The Illinois Supreme Court overturned a 35-year-old precedent in December 2018 and abolished implied warranty of habitability claims against subcontractors. In Sienna Court Condominium Association v. Champion Aluminum Corporation, et al., 2018 IL 122022, 2018 WL 6818447 (Ill. 2018), the court agreed with subcontractors that, where there was no contractual privity between the homebuyer and subcontractor, there could be no implied warranty of habitability.
For the past 35-years, subcontractors in Illinois faced uncertain liability for implied warranty of habitability claims by homebuyers for construction defects despite a lack of privity between the subcontractor and homebuyer. This precedent stood since the 1983 state appellate court ruling in Minton v. The Richards Group of Chicago, 116 Ill. App. 3d 852 (1st Dist. 1983) first extended the implied warranty of habitability to subcontractors only “where the innocent purchaser has no recourse to the builder-vendor.”
The Illinois Supreme Court first recognized the implied warranty of habitability for newly constructed homes in Peterson v. Hubschman Construction Co., 76 Ill.2d 31 (1979). There, the Supreme Court held that, in the context of residential construction, the warranty of habitability is implied in the sales contract from the builder-vendor to the vendee in order to protect the first purchaser of a new house against latent defects that would render the house not reasonably fit for its intended use.
The Supreme Court reasoned that recognition of the implied warranty of habitability was necessary because the buyer of a newly constructed house “has little or no opportunity to inspect” the house and “must rely upon the integrity and the skill of the builder-vendor.” Thus, the implied warranty of habitability was borne out of public policy to ensure that new homebuyers received the benefit of their bargain with the builder-vendor—a house reasonably fit for use as a residence.
Following Peterson, Illinois courts gradually expanded the implied warranty of habitability to serve the underlying public policy of protecting first-time homebuyers of new construction. The most significant expansion of the implied warranty of habitability was Minton. In Minton, the appellate court acknowledged that, although the implied warranty of habitability was rooted in the execution of the sales contract, it was independent of the contract, and privity of contract was not required.
The court held that, where the purchaser of a newly constructed home “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor, the warranty of habitability applies to such subcontractor.” Accordingly, the Minton decision granted new homebuyers the right to bring a direct action for breach of the implied warranty of habitability against the general contractor if the developer was insolvent, and to maintain implied warranty of habitability claims against the subcontractors if both the developer and general contractor were insolvent.
A Precedent Upended
All of that changed on Dec. 28, 2018 in Sienna Court, which overruled Minton and abolished implied warranty of habitability claims against subcontractors. The decision marks a significant change in Illinois construction-defect jurisprudence.
In Sienna Court, the condominium association, on behalf of the unit owners, filed suit against the developer, general contractor, subcontractors, designers, and material suppliers for alleged construction defects in a two-building, 111-unit property located in Evanston, Ill. In the atypical scenario, both the developer and general contractor were insolvent. However, prior to the filing of the lawsuit, the condominium association obtained relief from the automatic bankruptcy stay so that it could pursue claims against the developer and general contractor to the extent of their available insurance coverage. The condominium association also recovered approximately $308,000 from the developer in the bankruptcy through a warranty escrow fund that the developer was required to establish.
The subcontractors jointly moved to dismiss the association’s implied warranty of habitability claims, arguing that the association had “recourse” to both the developer and general contractor in the form of insurance and the warranty fund, and therefore, under Minton, the association could not directly sue the subcontractors for breach of the implied warranty of habitability. The trial court denied the subcontractors’ motion to dismiss but certified several questions of law for discretionary appeal.
The appellate court answered the certified questions of law against the subcontractors’ position, and held that legal insolvency, rather than recourse, was the standard for determining whether a breach of implied warranty of habitability claim can be asserted against a subcontractor. The appellate court also refused to reconsider its decision in Minton. Thereafter, the Illinois Supreme Court granted the subcontractors’ petition for leave to appeal the certified questions of law and the underlying validity of the Minton decision.
The Illinois Supreme Court reasoned that there was no privity between a homebuyer and subcontractor, yet Minton allowed a tort action to be maintained against subcontractors for economic loss where the builder-vendor was insolvent.
The Supreme Court found that such a result was violative of the economic loss rule previously recognized in Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69 (1982), which essentially denies a tort remedy to plaintiffs where the loss is limited to disappointed commercial expectations. Therefore, the Supreme Court rejected the reasoning in Minton since it did not address Moorman or why the economic loss rule would not apply, and failed to consider the impact on the subcontractors’ contractual relationships.
In overruling Minton, the Illinois Supreme Court in Sienna Court held that purchasers of newly constructed homes cannot pursue breach of implied warranty of habitability claims against subcontractors where there is no contractual privity. And, although the Supreme Court only addressed whether such claims could be maintained by homebuyers against subcontractors, it is likely that the same rationale will also apply to bar implied warranty of habitability claims by homebuyers against general contractors since there is no privity between them either. The decision in Sienna Court represents a seismic change in Illinois law and may signal the end of implied warranty of habitability claims in construction-defect cases.