Buyer Beware: Illinois Supreme Court Protects Subcontractors from Implied Warranty Claims by Homeowners with No Contractual Relationship

ABSTRACT: The Illinois Supreme Court recently held that a subcontractor hired by a general contractor cannot be liable to a purchaser of a newly constructed home for breach of an implied warranty of habitability absent a direct contractual relationship with the homeowner.

The Illinois Supreme Court recently overturned 35 years of precedent in holding that a purchaser of a newly constructed home cannot pursue a cause of action for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship between the two, explicitly overruling Milton v. Richards Group of Chicago Through Mach, 116 Ill. App. 3d 852 (1st Dist. 1983). In a victory for construction subcontractors, the court held that the homeowner’s claim for breach of the implied warranty of habitability is limited to those parties with whom the homeowner has a direct contractual relationship, typically the general contractor. Specifically, a subcontractor hired by the general contractor owes no such implied warranty to the homeowner.

The case of Sienna Court Condominium Association v. Champion Aluminum Corp., et al. arose from claims of water intrusion and other construction defects at a newly constructed 111-unit condominium complex in Evanston, Illinois. Acting on behalf of the owners of the individual units, the complex’s condominium association filed a lawsuit claiming that latent construction defects rendered the complex unfit for habitation. The pleadings alleged a contractual warranty claim against the developer, as well as claims for breach of an implied warranty of habitability against the general contractor, the architects, the engineers, and numerous materials suppliers and subcontractors.

The subcontractors and material suppliers filed a motion to dismiss arguing that they owed no implied warranty of habitability, in part because they had no direct contractual relationships with the individual homeowners or the association. Although the trial court denied the motion, it promptly certified the ruling for interlocutory appeal under a state rule allowing appellate courts to examine certain preliminary issues.

On appeal, the state Supreme Court overruled the trial court and ordered it to dismiss the claims against the subcontractors, holding that “the purchaser of a newly constructed home may not pursue a claim for breach of an implied warranty of habitability against a subcontractor where there is no contractual relationship.”

The doctrine of implied warranty of habitability is a “creature of public policy” that was first recognized by the Illinois Supreme Court in 1979. See Peterson v. Hubschman Construction Co., 76 Ill. 2d 31 (1979). It protects the first purchaser of a new home against latent defects that may render the house not reasonably fit for habitation, under the reasoning that a buyer “has a right to expect to receive that for which he [or she] has bargained and that which the builder-vendor has agreed to construct and convey to him, that is, a house that is reasonably fit for use as a residence.” Id. at 40.  Such a warranty, whether or not explicitly stated in a contract, exists “by virtue of the execution of the agreement” between the builder and the buyer. Id. at 41.

While the doctrine has expanded and been developed through case law over the years, the Illinois Supreme Court has never held that a homeowner may pursue a claim for breach of an implied warranty of habitability against a subcontractor with whom it has not contracted. That said, one intermediate appellate decision had allowed such a claim only where the homeowner “has no recourse to the builder-vendor,” this newly decided Supreme Court opinion overrules that decision and limits the applicability of the implied warranty of habitability to only those parties who have a direct contractual relationship with the plaintiff.

At the heart of this decision is the distinction between contract and tort law. Here, the plaintiff had contended that privity of contract should not be a factor because the implied warranty of habitability was a tort claim developed by the courts. The Supreme Court disagreed. It characterized the warranty as an implied contractual term imposed by the courts as a matter of public policy. Because the cause of action was based on an implied contractual term, if no contract exists between parties, neither does an implied warranty of habitability.

The court found support for its reasoning in prior cases holding that parties were free to include in their contracts a waiver of the implied warranty of habitability. “A person may choose not to commence an action in tort,” the court wrote, “but he [or she] cannot waive a duty imposed by the courts” (emphasis added). The fact that the implied warranty of habitability is subject to waiver is “a conclusive indication that a cause of action for breach of the warranty must be based in contract, not in tort.”

The court also noted that if a claim for breach of an implied warranty of habitability was based in tort, as the plaintiffs had argued, it would be precluded by the “economic loss doctrine.” This somewhat complex doctrine grew out of product liability law but is now frequently applied in construction cases. In its simplest form, it provides that “an action for economic loss requires the plaintiff to be in contractual privity with the defendant,” preserving the “distinction between tort and contract” by denying remedies in tort for complaints that are based in contract. 

Under the economic loss doctrine, also known as the Moorman doctrine in Illinois, tort claims for purely economic losses—without accompanying claims of personal injury or damage to other property—are limited to cases of fraud or misrepresentation.  See Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69 (1982).  Here, the court found that the latent defects that formed the basis of the condominium owners’ claims were “the definition of pure economic loss […], i.e., when the product disappoints the purchaser’s commercial expectations and does not conform to its intended use.”

This decision provides meaningful protection to Illinois subcontractors. It insulates them from tort claims asserted by dissatisfied homeowners whose complaints should be addressed with the general contractor whom they hired and with whom they have a contractual relationship. It is then left to the general contractor to seek defense, indemnity, and/or contribution from the various trades responsible for the claimed defects, all according to the terms of their respective contracts. 

The ruling protects subcontractors’ freedom to negotiate the allocation of risks and liabilities directly with the general contractor without fear that they will face some additional and unforeseen exposure in tort if the homeowner ends up unhappy with the finished product delivered by the general contractor. This security is especially important to subcontractors that did not agree to guarantee the quality of the entire home and often only worked on a small portion of the overall project. By not allowing homeowners to bring direct actions for breach of an implied warranty of habitability against a subcontractor with whom they have no contractual relationship, the Illinois Supreme Court has in one decision strengthened contract law in Illinois, reined in attempts to unnecessarily broaden tort law, and reaffirmed the legal distinction between the two.