Opinion
Case No. 99 C 5384
March 29, 2002
ORDER
Unsatisfied with defendant Duke Engineering Services, Inc.'s ("DES") services, plaintiff Illinois Power Company ("Illinois Power") filed a five-count amended complaint, alleging (I) breach of contract, (II) breach of warranty, (III) deceptive trade practices, (IV) fraudulent misrepresentation, and (V) negligent misrepresentation. DES moves for partial summary judgment as to damages on Counts I, II, and V. For the reasons outlined below, the motion is granted although not in the precise form DES requested.
I. Background
The following facts are undisputed, unless otherwise indicated. Illinois Power is a public utility regulated by the State of Illinois. In August of 1998, Illinois Power requested that DES examine degraded voltage issues affecting the Clinton Power Station, a nuclear power plant. DES made a presentation to Illinois Power on September 9, 1997. By early October, the two parties had signed a "charter" describing a set of generic solutions to the degraded voltage problem to be delivered by May 31, 1998, and indicating that DES would serve as Project Manager. Various project plans and proposals followed. Illinois Power alleges, and DES denies, that before October 24, 1997, DES represented that it had sufficient personnel and could complete the degraded voltage project by May 31, 1998. Needless to say, the project was not completed by that date. Illinois Power alleges that DES knew or should have known that it could not meet the May 1998 deadline. More generally, Illinois Power charges repeated breach of contract, general incompetence, bad management, and an improper conflict of interest. The result, Illinois Power claims, was over $20,000,000 in damages, which Illinois Power seeks to recover in this diversity action.
Of particular relevance to the pending motion are two formal contracts signed by the parties in February of 1998. The first, signed February 5 but effective January 15, is a "Program Manager's Agreement." (Def.'s App. Tab D ("2/5/98 Agreement"), at D017654.) The second contract, dated February 11, is styled simply as an agreement between Illinois Power and DES. (Def.'s App. Tab C ("2/11/98 Agreement"), at D017342.) Each contract contains an "entire agreement" clause purporting to supersede all prior representations. The relationship between the two documents is disputed, as will be explained below. Each contract also contains multiple provisions limiting damages. It is on the basis of these limitation-of-damages provisions that DES moves for partial summary judgment.
II. Analysis
Summary judgment is proper when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "The nonmovant must show through specific evidence that a triable issue of fact remains on issues on which he bears the burden of proof at trial." Warsco v. Preferred Tech. Group, 258 F.3d 557, 563 (7th Cir. 2001) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)). Consistent with the choice-of-law provision in each contract (2/5/98 Agreement, at D017670; 2/11/98 Agreement, at D017357), the parties agree that Illinois law governs. The task of this court is therefore to predict how the Illinois Supreme Court would decide the issues presented. Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir. 1997). "Where the Illinois Supreme Court has not ruled on an issue, decisions of the Illinois Appellate courts control, unless there are persuasive indications that the Illinois Supreme Court would decide the issue differently." Id.
Given the complexity of the issues, a short preview of the court's analysis and conclusions may be helpful. Because Illinois Power seeks damages only for economic loss, it cannot proceed on a negligence theory. The negligent misrepresentation claim, Count V, is therefore dismissed. The breach of contract and breach of warranty claims, Counts I and II, fare better, but Illinois Power's statutory and policy arguments against the enforceability of the contractual damage-limitation provisions fail. Accordingly, DES is entitled to partial summary judgment limiting damages on those two counts. The damages caps will be greater than DES originally requested, but the current record does not permit the court to determine the exact amounts. An exclusive remedy provision in the 2/5/98 Agreement precludes any recovery for breach of some of the warranty provisions relied upon by Illinois Power, so the court enters summary judgment in favor of DES to the extent Count II depends on those warranty provisions.
A. Compensation Paid
DES's primary argument is that damages on each claim must be limited to the compensation paid to DES for its work on the relevant contract. This argument is based on two parallel provisions, one in each of the February 1998 contracts:
DES' total cumulative liability for claims of any kind whether based on contract, tort (including negligence and strict liability), under any warranty or otherwise, for any loss or damage relating to this agreement or the performance of the services shall in no case exceed the compensation paid to DES from any liability in excess of such amount.
(2/5/98 Agreement, at D017653.)
Contractor's total cumulative liability for claims of any kind, whether based on contract, tort (including negligence and strict liability), under any warranty or otherwise, for any loss or damage relating to this contract or the performance of the work, shall in no case exceed the compensation paid to Contractor for such work, and Owner hereby releases Contractor from any liability in excess of such amount.
(2/11/98 Agreement, at D017365 (capitalization adjusted).)
Illinois Power suggests that first provision may have been superseded when the parties entered into the contract containing the second. Because this dispute goes to the amount of damages recoverable, not to the logically prior question of whether any damages cap of this form is valid under Illinois law, it is considered infra Section II.A.3.
1. The Indemnification Act
In response, Illinois Power argues first that these limitation-of-liability provisions are void under section 1 of the Illinois Construction Contract Indemnification for Negligence Act (the "Indemnification Act" or "Act"):
With respect to contracts or agreements, either public or private, for the construction, alteration, repair or maintenance of a building, structure, highway bridge, viaducts or other work dealing with construction, or for any moving, demolition or excavation connected therewith, every covenant, promise or agreement to indemnify or hold harmless another person from that person's own negligence is void as against public policy and wholly unenforceable.740 ILCS 35/1 (West 1993).
The parties do not dispute that both contracts deal with construction, but DES contends that this species of provision is not an "agreement to . . . hold harmless." Id. A hold-harmless agreement is equivalent to an exculpatory clause and completely insulates a party from liability, DES proposes, whereas a limitation-of-damages provision merely caps a party's liability at an agreed level. One of the cases relied upon by DES to support this proposition, however, expressly holds that a provision limiting damages to the "amount paid" under the contract is an exculpatory clause. Rueben H. Donnelley Corp. v. Krasny Supply Co., 592 N.E.2d 8, 10-11 (Ill.App.Ct. 1991). More fundamentally, none of the cases DES cites on this point actually interprets the phrase "hold harmless" as used in the Indemnification Act. The Illinois Appellate Court has repeatedly stated that "[a] contract which purports to relieve a tortfeasor of some or all of its liability, premised upon its own negligence, cannot stand in light of the Act." Lavelle v. Dominick's Finer Foods, Inc., 592 N.E.2d 287, 291 (Ill.App.Ct. 1992) (emphasis added); Motor Vehicle Cas. Co. v. GSF Energy, Inc., 549 N.E.2d 884, 889 (Ill.App.Ct. 1989); accord Stiffle v. Marathon Petroleum Co., 876 F.2d 552, 559 (7th Cir. 1989). But even if DES's proposed distinction were valid, the relevant contractual provisions foreclosed the possibility of Illinois Power recovering any damages from DES until Illinois Power first paid compensation to DES. The provisions therefore constituted "hold harmless" agreements at conception, as DES would interpret that phrase. In the first weeks of the contract, DES had zero liability for harm it may have negligently inflicted on Illinois Power.
This distinguishes two cases relied upon by DES, Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195 (3d Cir. 1995), and Marbro, Inc. v. Borough of Tinton Falls, 688 A.2d 159 (N.J.Super. 1996), in which the relevant contractual clauses provided for substantial damages before any consideration had been paid.
A finding in favor of Illinois Power would seem to follow ineluctably, but ending the analysis here would overlook several important points: two implicit limitations on the Act and a more basic principle of Illinois tort law. Although this court ultimately rests its holding on the tort law doctrine, the statutory limitations are important and help to situate Illinois Power's other policy arguments. The Illinois Supreme Court recently had occasion to consider the purposes of the Act:
"It is generally known that indemnity and hold-harmless agreements are most widely used in the construction industry. The legislature in enacting section 1 may have considered that the widespread use of these agreements in the industry may have removed or reduced the incentives to protect workers and others from injury. * * * The statute would thwart attempts to avoid the consequences of liability and thereby insure a continuing motivation for persons responsible for construction activities to take accident prevention measures and provide safe working conditions." Davis [v. Commonwealth Edison Co., 336 N.E.2d 881, 884 (Ill. 1975)].
The purposes of the Indemnification Act were again examined in Capua [v. W. E. O'Neil Constr. Co., 367 N.E.2d 669 (Ill. 1977)]. There, sections 1 and 3 of the Act were harmonized. Section 3 provides that the Act "does not apply to construction bonds or insurance contracts or agreements." 740 ILCS 35/3 (West 1994). In Capua, this court confirmed the legislative purpose set forth in Davis and further determined that section 3 deals with an additional protective interest-the interest of construction workers, as well as members of the general public who sustain construction related injuries, in supplemental sources of compensation. Capua, [ 367 N.E.2d at 671-72]. Davis and Capua demonstrate that as a matter of public policy, courts will not enforce promises to indemnify contained in construction contracts because their dominant aspect is the disincentive for the indemnitee to exercise care.
Braye v. Archer-Daniels-Midland Co., 676 N.E.2d 1295, 1303 (Ill. 1997).
This explanation of the Act demonstrates why DES misses the mark with its argument that DES is not being held "harmless" because it would remain potentially liable for over $10 million in damages even if these limitation clauses are enforced. As the Illinois Supreme Court explains, the purpose of the Act is to ensure that the party with control over construction work has a continuing incentive, derived from its potential liability for negligence, to exercise due care. Before DES was paid compensation under the contract, such an incentive was lacking. The effect of a contractual provision on the parties' incentives must be evaluated ex ante, not ex post. But the policy motivating the Act is helpful to DES in another way.
The ultimate goal of the Act, it appears, is to protect construction workers and the general public. One might plausibly infer that the Act applies only where the interests of third parties are at stake. The Fifth District of the Illinois Appellate Court appeared to adopt this construction in Ralph Korte Construction Co. v. Springfield Mechanical Co., 369 N.E.2d 561 (Ill.App.Ct. 1977): "The agreement, as here applied, does not remove or reduce any incentives to protect workers and others from injury since it does not involve any question of liability to a third party." Id. at 562. This interpretation of the Act would favor enforcement of the hold-harmless provisions at issue here because no non-parties to the contracts were affected.
However, a subsequent case from the First District reads Ralph Korte as limited to instances in which the parties waive their rights against each other only to the extent they are covered by property insurance. Modern Steel Treating Co. v. Liquid Carbonic Indus./Med. Corp., 698 N.E.2d 710, 714 (Ill.App.Ct. 1998); see also Intergovernmental Risk Mgmt. v. O'Donnell, Wicklund, Pigozzi Peterson Architects, Inc., 692 N.E.2d 739 (Ill.App.Ct. 1998). The First District did not justify this limitation, and this court perceives no reason under the Act to distinguish between cases of self-insurance and insurance through an independent carrier. Contracting parties are generally free to assign among themselves the risks of insolvency. At bottom, Modern Steel rests on a broader notion of whom the Act was designed to protect. Construction is so inherently risky, the court apparently reasoned, that parties to construction contracts may not assign among themselves the risks of harm to themselves (without limiting such a reassignment to insurance proceeds).
This court strongly suspects, based on Davis, Capua, and Braye, that the Illinois Supreme Court would decline to follow the First District's reading of the Indemnification Act. Cf. Hess Oil Virgin Islands Corp. v. UOP, Inc., 861 F.2d 1197, 1207 (10th Cir. 1988) (applying Illinois law) (holding that contractual provision waiving right to recover for business interruption and lost profits did not violate the Act because "[t]he limitation clause in no way restricts UOP's responsibilities to workers or the public which the statute concerns"). In light of Modern Steel, however, this court would rather not rest its holding on this prediction. Cf. Allen, 128 F.3d at 466 ("Where the Illinois Supreme Court has not ruled on an issue, decisions of the Illinois Appellate courts control, unless there are persuasive indications that the Illinois Supreme Court would decide the issue differently.").
An alternative implicit limitation on the Act is consistent with both the purposes of the Act and, as far as this court is aware, all of the case law. Not every indemnification or hold-harmless agreement in a construction contract is unenforceable. Rather, the Act voids only those agreements that reduce the incentive to avoid construction-related injuries. Cf. Braye, 676 N.E.2d at 1303 ("construction related injuries"). This principle holds whether the injured person is a construction worker, a member of the general public, or (assuming the First District got it right in Modern Steel) a party to the contract. Two cases illustrate.
In Lovellette v. Southern Railway Co., 898 F.2d 1286 (7th Cir. 1990), a property owner, in return for a fee, had given another company permission to build and maintain a sewer pipe on the owner's property. The licensee erected a fence around the pipe, which was the proximate cause of personal injuries sustained by third parties. When the injured parties sued the owner, the owner sought indemnity from the licensee under an indemnity provision in the license. The licensee defended on the theory that the indemnity clause was void under the Act. The Seventh Circuit rejected this defense, inferring from the purposes of the Act that
the indemnitee must be in a position to avoid negligence or, viewed from a different perspective, to cause harm negligently in construction activities. In other words, where an indemnitee has merely accommodated the indemnitor and the indemnitee does not assume responsibility for any construction activities, the operation of the statute is not triggered. It is not enough . . . that the indemnitee sign an agreement somehow connected with construction activity.
Id. at 1290. Of course, unlike the indemnitee in Lovellette, DES was in a position to negligently cause harm in construction activities. The broader lesson of Lovellette, however, is that courts do not apply the Act mechanically to void all indemnity agreements in all contracts related to construction, but rather examine whether applying the Act in a particular case will serve its ends.
A more directly applicable case is North River Insurance Co. v. Jones, 665 N.E.2d 987 (Ill.App.Ct. 1995). There, the First District held that because "the Act is intended and serves to protect construction workers . . . and the public as well from the dangers associated with construction work," the Act did not void a limitation-of-damages clause in a fire alarm system contract as applied to damages incurred "after installation of [the] alarm system is completed." Id. at 991. By negative implication, if the damages had occurred during the installation of the alarm system — for example, when a worker installing a smoke detector fell off a ladder — then the Act presumably would have applied and voided the limitation-of-damages clause. The type and timing of the harm, not the nature of the contract, determines the applicability of the Act. The critical question is whether enforcing the contractual provision would reduce the incentive to avoid "dangers associated with construction work." Davis, 336 N.E.2d at 884. An alarm system failing after installation is not one of these harms, but personal and property injuries sustained during installation would be.
This reading of the Act is consistent with the holding of Modern Steel. There, the relevant contract was for the installation of a control panel to regulate the atmosphere in a furnace. 698 N.E.2d at 351-52. While construction work was still on-going (the court made a point of observing), the furnace exploded, inflicting substantial property damage. Id. at 353. Clearly, this event was a danger associated with construction. In contrast, the risk that one party to a contract will negligently misrepresent its ability to perform by a certain date or fail to meet its duty of competence is not a danger unique to construction work. For that reason, the Act would not void the hold-harmless clauses in the case at bar.
The use of the subjective verb tense in the prior sentence is intentional. What the parties mysteriously overlook is the fact that Illinois Power fails to state a claim for negligence. The only damages claimed by Illinois Power for DES's negligent misrepresentations are the amount of money paid to DES under the contract and consequential damages. In essence, Illinois Power seeks to recover for its disappointed business expectations. These damages represent pure economic loss. See Moorman Mfg. Co. v. Nat'l Tank Co., 435 N.E.2d 443, 449 (Ill. 1982). A plaintiff can recover economic loss for negligent misrepresentations only if the defendant "is in the business of supplying information for the guidance of others in their business transactions." Id. at 452. No such allegation appears in Illinois Power's complaint. See Analysts Int'l Corp. v. Recycled Paper Prods., Inc., No. 85 C 8637, 1997 U.S. Dist. LEXIS 5611, at *16 (N.D.Ill. June 19, 1987) (granting summary judgment to defendant on negligent misrepresentation claim where defendant was not alleged to be in the business of supplying information). But even if providing pre-contractual proposals were deemed to be part of DES's business, the information provided here was incidental to a tangible product, the degraded voltage project, and could have been memorialized in contractual terms. See Fireman's Fund Ins. Co. v. SEC Donohue, Inc., 679 N.E.2d 1197, 1201-02 (Ill. 1997) (affirming dismissal of negligent misrepresentation claim seeking economic loss damages against engineer because representations were incidental to a tangible product, the construction project). Recovery must therefore be in contract, not tort.
A case on all fours is Union Oil Co. v. John Brown EC, No. 94 C 4424, 1994 U.S. Dist. LEXIS 13930 (N.D.Ill. Sept. 26, 1994). There, the plaintiff alleged that the defendant "negligently misrepresented that it could complete the project for the sum of $46,900,000, that it could complete the project on time, and that it could complete the project without defects and in a workmanlike manner." Id. at *11. The court held that the economic-loss doctrine barred recovery on this claim, explaining that "Illinois courts have repeatedly held that when the only information proffered by a defendant relates to the goods or services to be provided by the defendant, the defendant is not deemed to be in the business of providing information for the guidance of others and is not liable for negligent misrepresentation." Id. at *12. Similarly, Illinois Power's negligent misrepresentation claim is dismissed.
Illinois Power's inability to state a claim for negligence removes this case from the Act's sphere of influence. The Act applies only to agreements that indemnify or hold harmless a person from that person's "own negligence." 740 ILCS 35/1. As just explained, the negligent misrepresentation claim is gone. Because the breach of contract and breach of warranty claims do not sound in negligence, the Act is not applicable to those claims either.
2. Public Policy
Illinois Power's second line of attack on the limitation-of-liability provisions is public policy. In Illinois, "[p]ublic policy strongly favors freedom to contract." McClure Eng'g Assocs., Inc. v. Reuben H. Donnelley Corp., 447 N.E.2d 400, 402 (Ill. 1983). "Regarding contracts that shift the risks of one's own negligence to another contracting party, the general rule is to enforce exculpatory contracts unless . . . it would be against a settled public policy of the State to do so. . . ." Harris v. Walker, 519 N.E.2d 917, 919 (Ill. 1998). Illinois Power argues that public policy prohibits the enforcement of an exculpatory clause in a contract involving a public utility, although it admits that no published Illinois decision limits a public utility's right to bargain away its legal remedies. This admission alone strongly suggests that enforcement would not offend a "settled" public policy of Illinois.
In search of indirect support for its argument, Illinois Power marshals the following quotations from two cases. "The decisions of this court have consistently reflected a judicial concern with balancing the need to respect the right to freely contract with the need to protect parties from unfair provisions in contracts involving publicly regulated activities." McClure, 447 N.E.2d at 402-03. "Exculpatory agreements that are contrary to public policy include those . . . between the public and those charged with a duty of public service, such as involving a common carrier, an innkeeper, a public warehouseman or a public utility. . . ." White v. Village of Homewood, 628 N.E.2d 616, 619 (Ill.App.Ct. 1993) (emphasis added).
As DES aptly observes, however, the court's concern in each instance was protecting the public from the regulated entity's exculpatory clause, not protecting the regulated entity. Indeed, the only two cases cited by the Illinois Supreme Court in support of the quoted passage from McClure that decline to enforce exculpatory clauses on public policy grounds involve clauses favoring the entity with duties to the public. See Chicago N.W. Ry. Co. v. Chapman, 24 N.E. 417, 418 (Ill. 1890) (common carrier); Tyler, Ullman Co. v. W. Union Tel. Co., 60 Ill. 421, 432 (1871) (telegraph company). These cases make clear that the policy at stake is protecting the public. See, e.g., Tyler, 60 Ill. at 432 ("It is the settled doctrine of this court that a railroad company can not purchase exemption from gross negligence, or protect itself against such; that it would be against public policy so to contract. We see no reason why the rule should not be the same in regard to telegraph companies, for they are, like railroads, public institutions, having duties to perform to the public."). What is more, a third case cited in McClure directly undermines Illinois Power's position. In Sweney Gasoline Oil Co. v. Toledo, Peoria W. R.R. Co., 247 N.E.2d 603, 605 (Ill. 1969), the court enforced an exculpatory clause in favor of a railroad against a lessee, notwithstanding the fact that the railroad was a publicly regulated entity. Sweney is inconsistent with the notion that exculpatory clauses are automatically unenforceable where one party to the relevant contract is a public entity. Cf. Rosenstein v. Standard Poor's Corp., 636 N.E.2d 665, 672 (Ill.App.Ct. 1993) ("Even where a semi-public nature is found to permeate the transaction between the parties, the exculpatory clause will be recognized.").
Setting aside the case law, Illinois Power's policy argument is unsound. The argument is that if a contractor like DES is able to avoid the costs of its own negligence and breach of contract, then the public utility will be forced either to pass these costs on to the consumer in the form of higher rates or to bear the costs itself by reducing capital improvements. Either option is bad for the public, Illinois Power contends. This ex post analysis overlooks an obvious point: if exculpatory agreements were unenforceable, contractors would demand higher compensation before subjecting themselves to unlimited liability. In all likelihood, some contractors would not be willing to work at all under such terms. Cf. Gillespie v. City of Indianapolis, 185 F.3d 693, 702 (7th Cir. 1999) (explaining that without a statutory limitation of liability, "some vital participants in the construction of nuclear plants — including architects, engineers, and smaller manufacturers of component parts — would likely have withdrawn from the industry"). If it is truly in the public interest that all contractors on public utility jobs be subject to unlimited liability, then the utilities will insist on such a term in their contracts. They do not need any help from the courts.
Next, Illinois Power argues that "overriding public policy concerns for nuclear safety" render unenforceable the damage limitation clauses. (Resp. at 9.) Limiting liability, the argument goes, will reduce the incentive to exercise due care below the level acceptable in the nuclear power industry. Congress apparently disagrees. The Indemnification and Limitation of Liability Act, 42 U.S.C. § 2210, limits the liability of those who participate in the construction of nuclear power plants in order to reduce the cost of such construction. Illinois Power cites no case to support the view that, as a matter of public policy, contractual exculpatory clauses are per se void in the nuclear power industry. The only relevant case this court has found rejects that argument. See Portland Gen. Elec. Co. v. Bechtel Corp., No. 79-103, 1980 U.S. Dist. LEXIS 9712, at *16-17 (D.Or. June 4, 1980). The court similarly rejects the proposition that any incremental reduction in the incentive to exercise due care in this industry is per se unacceptable on public policy grounds.
Illinois Power's third policy argument, also devoid of any direct case law support, is that engineers, like doctors, lawyers, and real estate brokers, are not permitted to limit their liability for professional services. "Because Illinois law imposes the duty of care upon professional engineers, DES' attempt to [limit] their [sic] liability for a statutory duty is void as against public policy." (Resp. at 11.) Illinois Power cites Cerney Pickas Co. v. C.R. Jahn Co., 106 N.E.2d 828 (Ill.App.Ct. 1952), for its premise that a "person cannot exempt [him]self from violation of [a] duty imposed by ordinance." (Resp. at 11.) Illinois Power would do well to read the subsequent history of the cases it cites. After remand, the Illinois Supreme Court reversed the appellate court decision and expressly rejected the relevant proposition of law. See Cerney Pickas Co. v. C.R. Jahn Co., 131 N.E.2d 100, 102 (Ill. 1955) ("That one of the grounds of negligence charged in this case was the lessee's failure to comply with the building ordinances in making alterations in the building is not, we think, of controlling significance" in determining the enforceability of an exculpatory clause.).
The Illinois Appellate Court similarly ignored the subsequent history of Cerney Pickas in Zimmerman v. Northfield Real Estate, Inc., 510 N.E.2d 409, 415-16 (Ill.App.Ct. 1986) (holding that real estate agents cannot contractually avoid liability for negligence). Whether or not this error infects the holding of Zimmerman, real estate brokers, unlike engineers, have fiduciary duties toward their clients.
While no court applying Illinois law has addressed the question of whether public policy prevents an engineer from contractually limiting his liability to another party to the contract, the weight of authority from other jurisdictions suggests that an engineer can do so. See Georgetown Steel Corp. v. Law Eng'g Testing Co., 7 F.3d 223 (table), 1993 U.S. App. LEXIS 23541, at *8 n. 3 (4th Cir. Sept. 14, 1993); Rogers v. Parish Corp., No. 5:92:CV:101, 1993 U.S. Dist. LEXIS 13162, at *9-12 (W.D.Mich. Aug. 30, 1993); R-1 Assocs. v. Goldberg-Zoino Assocs., No. 91-7417-E, 1995 Mass. Super. LEXIS 395, at *11-15 (Mass.Super. Aug. 16, 1995); see also Cent. Hudson Gas Elec. Corp. v. Combustion Eng'g, Inc., No. 86 Civ. 3061, 1989 U.S. Dist. LEXIS 8509, at *12-14 (S.D.N.Y. July 26, 1989) (enforcing damage limitation clause in favor of engineer without discussion of public policy); Long Island Lighting Co. v. Imo Delaval, Inc., 668 F. Supp. 237, 244 (S.D.N Y 1987) (same); Sear-Brown Group v. Jay Builders, Inc., 665 N.Y.S.2d 162, 163 (N.Y.App.Div. 199 7) (same); cf. Carvalho v. Toll Bros. Developers, 675 A.2d 209, 215 (N.J. 1996) (holding that exculpatory clause did not protect engineer with contractual responsibility for the progress of the work and knowledge of hazardous conditions from liability for death of a construction worker).
This court does not believe that the Illinois Supreme Court would adopt a per se rule against engineers contractually limiting their liability to another contracting party. Unlike doctors, lawyers, and real estate brokers, engineers are not fiduciaries for their clients. To be sure, clients rely on engineers' professional judgment and mistakes can affect the safety of clients and others. The Illinois legislature presumably recognized these risks when it enacted the Indemnification Act. To the extent engineering work results in construction-related damage to third parties, injured parties are clearly protected by the Act. As explained above, however, the Act does not cover the case at bar. In the absence of some indication that public policy in Illinois goes further than the Act, this court will not extend the prohibition on exculpatory clauses to all contracts involving engineers. That Illinois licenses engineers is also not convincing evidence that exculpatory clauses violate public policy. The regulating authority can enforce an engineer's statutory duties with or without a private cause of action. Illinois Power is a sophisticated party and could have negotiated for unlimited liability. Its decision not to do so will be respected.
Finally, Illinois Power asserts that "otherwise enforceable exculpatory provisions are not effective as to `reckless or intentional breaches [of contract] or those committed in bad faith.'" (Resp. at 11 (quoting Jewish Hosp. v. Boatman's Nat'l Bank, 633 N.E.2d 1267, 1280 (Ill.App.Ct. 1994).) Illinois Power's creative insertion notwithstanding, Jewish Hospital involved claims for negligence and breach of fiduciary duty, not breach of contract or warranty. That a breach of contract may be reckless or intentional is generally of no legal significance. Cf. Morrow v. L.A. Goldschmidt Assocs., Inc., 492 N.E.2d 181, 185-86 (Ill. 1986) ("We cannot agree that a breach of contract becomes a tort just because the breach was wilful and wanton."); Vail v. Bd. of Educ., 706 F.2d 1435, 1456 (7th Cir. 1983) (Posner, J., dissenting) ("Breach of contract is a strict-liability concept."), aff'd by equally divided court, 466 U.S. 377 (1984). This court is aware of no Illinois case holding that, absent fraud, an exculpatory clause does not cover an intentional breach of contract. It is worth noting that DES invokes the limitation-of-liability provisions only with respect to its breach of contract and breach of warranty claims. Thus, Illinois Power's fraudulent misrepresentation and deceptive trade practices claims, derived from essentially the same facts, will be unaffected.
3. Amount of "Compensation Paid"
Based on the affidavit of Larry Davis, DES asserts that Illinois Power paid DES $189,480 for its work under the 2/5/98 Agreement and $10,691,608 for its work under the 2/11/98 Agreement. (Rule 56.1(a)(3) Statement ¶ 11.) These amounts do not include direct costs of travel expenses and subcontractor fees. (Def.'s App. Tab E, ¶ 5.) In response, Illinois Power argues that its payments cannot be separated into two parts, but were made pursuant to a single agreement. Illinois Power cites only the first page of a November 1997 project plan to support this argument. (Def. App. Tab A, at D016681.) The plan does indicate that the scope of the degraded voltage project was to include both DES's direct engineering work and its construction subcontractor and procurement oversight responsibilities. An attachment to the plan indicates that both a "procurement agreement" and a "contract for this project" were at that time "being negotiated between Illinois Power and DES." (Id. at D016704.) The plan does not appear to be a contract between Illinois Power and DES and suggests that two separate, although obviously related, contracts still under negotiation would govern the parties' relationship in the future.
The language of the agreements supports DES's position that the compensation it received (at least after the contracts became effective) can be parsed between the two agreements. Each contract includes an "entire agreement" clause purporting to supersede all prior understandings with respect to the subject matter of the contract. (2/5/98 Agreement, at D017670; 2/11/98 Agreement, at D017361.) In light of these integration clauses, Illinois Power cannot rely on the November 1997 project plan to inform interpretation of the two contracts. The 2/5/98 Agreement purports to be a "Program Manager's Agreement" and focuses exclusively on DES's project management duties. (D017654-55.) The 2/11/98 Agreement, on the other hand, does not specifically define DES's responsibilities and appears to be a "consulting engineering services" agreement between Illinois Power and DES. (D017350.) Because the two contracts deal with different subject matter, the court rejects Illinois Power's suggestion that the later agreement superseded the earlier one.
Until DES raised the damages limitation issue, Illinois Power appeared to agree that the earlier agreement survived. The amended complaint quotes extensively from the 2/5/98 Agreement. (Am. Compl. ¶ 22.)
It does not necessarily follow, however, that damages for claims arising from each contract should be capped at the amount of compensation paid under that contract. This depends on the text of the contracts. Illinois Power argues that the term "compensation paid" under the 2/5/98 Agreement should include compensation paid for all services DES performed, not just for services rendered under that agreement. In support of this interpretation, Illinois Power emphasizes the second half of the phrase "relating to this agreement or the performance of the services." The provision, however, does not refer to "any services" or "all services," but to "the services." In context, this court believes that the only sensible way to read this phrase is as limited to the services rendered under the 2/5/98 Agreement. There would be no principled basis on Illinois Power's proposed reading to exclude services rendered by DES on a totally unrelated project. Without clearer contractual language, this court will not infer such a bizarre result.
Relying only on the quoted language, the strongest counter-argument is that the narrow interpretation renders superfluous the phrase "or the performance of the services." All services performed under the agreement, the argument goes, are related to the agreement and therefore covered by the first half of the disjunctive phrase. But the premise is not necessarily true. One might read the phrase "relating to this agreement" as limited to events surrounding contract formation, rather than performance. Thus, the phrase "or performance of the services" makes clear that the damages cap covers liability arising both from formation and from performance.
A better, but also unconvincing, textual argument for Illinois Power's proposed reading is based on a comparison of the two contracts. The 2/5/98 Agreement limits damages to "the compensation paid to DES," whereas the 2/11/98 Agreement limits damages to "the compensation paid to Contractor for such work," which in context apparently refers to work anticipated or performed under that contract. The omission of the phrase "for such work" arguably indicates an intention to include compensation paid to DES for all work. Of course, the 2/5/98 Agreement came first, so it is somewhat awkward to describe the phrase as having been omitted. Timing is not the only reason to think that the omission was unintentional. The parties — perhaps in the process of replacing the standard form "Contractor" with "DES" — appear to have inadvertently deleted the immediately adjacent phrase "for such services, and Owner hereby releases Contractor. . . ." What is left is the nonsensical "compensation paid to DES from any liability in excess of such amount." This scrivener's error will not be construed to indicate an intent to trump the more natural reading of "compensation paid" as limited to compensation paid under the 2/5/98 Agreement.
Illinois Power raises two objections to the compensation totals provided by DES. It succeeds at least in part on both fronts, but neither objection precludes partial summary judgment. First, Illinois Power argues that all expenses for construction should count toward the liability cap. The 2/11/98 Agreement defines "compensation" to include "personnel charges and reimbursable expenses" for time and work under the contract. (2/11/87 Agreement, at D017350.) "Subcontractors and Retained Contractors" is a subsection under compensation. (Id. at D017352.) It is undisputed that through February 1998 Illinois Power reimbursed DES for construction subcontracting. Thus, under the terms of the contract, these payments constitute "compensation paid" for purposes of calculating the liability cap. On the other hand, it is undisputed that Illinois Power removed the construction work from DES's direct responsibility after February 1998 and no longer reimbursed it for any construction work. Whether or not Illinois Power was, as it claims, mitigating its damages by taking direct control over the construction work, the amounts paid to third parties cannot be deemed "compensation paid" to DES.
Second, Illinois Power asserts that staff augmentation costs should count toward the liability cap. This assertion is valid. The 2/11/98 Agreement specifically includes staff augmentation costs as an element of compensation. (Id. at D017352.) Dictionary definitions and DES's proposed distinction between payment and reimbursement cannot overcome the clear terms of the contract. The total liability cap for claims under the 2/11/98 Agreement will include staff augmentation and construction subcontracting costs actually received by DES.
To the extent there may be any ambiguity, it would be interpreted against DES, as the beneficiary of an exculpatory clause. See Harris, 519 N.E.2d at 919.
Thus, DES's liability for breach of contract and breach of warranty claims based on the 2/5/98 Agreement and the 2/11/98 Agreement will be limited to the amount of compensation paid to DES under the relevant contract. On the current record, however, the court is unable to provide exact dollar amounts. In its reply brief, DES asserts that the total amount paid to DES under both contracts was $12,924,555.26. This figure does not appear in DES's statement of facts and is not attested to by affidavit. In addition, DES fails to divide the "expenses" category between the two agreements.
B. Consequential Damages
In Count I, Illinois Power seeks consequential damages for breach of contract. The February agreements, however, expressly absolve DES from liability for consequential damages. (2/5/98 Agreement, at D017653; 2/11/98 Agreement, at D017365.) Illinois Power contends that these provisions are unenforceable under Illinois law for all of the same reasons it marshaled against the "compensation paid" provisions. The reasons fare even worse in this milieu. The Tenth Circuit, applying Illinois law, has expressly rejected the view that a clause barring consequential damages is void by operation of the Indemnification Act. Hess Oil, 861 F.2d at 1207. Illinois courts in upholding no-consequential-damages clauses have relied on the fact that such provisions, unlike hold-harmless clauses, do not eliminate recovery altogether. See, e.g., Rayner Covering Sys., Inc. v. Danvers Farmers Elevator Co., 589 N.E.2d 1034, 1038 (Ill.App.Ct. 1993). To the extent Count I alleges breach of the 2/5/98 and 2/11/98 Agreements, consequential damages are barred.
C. Breach of Warranty
DES argues that Illinois Power's exclusive remedy for breach of warranty under the 2/5/98 Agreement is an equitable adjustment in the compensation paid or to be paid to DES. This argument is based on the "Warranty" paragraph of the 2/5/98 Agreement, which, after outlining several specific duties of DES, provides:
DES makes no other warranties or representations, whether statutory, expressed or implied (including implied warranties of merchantability and fitness for a particular purpose). The sole liability of DES relating to the services shall be limited to reperforming at DES' expense any services performed by DES which have failed to meet the above warranty. . . . In the event that reperformance is impracticable, DES may, in its sole discretion, make an equitable adjustment in the compensation paid, or to be paid to DES by owner, for DES' failure to meet its warranty obligations hereunder. The foregoing remedies shall be owners sole remedies for any failure of DES to comply with its warranty obligations.
(2/5/98 Agreement ¶ 19.3, at D017664.) Delays are addressed in a later paragraph, in which "DES warrants its expertise in maintaining schedules for assigned work and will recognize events likely to cause delay." (Id. ¶ 28.1, at D01768.) That paragraph goes on to provide that DES will promptly notify Illinois Power of any expected delay and submit claims for schedule extensions.
Neither party cites any case law addressing the enforceability of this type of contract provision. This court sees no reason why it should be deemed per se unenforceable. DES could have made no warranty at all — there was plenty of other consideration in the contract — which would amount to the same thing as limiting damages to zero for breach of warranty. But the warranties here were better than nothing: where reperformance was practical, DES committed itself to reperforming at no charge to Illinois Power. Here, reperformance is impossible, so Illinois Power's exclusive remedy for breach of its duties under the warranty paragraph is requesting a wholly discretionary compensation adjustment from DES. To the extent Count II depends on paragraph 19 of the 2/5/98 Agreement, summary judgment in favor of DES is entered.
Delay and scheduling failures stand on a different footing. This court concludes that the damages provided for in paragraph 19 apply only to the warranties outlined in that paragraph. Several aspects of the contract lead to this conclusion. Most fundamentally, reperformance for delay is never possible, so much of paragraph 19 is inapplicable by its plain terms. It seems implausible to suppose that Illinois Power would demand assurances concerning scheduling and then agree to a wholly discretionary remedy for delay. Paragraph 19 is titled "Warranty," the first two sub-paragraphs address duties of competence, care, and professionalism, and the exclusive remedy provision in sub-paragraph 19.3 refers at one point to "the above warranty." Paragraph 28, entitled "Delay," appears seven paragraphs and four pages later. The logic, language, and structure of the contract dictate that the exclusive remedy provision for breach of warranty is limited to the warranties described in paragraph 19. Accordingly, to the extent Count II depends on paragraph 28 of the 2/5/98 Agreement, summary judgment in favor of DES is denied and damages will be capped at the amount of compensation paid under the 2/5/98 Agreement.
Even if the court found an ambiguity concerning the scope of the exculpatory clause, the court would be constrained to interpret the clause narrowly. See Harris, 519 N.E.2d at 919.
This is not necessarily the upper limit of Illinois Power's potential recovery for breach of warranty. Although Illinois Power does not expressly rely on the 2/11/98 Agreement in support of its breach of warranty claim, DES in that contract "warrants that its services shall be performed . . . with professional thoroughness and competence." (D017362.) Illinois Power's allegations arguably support recovery for breach of this provision.
III. Conclusion
For the foregoing reasons, Count V is dismissed, damages under Counts I and II are limited to the compensation paid to DES under the February contracts, and judgment in favor of DES is entered as to Count II to the extent that count is based on paragraph 19 of the 2/5/98 Agreement.