More on Illinois Contract Litigation

by David Cosgrove

It is important, in the first instance, to understand the nature of a warranty and the difference between a warranty and any other type of contractual representation or promise. The Illinois Appellate Court, in the case of Vasco Trucking, Inc. v. Park Jill Truck Co., 6 Ill.App.3d 572, 286 N.E.2d 383 (4th Dist. 1972) defined a warranty. In so doing they stated:

“So that there be no mistake as to our frame of reference, let us define ‘warranty’.

Black’s Law Dictionary, Revised 4th Edition, 1968, tells us that a ‘warranty’ is ‘A statement or representation made by the seller of goods, contemporaneously with and as a part of the contract of sale, though collateral to the express object of it, having reference to the character, quality or title of the goods, by which he promises or undertakes that certain facts are or shall be as he then represents them’.

And in Metropolitan Coal Co. v. Howard, 2 Cir., 155 F.2d 780-784, Judge Learned Hand in his usual pithy style wrote: ‘A warranty is an assurance of one party to a contract of the existence of the fact upon which the other party may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the promisor cannot control what is already in the past. To argue that the promisee is responsible for failing to independently confirm it, is utterly to misconceive its office.’ [6 Ill.App.3d at 576] [emphasis added]

The Illinois Appellate Court, in the case of Indeck North American Power Fund v. Norweb PLC, has more recently had occasion to address the legal implications of a “warranty.” 316 Ill.App.3d 416, 735 N.E.2d 649 (1st Dist. 2000). In that case, our Appellate Court noted that both Illinois and New York recognize that an express warranty is a creature of contract which a warrantor has created or agreed to by making the requisite affirmation as a part of the contract to which it is an adjunct. Id. at 427-428. The Indeck court cited with approval the New York case of CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 553 N.E.2d 997 (1990). The CBS case is particularly apt in the instant case with regard to what it says about warranties, all of which was approved by the Illinois Appellate Court in Indeck. At 553 N.E.2d 1001-1002, the CBS court noted:

The critical question is not whether the buyer believed in the truth of the warranted information . . . but ‘whether [it] believed that [it] was purchasing the [seller’s] promise that [as to its truth].’ [citation omitted]. . . . This view of ‘reliance’- i.e., as requiring no more than reliance on the express warranty as being part of the bargaining between the parties – reflects the prevailing perception of an action for breach of express warranties as one that is no longer grounded in tort but essentially in contract [citations omitted]. The express warranty is as much a part of the contract as any other term. Once the express warranty is shown to have been relied upon as a part of the contract, the right to be indemnified in damages for its breach does not depend on proof that the buyer thereafter believed that the assurances of fact made in the warranty would be fulfilled. The right to indemnification depends only on establishing that the warranty was breached. [emphasis added]

The facts of CBS are particularly compelling. In that case CBS entered into a purchase agreement with the defendant, Ziff-Davis, for the sale of the consumer magazine’s business. In the purchase agreement, Ziff-Davis warranted that the audited income and expense report of the businesses for the 1984 fiscal year which had previously been provided to CBS had been prepared in accordance with generally accepted accounting principles and that such report presented fairly the items set forth within it. Ziff-Davis agreed to furnish an interim income and expense report of the businesses covering the period from end of the 1984 fiscal year and warranted that from July 31, 1984 until closing there had not been any material adverse change in the seller’s business of publishing and distributing the various publications. CBS subsequently discovered that the financial statements provided by the defendant there were not prepared according to GAAP and did not fairly depict Ziff-Davis’ financial condition.

Subsequent to the execution of a contract the underlying transaction was closed and CBS brought action claiming that Ziff-Davis had breached the warranties made as to the magazine’s profitability, i.e., the financial condition as depicted in the financial statement allegedly prepared in accordance with GAPP.

The defendant, Ziff-Davis, moved to dismiss the action subsequently filed by CBS, claiming, inter alia, that CBS had not “relied” on the information contained in the warranted financial statements. The trial court and appellate court dismissed the breach of warranty action in the CBS complaint on the basis that CBS had not, in fact, relied upon the information contained in the financial statements provided by Ziff-Davis. The New York Court of Appeals reversed using the language described above.

In Indeck, the court relied, not only on CBS, Inc. v. Ziff-Davis Publishing, but upon the case cited by the Appellate Court in Vasco Trucking, Inc., Metropolitan Coal Co. v. Howard. The Indeck court noted, citing Metropolitan Coal, that representations and warranties are assurances upon which a party may rely and that they are intended, precisely, to relieve the promisee of any duty to ascertain the fact for himself. The Indeck court noted that a warranty is operative even if the party to whom it is given does not believe it to be true. The Indeck court reiterated and adopted the holding in CBS, in noting that to recover on a warranty claim, a party need only show that the warranty is a part of the contract and is relied upon. The right of indemnification depends only upon establishing that the warranty is breached. Indeck, 316 Ill.App.3d at 428.

The above cited cases establish, definitively, the legal implication of a warranty. As the Vasco Trucking case established, inter alia, a warranty “. . . amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue . . . .” (citing Metropolitan Coal Co. v. Howard). In the Indeck case, the court reiterated that position when it noted, citing CBS, the New York case cited above, that the breach of warranty carries with it a right to “indemnification.”

The blog reader’s attention is directed, initially, at the case of Midland Insurance Co. v. Bell Fuels, Inc., 159 Ill.App.3d 780, 513 N.E.2d 1 (1st Dist. 1987). At 159 Ill.App.3d 785, the court defined the term “indemnify.” In so doing the court noted the following:

It is amply demonstrated in Midland’s brief that the word ‘indemnify’ encompasses more than the legal concept of indemnity. Webster’s New Collegiate Dictionary 1147 (1977 ed.) defines ‘indemnify’ as ‘to make compensation to for incurred hurt, loss or damage’ and lists the word ‘pay’ as a synonym. Black’s Law Dictionary defines the word indemnify as meaning ‘To save harmless; to secure against loss or damage; to give security for reimbursement of a person in case of an unanticipated loss falling on him.’ (Black’s Law Dictionary 692 (5th ed. 1979). While many dictionaries do not include ‘insure’ among the definitions of ‘indemnify,’ [citation omitted] the term ‘indemnity,’ in contrast is generally more narrowly defined to mean ‘insure.’ Black’s Law Dictionary defines ‘indemnity’ as ‘a collateral contract’ or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person.’ (Black’s Law Dictionary 692 (5th ed. 1979).

Significantly, in defining the term “save harmless” or “hold harmless” Black’s Law Dictionary (8th ed. 2004) defines the term as “To absolve (another party) from any responsibility for damage or other liability arising from the transaction; INDEMNIFY. – also termed save harmless.

The appellate court in the case of Bridewell v. Board of Education of Shawnee Community in its School District No. 84, had occasion to consider the scope of responsibility for a party obligated to “indemnify” another. 2 Ill.App.3d 684, 276 N.E.2d 745 (5th Dist. 1971). Specifically, the court had occasion to determine whether the term “indemnify” would have required the party whose obligation it was to indemnify the other to pay attorneys fees for defense of the subject action. The appellate court, in Bridewell, relied upon the case of General Accident Fire & Life Assurance Corp. v. Smith and Oby Co., 272 Ill.App.2d 581 (6th CCR), which involved an indemnification in which a subcontractor involved there agreed to “indemnify” the general contractor against all loss, liabilities, suits or obligation of every kind paid or incurred by the general contractor on account of the failure of the subcontractor to perform as agreed. In passing on the scope of the obligation to “indemnify,” the court concluded that that scope included the payment of attorneys’ fees incurred by the contractor in defending the action involved. There, the indemnifying party, the subcontractor, refused to defend the action requiring the general contractor to do so. The duty of indemnification was found by the appellate court to include the payment of attorneys’ fees.

As discussed in detail above, it is well-established in Illinois that an express warranty is as much a part of the contract as any other term, and amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue. Indeck, 735 N.E.2d at 659. Specifically, if a party breaches an express warranty, the non-breaching party may rescind the contract and recover back the purchase price or sue on the warranty and recover damages. Phillips v. Ripley & Fletcher Co., 541 A.2d 946, 949 (Me. 1988) (adopting warranty law nearly identical to Illinois). Importantly, “a representation is operative even if the party to whom it is given does not believe it to be true.” Id. As noted above, to recover on a warranty claim, a party need only show that the warranty is part of the contract, and is relied upon. Id. Accordingly, “the right to indemnification depends only on establishing that the warranty was breached.” Indeck, 735 N.E.2d at 659. So, if you are litigating a breach of contract case and have an Illinois choice of law provision, or contract formation took place in Illinois without a choice of law provision, you would be wise to carefully evaluate the contract’s express warranties, particularly if you or your client was the party that made them! Food for thought.