The True Test of a Contract – Litigation!

Steven N. Malitz
ARNSTEIN & LEHR LLP
120 SO U T H RI V E RSI D E P L A ZA | SU ITE 1200
CHI CA G O , I L 60606
P 312.876.71 34 | F 312.876.6 234
snmalitz@arnstein.com

It is rare that an attorney has occasion to litigate a contract which he or she drafted. A poorly drafted
contract could result in embarrassment to the attorney and, worse, exposure to the client for which
the contract was drafted.

Steven Malitz represents numerous service businesses. One such business is the largest real estate
inspection business in Illinois. Malitz drafted an inspection agreement which each client must sign
before the inspection. The agreement contains various provision meant to protect the inspection
business while still being fair to the consumer, as required by law.

The inspection business became embroiled in litigation. Plaintiff insurance company sued the
inspection business and swimming pool business for negligently failing to notify homeowner of the
improper installation of a spa heater in his garage. The spa heater caught fire, damaging the
homeowner’s property. Specifically, insurer claimed that in 2005 the homeowner purchased a home
with an existing spa heater located in the garage. The insurer alleged that the pool company installed
the spa heater incorrectly because the heater was installed in a residential garage, in violation of code.
Insurer also alleged that the inspection business inspected the property in 2005 shortly before the
homeowner purchased the home, and failed to note the presence of the improperly installed heater.
Insurer contended that the spa heater caught fire causing damage to the home and its contents.

The insurer paid the homeowner’s claim and then sued the inspection and pool businesses for
reimbursement. (Although the inspection business had errors and omissions insurance coverage, the
E&O carrier denied coverage requiring inspection business to defend itself.)

Malitz filed a motion to dismiss the suit, arguing that the inspection business owed the homeowner
no duty to inspect, note or warn him of the alleged improper installation of the spa heater because the
homeowner signed the inspection agreement, which:

a) Clearly excluded ”pools, spa bodies and any underground piping” and
“saunas, steam baths, fixtures and equipment” as outside the scope of
the inspection

b) Provided that if the homeowner failed to initiate arbitration within one

year of the date of the inspection report, his claim was time-barred;
and,

c) Limited liability to a refund of the fee paid for the inspection.

The inspection agreement drawn by Malitz also allowed for payment of attorneys’ fees to the
“prevailing party” in any arbitration or litigation.

1
In opposing the motion to dismiss, the insurer argued that the “spa heater” was actually a “water
heater,” which was not excluded from the inspection under the inspection agreement. Malitz rejected
the insurer’s attempt to conveniently label the spa heater as a water heater, and pointed to the
exclusions listed in the inspection agreement. Next, the insurer argued that the one-year limitations
period was too short by law. Mr. Malitz presented law that parties to a contract may agree on a
shortened imitations period to replace a statute of limitations, if reasonable. Finally, the insurer
argued that limiting liability to the fee paid for the inspection was void by law. Malitz argued that
public policy strongly favors freedom of contract and the provision, as drafted, was conspicuous.

Realizing that the inspection agreement doomed its suit against the inspection business, and in an
attempt to avoid paying attorneys’ fees to the inspection business under the agreement, the insurer
moved to voluntarily dismiss its claim against the inspection business on the eve of the hearing. At
this point, the inspection business had already incurred substantial fees and costs. Malitz objected to
the insurer’s motion for voluntary dismissal and sought a ruling on his previously-filed motion for
involuntary dismissal.

At the hearings on Malitz’ motion for involuntary dismissal and the insurer’s motion for voluntary
dismissal, the judge denied the insurer’s motion and granted Malitz’ motion, dismissing the inspection
business from the suit due to expiration of the one-year limitations period in the agreement.

The insurer then asked the judge to reverse himself, arguing that the insurer should have been
permitted to dismiss the case against the inspection business and, regardless, a one-year limitations
period is void. The judge denied the insurer’s motion for reconsideration and the dismissal stood as to
inspection business, leaving the pool business as the sole defendant.

In order to recoup fees spent by the inspection business, Malitz sought fees from the insurer under the
fee provision in the agreement. In opposing Malitz’ fee petition, the insurer argued that because only
the homeowner signed the agreement, the insurer was not bound by it. The insurer also argued that
the attorneys’ fees provision “shocked the conscience” due to the gross unfairness in bargaining
power between the inspection business and the homeowner.

At the hearing on Malitz’ petition for fees, the judge found that the insurer—having stepped into the
shoes of homeowner in suing inspection business—was bound by the inspection agreement,
including the fee provision. Following a trial to determine the amount of fees owed by the insurer, the
judge awarded the inspection business a large portion of the fees spent in litigation.

After concluding litigation with the insurer, Malitz again made a demand on the inspection business’
E&O carrier to bridge the gap between the amount of fees the homeowner’s insurance carrier was
ordered to pay by the judge, and the amount of fees incurred by the inspection business in litigation.
Although the E&O carrier had initially denied coverage, Malitz threatened suit based on his
construction of the policy, persuading the E&O carrier to pay all fees over and above those paid by
homeowner’s insurer.

This case was an important win-win because the inspection agreement was upheld in all respects,
and, the inspection business—though required to defend itself—won the suit, forced a plaintiff to pay
it money, and was made whole from homeowner’s and E&O insurers. The result of this litigation
demonstrates that contract drafting is not a mere exercise or money-maker for attorneys. Rather,
good drafting is an invaluable shield for any business.