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Condominium Law FLASHPOINTS January 2019

January 15, 2019Print This Post Print This Post

Kenneth Michaels, Jr., Bauch & Michaels, LLC, Chicago
312-588-5000 | E-Mail Kenneth Michaels, Jr.

Illinois Supreme Court Overrules 35 Years of Contract Law Protecting Homeowners through Implied Warranty of Habitability

At the close of 2018, the Illinois Supreme Court sacrificed 35 years of law surrounding the implied warranty of habitability on the altar of the Moorman doctrine. The conflict between these two judicial doctrines has existed since they were initially recognized. The question became whether to protect purchasers who have the misfortune of having their new homes built by incompetent contractors or to protect the business interests of the construction industry. The latter prevailed. Although the implied warranty of habitability is not dead, it is certainly diminished.

The court’s opinion in Sienna Court Condominium Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶25, expressly overruled Minton v. Richards Group of Chicago, 116 Ill.App.3d 852, 452 N.E.2d 835, 72 Ill.Dec. 582 (1st Dist. 1983). Facing public policy choices between protecting home purchasers and the separation between contract and tort, Justice Kilbride chose to protect the homeowners making, in many instances, the largest single investment of their lives, citing Petersen v. Hubschman Construction Co., 76 Ill.2d 31, 389 N.E.2d 1154, 1158, 27 Ill.Dec. 746 (1979). He was the sole dissenter. Sienna Court, supra, 2018 IL 122022 at ¶¶35 – 45. We will begin our review with his dissent.

Justice Kilbride’s dissent focused on the policies and rationale underlying the implied warranty of habitability, which was recognized by the Illinois Supreme Court in 1979 in Petersen, supra. Petersen was a “ ‘judicial innovation’ used to give relief to purchasers of new homes who subsequently discover latent defects.” Sienna Court, 2018 IL 122022 at ¶37. The Petersen court recognized an implied warranty in contracts for the sale of new houses because of an “unusual dependent relationship” between a builder-vendor and homeowner-vendee. Homeowners often have no opportunity to inspect a home before it is built, and even if they do, they are “usually not knowledgeable about construction practices and must rely to a substantial degree upon the integrity and skill of the builder-vendor.” Id.

In Redarowicz v. Ohlendorf, 92 Ill.2d 171, 441 N.E.2d 324, 65 Ill.Dec. 411 (1982), the Supreme Court held that privity of contract was not required to assert a claim for breach of the implied warranty and extended the implied warranty to a subsequent purchaser of a newly constructed home. Justice Kilbride examined the policy underlying Petersen and Redarowicz, namely, protecting the expectations of innocent home purchasers by holding builder-vendors accountable. 2018 IL 122022 at ¶41.

The following year after Redarowicz, in Minton, supra, the appellate court held that the implied warranty applied to subcontractors when a vendee homeowner sustained losses from a defect caused by a subcontractor and the homeowner could not recover from the vendor-builder because of its insolvency. Sienna Court, supra, 2018 IL 122022 at ¶42. Once the Supreme Court eliminated the need to show privity in Redarowicz, Minton logically flowed from the analysis. Subsequently, courts have followed and even expanded Minton for the past 35 years. For example, as discussed by this column in December 2016, in Board of Managers of 1120 Club Condominium Ass’n v. 1120 Club, LLC, 2016 IL App (1st) 143849, 66 N.E.3d 863, 408 Ill.Dec. 858, the appellate court held that homeowners suffering losses from construction defects did not need to prove the vendor’s insolvency to pursue claims against the general contractor who in turn could pursue claims against the subcontractors.

Demonstrating that this was a purely a choice between competing policies, the majority opinion in Sienna Court sounds familiar and presents similar arguments voiced by Justice Ryan, joined by Justice Underwood, in his dissent in Redarowicz v. Ohlendorf, 92 Ill.2d 171, 186 – 187 (1982).

My colleagues, in the case before us, by abolishing the privity requirement, have transferred what was conceived in Petersen as a contract action into an action in tort in the nature of strict liability. Calling this action an implied warranty action is a mere fiction to circumvent our recent decision in Moorman Manufacturing Co. v. National Tank Co. (1982), 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443, which held that recovery for economic loss cannot be had under strict liability in tort. If it is the desire to permit the recovery for economic loss in a strict liability tort action, why do we not simply so hold?

Implied warranty without privity is essentially strict liability in tort. Historically, the tort of strict liability evolved from the contract action based on implied warranty. Redarowicz, supra, 441 N.E.2d at 331 – 332 (Ryan, J., dissenting).

Factual Background

The Sienna Court Condominiums, located in Evanston, consist of two buildings containing 111 units. Sienna Court, supra, 2018 IL 122022 at ¶3. Because of defective construction, there was water infiltration in the common elements and units. The plaintiff association’s ultimate complaint contained 10 counts. The first count alleged breach of express warranty against the developer, TR Sienna Partners, LLC. The other nine counts asserted claims for breach of implied warranty of habitability against the developer, the general contractor, the architect and engineering design firms, material suppliers, and several subcontractors. 2018 IL 122022 at ¶4.

Both the developer and general contractor had filed for bankruptcy relief. The condominium association obtained relief in the bankruptcy court from the automatic stay to pursue claims against both entities to the extent of their available insurance. (Section 388 of the Illinois Insurance Code, 215 ILCS 5/1, et seq., provides that the bankruptcy or insolvency of an insured does not release the insurer from claims under a policy. 215 ILCS 5/388.) Additionally, the condominium association recovered approximately $308,000 from a warranty escrow fund that was required to be established and funded from unit sales under an Evanston ordinance. 2018 IL 122022 at ¶5.

The trial court denied several material suppliers, and other defendants’ motions to dismiss, all of which focused on language in Minton. Language in Minton left an ambiguity as to whether the plaintiff could pursue claims against the subcontractors and supplier defendants because the builder-vendors were insolvent or did the recoveries against the insurers and warranty escrow fund negate any action under Minton against these defendants. 2018 IL 122022 at ¶6. Four questions seeking to clarify Minton under these facts were certified under Illinois Supreme Court Rule 308 to the appellate court, and the Rule 308 appeal was consolidated into other appeals arising from this litigation. 2018 IL 122022 at ¶7. The four certified questions did not query whether Minton was good law.

The appellate court held that the legal insolvency of the vendor and general contractor was enough, without inquiry into other recourse, to trigger claims for breach of the implied warranty of habitability against subcontractors. 2018 IL 122022 at ¶9. The Supreme Court granted the defendants’ petition for leave to appeal. 2018 IL 122022 at ¶10.

Sienna Court’s Majority Opinion

The Supreme Court’s analysis began with Petersen and briefly touched on the evolution in the 1960s of product liability law from what were essentially contractual claims into tort claims sounding in strict liability once these courts no longer required plaintiffs to prove privity of contract. 2018 IL 122022 at ¶¶14 – 18. The court then summarized the economic-loss rule adopted in Illinois under Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 435 N.E.2d 443, 61 Ill.Dec. 746 (1982), which was adopted shortly before Redarowicz. The Moorman doctrine is intended to preserve the distinction between actions sounding in contract and tort. 2018 IL 122022 at ¶21. Ironically, in its analysis here for the preservation of the distinction between contract and tort, the majority opinion quoted at length from Justice Miller’s special concurrence in Collins v. Reynard, 154 Ill.2d 48, 607 N.E.2d 1185, 1189, 180 Ill.Dec. 672 (1992), in which the Supreme Court found itself in a Moorman doctrine conundrum because the appellate court had logically applied the Moorman doctrine to effectively eliminate most attorney malpractice actions in Illinois. In Collins, the court retreated from a strict application of the Moorman doctrine to preserve actions for attorney malpractice by finding such actions sound in both contract and tort.

In Sienna Court, the Supreme Court concluded:

[I]t is clear that to hold the implied warranty of habitability is a duty imposed in tort, as plaintiff contends, we would necessarily have to recognize a new exception to the Moorman doctrine and also eliminate the option of waiver of the warranty. Not only does this implicate principles of stare decisis, but it also raises significant practical problems, particularly for subcontractors. Subcontractors depend upon contract law and their contracts with the general contractor to protect and define their risks and economic expectations. The subcontractors’ fees and costs are set in relation to their liability exposure, which is controlled in turn by their contracts. To allow what is, in effect, a tort claim to be brought directly against subcontractors by homeowners would undermine and, in some instances, render pointless these contractual obligations and restraints. Avoiding this outcome and preserving the distinction between tort and contract law is the principal point of the economic loss rule. 2018 IL 122022 at ¶24.

The court then proceeded to overrule Minton. 2018 IL 122022 at ¶25.

The Supreme Court rejected the argument that it was leaving homeowners without a remedy because every civil litigant faces the possibility that a defendant may file for bankruptcy relief. When the homeowners bought their condominium units, they had a potential cause of action for breach of the implied warranty of habitability against the developer. The developer’s subsequent bankruptcy does not mean they were deprived of a remedy. 2018 IL 122022 at ¶28.

Takeaway

The impact of Sienna Court will be substantial with regard to the construction and insurance industries. In the long term, there will be an impact in housing in Illinois. Actions for breach of the implied warranty of habitability against subcontractors causing the defects were not a perfect solution, but at least the situation was better than no remedy being available.

At some point, it is hopeful that our Supreme Court will step back and examine the Moorman doctrine to see if the conflicts continually arising do not lie there. Meanwhile, Illinois has taken a step further back into the world of caveat emptor.

(NOTE: The Sienna Court Condominiums development in Evanston is not related to the Siena at Old Orchard Condominium in Skokie, which is the subject of two recent appellate court opinions arising from construction defect litigation, Siena at Old Orchard Condominium Ass’n v. Siena at Old Orchard, L.L.C., 2017 IL App (1st) 151846, 75 N.E.3d 420, 412 Ill.Dec. 440 (discussed at length in Condominium Law FLASHPOINTS April 2017 and available in the IICLE® Online Library to subscribers) and Siena at Old Orchard Condominium Ass’n v. Siena at Old Orchard, L.L.C., 2018 IL App (1st) 182133 (decided December 27, 2018).)

For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) — 2016 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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