November 03, 2016

New Appellate Ruling Increases Residential Builders' Exposure to Defect Liability in Illinois

Illinois law on the implied warranty of habitability (IWH) is continuously changing, and residential builders should take notice of a new opinion issued by the Appellate Court, First District, on October 26 in a construction defect dispute. Although the procedural history is convoluted (the opinion consolidated three separate appeals), the underlying fact pattern is fairly typical: a condominium association discovered latent defects causing water infiltration and sued both the developer-vendor and its general contractor-builder (GC) for breach of the IWH. In turn, the developer sued the GC for breach of contract and indemnity, and the GC sued the subcontractors that performed the allegedly defective work for contract and warranty breaches. Motion practice ensued, various claims were dismissed while others were not, and everyone appealed.

But what makes this case unique is how the Appellate Court addressed the IWH claim the association asserted directly against the GC. The trial court granted the GC’s motion to dismiss, because the association had not demonstrated that it lacked recourse from the developer due to the developer’s insolvency, relying on the rule set forth in Minton v. Richards Group of Chicago that requires such proof before a homeowner can pursue an IWH claim against a party with whom it had no contractual privity. On appeal, the Court ruled that the association could pursue the GC directly for breach of the IWH, even in the absence of contractual privity and proof that it lacked recourse against the developer-vendor. Finding the Minton exception inapplicable, the Appellate Court likened the situation to that in 1324 W. Pratt Condominium Ass’n. v. Platt Construction Group, Inc. (Pratt I), where it allowed such a claim to proceed directly against a builder/GC, but under facts where the developer-vendor was insolvent. 

The Court explained that “in issuing its decision in Pratt I, [it] did not consider the developer’s involuntary dissolution or solvency status in reaching the conclusion that the [IWH] applied to the builder. Accordingly, the fact that the developer in Pratt I was involuntarily dissolved at the time of suit is a distinction without a difference.” In other words, the Court declared that its intention in Pratt I was to allow homeowners to sue residential builders directly, irrespective of the status of the developer-vendor and in the absence of contractual privity. It went on to state:  “To require a plaintiff to first pursue the developer before it can pursue the entity most responsible for any defects, simply because the developer was the seller (or extended the warranty, as [the GC] and the subcontractors refer to it) is untenable.” But when it comes to pursuing “down the line” contractors below the GC, the Minton rule would still apply.

Thus, the case is noteworthy because it eliminates a defense previously thought to exist for builders against the judicially created IWH claim. Although residential builders can avoid or diminish the effects of this ruling with careful drafting and planning on future projects, many may now be exposed for already built units that manifest latent defects in the years to come.

Read the full opinion.

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