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Asset Recovery Contracting, LLC v. Walsh Construction Company of 05 Ch 1014 Illinois

November 1, 2012


Appeal from the Plaintiff-Appellant, ) Circuit Court of Cook County. The Honorable Thomas R. Mulroy, Jr., Judge Presiding.

The opinion of the court was delivered by: Justice Pucinski

JUSTICE PUCINSKI delivered the judgment of the court, with opinion. Presiding Justice Lavin and Justice Fitzgerald Smith concurred in the judgment and opinion.



¶ 2 The instant case arose from a multimillion dollar redevelopment of the Palmolive Building at 919 North Michigan Avenue, Chicago, Illinois, to convert the commercial office building into residential and retail condominiums. Defendant Walsh Construction Company of Illinois (Walsh) was the general contractor for the "core and shell" phase of the project, which generally entails removal of the interior finishes and mechanical and electrical and plumbing systems in preparation for build-out work. Margaret Walsh was Walsh's senior project manager and was on the site daily beginning in March 2004. Jeff Pezza was Walsh's junior project manager and was on the jobsite daily. Walsh executed a contract with Palmolive Tower Condominiums, LLC (Palmolive), dated August 1, 2003. Pursuant to the terms of the prime contract, Palmolive's designated representatives were agents at Draper and Kramer Inc. (Draper and Kramer).

¶ 3 Walsh entered into various subcontracts for the project, including a subcontract agreement with Asset Recovery Contracting, LLC (ARC ), to perform the interior demolition, dated September 12, 2003. After the events related to this construction project, ARC filed for bankruptcy and then filed the instant lawsuit against the above-captioned defendants. ARC was owned by Daniel Hoffman, who was the company's managing member; James Werner, who served as a project manager, supervisory and estimator; Allen Formeister, who was a project manager and the senior estimator; and Michael McCabe, who was ARC's accountant. Todd Westmoreland was also ARC's project coordinator and worked with Werner and Patricia Gruenke to prepare ARC's estimate for the project. Westmoreland was on the site regularly. Michael Gibbons was one of ARC's superintendents.

¶ 4 ARC decided to bid on the project in 2003. Westmoreland and Gruenke prepared ARC's debris quantity estimate for the project. On March 10, 2003, ARC submitted its initial bid for the project, which assumed a 12-month schedule for a base price of $2.9 million. Werner voiced concerns to Walsh about the various delays on a previous project on which the parties worked, at 175 West Jackson, but was assured that this project would be different.

¶ 5 In July 2003, ARC began work on the project, before ARC and Walsh signed the subcontract agreement. ARC did not sign the subcontract until March 19, 2004 and Walsh did not sign the agreement until May 5, 2004.

¶ 6 The subcontract required ARC to do the following:

"Furnish all labor, materials, equipment, insurance, taxes and supervision as required to fully fabricate, deliver F.O.B. Project and install all Demolition as more completely described in the exhibits attached hereto, in strict compliance with the plans and specifications and as directed by Contractor."

¶ 7 The project schedule was attached to the subcontract agreement as Exhibit I, which set forth the timing, sequence and duration of the work of the prime contract. Included were dates related to the timing and sequence of ARC's work under the subcontract. ARC's work was divided into three major areas of the building, to be performed concurrently: (1) the tower (floors 18 through 38); (2) the base (floors 1 through 17); and (3) three basements. The project schedule set forth that ARC's demolition work was to be completed in approximately 19 weeks. There were remaining isolated demolition activities scheduled for later in the project, but the bulk of the demolition work was scheduled to be completed within a four-month period.

¶ 8 ARC's work schedule was critical to the project, as a delay in ARC's demolition work would delay the overall schedule for the redevelopment of the building. The prime contract contained a schedule that was similar to the schedule of the ARC subcontract. Exhibit A of the prime contract contained a set of clarifications dated October 16, 2003, stating that "Walsh Construction has assumed unrestricted access to perform demolition and construction above and below existing tenants." The prime contract further provided that the contract schedule was "predicated on a 10/1/03 Notice to Proceed. If this date is changed, the schedule may have to be accelerated or delayed, at the owner's direction ***."

¶ 9 I. Evidence Regarding Delays Prior to Execution of the Contract

¶ 10 In August 2003, ARC began its work, starting with demolishing the three basement levels of the building. On September 12, 2003, ARC was informed by Walsh at a meeting that the Chicago fire department (CFD) had issued an order prohibiting demolition below any occupied floor and within two floors above any occupied floor in the building. Walsh requested, and ARC provided, cost estimates for the potential effects of this delay. On September 16, 2003, Werner wrote to Walsh outlining the costs associated with six possible scenarios which could be caused by the CFD order. Scenario six assumed the CFD order would remain in place and stated that the estimate of the cost to ARC would be $390,000. Although at this point in time the subcontract agreement had not yet been signed, ARC did not include this additional cost in the subcontract.

¶ 11 The owner attempted to obtain relief from the CFD's order for the next two months. However, while the owner did so, it allowed its tenants and sales staff, including its agent, Draper and Kramer, to remain in the building, thus effectively preventing any demolition under the prohibition of the CFD's order. Also, at the same time, the owner's funding did not come through as scheduled, which also delayed authorization to ARC to commence its work on all areas except a few selected areas of the basements.

¶ 12 Also, prior to the project, Elizabeth Arden, a tenant in the building, as well as other entities, initiated litigation against Palmolive over concerns about the impending construction. In settlement, Palmolive entered into an agreement (Arden Agreement) which was incorporated into Walsh's prime contract with Palmolive. The Arden Agreement limited the manner of demolition by prohibiting loud work or dropping debris above from above the fourth floor of the building during Elizabeth Arden's business hours. ARC's subcontract with Walsh incorporated the restrictions in the Arden Agreement within the prime contract.

¶ 13 On January 15, 2004, ARC wrote a letter to Walsh concerning terms of the proposed subcontract but did not ask for any increased costs. ARC proposed a change whereby Walsh could only "reasonably" change the sequence and pace of ARC's work. Walsh agreed to this modification and it was incorporated into the contract. ARC also proposed the following modification: "there would be no waiver of claims unless Walsh was prejudiced by ARC's failure to give notice." However, Walsh rejected this modification and it was not incorporated into the subcontract. ARC also suggested a provision obligating Walsh to pay for overtime, additional supervision, equipment, expedited material and other additional costs reasonably caused by or attributable to delay, hindrance or interference, but Walsh rejected this modification. ARC did not request an increase in the overall contract price in the subcontract.

¶ 14 On January 20, 2004, Walsh issued a revised project schedule dated January 19 to ARC and all other subcontractors. The revised project schedule increased the duration of ARC's bulk demolition work by an additional seven months through July 23, 2004, and divided ARC's work into more detailed piecemeal demolition in the major project areas. Walsh requested that all subcontractors review the revised schedule and report any problems or objections to Walsh by February 17, 2004.

¶ 15 After receipt of this revised schedule, ARC's project manager, James Werner, sent an e-mail to Walsh's project executive, Jack Keating, enclosing extended overhead cost projections for the revised schedule based on 14 additional weeks. At Keating's request, two weeks later, on February 10, 2004, Werner provided a modified version of the cost projection to one of Walsh's project managers, Jeff Pezza, which included an extended overhead cost projection of a total of $361,340, and an additional cost of $332,178 for carpet areas for the building.

¶ 16 The minutes of the Walsh February 17, 2004, subcontractor coordination meeting indicated that all dates in the revised schedule were "assumed ok." ARC attended this meeting and no objection is reflected in the minutes of the meeting. ARC and Walsh continued to negotiate the terms of the subcontract through March 18, 2004.

¶ 17 In late February or early March 2004, Margaret Walsh, another project manager for Walsh, returned to the project after an extended leave and, unaware of the delays, issued a letter to ARC objecting to its failure to complete all of its work in the tower, as required by the January 19 schedule revision. In response, Werner sent a letter to Ms. Walsh dated March 3, 2004, which detailed the delays due to the actions and inactions by the owner, the owner's engineers, and Walsh. Werner advised Ms. Walsh that ARC had submitted "change requests of $590,000 (noting including any cost evaluation of the impacts discussed in this letter), of which only $82,000 has been approved for billing." Werner also informed her that "[p]ending changes include work performed as far back as October."

¶ 18 II. Contract Terms

¶ 19 Notwithstanding these pending ongoing discussions regarding increased costs, ARC executed the subcontract agreement on March 19, 2004. Werner negotiated the subcontract on behalf of ARC from October 2003 through March 18, 2004, with the aid of an attorney. The subcontract was prepared on a Walsh standard contract form and incorporated was Exhibit J, a contract rider, which modifies the terms of the standard form. Additions to the contract were shown in underlined text. Deletions were shown with strikethrough typeface. Specifically, section 2.1 of Exhibit J provides the following:

"Time is of the essence. Subcontractor will proceed with Subcontractor's Work in accordance with Contractor's schedule as amended by Contractor from time to time. Contractor shall have the right to direct reasonable adjustments, with reasonable advance notice, to the sequence and pace of Subcontractor's Work without monetary compensation to Subcontractor. *** Contractor shall, and shall cause other subcontractors, to likewise make reasonable adjustments to their respective Work, to enable Subcontractor to complete the Subcontract Work in the time required by the Prime Contract between the Owner and the Contractor."

¶ 20 Section 4.3 of Exhibit J set forth the modification of the clause providing for the assertion of a claim by ARC as a subcontractor as follows:

"Claims. A 'Claim' is a Subcontractor's demand or assertion seeking, as a matter of right, an increase in Subcontract Amount, an extension in the time for performance of Subcontractor's Work, or relief with respect to the terms of the Contract. All Claims must be made by written notice to the Contractor at least one (1) week prior to the beginning of the Subcontractor's Work or the date by which Contractor is obligated to give notice to the Owner with respect to such claim, or within one (1) week of the Subcontractor's first knowledge of the event. Costs or delays occurring more than one week prior to such notification, if any, whichever shall first occur, otherwise, such claims shall be deemed waived. Pending final resolution of a Claim, unless otherwise agreed in writing, the Subcontractor shall proceed diligently with performance of the Subcontractor's Work and the Contractor shall continue to make payments in accordance with this agreement. Contractor shall provide reasonable verification, if requested by Subcontractor, of Subcontractor's costs for performing disputed work, without acknowledging the validity of a Claim."

¶ 21 Section 4.4 of the subcontract agreement provides the following regarding delay:

"Delay. If the progress of the Subcontractor's Work is substantially delayed, hindered or interfered with through no fault or responsibility of the Subcontractor, then the Contractor shall either (I) extend the time for the performance of Subcontractor's Work by Change Order, but such extension shall be limited to that amount of time which will enable Contractor to meet its obligation to Owner to compete the Project in accordance with the Contract Documents, or (ii) have the right to order Subcontractor to accelerate its Work with additional manpower and the expediting of materials, but Contractor shall be obligated to pay only for the costs of expediting material.

Except for the costs of expediting materials at the order of Contractor pursuant to the previous paragraph, the Contractor shall not be liable to the Subcontractor for any damages or additional compensation as a consequence of delay, hindrance, interference or other similar event, caused by Contractor, by any act, negligence, or default of the Owner or Architect/Engineer, or by reason of fire, casualty, act of God or any other reason beyond the Contractor's control. It is expressly understood and agreed that the Subcontractor's sole and exclusive remedy for any delay, hindrance, interference or other similar event, shall be an extension in the time for performance of the Subcontractor's Work."

¶ 22 Section 4.4 of the rider added the following language to section 4.4 of the subcontract agreement:

" 'Notwithstanding anything to the contrary contained in this Contract, in the case of any Claim by Sub against GC relating to delays, hindrance or interference of Sub's Work cause by the acts or omissions of Owner, Sub agrees that it shall be entitled to recover against GC only to the extent that GC is entitled to recover from Owner for such delays, hindrance or interference under the terms of the Prime Contract.' "

¶ 23 Section 8.3.1 of the supplementary conditions of the prime contract between Walsh and the owner (Palmolive) gave Walsh a right to an extension of time as a remedy for delays and provided the following:

"8.3.1. If the Contractor is delayed at any time in the progress of the Work by any act or omission of the Owner, the Architect or other contractors hired by the Owner or by labor disputes, fire, unusual delay in transportation, adverse weather conditions as hereinafter described, unavoidable casualties, or any other causes beyond the Contractor's reasonable control (but not including delays caused by Subcontractors or material suppliers for reasons other than those which are beyond the control of such Subcontractors or material suppliers), then the date(s) established for Substantial and Final Completion shall be extended by Change Order for a period not exceeding the length of such delay if promptly after the commencement of any such delay, the Contractor delivers to the Owner a written notice of such delay stating the nature thereof and the manner and cost of the action to be taken by Contractor to remedy the delay, in a timely manner following the expiration of any such delay provides a written request for extension of the Substantial or Final Completion Date(s) by reason of such delay and such request is approved by the Owner, which approval shall not be unreasonably withheld. Failure to deliver any such notice or request promptly and timely shall constitute an irrevocable waiver of any extension of the Substantial and Final Completion Date(s) by reason of the cause in respect of which such notice and request were required.

In the event of any unpermitted delay, in addition to and without prejudice to any other remedies of the Owner, the Contractor shall pay to the Owner upon demand (and the Owner shall be entitled, if the Owner so elects, to offset from any sum payable to the Contractor) the amount of any actual or direct (not consequential) loss as a result of such delay."

¶ 24 Section 8.1.9(i) of the addendum to the prime contract provided:

"The following costs shall not be reimbursable as a Cost of the Work:

(i) Costs incurred as a result of any delay, whether or not a 'Permitted Delay' under Section 8.3.1 of the General Conditions, as supplemented, except as expressly permitted under Section 8.3.3 of the Supplementary Conditions attached hereto and made a part hereof."

¶ 25 Article 8.3.3 of the supplementary conditions provided:

"8.3.3. Extension of time shall be the Contractor's sole remedy for delay, unless the same shall have been caused by acts constituting intentional interference by the Owner with the Contractor's performance of the Work, and where and to the extent such acts continue, after the Contractor's notice to the Owner of such interference. The Owner's exercise of any of its rights or remedies hereunder shall not under any circumstances by construed as intentional interference with the Contractor's performance of the Work."

ΒΆ 26 Thus, the limitations in these provisions applicable to Walsh against the owner also applied to the recovery ARC would be entitled to against Walsh under section ...

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