Appellate Court Rules that Plaintiff Cannot Sue for Breach of Contracts which It is Neither a Party to nor an Intended Beneficiary

 The vast majority of breach of contract lawsuits in commercial litigation involve one party to a contract suing the other party to the contract for failing to perform. Recently, an Illinois Appellate Court was forced to address a less common scenario where the plaintiff alleging a breach of contract was not a party to the original contract. The court ultimately ruled that a non-party property owner could not assert breach of contract or negligence claims against parties to various construction contracts between the tenants of the property and the contractors and architects. The Court based its conclusion on the determination that the property owner was not an intended beneficiary of the contracts at issue.

Navigant Development, LLC owned a restaurant property on Wells Street in downtown Chicago. After two separate tenants completed two separate renovations at the property, defects in the trusses supporting the property’s ceiling were discovered. Further investigation revealed extensive damage to several of the trusses forcing Navigant to shut the building down and make repairs costing nearly a million dollars to fix the structure. Navigant’s insurer paid Navigant for the cost of these repairs and for the income lost during the time the restaurant was closed. As the owner’s subrogee, the insurer then sued various contractors and architects involved in the renovation projects, alleging multiple counts of breach of contract and negligence. In its complaint, the insurer alleged that Navigant was an intended third-party beneficiary because the defendants knew the work was to be performed at a property owned by Navigant.

The defendants sought dismissal of the claims arguing that Navigant was not an intended third-party beneficiary of the contracts at issue. The defendants also argued that the negligence claims were precluded by the economic loss doctrine. The trial court ultimately granted the defendants’ motions with prejudice finding that Navigant could not be an intended third-party beneficiary to the contracts between defendants and Navigant’s tenants. The trial court also found that the negligence claims were barred by the economic loss doctrine and that none of the exceptions to the doctrine applied to the case. After the court denied the insurer’s motion to reconsider the dismissal, the insurer appealed.

The Court began its analysis of the breach of contract rules by reciting the general rule that “absent privity of contract, an owner of real property cannot sue a defendant for breach of contract unless he can show that the contracting parties undertook duties and obligations for the owner’s direct benefit.” “Incidental beneficiaries,” the Court explained, “have no contractual rights or standing to enforce a contract’s terms.” After reciting the general rule, the Court further explained that the plaintiff’s claim faced an additional obstacle, namely the “presumption . . . that contracting parties did not intend to confer beneficiary status on a third party, as parties typically enter into contracts for their own benefit.”

The insurer argued that the Court could infer that Navigant was an intended third-party beneficiary by considering the surrounding circumstances at the time the contracts were executed. Because the Court found no ambiguity in the contracts, it rejected the insurer’s invitation to consider anything beyond the four corners of the contracts themselves.

The Court noted that none of the contracts named Navigant as an intended beneficiary or even mentioned Navigant. The Court rejected the argument that Navigant’s mere ownership of the property being renovated and the defendants’ knowledge of its ownership rendered it an intended third-party beneficiary. At best, the Court explained, this “would make Navigant an incidental beneficiary.”

The Court next turned to the question of whether the insurer’s negligence claims were barred by the economic loss doctrine. The Court noted that the economic loss doctrine “denies a tort remedy for those whose complaint is rooted in the disappointment of commercial or contractual expectations.” Economic losses the Court explained are “damages for inadequate value, the cost of repairing or replacing a defective product, or resulting lost profits, excluding any claim for personal injury or damage to other property [and] also extends to defective services.” Since the insurer’s negligence claims “were clearly based on commercial expectations,” as they expressly relied on the duties created by the defendants’ contracts. In essence, the insurer was disappointed that the defendants’ work did not live up to expectations and ultimately required expending money to fix. “These damages are the epitome of economic loss,” the Court concluded.

The Court’s full opinion is available here.

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