Illinois' Consumer Fraud Act Affects the Construction Industry

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 17, November-December, 1999.

Illinois' Consumer Fraud Act, created in 1961, continues to make the news. Last month, a judge in state court in Williamson County, Illinois, awarded $130 million in actual damages and an additional $600 million in punitive damages against State Farm for violation of Illinois' Consumer Fraud Act (formerly known as the Illinois Consumer Fraud and Deceptive Business Practices Act). In total, the judge and jury assessed $1.2 billion against State Farm relating to its practice of specifying non-original equipment parts for repair estimates for millions of its insureds' vehicles.

Since 1998, the appellate courts in Illinois have written more than 25 decisions involving the Illinois Consumer Fraud Act. Three of them involved the construction industry. Given the result in State Farm, it is likely that lawsuits against target defendants, including contractors and subcontractors, will continue at an accelerated pace.

What is Consumer Fraud?

The Illinois Consumer Fraud Act requires proof of three facts: 1) a deceptive act or practice by defendant; 2) defendant's intent that plaintiff rely upon the deception; and 3) the occurrence of the deception in the course of conduct involving trade or commerce.

These three elements permit the attorney general to sue. For a private citizen, company or partnership to sue, it must show a fourth element: its own damage as a result of defendant's violation of the Act.

Potential recovery under the Act is enormous. It can include economic damages, injunctive relief, punitive damages, reasonable attorney fees, court costs, and any other relief that the court deems proper. These varied and substantial forms of damage recovery are almost without parallel in the State of Illinois.

Arbitration

A judge, not a jury, decides lawsuits involving the Act. In the construction industry, binding written arbitration agreements prevent a trial in a court of law. Even so, the Act applies to proceedings in arbitration as well as traditional court trials. In fact, a big damage recovery can be just as likely in arbitration.

Consider, for example, what happened in Father & Sons, Inc. v. Taylor, decided late in 1998. The contractor sued homeowners for about $19,000.00 pursuant to a contract for work on a new addition to their home. The homeowners countersued in multiple counts, including consumer fraud. The court sent the dispute to binding arbitration due to an arbitration provision in the construction contract.

The arbitrator denied the contractor's claim. Instead, he awarded the homeowners on their countersuit $40,000.00 to remedy defects in the home, $22,000.00 to cover the cost of hiring experts for the litigation, $75,000.00 for attorney fees and $1,400.00 for the arbitration service (American Arbitration Association). The arbitrator also declared the contractor's mechanic's lien on the home to be null and void.

The contractor initially hoped to recover $19,000.00 on his claim against the homeowners. He ultimately ended with no recovery on that claim but instead a judgment against him of $138,406.00. This included attorney fees exceeding 50% of the entire award. The Illinois appellate court affirmed this judgment.

Homeowners

In another recent case, Falcon Associates, Inc. v. Cox, a homebuilder sued the purchasers of a home for alleged damage. The purchasers had posted signs in their windows complaining that the homebuilder did not properly fix various problems. The purchasers countersued on a variety of theories, including consumer fraud. The trial court entered judgment on a jury verdict of $222,896.77 for the purchasers on claims of breach of contract and negligence but decided the Consumer Fraud Act did not apply.

The dispute largely involved the alleged promise by the homebuilder to provide a house with R-19 insulation. Given an alleged failure to do so, the homeowners claimed consumer fraud. The appellate court agreed that the Act did apply even if the contractor only made innocent misrepresentations.

Homeowners enjoyed similar success in Grove v. Huffman. They sued their builder for breach of implied warranty and violation of the Consumer Fraud Act. Their chief complaint was that the home was misdesigned. The lower portions were below the ground water level. The house "flooded" several times.

The jury found for the homeowners and awarded $34,859.00. This included $16,669.00 for costs to repair portions of the home and personal property damage, $12,190.00 for costs of repairs to remedy defects in construction, and $6,000.00 for loss of use of the home.

The trial judge then awarded an additional $12,500.00 for violation of the Act and an additional $21,073.00 in attorney fees. The court found the homebuilder's representations about a dry house may have been innocent. Nevertheless, they were sufficient to trigger a violation of the Act and a substantial damage recovery.

Environmental

Sometimes a lawsuit to enforce a mechanic's lien becomes a countersuit lodged in misrepresentation. Such was the case last year in Peter J. Hartmann Co. v. Capital Bank and Trust Co.

An excavating subcontractor that performed an environmental clean up sued to enforce a mechanic's lien. The defendant landowners countersued for violation of the Consumer Fraud Act. They alleged that the subcontractor had presented itself as an expert on environmental clean up. The landowners informed the subcontractor that they were relying upon the contractor's projections regarding clean-up costs in deciding what price to pay for the property. They argued that the environmental subcontractor "dramatically underestimated" the cost to remedy the property. Had this not occurred, they would not have purchased the property.

Once again, the appeals court concluded that even a negligent misrepresentation of this sort could trigger the Consumer Fraud Act. The appeals court allowed the action to proceed.

Attorney General

The attorney general may pursue an action for consumer fraud whenever it has reason to believe that the target defendant has engaged in a practice in violation of the Act. The defrauded party does not have to be a consumer.

In People ex rel Hartigan v. E & E Hauling, Inc., the Supreme Court of Illinois allowed the attorney general to sue for consumer fraud 23 separate defendants, including individuals, in one lawsuit. The defendants were construction contractors who participated in the construction of the McCormick Place Annex and various state highway construction projects. The consumer fraud involved allegations that defendants misrepresented levels of participation by certain contractors, including minorities and women.

Understandably, the Illinois Consumer Fraud Act has become a favorite tool for plaintiff lawyers looking to maximize their potential recovery. Given its broad application, anyone in construction who is involved with the public should consider its effect.

Jim Keller is a partner at Herzog, Crebs & McGhee, LLP, St. Louis, Missouri, where he concentrates on construction law, real estate and business litigation. He also is a panelist with the American Arbitration Association.