Freedom of Contract vs. Public Duty: Professionals with Specialized Knowledge May Be Liable for Negligent Misrepresentation
Over the past couple of decades, contracts have been less about bargained promises or promises for performance and more about disclaiming responsibilities for one’s work and extracting indemnifications from weaker parties. Lawyers become understandably excited or agitated when they see a court cutting through contractual armor and recognizing common-law relief for those who rely on the expertise of others. Recently, the First District of the Illinois Appellate Court reversed and remanded a §2-615 dismissal of a condominium association’s action for negligent misrepresentation against the engineering firm that prepared the condominium conversion project’s engineering report relied on by the prospective unit purchasers. 21 Kristin Condominium Ass’n v. Pioneer Engineering & Environmental Services, LLC, 2020 IL App (1st) 191868, ¶8.
Section 22 of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., sets forth minimal required disclosures that a developer must make to prospective unit purchasers prior to the first sale of a unit. 765 ILCS 605/22. If the project is for development of a conversion condominium (i.e., conversion of an existent apartment building or similar structure), of more than six units, the disclosures must include:
[A]n engineer’s report furnished by the developer as to the present condition of all structural components and major utility installations in the condominium, which statement shall include the approximate dates of construction, installation, major repairs and the expected useful life of such items, together with the estimated cost (in current dollars) of replacing such items. 2020 IL App (1st) 191868 at ¶13, quoting 765 ILCS 605/22(e).
In October 2006, the predecessor of the defendant engineering firm delivered its Property Condition Assessment, (i.e., an engineering report), to the developer, its client, of a 21-story conversion building in Schaumburg that had hired the engineers. The report described that it was done pursuant to the standards of the American Society for Testing and Materials (ASTM) and was based on reviews of documents, discussions with persons with knowledge about the property, and a visual inspection of the property. 2020 IL App (1st) 191868 at ¶3. The report stated: “The ASTM standard was developed to provide current owners, prospective buyers, lending institutions or other interested parties with qualified professional judgments concerning the presence or likely presence of conspicuous defects or material deferred maintenance of a subject property’s material systems components or equipment.” Id. The report also noted that: “The purpose of this report is to assist the Client in determining the condition of the building, in addition to establishing an estimate of replacement costs for the common areas of the subject property.” Id.
The report presented numerous findings concerning the condition of the garage structure, roofing membrane, and other parts of the property and cost estimates for future replacement at the end of the components’ useful life. 2020 IL App (1st) 191868 at ¶4. The defendant engineers warranted that its work was in accordance with ASTM standards, cautioning that “[n]o assessment can eliminate the uncertainty regarding the potential for physical deficiencies in connection with a property.” Id. Any cost estimates are intended to be opinions of probable costs. Id. The report contained, as we would expect, a limitation as to who could rely on the report. “This report has been prepared for the sole use of the Client identified in the report and cannot be relied upon by other persons or entities without the permission of Pioneer.” Id. The report stated that no implied or expressed warranties were intended. Id.
In May 2017, the condominium association brought a negligent misrepresentation action against the successor of the engineering firm that prepared the report. The developer had included the engineering report in its disclosure statement. The defendant allegedly knew that the project was a condominium conversion and that its report would be included in the disclosure statement. Some information in the report was specifically for prospective purchasers. Allegedly, false statements were included in the report relating to the useful life of the roof and its replacement costs, the useful life of the elevators and their required maintenance costs, and the useful life of the concrete in the parking structure and its remediation costs. 2020 IL App (1st) 191868 at ¶5.
The trial court dismissed the complaint for failure to state a claim, and the plaintiff association appealed. 2020 IL App (1st) 191868 at ¶6.
The standard of review was de novo because the dismissal was pursuant to §2-615 of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq. Under this standard, all well-pleaded facts are taken as true and allegations are construed in a light most favorable to the plaintiff. The action should not have been dismissed “unless it is clearly apparent that no set of facts can be proved that would entitle the plaintiff to recovery.” 2020 IL App (1st) 191868 at ¶8.
The prima facie case for negligent misrepresentation in Illinois requires the plaintiff to allege facts to support findings that “(1) [the] defendant is in the business of supplying information for the guidance of others in their business dealings; (2) [the] defendant provided information that constitutes a misrepresentation; and (3) [the] defendant supplied the information for guidance in the plaintiff’s business dealings.” 2020 IL App (1st) 191868 at ¶9, quoting Tolan & Son, Inc. v. KLLM Architects, Inc., 308 Ill.App.3d 18, 719 N.E.2d 288, 296, 241 Ill.Dec. 427 (1999). Pioneer did not challenge the first element but argued that it had no duty to the association or its members because it did not sell the units. 2020 IL App (1st) 191868 at ¶10.
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. 2020 IL App (1st) 191868 at ¶10, quoting RESTATEMENT (SECOND) OF TORTS §552 (1977) (RESTATEMENT).
Liability is limited to losses suffered by “the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it.” 2020 IL App (1st) 191868 at ¶11, quoting RESTATEMENT §552. Comment (h) to RESTATEMENT §552, notes that a plaintiff need not be specifically identified but may be a person within a group or class of persons who the maker of the representation intends to reach and influence. 2020 IL App (1st) 191868 at ¶12.
The appellate court readily disregarded the defendant’s argument that it could not be liable because §22 of the Condominium Property Act requires the developer to make disclosures and did not provide any cause of action against anyone other than the developer. This argument misses the point that the association did not sue the engineer for violating the Act, but for breaching its common-law duties owed to the prospective purchasers. 2020 IL App (1st) 191868 at ¶13.
Regarding the prospective buyers relying on the report and being an intended audience, the defendant argued that the report expressly stated that it was intended for the developer and that others could not rely on it. The association argued that the defendant engineers knew that the developer would use the report to inform prospective purchasers about the condition of the building. The appellate court found that the complaint sufficiently alleged facts whereby a trier of fact could find that the engineer knew that the developer intended to distribute the report to prospective unit buyers and that a prospective buyer reading the limitation that the report could not be relied on would reasonably conclude that the prospective buyer had the engineer’s permission to rely on the report. 2020 IL App (1st) 191868 at ¶14.
Takeaway. This case is interesting for lawyers on many levels, not the least of which being that the appellate court’s holding challenges and possibly vitiates well-established customs and actions by many lawyers to protect their clients from liability for negligent misrepresentations. This case presents a classic conflict between a libertarian freedom of contract and a public duty owed for society’s benefit as recognized in the common law.
A couple of observations: (1) Ultimately, the court’s approach under §552 of the RESTATEMENT (SECOND) OF TORTS is from a reasonable recipient’s perspective in determining whether the recipient was within the class of intended recipients to rely on the report. In the future, we can expect to see much stronger and more precise disclaimers of who is intended to rely on the report, produced in bold and possibly larger typeface. Rather than stating that the report cannot be relied on by anyone other than the client without the permission of the author, we may see practices develop to proscribe reliance to anyone except a person receiving written certification of such from the author. (Think in terms of certificates of insurance for additional insureds). (2) The court’s holding here could foreseeably increase transactional costs for opinions and reports well beyond the scope of condominium conversion projects. Section 552 applies to any professional providing opinions under certain circumstances. Professionals will need to be more careful. On the other hand, this holding recognizes that the persons who are likely to be relying on professional opinions from those with specialized knowledge are less likely to be harmed by the opinions if those in the industry producing the reports cannot escape liability by a fictional disclaimer of who may rely on the report. In such circumstances, the common law has achieved its purpose.
For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) (IICLE®, 2016). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.