Purchasers Beware: Major Change to the Implied Warranty of Habitability in Illinois Construction Defect Cases

On December 28, 2018, the Illinois Supreme Court made a major change to the law of the implied warranty of habitability.  Overruling just over 35 years of precedent, the Court held that purchasers of newly constructed homes may not pursue claims for breach of an implied warranty of habitability against a subcontractor with whom the purchaser does not have a contractual relationship – regardless of available remedies against the seller.  Sienna Court Condominium Association v. Champion Aluminum Corporation, 2018 IL 122022 (December 28, 2018).

The case was initiated by the purchasers of condominium units in a newly constructed 111-unit property located in Evanston, Illinois.  In 2013, the purchasers filed suit seeking recovery for construction defects.  Among other claims, the purchasers asserted implied warranty of habitability causes of action against the developer which sold the units, the general contractor, and several of the general contractor’s subcontractors.

The subcontractors filed a joint motion to dismiss the implied warranty of habitability claims filed against them.  Eventually, the issue made its way to the Illinois Supreme Court.  The Illinois Supreme Court agreed to resolve the following question:  may the purchaser of a newly constructed home assert a claim for breach of an implied warranty of habitability against a subcontractor who took part in the construction of the home, but did not have a contractual relationship with the purchaser?

The Court answered this question in the negative.  The Court determined that the loss that could be recovered by the purchasers under the implied warranty of habitability involves disappointed commercial expectations – i.e., pure economic loss.  The Court reasoned that economic losses are contractual in nature and, therefore, require contractual privity between the parties.

The Sienna opinion includes two important findings.   First, the Court addressed Minton v. The Richards Group – a case on the books for just over 35 years.  116 Ill. App. 3d 852 (1983).  Minton provided an exception to the privity requirement in situations where the purchaser had no recourse against the builder-vendor and sustained loss due to faulty work caused by a subcontractor.  The Sienna opinion expressly overrules Minton, holding that the Minton exception is no longer available to purchasers. Second, the Sienna opinion reaffirms the economic loss rule set forth in Moorman Manufacturing Co. v. National Tank, 91 Ill. 2d 69 (1982), which provides that claims for disappointed commercial expectations – such as an implied warranty of habitability – are generally limited to parties in contractual privity.

The effect of the Sienna ruling will depend on the player.  On one hand, the ruling is concerning for purchasers. Though purchasers may have a reasonable expectation that their general contractor’s subcontractors will perform work on their new home competently, Sienna may ultimately preclude such purchasers from holding subcontractors responsible, even in the face of an insolvent developer or general contractor.  On the other hand, subcontractors that do not have a contractual relationship with a purchaser will likely welcome the ruling because it allows such subcontractors to depend on their own contracts to protect and define their project risks and economic expectations.