CASE NOTE: Architect Prevails In Lawsuit Brought By Project Investor
June, 2007
Case Discussion
In F.H. Paschen/S.N. Nielsen, Inc. v. Burnham Station, L.L.C. (2007 WL 837240; 2007 Ill. App. LEXIS 245), a lawsuit was brought against an architect by a project investor. The Burnham Station, L.L.C. (Burnham) is an Illinois limited liability company that was formed by James Letchinger and JDL Development to acquire and develop certain real estate located at 15th and Clark Streets in Chicago, Illinois, for the design, construction, and sale of condominiums and town homes. The plaintiff, FHP/SNN, was an investor of Burnham Station and executed a subscription agreement to purchase six membership interests in Burnham for $600,000. JDL managed Burnham Station and Letchinger is its president. One of the defendants, Tigerman McCurry Architects (TMA) is an Illinois architectural firm that drew up the architectural and design drawings, plans, and specifications of all of the underground and aboveground structures at the Burnham Station project and Stanley Tigerman is its president. TMA entered into its contract with JDL. The project did not go as planned and Plaintiff eventually lost its $600,000 investment. Plaintiff’s complaint included TMA as a defendant. One count of the complaint alleged a claim for derivative breach of contract in that TMA failed to provide adequate drawings, plans, and specifications for the development of the Burnham project. Another count alleged derivative professional negligence.
TMA filed a motion for summary judgment alleging that Plaintiff lacked standing to sue derivatively on behalf of Burnham because the contract at the center of the controversy was entered into solely between TMA and JDL, not Burnham, and TMA never consented to an assignment of its contract. TMA also maintained in its motion that neither Plaintiff nor Burnham was an intended third-party beneficiary of the contract.
The architect’s motion was supported by the affidavit of Tigerman. The affidavit stated that TMA was retained by JDL Development Corporation to provide professional services for the development of the Burnham Station project. TMA did not consent to an assignment of its contract with JDL to any parties. Moreover, TMA was not aware of the identity of any of the investors in the LLC and, in fact, did not even know of the creation of the LLC.
The court relied upon the affidavit of Tigerman. The court observed that the affidavit contained simple, declaratory statements which were facts based upon his personal knowledge. The court found that the affidavit contained sufficient information to establish its essential purpose which was to inform the court that the contract was solely between TMA and JDL.
The court also relied upon Tigerman’s averment that there was no assignment of this contract to a third party. Where the personal qualities of either party are material to a contract, the contract is not assignable without the assent of both parties.
The court also found that Burnham L.L.C. was not a third-party beneficiary of the TMA agreement. In order to determine whether another is a third-party beneficiary, courts look to the contract to determine the intent of the parties. Only third parties who are direct beneficiaries have rights under a contract. It is not enough that the third party will only reap incidental benefits from the contract. The test is whether the benefit to the third person is direct to him or is just an incidental benefit to him arising from the contract. A third party is a direct beneficiary when the contracting parties have manifested an intent to confer a benefit upon a third party. Whether a party is a third-party beneficiary is determined on a case-by-case basis. Courts require an express provision because the contract’s provisions apply only to them and not to third parties. In order to overcome that presumption, the implication that the contract applies to third parties must be so strong as to be practically an express declaration.
The court observed that FHP/SNN had the burden of proving that TMA intended to confer a direct benefit upon Burnham or Plaintiff. They failed to identify any words in the oral agreement which would constitute an express declaration to overcome the presumption that TMA and JDL contracted only for themselves. Although JDL was the development manager for the Burnham project, the record was devoid of evidence that either the plaintiff or Burnham was the intended third-party beneficiary under this contract.
Lastly, the court affirmed the dismissal of the claim of professional negligence. The court ruled that the economic loss doctrine applies to bar Plaintiff’s professional negligence claim against TMA. The court observed that tort theory is appropriately suited for personal injury or property damage resulting from a sudden or dangerous occurrence, while the remedy for economic loss, loss relating to a purchaser’s disappointed expectations, lies in contract. Relying upon the 2314 Lincoln Park case at 136 Ill. 2d 302 (1990), the court held that a plaintiff may not recover economic losses against an architect under a theory of negligent design. Such a claim concerns the quality rather than the safety of the building, and thus is a matter more appropriately resolved under contract law.
AIA Document B141-1997
AIA B141-1997 has a provision that addresses the AIA Document B141-1997 assignments. Section 1.3.7.9 states that:
The Owner and Architect, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party in this Agreement and to the partners, successors, assigns and legal representatives of such other party with respect to all covenants of this Agreement. Neither the Owner nor the Architect shall assign this Agreement without the written consent of the other, except that the Owner may assign this Agreement to an institutional lender providing financing for the Project. In such event, the lender shall assume the Owner’s rights and obligations under this Agreement. The Architect shall execute all consents reasonably required to facilitate such assignment.
Therefore, by its clear language, AIA Document B141-1997 explicitly limits assignments without consent of the architect to institutional lenders who finance the project.
AIA Document B141-1997 also has a provision that addresses third parties. Section 1.3.7.5 states that “Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third-party against either the Owner or Architect.”
Learning Points
Careful attention should be followed regarding contracts. Be aware of the exact identity of the contracting parties. Confirm that the contract is signed and dated by the appropriate, authorized person on behalf of the contracting parties. Consider express provisions in the contract that the contract is being entered into for the sole benefit of the contracting parties and that there are no other intended third-party beneficiaries. Also, consider a provision that the contract is not assignable without the written consent of the contracting parties.
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