of the guarantees; (2). the trial court erroneously permitted cross-examination of a Bank officer regarding his alleged conflict of interest in the corporate debtor; (3) the trial court erred in giving certain jury instructions over plaintiff’s objections; (4) the trial court erred in refusing to direct a verdict against defendants; and (5) the trial court erroneously disqualified a witness without conducting a hearing. Defendants cross-appeal for certain expenses and attorney fees. We reverse the judgment and remand the cause for a new trial because we find that several jury instructions were improperly given.

The pending litigation concerns the liability of defendants Melvin DeGraff, Burton Kaplan, and Anthony Corso, as guarantors of the Bank’s loans to Tulane Industries. Defendants were shareholders of Tulane, which was dissolved in 1974.

According to the parties’ stipulations, Tulane Industries, Inc., was organized on or about March 28, 1972. Defendants signed certain guarantee forms furnished by the Bank, which initially extended credit to Tulane on November 1, 1972, in the amount of $60,000. Defendants identified their signatures on the printed forms, which they said were exact copies “in their present condition,” but denied that the copies of the guarantees were in the same condition as when they were signed. The stipulation further stated that the initial $60,000 loan had been repaid, as had eight others in varying amounts over a period of time from January 1973 to September 1973. Four loans to Tulane remained outstanding at the time the stipulation was adopted, totalling over $137,000 in principal and $79,500 in interest, which was accruing at the rate of $39.54 per day. In December 1974, the Secretary of State dissolved Tulane.

According to testimony adduced at trial, Tulane Industries in 1971 was a dormant company that Simon Bernstein had organized. He met Richard Curtis, a businessman who had developed and sold several hundred laundromat facilities in several States. The two men agreed to activate Tulane as a company that would develop and sell laundromat facilities at various locations. Tulane would sell equipment to the laundromats, but once they were in operation, separate partnerships would be formed to buy the facilities and Tulane would not own or operate them. In addition to Bernstein and Curtis, the other shareholders in Tulane were Burton Sapoznick and Samuel Beglin, not parties to this appeal, and defendants DeGraff, Kaplan, and Corso.

At its inception, the assets of Tulane included an airplane, approximately $100,000 in cash, and some laundry equipment. To obtain further operating capital, DeGraff arranged a meeting between Curtis, Tulane’s president, and Henry Hindin, one of the Bank’s vice presidents. DeGraff, a certified public accountant, knew Hindin as a client of DeGraff’s accounting firm. Hindin’s duties included bringing new business to the Bank. Hindin introduced Curtis to Bruce Hepner, a loan officer at the Bank, who handled the Tulane account from 1972 until he was notified that the corporation would be unable to make further payments.

Hepner testified that after a brief meeting with Curtis, he met with DeGraff, Curtis, Corso, and possibly Kaplan and Hindin in the latter part of 1972. Others were present at the meeting, but Hepner could not recall specific names. At this meeting the loan to Tulane was discussed. Regarding the guarantees, Hepner testified that he could only recall someone asking him if the guarantees could be limited and he replied in the negative. Hepner identified the guarantee forms signed by defendants and stated that he gave out blank forms at the meeting. Although he did eventually receive signed and completed forms from defendants, he was unsure as to the dates that he received the forms. He thought Corso’s had been completed and returned during the meting. Hepner also admitted that in his deposition he had testified that he did not specifically recall when the guarantees were actually received by the Bank and that it was possible that some of them may have been received after the Bank disbursed the initial loan to Tulane. Hepner further testified that in 1972, the Bank did not have a separate printed form for limited guarantees. If the Bank agreed to grant a limited guarantee, the regular form would be given to in-house counsel for inclusion of the necessary wording.

Defense witnesses testified as follows. Curtis related that he and DeGraff met with Hepner and Hindin at the Bank in late 1972 to discuss the Tulane loan. Hepner advised that the loan would be approved if the shareholders agreed to guarantee the loans. DeGraff told Hepner that he lacked authority to accept on behalf of the other shareholders but that he would discuss the. matter with them and report back to the Bank.

Shortly thereafter, the Tulane shareholders met. Present were Curtis, DeGraff, Kaplan, Corso, Sapoznick, and Bernstein, via a speaker phone. Hindin was also present during part of the meeting. At this meeting, it was suggested that the shareholders provide guarantees limited to their pro-rata stock ownership. Alternatively, it was suggested that if the Bank did not find the pro-rata proposal acceptable, they would agree to guarantee a maximum of $60,000 aggregate, to cover the first loan. According to DeGraff’s testimony at trial, Hindin was present during these discussions and, when asked for his opinion, told them to present their proposals to the Bank. The other shareholders agreed to these alternatives and directed DeGraff and Curtis to present them to the Bank.

In a subsequent meeting with Hepner, DeGraff, Curtis and Corso, Hepner rejected the pro-rata suggestion but agreed to accept the $60,000 limitation. Further, Hepner stated that any future loans to Tulane would be made upon the financial strength of the corporation.

All three defendants testified as to their understanding that their personal aggregate liability was limited to a maximum $60,000 of total corporate indebtedness. All three signed the forms in blank; that is, they testified that when they returned the forms, nothing except their signatures was written on the guarantees. Curtis testified that he returned his form in November, after the initial loan had been disbursed. Kaplan testified that he authorized Curtis to return his signed form to the Bank with the express understanding that his liability would be limited to $60,000. DeGraff testified that he did not sign his form until December of 1972 or January of 1973, but that Hepner had asked him to backdate the form to November 1, the date of the first loan. Corso testified that he signed his form several weeks after November 1, 1972, although the form bears that date. He also testified that Hepner told him personally that his liability under the guarantee would be limited to $60,000.

Defendants also introduced into evidence two standard bank confirmation inquiry forms relating to Tulane’s account status at the Bank as of July 31, 1973, and December 31, 1973. The July inquiry indicated that the loans then outstanding were unsecured. The December inquiry indicated that Tulane’s loan liability as of that date was secured by a life insurance policy. Neither inquiry referred to any guarantees. According to Hepner’s testimony, a guarantee was considered to be a form of security for a loan. A 3-year employee of the Bank, George Krumm, identified the Bank inquiry forms as having been completed under his supervision.

Plaintiff called Henry Hindin to testify in rebuttal and moved to bar any cross-examination regarding his investment in partnerships created by Tulane Industries. Hindin testified that he did not remember introducing defendants to Hepner, but stated that it was possible that he had. He also denied participating in any discussions of loans to Tulane in 1972. The court denied plaintiff’s motion to bar cross-examination regarding Hindin’s interest in four of the laundromats developed by Tulane and Hindin admitted that he did not disclose his interests to the Bank on the disclosure forms he was required to complete. He denied any conflict of interest or wrongdoing. He also said that the Bank’s in-house counsel agreed that he had done nothing wrong in investing in the laundromats.

Both sides moved for a directed verdict and the court reserved its ruling. After a lengthy instruction conference and closing arguments, the jury returned its verdict in favor of defendants.

Opinion

In its motion in limine to exclude certain evidence, the Bank urged the trial court to construe the signed forms as the final and complete expression of the contracts of guarantee. The Bank’s printed forms include the following language and blanks:

“CONTINUING GUARANTEE FOR VALUE RECEIVED and in consideration of advances, credit, or other financial accommodation concurrently herewith being afforded or hereafter to be afforded to ............. in ovoTnottoT' nollon fhn ‘Debtor’), by EXCHANGE NATIONAL BANK OF CHICAGO, or its successors or assigned (hereinafter called the ‘Bank’), the undersigned hereby guarantees the full and prompt payment to the Bank at maturity and at all times hereafter of all indebtedness, obligations and liabilities of every kind and nature of the Debtor to the Bank (including all indebtedness, obligations and liabilities of partnerships, created or arising while the Debtor may have been or may be a member thereof), howsoever evidenced, whether now existing or hereafter created or arising, direct or indirect, absolute or contingent, or joint or several, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise; and the undersigned further agrees to pay all expenses (including court costs and attorneys’ fees), paid or incurred by the Bank in endeavoring to collect such indebtedness, obligations and liabilities, or any part thereof, and to enforce this guaranty.
* * *
The undersigned’s liability hereunder shall in no wise be affected or impaired by any of the following (any or all of which may be done or omitted by the Bank without notice to any one and irrespective of whether the guaranteed debt shall be increased or decreased thereby), namely: (a) any acceptance by the Bank of any security or collateral for, or other guarantors or obligors upon, any guaranteed debt; (b) any compromise, settlement, surrender, release, discharge, renewal, extension, alteration, exchange, sale, pledge or other disposition of, or substitution for, or indulgence with respect to, or failure, neglect or omission to realize upon, or to enforce or exercise any liens or rights of appropriation or other rights with respect to, any guaranteed debt or any security or collateral therefor or any claims against any person or persons primarily or secondarily liable thereon; (c) the granting of credit from time to time by the Bank to the Debtor in excess of the amount, if any, to which the right of recovery under this guaranty is limited; or (d) any act of commission or omission of any kind or at any time upon the part of the Bank with respect to any matter whatsoever, other than the execution and delivery by the Bank to the undersigned of any express written release or cancellation of this guaranty.
***
SIGNED AND DELIVERED by the undersigned, at Chicago, Illinois, this_day of_, 19_

Plaintiff argues that the trial court violated the parol evidence rule by erroneously admitting evidence of prior negotiations between the parties. According to defendants’ testimony, the Bank loan officer, Hepner, agreed to the $60,000 limitation on the shareholders’ liability for the corporate indebtedness. Plaintiff contends, however, that this testimony should not have been admitted because the signed guarantee forms are facially complete, unlimited and unconditional. Consequently, defendants’ evidence of the limitation impermissibly contradicted the terms of the instrument.

In response, defendants raise several grounds to justify the admission of the evidence. Initially, they argue that plaintiff has waived the issue. We disagree, however, because plaintiff made a motion in limine to exclude the extrinsic evidence relating to the guarantees. Therefore, the Bank preserved its objection to the introduction of the extrinsic evidence. We do agree with defendants, however, that the trial court did not abuse its discretion in admitting the testimony. Defendants’ primary theory is that the guarantees never became binding contracts because their effectiveness was conditioned on the Bank’s agreement to limit the guarantees to $60,000; thus, the Bank’s failure to complete the forms in accordance with the agreement prevented defendants’ liability from ever arising.

Under plaintiff’s formulation of the parol evidence rule, the printed guarantees would presumptively be the final, complete, and unambiguous expression of the parties’ intent. Based on that presumption, evidence of a prior or contemporaneous agreement would be inadmissible to vary the terms of the written agreement. (38 Am. Jur. 2d Guaranty sec. 124 (1968).) To determine whether the written document was the final, integrated expression of the parties’ agreement, the court would refer only to the instrument itself. Cargill Commission Co. v. Swartwood (1924), 159 Minn. 1, 198 N.W. 536.

Other courts, recognizing that a written instrument is not self-proving, consider any relevant evidence surrounding the creation of the document, to initially determine whether the parties intended the writing to be the final or integrated expression of their agreement. (Restatement (Second) of Contracts sec. 209 (1981).) Under the Restatement rationale, where a writing appears complete and specific, it will be considered integrated unless it is established by other evidence that the writing did not constitute a final expression. (Section 209(3).) This preliminary determination of whether it is integrated, moreover, is for the court to decide, separate from questions of interpretation of applicability of the parol evidence rule. Section 209(2). See also sections 213 and 215.

In State Bank v. Cirivello (1978), 74 Ill. 2d 426, 386 N.E.2d 43, the Illinois Supreme Court implicitly rejected the “face of the instrument” test in favor of allowing testimony that a guarantee, seemingly complete and unconditional on its face, was not to take effect unless and until all 13 co-partners of a limited partnership agreed to be guarantors for a bank loan. The plaintiff bank had filed an action against certain of the partners, 12 of whom had signed the guarantees and delivered them to the bank. The forms did not contain any limitation or condition regarding the requirement that all co-partners sign guarantees. The court said that a “condition becomes a part of the guaranty if it is known and agreed upon by the parties.” (74 Ill. 2d 426, 431, 386 N.E.2d 43, 45.) The court further noted that such a conditional guarantee contemplates, as a condition precedent to the signor’s liability, the happening of some contingent event.

In State Bank, as in the present case, the signed forms were facially unconditional and, if given effect, would have made all who signed liable, jointly and severally, for the entire obligation. By analogy, we find that defendants in the pending case were properly allowed to offer evidence that the instruments they signed were incomplete, not the fully integrated contracts that plaintiff asserts.

In Main Bank v. Baker (1981), 86 Ill. 2d 188, 199, 427 N.E.2d 94, the court enumerated several situations in which the parol evidence exclusionary rule does not apply, stating that:

“In some circumstances parol evidence may be considered to aid in the interpretation of a contract (Martindell v. Lake Shore National Bank (1958), 15 Ill. 2d 272, 283; 9 Wigmore, Evidence sec. 2470 (3d ed. 1940)), and such evidence may be admissible to invalidate a contract under certain circumstances (e.g., State Bank v. Cirivello (1978), 74 Ill. 2d 426 (incomplete instrument); Bell v. McDonald (1923), 308 Ill. 329 (conditional delivery); Van Buskirk v. Day (1863), 32 Ill. 260 (fraud); Restatement of Contracts sec. 238 (1932)), but parol evidence is otherwise inadmissible to vary or contradict the clear written provisions of an integrated contract (Kendall v. Kendall (1978), 71 Ill. 2d 374; Scholbe v. Schuchardt (1920), 292 Ill. 529; Restatement (Second) of Contracts secs. 239, 241 (Tent. Draft Nos. 1 through 7 (1973)).”

In Fisk Tire Co. v. Burmeister (1929), 252 Ill. App. 545, a situation strikingly analogous to the present case, defendant agreed to guarantee payment for another’s purchase. Defendant testified at trial that she and plaintiff had agreed to limit her liability to $400. She signed a blank, “unconditional” guarantee form and returned it to plaintiff. The limitation was never inserted anywhere on the guarantee. In rejecting plaintiff’s argument that the parol evidence rule barred admission of the limitation testimony, the court held that the rule did not apply where the guarantee had not been properly completed in accordance with the parties’ agreement. Thus, the guarantee contract never became effective and defendant was not liable for even the $400 amount that she had originally agreed to pay.

After the reasoning of Fisk and Cirivello, we conclude that the trial court properly admitted evidence of the parties’ intention. It was then for the jury to weigh all the evidence and determine whether a contract actually came into existence.

II

Plaintiff next contends that jury instructions Nos. 1, 12, 14A, 14B, 15, and 16 were erroneously given because they are either argumentative and unduly emphasized certain matters favorable to defendants, or are incorrect as a matter of law. We agree that some of the instructions should not have been given, and base our reversal on this issue.

Initially, we note that the parties properly submitted Illinois Pattern Jury Instructions when feasible. Since there exist no specific pattern instructions based upon contracts of guarantee, the parties drafted several. According to Supreme Court Rule 239 (73 Ill. 2d R. 239), such instructions “should be simple, brief, impartial, and free from argument.”

Instruction No. 16 provides as follows:

“If you find that a Defendant agreed to guarantee a portion of the obligations of Tulane Industries, Inc. to the Exchange National Bank, but that the Exchange National Bank, upon receipt of that Defendant’s signed guarantee form, materially altered it in a manner not in conformity with its agreement with such Defendant, then such Defendant is not liable to the Plaintiff, and you will have no occasion to consider the question of damages.”

Plaintiff’s objection to this instruction is twofold. First, the question of material alteration only pertains to one guarantee, that of De-Graff. Second, the materiality of an alteration on a document raises a question of law to be decided by the court rather than the jury.

We agree that, this instruction is improper. Corso’s signed form contained no alteration and Kaplan’s form merely indicated that the day of the month it was signed may have been marked over. Kaplan testified that he signed the form “sometime” in December of 1972 and that, looking at the form, the date appeared to be either the 13th or 18th of that month. We are unable to discern the remotest significance of this alteration, if that is what it is. Defendants do not explain how the change of a date from the 13th to the 18th bears on the parties’ rights or obligations, a necessary prerequisite to the finding that an “alteration” is “material.” See Ruwaldt v. W. C. McBride, Inc. (1944), 388 Ill. 285, 57 N.E.2d 863.

The only form on which an arguably material alteration was made is that of defendant DeGraff. In the top of the form, in the blank for the debtor’s name, is printed “Melvin DeGraff.” A single line is drawn through his name and the name of the actual debtor, Tulane Corporation, is written in. Defendants argue that this is indicative of a material alteration because the substitution of one debtor’s name for another in a guarantee contract substantially affects the rights and obligations of the parties. While we agree that in the abstract, such an alteration could be classified as material, we are not persuaded that the name substitution has any substantial effect in this particular case. The purpose of a guarantee is for one person to answer for the debt of another; clearly, the entry of Melvin DeGraff’s name as debtor on Melvin DeGraff’s guarantee would be meaningless. The corporation’s debt was the undisputed object of the defendants’ personal guarantees, and the above-mentioned alteration can only be viewed as the correction of a clerical-type error.

We conclude that an instruction on material alteration was incorrectly given because the elements of such a defense are not supported by the evidence; consequently, such an instruction could well have led to jury confusion. Defendants’ major theory of the case, that the guarantees never became effective because they were not completed in conformance with the parties’ agreement, was adequately covered in another instruction. Because the material alteration instruction injected a collateral and unsupported alternative theory into the case, it constitutes reversible error.

Instruction No. 14A provided that:

“Taken as a whole, the terms of the written guarantee in this case are not inconsistent with the possible existence of an oral agreement to limit the amount of the indebtedness of the guaranteed.”

Plaintiff objected to this instruction on the ground that it suggests to the jury that such an oral agreement did, in fact, exist, and therefore, it is argumentative of defendants’ theory of the case. We agree that it is inappropriate and confusing. As a partial statement of the parol evidence rule, it may be accurate, but since the trial court had preliminarily ruled that the extrinsic evidence was admissible, we do not comprehend how this instruction could aid the jury’s deliberations. Although this instruction, standing alone, might not constitute reversible error, we conclude that it is confusing and should not be given upon retrial.

We also agree with plaintiff that instruction No. 14B was erroneously given. That instruction provides:

“If you decide that plaintiff was not relying upon defendant’s guarantees in making all or some of the loans to Tulane Industries, which may still be outstanding, you may infer that there were no guarantee agreements then in effect or that any guarantee agreement then in effect was limited in amount.”

Lengthy discussion in the transcript indicates that the significance of the Bank’s “reliance” on the defendants’ guarantees was sharply contested. Plaintiff’s main objection to the instruction is that it improperly engrafts an extra element of reliance onto the law of guaranty. Defendants counter that the Bank’s conduct in lending Tulane money without reliance on the guarantees is evidence of their “practical construction” of the agreements.

The cases cited by defendants accurately state that parties’ actions are relevant to their own intent or understanding of their agreement, which can then be considered in the judicial construction of the contract. (See Occidental Chemical Co. v. Agri Profit Systems, Inc. (1975), 37 Ill. App. 3d 599, 346 N.E.2d 482.) We acknowledge that defendants adduced some evidence tending to show that plaintiff may have tendered loans to Tulane without regard to the efficacy of the guarantees. One inference from such evidence is that the Bank did not rely on the guarantees because it did not believe that they were binding. On the other hand, the jury might have inferred that the Bank believed that the guarantees were validly executed and enforceable at any time without a showing of actual reliance on them. We believe that the matter of the Bank’s “reliance” on the guarantees, while relevant and admissible, should not have been the subject of a separate instruction for the jury. As worded, it tends to direct the jury to draw the inference favorable to defendants. As such, it is argumentative. The Illinois Pattern Jury Instructions were drafted to avoid instructions that emphasize one particular evidentiary issue over others. See Foreward to Illinois Pattern Jury Instructions, Civil, at VI (2d ed. 1971).

Next, plaintiff challenges the instructions Nos. 1 and 12, which concern agency principles and apparently were submitted because of defendant Kaplan’s lack of direct contact with the Bank or Bank representatives. Instruction No. 1 states:

“An agent is the person who, by agreement with another called the principal, represents the principal in dealings with third persons or transacts business, manages some affairs or does some service for the principal, with or without compensation. The agreement may be oral or written, expressed or implied.
An agent may by his words and actions only bind his principal as to matters and to the extent that he has been given expressed or implied authority to do so by his principal.”

Instruction No. 12 recites, in pertinent part, as follows:

«*** thg plaintiff contracted with an agent or any defendant, then the plaintiff has the burden of proving that the agent was in fact an agent of the particular defendant, and had the authority to contract with the plaintiff on the specific terms claimed by the plaintiff.”

Although plaintiff does not seriously dispute the general accuracy of the law reflected in instruction No. 1, plaintiff argues that instruction No. 12 imposes upon it the unfair burden of proving a “secret understanding” between Kaplan and the other defendants, which was never communicated to the Bank. We do not believe, however, that plaintiff’s objection is well taken. The evidence supports the inference that DeGraff and Curtis were acting on behalf of the other shareholders following the meeting in late 1972 when they agreed to undertake a limited guarantee and directed Curtis and DeGraff to report back to the Bank. Kaplan testified that he gave his guarantee to Curtis to give to the Bank upon the understanding that his liability was limited to the $60,000, as agreed in the shareholder meeting. The Bank did not offer any rebuttal to defendants’ evidence that the Tulane shareholders dealt with the Bank essentially as a group, rather than as individuals. It is not disputed that DeGraff and Curtis took the active role in the loan transaction and in effect, represented the other shareholders. Nor is it argued that the Bank would have had to explain the guarantees to each defendant, in person, for them to be binding. Hence, the question of agency is not really a major disputed issue in the case. Possibly, instructions Nos. 1 and 12 are superfluous. Nevertheless, for the Bank to enforce the guarantee contract against Kaplan, part of its burden of proof would be to establish, if it did not deal directly with him, that it contracted with his agent, who acted with express or apparent authority to represent him. Since the apparent authority of Curtis and DeGraff was established in the defendants’ evidence, the Bank did not have to actually prove that element. Accordingly, the submission of the agency instructions may have been confusing and should not have been given. We do not believe, however, that they are incorrect statements of law or that they substantially prejudiced plaintiff, who, of course, retained the ultimate burden of persuasion throughout the trial.

Plaintiff’s final objection to jury instructions is aimed at No. 15, which provides:

“If you find that a defendant agreed to guarantee a portion of the obligations of Tulane Industries Inc. to the Exchange National Bank, but that the Exchange National Bank, upon receipt of that defendant’s signed guarantee form failed to complete the form in accordance to the terms of its agreement with such defendant as to the amount of obligations guaranteed, then such defendant is not liable to the plaintiff and you will have no occasion to consider the question of damages.”

As we indicated in our discussion of instruction No. 16 on material alteration, defendants were entitled to an instruction on the effect of the Bank’s failure to complete the written guarantee in accordance with the parties’ agreement but not on the question of material alteration. The above instruction is a proper statement of law and we do not find it to be argumentative. Plaintiff, however, argues that it precludes the jury from finding that defendants were liable for at least $60,000 and that the trial court erred in refusing to direct a verdict in that amount against all defendants.

After arguing persistently throughout pretrial motions and trial and closing arguments that there was never an agreement to limit the amount of the written guarantees, plaintiff wants to change its position and have a verdict directed in the amount of $60,000 based on that agreement. Defendants’ admissions, in this case, were part of their defense that no legally binding contract of guarantee ever came into being because of the Bank’s failure to complete the documents as agreed. Under the rule stated in Fisk, defendants would not be liable for the $60,000 amount because of the failure of the condition precedent to the contract to ever be satisfied, without which defendants’ obligations to pay never arose. We conclude that instruction No. 15 was properly given and that the trial court did not err in refusing to direct verdicts.

III

In view of our decision to reverse the judgments and remand for a new trial, we will not discuss the other issues raised in detail. One issue that may recur, however, needs brief mention. Plaintiff contends that the trial court erred in allowing defendants to elicit certain evidence from Henry Hindin, which was offered for impeachment on the basis of possible bias. After reviewing the record and the arguments pertinent to this issue, we hold that the trial court did not abuse its discretion. When plaintiff first moved to bar testimony relating to Hindin’s alleged failure to disclose to the Bank a possible conflict of interest in his dealings with laundromats developed by Tulane, the trial court reserved its ruling until the matter came up in issue at trial. Eventually plaintiff called Hindin as a rebuttal witness, to deny that he was present during the discussions involving the loans to Tulane. Defendants then cross-examined Hindin regarding his failure to disclose his laundromat interests to the Bank. Plaintiff argues that the attempted impeachment was not material and should have been excluded. We disagree. Once Hindin testified for plaintiff, defendants were entitled to cross-examine him without undue restrictions. The circumstances surrounding his nondisclosed investments in the laundromats, we believe, were proper subjects to explore on cross-examination. The trial court was aware of plaintiff’s objection based on relevancy but ruled in favor of the admissibility of the testimony. The weight to be given the evidence was properly for the jury to determine and we conclude that the court did not err in its ruling.

IV

The final issue for our consideration is defendants’ cross-appeal for certain expenses and attorney fees. The basis for their claim is that prior to trial they submitted requests to plaintiff to admit facts. Plaintiff denied some of the requests and defendants now argue that they established the truth of those matters at trial. Accordingly, they contend, the trial court erroneously denied their request for expenses and fees pursuant to Supreme Court Rule 219(b) (73 Ill. 2d R. 219(b)), which provides:

“Expenses on Refusal to Admit. If a party, after being served with a request to admit the genuineness of any documents or the truth of any matters of fact, serves a sworn denial thereof, and if the party requesting the admissions thereafter proves the genuineness of the document or the truth of the matter of fact, he may apply to the court for an order requiring the other party to pay him the reasonable expenses incurred in making the proof, including reasonable attorney’s fees. Unless the court finds that there were good reasons for the denial or that the admissions sought were of no substantial importance, the order shall be made.”

Focusing on the wording and implicit policy of the rule, which is to simplify litigation and promote settlement, defendants underscore three criteria upon which a trial court must base its order for expenses and fees under the rule: (1) the moving party’s proof of the truth of the matters asserted which were denied by the respondent; (2) lack of respondent’s good reasons to deny the facts; (3) substantial importance of the matters as to which the admissions were sought. If these criteria are established, defendants maintain, the trial court is mandated to award expenses and fees.

Defendants concede that they could not discover any cases arising under this rule and delineating the standards for determining whether facts have been proven. They also acknowledge that it is not feasible to rely solely on the jury’s general verdict as automatic “proof” that the denied matters were true. They argue, however, that the trial court must consider all relevant factors and then determine whether each denied request to admit was proven true.

Defendants present a lengthy, complicated rationale for our reversal of the trial court’s order denying their fees and expenses under Rule 219(b). In examining these eight requests to admit, however, we do not conclude that the trial court erred. The requests in issue are as follows:

“Request to Admit No. 5: At the time that the document *** was executed by BURTON KAPLAN in its original form and delivered to Plaintiff, BURTON KAPLAN intended that his liability thereunder to Plaintiff not exceed $60,000.
Request to Admit No. IS: (Identical to No. 5, except that it referred to the guarantee signed by DE GRAFF.)
Request to Admit No. 6: At the time the document *** was executed by BURTON KAPLAN in its original form and delivered to Plaintiff, the EXCHANGE NATIONAL BANK OF CHICAGO intended BURTON KAPLAN’s liability thereunder to Plaintiff not exceed $60,000.
Request to Admit No. W. (Identical to No. 6, except that it refers to DE GRAFF.)
Request to Admit No. 9: The document entitled ‘continuing guarantee’, at the time it was signed by Melvin DeGraff did not bear the handwritten words ‘Tulane Corporation’.
Request to Admit No. 10: The document entitled ‘continuing guarantee’, *** at the time it was delivered to Plaintiff did not bear the handwritten words ‘Tulane Corporation’.
Request to Admit No. 11: The original document entitled ‘continuing guarantee’ and executed by Melvin DeGraff *** was first received by Plaintiff on or after January 3,1973.
Request to Admit No. 12: Melvin DeGraff’s signature was affixed to the document, *** in January of 1973.”

Request Nos. 5 and 13 ask the Bank to admit defendants’ intent as to the limitation of their liability under the guarantees. Nos. 6 and 14 ask the Bank to admit its own intent to limit the guarantees. Plaintiff’s case against defendants is based on its possession of signed, facially unlimited guarantees and Hepner’s testimony that he did not approve any limitation proposals. Therefore, the Bank’s admission of these four requests would be conceding away its whole case. Plaintiff’s duty to admit facts surely does not extend to accepting defendants’ version of the parties’ actual intent with respect to the guarantees. The jury’s verdict in favor of defendants does not necessarily mean that defendants proved that the parties intended to limit the guarantee; in fact, had the jury found defendants liable for $60,000, the “proof” of these requests might appear stronger. Nevertheless, Rule 219(b) requires, in addition to proof of the matters asserted, that the denying party lacked good reasons to deny. We do not find unreasonable the Bank’s reliance on the signed guarantee forms and its loan officer’s testimony.

Requests Nos. 9 and 10 appear to lack substantial importance because it is undisputed that Tulane is the debtor for whom defendants were willing to sign guarantees. Plaintiff does not necessarily dispute defendants’ testimony that the guarantees were signed and delivered in blank, and under either party’s theory of the case plaintiff had authority to fill in the name of the debtor. It is plaintiff’s alleged failure to complete the form in accordance with the parties’ agreement that is of primary importance, not who wrote in the debtor’s name and when.

Requests Nos. 11 and 12 ask for the admission of specific dates which might not have been within plaintiff’s recollection. Indeed, Hepner’s testimony at trial was that he did not recall the actual dates that the documents were received by the Bank. The documents themselves do not reflect the January 1973 dates. Even if it is assumed that defendants’ testimony proved the delivery dates for purposes of Rule 219(b), we do not find it unreasonable for the Bank not to admit the truth of that which it could not recall.

Rule 219(b) does not qualify or explain the type of factual matters that come within its scope. As a discovery rule, however, the rule applies most logically to matters within the denying party’s control or knowledge which may be subsequently verified by independent sources, as for example, a party’s income or the existence of a cloud on a party’s real estate title. If one party unreasonably denies such facts under oath, the opposing party should be able to recover expenses and fees expended in proving them. If the rule is extended to all controverted matters which become “proven facts” only through a general verdict or judgment, the prevailing party to an action would presumably be allowed to recover fees and expenses routinely. We do not believe this is the intent of Supreme Court Rule 219(b).

In the pending case, notwithstanding the problems of ascertaining whether each requested admission was in fact proved, we conclude that the requests were denied for good reasons. Consequently, we affirm the trial court’s denial of defendants’ petition for expenses and fees.

For the reasons herein discussed, we reverse the trial court’s judgment on the jury’s verdict and remand the cause for a new trial. Further, we uphold the denial of cross-appellants’ expenses and attorney fees under Supreme Court Rule 219(b).

Reversed in part, affirmed in part, and remanded.

LORENZ and MEJDA, JJ., concur.

      Plaintiff relies on National Bank & Trust Co. v. Becker (1962), 38 Ill. App. 2d 307, 187 N.E.2d 355, for the proposition that to come with the parol evidence rule an alleged oral limitation on a written guarantee must qualify as a condition precedent rather than a condition subsequent. The court then, in effect, defined any condition which “violates” the terms of the contract as a condition subsequent. (38 Ill. App. 2d 307, 312.) Section 217 of the Restatement (Second) of Contracts (1981), however, explains that “[wjhere the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement is not integrated with respect to the oral condition.” Comment (b) to the section explains that this rule has sometimes been limited to oral conditions consistent with the written terms, but in actuality, an oral requirement of a condition is never
        completely consistent with a signed, written agreement which is complete on its face. In such cases, evidence of the oral requirement bears directly on the issue of whether the parties adopted the writing as an integrated agreement. Inconsistency, thus, is merely one factor in the preliminary determination of whether and to what extent the written document is integrated.


author: JUSTICE LINN

text:
    JOHN T. WINSTON, Plaintiff-Appellee, v. TRUSTEES OF THE HOTEL AND RESTAURANT EMPLOYEES AND BARTENDERS INTERNATIONAL UNION WELFARE FUND et al., Defendants-Appellants.
    First District (4th Division)
    No. 81—2256
    Opinion filed October 21, 1982.

      Rock, Fusco, Reynolds & Heneghan, of Chicago (John J. Reynolds and William P. Jones, of counsel), for appellants.
    Cohn and Flynn, of Chicago (Erwin Cohn, of counsel), for appellee.
   JUSTICE LINN

delivered the opinion of the court:

Following a hearing on cross-motions for summary judgment, the circuit court of Cook County granted summary judgment for plaintiff, John T. Winston, and against defendants, trustees of the Hotel and Restaurant Employees and Bartenders International Union Welfare Fund and William L. Meyers, Inc. The circuit court’s, judgment order held that as a matter of law plaintiff was entitled to extended medical disability coverage under the union health and welfare plan that was in dispute-.

Defendants appeal, arguing that the trial court erred in basing its decision on the description of coverage in the plan booklet distributed by the defendant trustees to eligible employees under the union welfare plan. Defendants claim that the plan booklet is only a description of the contract of insurance, not the contract itself, and that benefits derive only from trustee action under the plan. Therefore, defendants argue, it was error for the trial court to find that plaintiff was entitled to extended medical benefits on the basis of language in the plan booklet.

We disagree with defendants and affirm the circuit court.

Facts

Plaintiff was employed by the Conrad Hilton Hotel from 1946 until 1977. He was a member of the Chicago Dining Room Employees, Cooks and Bartenders Union, and was covered under the Hotel and Restaurant Employees and Bartenders International Union Welfare Fund administered by defendants. Plaintiff suffered a heart attack on February 14, 1977 at the age of 62. He was totally disabled and was forced to terminate his employment.

On May 29, 1978, plaintiff submitted an application to defendants for extended medical, hospital, and disability benefits as described on pages 11-12 of the plan booklet distributed to eligible employees by defendants:

“If an Eligible Employee has become totally disabled and no later than one year after the discontinuance of his eligibility, furnishes written proof satisfactory to the Trustees at the Administrative Office that such total disability still exists, his coverage will be extended as follows: 1. If he qualified for total disability prior to age 64, his coverage shall be extended for so long as his total disability shall continue ***.”

Defendants denied the requested coverage, informing plaintiff that he was entitled only to extension of his death benefit and denying that the above-quoted paragraph applied to extension of all benefits while he remained totally disabled.

On November 2, 1978, plaintiff filed an action for declaratory judgment and on May 8, 1979, plaintiff filed a motion for summary judgment. On March 19, 1981, plaintiff’s case was dismissed for want of prosecution. Plaintiff moved to reinstate the cause on April 3, 1981, and the dismissal for want of prosecution was vacated on April 15,1981.

Plaintiff again filed a motion for summary judgment, to which defendants responded on June 15, 1981. Defendants stated that the extended benefits provision applied only to death benefits and submitted an affidavit from an employee of defendant William L. Meyers, Inc., in support of this position. Plaintiff had received extended medical benefits from May 31 to August 31, 1980, and defendants claimed that under the provision on pages 22-23 of the plan booklet, which they stated was the only provision for extended medical benefits, this three-month coverage had exhausted the medical extension for which plaintiff was eligible. Defendants also stated that the disputed health and welfare plan was governed by the Employee Retirement Income Security Act (ERISA) (29 U.S.C. sec. 1001 et seq. (1976)) and the Labor-Management Relations Act (LMRA) (29 U.S.C. sec. 141 et seq. (1976)). Therefore, defendants noted, the trustees’ decision to deny benefits should not be overturned unless it was either arbitrary and capricious, unsupported by substantial evidence, or erroneous as a matter of law.

On June 24, 1981, defendants filed a motion for summary judgment. That day, a hearing on both plaintiff’s and defendants’ motions for summary judgment was held. The trial court found that the provisions on pages 11-12 of the plan booklet were applicable and those on pages 22-23 were not; that as a matter of law plaintiff was entitled to coverage as requested in his motion; and that “to the extent that the Trustees have applied this insurance policy in fashions other than the court has indicated, they acted in an arbitrary, capricious, and unreasonable manner.” The trial court accordingly granted summary judgment in favor of plaintiff. Defendants’ subsequent motion to reconsider was denied, and defendants appealed.

Opinion

Defendants argue on appeal that summary judgment should have been entered in favor of defendants, and that the entry of summary judgment against defendants constituted reversible error as a matter of law. We disagree.

I

The first argument advanced by defendants is that because ERISA and LMRA govern this dispute, Federal labor law applies, and the Federal requirements for overturning defendants’ decision denying extended coverage were not met. In support of this claim defendants state that the denial of extended medical benefits to plaintiff was consistent with defendants’ past practices, was based upon actuarial necessity, and was not arbitrary or capricious or done in bad faith. Plaintiff concedes that ERISA and LMRA apply to this case, but maintains that defendants’ actions were arbitrary and capricious and unreasonable, as the trial court found, in that defendants interpreted the plan booklet in a manner contrary to the plain meaning of its language. We agree with plaintiff.

The disputed paragraph, which appears on pages 11-12 of the booklet, is quoted above. The paragraph appears under the heading “Extended Benefit” and unequivocally states that an eligible employee disabled before age 64, as plaintiff was, will receive coverage as long as the disability continues. There is no express or implied limitation of extended coverage to a death benefit only. The extended coverage described on pages 22-23, which defendants claim is applicable to plaintiff, applies to eligible employees who contract any of 10 specified diseases. Plaintiff had a heart attack, not one of these diseases; the trial court thus correctly found that this section is inapplicable to plaintiff. Plaintiff argues persuasively that by making an interpretation of the plan booklet that was contrary to its wording, defendants acted in an arbitrary and capricious manner and read an ambiguity into the plan booklet where no ambiguity in fact existed.

In ruling on a disputed decision by the trustees of a pension plan, the court held as follows in Snyder v. Titus (E.D. Va. 1981), 513 F. Supp. 926, 935:

“The Court cannot permit such an unfounded interpretation to deprive an employee of his benefits where he has no way of anticipating such a deprivation upon reading the clear language in the plan in effect at the time of his application. A contrary result, the Court believes, would open the door to a shell game in the administration of pension plans, frought [sic] with potential abuse and caprice.
The Court thus holds that a denial of benefits to defendant is, under the plan, arbitrary and capricious, and contrary to the provisions of the pertinent plan.”

We find this analysis to be applicable to the instant case, and in view of the clear, unambiguous language of the plan booklet we necessarily hold that defendants’ denial of extended benefits to plaintiff was arbitrary and capricious and therefore improper.

The Snyder court’s trenchant observations point out the errors in defendants’ other arguments in support of their denial of benefits to plaintiff. Defendants claim that to grant full medical benefits to a totally disabled employee for life would have a substantial adverse actuarial economic impact on the fund. Defendants cite Gordon v. ILWUPMA Benefit Funds (9th Cir. 1980), 616 F.2d 433, for the proposition that unless this interpretation is unreasonable it must be upheld on review. Conversely, of course, if the interpretation is unreasonable, as we believe this interpretation is, it should be reversed on review. “[A]ny denial of pension benefits promotes the financial integrity of the plan but that certainly does not make the denial rational.” (Snyder v. Titus (E.D. Va. 1981), 513 F. Supp. 926, 934.) Defendants cannot claim that their decision was proper on the ground that it was consistent with their past practice because “[b]eing consistently wrong can hardly be sanctioned as right.” 513 F. Supp. 926, 934.

II

Defendants’ second argument in support of their claim that the entry of summary judgment for plaintiff was erroneous is that the trial judge incorrectly assumed the plan booklet is itself a contract of insurance. They state that “benefits derive only from trustee action as it exists under the Plan, not from the Plan Booklet.” To state that the plan booklet is not the insurance contract raises two correlative questions: (1) What is the actual contract of insurance? and (2) What then is the plan booklet? In our judgment, defendants have failed to answer either of these questions satisfactorily, and thus have failed to demonstrate that it was error for the trial court to hold that plaintiff was entitled to the extended benefits set forth in the plan booklet.

In support of their claim that “trustee action” somehow constitutes the contract under which plaintiff was insured, defendants rely on the trust agreement of the union health and welfare trust, which gives the trustees power “to determine all questions of eligibility.” Even if it were possible for an unwritten, unlimited, constantly mutable contract deriving solely from trustee action to exist, such a contract could not be derived from this grant of authority over eligibility. The question here is not eligibility, but extent of coverage, and this claim by defendants is accordingly lacking in merit.

Defendants also claim that the plan booklet is a “summary plan description” whose purpose is to provide general, but not detailed, information “concerning a particular plan.” Defendants have not explained their failure to submit to the court any alternative document or insurance contract describing the plan in detail. They quote the following paragraph in the booklet to establish that the booklet is not the contract: “The provisions of the Plan affecting the Eligible Employees’ coverage are described in this booklet. All benefits herein are governed by and are subject in every respect to the provisions of the Plan which alone constitute the agreements under which payments are made.”

Defendants’ distribution of the plan booklet containing the statement that coverage is described in it, in our judgment, can in no way be interpreted as sufficient warning that the coverage described could and would be denied at the sole discretion of the trustees. In our view, after plaintiff has made a claim based on the described coverage, which he reasonably expected to be honored, defendants should be estopped from denying the correctness of their own publication. “ ‘Estoppel *** arises whenever one by his conduct, affirmative or negative, intentionally or through culpable negligence, induces another to believe and have confidence in certain material facts, and the latter having the right to do so, relies and acts thereon, and is, as a reasonable and inevitable consequence, misled, to his injury.’ ” (Moline I.F.C. Finance, Inc. v. Soucinek (1968), 91 Ill. App. 2d 257, 260, 234 N.E.2d 57, 59, quoting Shapera v. Fargo (1926), 240 Ill. App. 145, 154.) We believe that the foregoing estoppel principles are applicable here.

For all the reasons stated above, we affirm the decision of the trial court.

Affirmed.

JOHNSON, P.J., and ROMITI, J., concur.