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Morrow v. L.a. Goldschmidt Assoc.

OPINION FILED APRIL 18, 1986.

RONALD E. MORROW ET AL., APPELLEES,

v.

L.A. GOLDSCHMIDT ASSOCIATES, INC., ET AL., APPELLANTS.



Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Myron T. Gomberg, Judge, presiding.

JUSTICE MORAN DELIVERED THE OPINION OF THE COURT:

Plaintiffs, purchasers of four townhouses designed, constructed and sold by defendants, filed an 11-count complaint in the circuit court of Cook County seeking damages for breaches of express warranty and an implied warranty of habitability. Upon allowance of defendants' motion to dismiss filed pursuant to section 2-619 of the Code of Civil Procedure (Ill. Rev. Stat. 1983, ch. 110, par. 2-619), the circuit court dismissed with prejudice counts VIII through XI of the complaint in which plaintiffs alleged wilful and wanton misconduct and sought punitive damages. The circuit court made the finding required under Supreme Court Rule 304(a) (87 Ill.2d R. 304(a)), and plaintiffs appealed. The appellate court reversed (126 Ill. App.3d 1089), holding that the counts stated a cause of action for wilful and wanton misconduct and punitive damages, and we allowed defendants' petition for leave to appeal (94 Ill.2d R. 315).

At issue is whether counts VIII through XI of plaintiffs' complaint state a cause of action for wilful and wanton misconduct which would, if proved, support an award of punitive damages. Plaintiffs maintain that, in addition to their express and implied warranty claims, they have alleged "a separate tort of wilful and wanton misconduct" which would, if proved, justify an award of punitive damages. Defendants, however, contend that plaintiffs have failed to allege the existence of an independent tort for which punitive damages can be awarded. They argue that the allegations in counts VIII through XI, at most, amount to an intentional breach of contract for which punitive damages are not available.

In their third amended complaint plaintiffs allege that they entered into four separate contracts for the purchase of townhouses in a development known as the Commons of Palos Park. Three of the defendants are Leo A. Goldschmidt, alleged to be a contractor and developer, L.A. Goldschmidt Associates, Inc., a corporation engaged in the construction business, and First Charter Service Corporation, a bank service corporation. Title to the real estate was conveyed by these defendants to defendant American National Bank, as trustee. The defendants, with the exception of American National Bank, formed an entity known as the Commons of Palos Park (Commons), and that entity planned, designed and constructed the housing development.

Three of the townhouses were purchased by plaintiffs prior to completion directly from defendants. One was purchased by an intervening purchaser who assigned his interest to the fourth plaintiff.

At the time of each closing, the Commons executed an express warranty. Under the one-year warranty, the Commons warranted that the roof and roof flashings would be free from leaks; that the basement would be waterproof and free from infiltration of water due to penetration through walls or floors; and that all plumbing would be in proper working order and free from all defects of workmanship and materials. The warranty also provided that the Commons would "correct all structural defects * * * due to faulty construction and/or defective materials" during the warranty period if given notice of the defects by the homeowner.

In counts I through VII, the express and implied warranty counts, plaintiffs allege numerous defects in the construction of their townhouses, several of which were present in all four units when the units were sold. The complaint alleges that the floors in all four townhouses are improperly supported because defendants either failed to install or improperly installed certain components of the floor-support system. The complaint alleges that as a result of the improper floor supports, the floors "shake, vibrate and/or sag to a degree which is far in excess of that which is usual and customary when walked upon * * * causing cracking of floor tiles and other substantial damage." Other structural defects which are alleged to be common to all four units include a nonfunctioning "reverse osmosis water system," and carpentry work which was defective and not performed in a good and workmanlike manner.

The complaint also alleges the existence of several defects which are particular to one or more, but not all, of the units. These alleged defects include: basement flooding; heating and cooling systems which do not function properly; an improperly installed sump pump; an improperly installed water system which resulted in a high concentration of suspended particles in the water and caused appliances to malfunction; improperly fitted gas and water fixtures resulting in gas and water leakage; and various instances where the dimensions of a particular unit were not constructed according to the contract specifications. The complaint further alleges that defendants failed to correct the defects despite repeated demands by plaintiffs to do so.

In counts VIII through XI, plaintiffs request punitive damages. In support of their claim for punitive damages plaintiffs allege, inter alia, that defendants "inadequately supervised the construction" of the plaintiffs' homes; "knowingly employed incompetent contractors, subcontractors and/or agents who performed the actual construction" of the homes, or were incompetent themselves; and "wantonly, willfully and/or recklessly failed to inspect" the homes or insure that the units were built "in a good and workmanlike manner and in accordance with the contract specifications." The complaint alleges that defendants' "wanton, willful and/or reckless conduct" is evidenced by their failure to install or to properly install a certain component of the floor-support system since such improper installation "is readily observed and could, and should have been detected by any competent supervisor/inspector familiar with the plans and specifications." Plaintiffs further allege that defendants were aware of the improperly constructed floor-support system as well as other enumerated defects, because similar defects were reported in another unit prior to the closings on plaintiffs' units, and because defendants were informed by various public officials of certain building code violations. In particular, the complaint alleges that a Palos Park building inspector informed defendants by letter on September 11, 1978, of several code violations in the complex, including the "lack of support under some floor areas." Finally, the complaint alleges that after defendants became aware of the defects in plaintiffs' units and other units in the complex, they "failed to inspect for similar defects * * * and/or properly and adequately correct same."

Both defendants and plaintiffs agree that under Illinois law counts VIII through XI must be construed as alleging a tort in order to properly state a cause of action for punitive damages. As a general rule, punitive damages are not recoverable for breach of contract. (Kelsay v. Motorola, Inc. (1978), 74 Ill.2d 172, 187; Hayes v. Moynihan (1869), 52 Ill. 423, 426; Bank of Lincolnwood v. Comdisco, Inc. (1982), 111 Ill. App.3d 822, 829; 11 Williston, Contracts sec. 1340 (3d ed. W. Jaeger 1968); 5 Corbin, Contracts sec. 1077 (1964); Note, Punitive Damages in Contract Actions — Are the Exceptions Swallowing the Rule?, 20 Wn.burn L.J. 86 (1980).) The sole purpose of contract damages is to compensate the non-breaching party, and punitive damages are not available even for a "wilful" breach of contract. The Restatement (Second) of Contracts explains the rule as follows:

"The traditional goal of the law of contract remedies has not been compulsion of the promisor to perform his promise but compensation of the promisee for the loss resulting from breach. `Willful' breaches have not been distinguished from other breaches, punitive damages have not been awarded for breach of contract, and specific performance has not been granted where compensation in damages is an adequate substitute for the injured party." Restatement (Second) of Contracts, ch. 16 (introductory note) (1979); see also E. Farnsworth, Contracts sec. 12.8, at 842 (1982).

The rule against awarding punitive damages for breach of contract has been applied to situations, like the present case, where homeowners have sued builders or contractors for construction defects. Courts traditionally have refused to award punitive damages in such cases where the allegations against the builder or contractor amounted to nothing more than a breach of contract. See, e.g., McLendon Pools, Inc. v. Bush (Ala. Civ. App. 1982), 414 So.2d 92; Richards v. Powercraft Homes, Inc. (1983), 139 Ariz. 264, 678 P.2d 449; Caradonna v. Thorious (1969), 17 Mich. App. 41, 169 N.W.2d 179; Freeman v. Westland Builders, Inc. (1981), 2 Ohio App.3d 212, 441 N.E.2d 283; Tibbs v. National Homes Construction Corp. (1977), 52 Ohio App.2d 281, 369 N.E.2d 1218.

An exception to the general rule that punitive damages are not recoverable for breach of contract is when the conduct causing the breach is also a tort for which punitive damages are recoverable. (McIntosh v. Magna Systems, Inc. (N.D. Ill. 1982), 539 F. Supp. 1185 (applying Illinois law); St. Ann's Home For The Aged v. Daniels (1981), 95 Ill. App.3d 576, 580; Restatement (Second) of Contracts sec. 355 (1979).) That is, punitive damages are recoverable "where the breach amounts to an independent tort and there are proper allegations of malice, wantonness or oppression." Bank of Lincolnwood v. Comdisco, Inc. (1982), 111 Ill. App.3d 822, 829; see also Hunter Douglas Metals, Inc. v. Edward C. Mange Trading Co. (N.D. Ill. 1984), 586 F. Supp. 926 (applying Illinois law); Sullivan, Punitive Damages in the ...


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