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Enforceability of Limitation of Liability Clauses

Limitations of Liability

Illinois law enforces contract clauses purporting to limit a party’s financial liability for damages.  In Rayner Covering Sys., Inc. v. Danvers Farmers Elevator Co., 589 N.E.2d 1034 (Ill. App. 1992), an Illinois Appellate Court upheld a limitation of damages clause in a contract for the sale of corn storage tarpaulin which insulated the seller from liability for consequential damages.  Id. at 1037-38.  The court noted that “[w]hile exculpatory or limitation of damages clauses are not favored and must be strictly construed against a benefitting party, the basis for their enforcement is the strong public policy favoring freedom of contract.”  Id. at 1037 (internal citations omitted); see also Hicks v. Airborne Express, Inc., 858 N.E.2d 48, 55 (Ill. App. Ct. 2006) (enforcing a limitation of liability in a delivery service contract which limited the courier’s liability to replacement); Intrastate Piping & Controls, Inc. v. Robert-James Sales, Inc., 733 N.E.2d 718 (Ill. App. Ct. 2000) (upholding product manufacturer’s limitation of liability to cost of defective material).  Illinois courts have also noted that parties may limit their liability to an exclusive remedy without using the word “exclusive.”  O’Shield v. Lakeside Bank, 781 N.E.2d 1114, 1119 (Ill. App. Ct. 2002) (“The remedy provision will be deemed exclusive if the contract warrants this interpretation, even if the word ‘exclusive’ does not expressly appear within the contract.”).

Parties may also contractually limit their remedies and exclude or modify warranties in sales contracts.  810 Ill. Comp. Stat. Ann. 5/2-719, 5/2-316 (West 2021).  Illinois courts do not require a specific reference to negligence in a contractual disclaimer provision.  Ill. Cent. Gulf R.R. Co. v. Pargas, Inc., 722 F.2d 253, 255 (5th Cir. 1984) (applying Illinois law).  Therefore, a limitation excluding “all indirect, specific or consequential damages” in a contract between a tank car owner and contractor was broad enough to cover damages to the property of third parties caused by the tank car owner’s negligence.  Id.

Exculpatory Clauses

While exculpatory provisions are disfavored and construed against the drafter, Illinois courts generally find them enforceable “unless: (1) enforcement would be against a settled public policy of the state; or (2) something in the social relationship of the parties militates against enforcement.”  Dargis v. Paradise Park, Inc., 819 N.E.2d 1220, 1232 (Ill. App. Ct. 2004); Home Healthcare of Ill., Inc. v. Jesk, 112 N.E.3d 594, 606-07 (Ill. App. Ct. Nov. 27, 2017) (finding escrow agreement contained valid exculpatory clause making party only liable for “willful misconduct or gross negligence”).  Conversely, Illinois courts are likely to enforce an exculpatory provision if: “(1) it clearly spells out the intention of the parties; (2) there is nothing in the social relationship between the parties militating against enforcement; and (3) it is not against public policy.”  Evans v. Lima Flight Team, 869 N.E.2d 195, 201 (Ill. App. Ct. 2007).  An exculpatory agreement must contain “clear, explicit, and unequivocal language referencing the type of activity, circumstances, or situation that it encompasses.”  Id. at 203. Injuries need not be specifically enumerated and rather, “the injury must only fall within the scope of possible dangers ordinarily accompanying the activity and, therefore, reasonably contemplated by the parties.” KFC Corp. v. Iron Horse of Metairie Rd., LLC, 18 C 5294, 2020 WL 3892989, at *15 (N.D. Ill. July 10, 2020). Exculpatory clauses have been found to apply to tort claims of individuals who are not directly a party to the contract.  Wells Fargo Bank Minnesota, NA v. Envirobusiness, Inc., No. 1-13-2714, 2015 WL 808266 (Ill. App. Ct. Feb. 25, 2015).

Indemnity Agreements

Under Illinois law, indemnification provisions in construction contracts relieving a person from liability for his own negligence are void as against public policy.  740 Ill. Comp. Stat. 35/1 (West 2021).  “[A]n indemnity contract will not be construed as indemnifying one against his own negligence, unless such a construction is required by the clear and explicit language of the contract.”  Hussar v. Brewster Condo. Corp., No. 1-17-2524, 2018 WL 3130844 (Ill. App. Ct. June 22, 2018) (quoting Westinghouse Elec. Elevator Co. v. La Salle Monroe Bldg. Corp., 70 N.E.2d 604, 607 (Ill. 1946));but see Bella Kay Bldg. Corp. v. City of Chicago, 208 N.E.2d 60, 72 (Ill. App. Ct. 1965) (finding that the rule set forth in Westinghouse was inapplicable where the party seeking indemnification was not the only one negligent and the indemnitor’s obligation was clear and explicit).  Illinois courts presume that parties know that a pure indemnification clause is void as a violation of public policy.  Pierre Condo. Ass’n v. Lincoln Park W. Assocs., LLC, 881 N.E.2d 588, 593 (Ill. App. Ct. 2007).  Accordingly, courts often construe contractual clauses seeking partial indemnity as clauses for contribution.  FHP Tectonics Corp. v. NES Rental Holdings, Inc., No. 1-14-1650, 2016 WL 3387306, at *12 (Ill. App. Ct. June 17, 2016).  For example, in Pierre Condo, a provision in a contract between a contractor and an excavation subcontractor required the subcontractor to indemnify property owners against all claims resulting from the subcontractor’s work “to the extent caused by the negligent actions or omissions” of the subcontractor “regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.”  To avoid running afoul of Section 35/1, the court construed the provision as requiring contribution, not indemnification.  Pierre Condo, 881 N.E.2d at 593 (stating that “the literal terms of a contract are not necessarily dispositive on the issue of whether [an indemnification clause] is void”). 

Enforceability of Waiver of Consequential Damages Clauses

Illinois courts have not directly addressed the enforcement of waiver of consequential damages clauses in the construction context, but have enforced such clauses in other contexts.  In Illinois, clauses waiving consequential damages are strictly construed and generally upheld based on the strong public policy favoring the freedom of contract.  See Computrol, Inc. v. Newtrend, L.P., 203 F.3d 1064, 1070 (8th Cir. 2000) (internal citations omitted) (“Illinois law allows parties to limit remedies and damages for breach of contract if no public policy bar exists.  While exculpatory or limitation of damages clauses are not favored and must be strictly construed against a benefitting party, the basis for their enforcement is the strong public policy favoring freedom of contract.”); Rayner Covering Sys., Inc. v. Danvers Farmers Elevator Co., 589 N.E.2d 1034, 1037 (Ill. App. 1992) (stating that “exculpatory or limitation of damages clauses are not favored and must be strictly construed against the benefitting party”, but that “the basis for their enforcement is the strong public policy favoring freedom of contract”); see also Westlake Fin. Grp., Inc. v. CDH-Delnor Health Sys., 2015 WL 69781, at *7 (Ill. App. 2 Dist. 2015) (citing Hicks v. Airborne Express, Inc., 858 N.E.2d 48, 54 (Ill. App. 2006)) (holding that clauses limiting damages are enforced due to the strong public policy favoring freedom of contract, but such clauses are not favored and will be strictly construed against the benefiting party).

In the context of transactions for the sale of goods, the Illinois Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances.  See 810 Ill. Comp. Stat. Ann. 5/2-711 – 5/2-714, 5/2-715(2).  However, Illinois code section 5/2-719 of chapter 810 permits the buyer and the seller to contract to limit or exclude consequential damages unless the contractually specified limitation or exclusion is unconscionable or where the circumstances cause the contractually specified limited or exclusive remedy to fail of its essential purpose.  See Sandy Alexander, Inc. v. Manroland, Inc., No. 19 C 2461, 2020 WL 902891, at *4 (N.D. Ill. Feb. 25, 2020) (citation and quotation marks omitted) (“Illinois has adopted the Uniform Commercial Code’s rule that consequential damages such as lost profits may be limited or excluded by parties to a contract unless the limitation or exclusion is unconscionable.”); Razor v. Hyundai Motor Am., 854 N.E.2d 607, 622 (Ill. 2006) (“Contractual limitations or exclusions of consequential damages will be upheld unless to do so would be unconscionable, regardless of whether the contract also contains a limited remedy which fails of its essential purpose.”).  In assessing whether such a contractual provision should be disregarded as unconscionable, “Illinois courts look to the circumstances existing at the time of the contract’s formation, including the relative bargaining positions of the parties and whether the provision’s operation would result in unfair surprise.”  CogniTest Corp. v. Riverside Pub. Co., 107 F.3d 493, 499 (7th Cir. 1997) (citations omitted).

Application of Economic Loss Doctrine

Illinois courts recognize the economic loss doctrine in its “intermediate” form for both products liability and construction cases.  This means that the doctrine bars tort recovery for purely economic losses except in situations of dangerous situations to persons or property.  See Fireman’s Fund Ins. Co. v. SEC Donohue, Inc., 679 N.E.2d 1197, 1199-1200 (Ill. 1997) (applying economic loss rule to suit against engineer); Moorman Mfg. Co. v. Nat’l Tank Co., 435 N.E.2d 443, 448 (Ill. 1982); see also Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 567-68 (7th Cir. 2012) (“Known as the Moorman doctrine in Illinois, this doctrine bars recovery in tort for purely economic losses arising out of a failure to perform contractual obligations. … If, for example, an architect bungles a construction design, the Moorman doctrine bars the aggrieved owner’s suit for negligence.”).  Illinois courts will not apply the doctrine, however, to situations where it is “unreasonably dangerous to the user or consumer or to his property … .”  Moorman Mfg. Co., 435 N.E.2d at 448; see also ExxonMobil Oil Corp. v. Amex Constr. Co., 702 F. Supp. 2d 942, 969 (N.D. Ill. 2010) (discussing “exception … composed of a sudden, dangerous, or calamitous event coupled with personal injury or property damage”).  Nor is the doctrine applied to cases “where a service professional has duties to his client that arise independently of his contractual duties.”  Receivership Mgmt., Inc. v. AEU Holdings, LLC, No. 18 C 8167, 2019 WL 4189466, at *18 (N.D. Ill. Sep. 4, 2019) (citation omitted).

Fraud Exceptions

Additionally, Illinois courts recognize other exceptions to the application of the economic loss rule where the plaintiff’s damages are proximately caused by a defendant’s intentional false representation, or where the plaintiff’s damages are proximately caused by a negligent misrepresentation by a defendant “in the business of supplying information for the guidance of others in their business transactions.”  Moorman Mfg. Co., 435 N.E.2d at 451-52 (Ill. 1982).  “The key question in assessing whether a defendant is in the business of supplying information is whether the parties’ relationship is in furtherance of the creation of a tangible product. Where the ultimate result of the contractual undertaking is the creation of a tangible product, the economic loss doctrine generally bars recovery of damages in tort.”  Stewart Title Guar. Co. v. Inspection & Valuation Int’l, Inc., No. 12 C 08918, 2013 WL 5587293, at *5 (N.D. Ill. Oct. 10, 2013) (declining to apply the exception to title company’s claim on construction project). The latter standard for negligent misrepresentation is also used in evaluating whether the doctrine applies in professional malpractice cases.  Fireman’s Fund Ins. Co., 679 N.E.2d at 1201-02.

Enforceability of No Damages for Delay Clauses

Although Illinois courts have consistently recognized the validity of no damages for delay clauses, such clauses are construed strictly against those who seek their benefit in order to “prevent unconscionable results which may arise from [] enforcement.”  John Burns Constr. Co. v. City of Chicago, 601 N.E.2d 1024, 1036 (Ill. App. 1992).  Additionally, Illinois courts recognize exceptions for delay caused by bad faith, delay not within the contemplation of the parties, delay of unreasonable duration, and delay attributable to the ignorance or incompetence of the engineer.  See J & B Steel Contractors, Inc. v. C. Iber & Sons, Inc., 642 N.E.2d 1215, 1221-22 (Ill. 1994); John Burns Constr. Co., 601 N.E.2d at 1033.

Strict Interpretation of Contract

In Illinois, the primary goal of contract interpretation is to give effect to the intent of the parties.  Virginia Surety Co. v. Northern Ins. Co. of New York, 866 N.E.2d 149, 153 (Ill. 2007).  In determining the intent of the parties, a court must consider the contract document as a whole and not focus on isolated portions of the document.  Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007).  The court initially looks to the four corners of the contract alone to determine whether there is any ambiguity.  Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 884 (Ill. 1999).  If the language of a contract is clear and unambiguous, the intent of the parties must be determined solely from the language of the contract document itself, which should be given its plain and ordinary meaning, and the contract should be enforced as written.  Virginia Surety Co., 886 N.E.2d at 153.  However, if the contract language is ambiguous, the meaning of the contract language must be ascertained through a consideration of extrinsic evidence. Gallagher, 874 N.E.2d at 58.  The determination of whether a contract is ambiguous is a question of law for a court to decide.  Central Illinois Light Co. v. Home Ins. Co., 821 N.E.2d 206, 213 (Ill. 2004) (citing American States Ins. Co. v. Koloms, 687 N.E.2d 72, 75 (Ill. 1997)).  That the parties disagree on the meaning of a term of a contract does not, in itself render that term of the contract ambiguous.  Id. at 214 (citing Johnstowne Centre Partnership v. Chin, 458 N.E.2d 480, 481 (Ill. 1983)).  Rather, a contract is ambiguous when the language used in the contract is susceptible to more than one reasonable interpretation.  Id.; see also Nicor, Inc. v. Associated Electric & Gas Ins. Servs. Ltd., 860 N.E.2d 280, 286 (Ill. 2006).  If a court determines that a contract is ambiguous, extrinsic evidence may be considered by the trier of fact in determining the intent of the parties.  Thompson v. Gordon, 948 N.E.2d 39, 47 (Ill. 2011) (citing Gallagher, 874 N.E.2d at 58).  Illinois courts will utilize to the doctrine of contra proferentem, only as a last resort if the court is unable to ascertain the intent of the parties using ordinary principles of contract interpretation.  Premier Title Co. v. Donahue, 765 N.E.2d 513, 517 (Ill. Ct. App. 2002). 

Prompt Payment Requirements (Public/Private)

Illinois Public – 30 Ill. Comp. Stat. 540/3-2, 540/7 (2022); 50 Ill. Comp. Stat. Ann. 505/3 (2022) (owner to prime:  State 90 days after invoice, local 30 days after approved invoice; prime to sub and sub to lower tiers:  10 business days or 15 calendar days after payment, whichever occurs earlier; interest at 1% per month for monies owed to prime or 2% per month on monies owed to subs, exceptions apply to interest on certain voided contracts, see 30 Ill. Comp. Stat. 540/3-2).

Illinois Private – 815 Ill. Comp. Stat. 603/1, 5, 10, 15, 99 (2022) (owner to prime 40 days after invoice receipt – 25 days for approval + 15 days to pay; payment deemed approved 25 days after receipt of invoice unless owner notifies contractor in writing of reason for withholding payment; prime to sub 15 days after payment; interest at 10% per annum).

False Claims Statute

740 Ill. Comp. Stat. Ann. 175/1-175/8 – The Illinois False Claims Act is substantially similar to the FCA.  The Illinois statute imposes a civil penalty of not less than the minimum amount and not more than the maximum amount allowed for a civil penalty for a violation of the FCA as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461), plus treble the amount of damages sustained by the state.  Id. 175/3.  In addition, the Illinois statute provides that a person violating the Illinois statute shall also be liable for the costs of a civil action brought to recover any such penalty or damages.  Id. 

Licensing Requirements for Construction Managers

Illinois statutes and regulations do not impose statewide licensing requirements on construction managers or general contractors.  Individual licensing regulations govern specific construction trades such as roofing and plumbing.  Illinois contractors and construction managers, however, may be subject to license requirements at the local level.  Local licensing requirements vary by municipality.

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