News and Events
The Supreme Court of Illinois Gives Unexpected New Year's Gift to Residential ContractorsJanuary 3, 2019Related Practice Areas: Construction
Last Friday, December 28, the Supreme Court of Illinois overruled the controversial Minton decision, in Sienna Court Condominium Association v. Champion Aluminum Corporation. This is a major development in the field of construction defect law, and one of the few that has favored the contractors who build single family homes, residential high-rises, condominiums, and other residential properties. Minton has been closely followed in Cook County and most of the rest of the state of Illinois since it was decided by the Illinois Appellate Court in 1983, over 35 years ago. Minton represented a substantial expansion of the judicially-created implied warranty of habitability imposed upon builder-vendors of residential properties. Essentially Minton created an unprecedented exception to black letter contract law, in allowing homeowners to file contractual claims against parties with whom they were not in privity of contract. No one paid more dearly for Minton than general contractors. On Friday, in a case involving our firm, the Supreme Court expressly overruled Minton.
The law pertaining to “construction defect” in Illinois has been evolving to a substantial degree over the last 45 years. Historically, the rule of caveat emptor governed sales of real property, and buyers could only rely on contract law in order to hold builders liable for defects in the construction. But the doctrine of merger (under which all agreements between buyer and seller were said to have merged in the deed) and caveat emptor (“buyer beware”) made it difficult to impossible for a buyer to prevail against a seller for latent defects discovered in construction. These rules remained unchanged in this country until 1957, when the implied warranty of habitability was first applied. In Illinois, the implied warranty of habitability was first recognized in a landlord-tenant relationship in 1972 in Jack Spring, Inc. v. Little, 50 Ill.2d 351 (1972).
The implied warranty of habitability was expanded to the sale of new homes in the important decision in Petersen v. Hubschman Construction Co., 76 Ill.2d 31 (1979). The Petersen court observed that “the implied warranty of habitability is a judicial innovation of rather recent origin used to avoid the harshness of caveat emptor and the doctrine of merger, and to afford a degree of relief to vendees of new homes who subsequently discover latent defects in the structure.” The Petersen court articulated three main justifications for the expansion of the implied warranty in the sale of new homes:
• Purchasers of new homes generally do not have the ability to determine whether the houses they have purchased contain latent defects
• Purchasers need the judicially-created protection because in most instances, the buyer is making the largest single investment in his or her life, and is usually relying upon the honesty and competence of the builder, who unlike the purchaser, is in the business of building new homes
• If construction of a new house is defective, its repair costs should be borne by the responsible builder-vendor who created the latent defect
Since Peterson, the implied warranty has been steadily expanded over the years in order to serve this underlying public policy. One major expansion of the warranty occurred 4 years after the Petersen decision was published, in Minton v. Richards Group of Chicago, 116 Ill.App.3d 852 (1983). In Minton, the Appellate Court of Illinois basically misread the earlier Petersen decision, in observing that, “While this warranty has roots in the execution of the contract for sale, it exists independently and privity of contract is not required.” The Minton court went on to hold that, “Where the innocent purchaser 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.”
As it turned out, Minton had a tremendously negative impact on contractors, given the way developers limit their liability when they develop property. Many or most developers create a limited liability company whose single purpose is to develop and market for sale the residential units. Many or most single purpose entities (SPE) are either dissolved, disbanded, or become bankrupt once the residential development is sold off. And even those which still exist once problems are detected are often minimally capitalized. Under Minton, the purchasers of the residential units could file a direct action against the general contractor if the developer/SPE was insolvent at the time of the filing of the lawsuit. That has been a fairly easy standard to meet for plaintiffs in construction defect litigation since the early 1980’s.
A confluence of factors has made defending Minton implied warranty claims extremely burdensome and costly for general contractors, which have disproportionately shouldered the Minton burden. Initially, the most important player in the project – the developer – is typically absent from the suit or involved by name only. The developer conceives of the project, hires the design professionals, sets the budget, hires the general contractor, and then markets and sells the units. And it is not unusual for the developer to engage in “value engineering” decisions that are meant to deliver more profit. Secondly, other key players cannot be sued. The Illinois Courts do not recognize the cause of action for violation of the implied warranty of habitability against design professionals, including the the architect and engineers. Finally, to make matters even worse, Illinois insurance coverage law is rather harsh in terms of coverage for contractors in construction defect litigation under traditional liability policies.Coverage is often limited or non-existent due to the manner in which “occurrence” and the “your work” exclusions have interpreted by the Illinois Courts. To recap, a general contractor can find itself defending an implied warranty of habitability claim against a party with whom it had no contract, and with important to critical players like the owner and architect totally absent from the suit. The general contractor still has recourse against its own subcontractors, to the extent they still exist and have assets sufficient to cover their own liability. And certainly the general contractor can defend the claim based on its non-involvement on decisions made by others, but these suits are typically decided by juries whose sympathies are strongly in favor of the aggrieved purchasers.
While the Supreme Court of Illinois has previously ruled upon (and recognized) the implied warranty of habitability, it had never considered the Minton expansion until Sienna Court. Last Friday, the Supreme Court expressly overruled Minton. Sienna Court is a bit different from the typical implied warranty claim in the sense that both the developer and the general contractor were insolvent. The subcontractors which were sued directly argued that they had no privity with the condominium owners and therefore did not owe an implied warranty to those owners. The Supreme Court agreed, and overruled Minton. We expect that general contractors will also be able to utilize the Sienna Court decision in seeking dismissal of Minton claims. The condominium owners have 21 days in which to ask for reconsideration, but it’s unlikely that would succeed.
Sienna Court does not disturb the general law on the implied warranty of habitability. But it restores the fundamental concept of privity of contract to these claims. Buyers of residential properties can no longer avoid privity and file direct claims against contractors involved in the project, absent a contractual relationship. A builder-vendor (developer) can still file its own claim against a general contractor. But in those instances where the developer is out of business or otherwise judgment-proof, the general contractor will no longer be left holding the bag for decisions made in the planning, development and design of those units.
For more information on this Supreme Court decision, please contact your Cassiday Schade attorney or the author of this article.