In the Spotlight: What Are You Implying?

The Two Big Implied Warranties

Generally, the two implied warranties that arise out of a construction project are: 1) the implied warranty of habitability; and 2) the implied warranty that the work will be performed in a workmanlike manner. When a contractor asks an owner to waive all implied warranties, the contractor will be targeting these two warranties in hopes of limiting the owner to the express warranties and the specific standards of performance set forth in the contract. Even when the parties agree to a waiver of these two implied warranties in the construction agreement, several factors will determine whether or not the waiver actually bars claims under such theories.

Two other implied warranties, the implied warranty of merchantability and the implied warranty of fitness for a particular purpose, arise out of a construction project on very rare occasions. The courts have consistently held that the implied warranties of merchantability and fitness for a particular purpose do not apply to construction projects since the work involves the sale of a service as opposed to the sale of goods. Nitrin, Inc. v. Bethlehem Steel Corp., 35 Ill.App.3d 577, 342 N.E.2d 65 (1st Dist. 1976). An exception may exist where the owner actually purchases the materials (e.g., windows) from a manufacturer, which in turn sends out a contractor to install the materials. In this case, the implied warranty of merchantability and the implied warranty of fitness for a particular purpose may come back into play.

The Implied Warranty of Habitability

The implied warranty of habitability was created “to protect purchasers of new homes upon discovery of latent defects in their homes.” Redarowicz v. Ohlendorf, 92' Ill.2d 171, 183, 441 N.E.2d 324 (1982). The public policy justifications for the theory are that purchasers of new homes generally do not have the ability to detect latent defects, such purchasers are usually making the largest investment of their lives, and the costs for such repairs should be borne by the responsible builder-vendor. 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc., 2012 IL App 111474, 974 N.E.2d 279, 285 (1st Dist. 2012).

With this background, it is important to note that the implied warranty of habitability does not arise out of every construction project. In fact, the doctrine's application is significantly limited by two essential requirements for stating a claim under the theory. First, it only applies to the purchase or the renovation of residential properties. Second, it only allows recovery against vendor-builders and general contractors, as opposed to subcontractors and suppliers, except in limited circumstances, discussed below.

Thus, in a commercial, non-residential context, it may not be worthwhile for either side to get hung up in negotiations over the waiver or inclusion of an implied warranty of habitability provision. Illinois courts have repeatedly held that the implied warranty of habitability has no bearing on non-residential projects. See Hopkins v. Hartman, 101 Ill.App.3d 260, 427 N.E.2d 1337 (4th Dist. 1981); Lowrie v. City of Evanston, 50 Ill.App.3d 376, 365 N.E.2d 923 (1st Dist. 1977); Board of Directors of Bloomfield Club Recreation Association v. Hoffman Group, Inc., 295 Ill.App.3d 279, 692 N.E.2d 825 (2nd Dist. 1998); J.B. Stein & Co. v. Sandberg, 95 Ill.App.3d 19, 419 N.E.2d 652 (1981) (commercial tenant cannot recover for damages to property under warranty); Hopkins, 101 Ill.App.3d 260, 427 N.E.2d 1337 (purchasers of duplex residence that was never occupied by purchasers but was used as rental property were not within class of persons protected by warranty).

That being said, several cases over the years have expanded the doctrine beyond single-family homes and beyond vendor-builders. For example, the doctrine has been applied to general contractors who build residential homes even if the buyer-homeowner entered into a contract with a different party, the seller-developer. See 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc., 404 Ill.App.3d 611, 936 N.E.2d 1093 (1st Dist. 2010).

The doctrine has also been extended to protect condominium associations for defects found in the common areas. See Briarcliffe West Townhouse Owners Association v. Wiseman Construction Co., 118 Ill.App.3d 163, 454 N.E.2d 363 (2nd Dist 1983). The doctrine has even been expanded to protect subsequent purchasers of new homes. See Hirsch v. Optima, Inc., 397 Ill.App.3d 102, 920 N.E.2d 547 (1st Dist. 2009); Redarowicz v. Ohlendorf, 92 Ill.2d 171, 441 N.E.2d 324 (1982).

At one point, it seemed as if the doctrine might be limited to builders who actually built and sold the homes, as opposed to the general contractor who was just hired by the developer. However, in Minton v. The Richards Group of Chicago, 116 Ill.App.3d 852, 452 N.E.2d 835 (1983), the court extended the warranty to contractors where the builder-vendor was insolvent, thereby leaving the purchaser with no available recourse against the builder-vendor. In 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc. (Pratt I), the court went one step further and held that the implied warranty of habitability always applies to general contractors, regardless of the solvency of a developer who actually sold the house to the plaintiff-purchasers. 404 Ill.App.3d 611, 618, 936 N.E. 1093 (2010). The end of the line may have been reached when the court held in 1324 W. Pratt Condo Association (Pratt II) that the doctrine did not apply to subcontractors where the purchasers still had an available recourse against a solvent general contractor. 2012 IL App (1st) 111474, 974 N.E.2d 279 (1st Dist. 2012).

In addition to the expansion of the warranty of habitability to more parties, the courts have also expanded the doctrine to include more types of structures. The courts have interpreted the doctrine's public policy interest in protecting new homeowners to mean that the warranty also applies to new additions to existing buildings (VonHoldt v. Barba & Barba Construction, Inc., 175 Ill.2d 426, 677 N.E.2d 836 (1997), new houses built on preexisting foundations (McClure v. Sennstrom, 267 Ill.App.3d 277, 642 N.E.2d 885 (1994), and vacant common lots of townhouse developments (Briarcliffe West Townhouse Owners Association v. Wiseman Construction Co., 118 Ill.App.3d 163, 454 N.E.2d 363 (1983).

Given these parameters by the courts, it appears that property owners and contractors should not worry much about the implied warranty of habitability if the project involves clearly non-residential property. However, where the project may be characterized as a residential one, the doctrine may be invoked against developers, general contractors, and in certain instances, subcontractors. In such circumstances, the contract language should be drafted in a way that anticipates that the doctrine will be applied and, therefore, balances the concerns of property owners on one side, and developers and contractors on the other side.

The Implied Warranty of Workmanlike Performance

Perhaps more broadly applicable, the implied warranty of workmanlike performance is incorporated by law into every construction contract. Every contractor impliedly warrants that he will perform his work “skillfully, carefully, diligently and in a workmanlike manner.” Dean v. Rutherford, 49 Ill.App.3d 768, 364 N.E.2d 625, 626 (4th Dist. 1977); Zielinski v. Miller, 277 Ill.App.3d 735, 740, 660 N.E.2d 1289, 1293 (1995); Meyers v. Woods, 374 Ill.App.3d 440, 451, 871 N.E.2d 160, 170-171 (3rd Dist. 2007). The courts have held that the failure to perform the work in such a manner results in a breach of the implied warranty of workmanlike performance and the contractor is liable for the cost of the needed repairs. Id.

The implied warranty of workmanlike performance could expose a contractor to significant liability on a project where the contractor intended to play a smaller role or to limit its scope of the project. For example, a project intended for summer might require additional resources, materials, and expenses if the same project were undertaken in the winter in order for the work to be performed in a workmanlike manner. If the contract implies this standard and the project is delayed, who bears the additional costs, the property owner or the contractor?

In Stark Excavating, Inc. v. Carter Construction Services, Inc., the court grappled with this issue of the additional costs incurred by a subcontractor in order to satisfy the workmanlike standard. 2012 IL App (4th) 110357, 967 N.E.2d 465 (4th Dist. 2012). In Stark Excavating, Inc., an excavating subcontractor sought additional compensation after it incurred costs due to a delay into the winter months on a warehouse expansion project. The subcontractor argued that in order to do the work properly in the winter, the subcontractor needed to warm the subgrade, supply heated enclosures, and add chemicals to the concrete mixtures. The trial court granted summary judgment in favor of the general contractor, finding that the work was outside of the contract and if the subcontractor decided the extra measures were needed, it “voluntarily” incurred such extra costs. The trial court found that the subcontractor could have chosen not to perform the work in a workmanlike manner.

The appellate court disagreed. On appeal, the court held that the subcontractor was required under the implied warranty of workmanlike performance to provide winter protection. The court specifically disagreed with the trial court's conclusion that the subcontractor could have chosen to perform the work in “an unworkmanlike manner.” Since the winter measures may have been required in order to satisfy the implied warranty of workmanlike performance, and since such costs fell outside the scope of the original contract, the court held that the subcontractor could maintain a cause of action for additional compensation.

One strange result of the Stark Excavating, Inc. case is that the implied warranty of workmanlike performance might now be used against property owners, when the intent of the doctrine was to protect property owners.' While this doctrine is important for property owners to set a threshold standard for contractors, if the scope of the work is not clearly defined, the costs of meeting such standards might mean the contractor is obligated to undertake additional measures and use additional materials. As the court found in Stark Excavating, Inc., the satisfaction of this implied standard by the contractor may result in an additional compensation claim against the owner.

Drafting Provisions to Deal with Implied Warranties

As is the case with almost any well-drafted construction contract provision, the trick to drafting an effective provision for implied warranties is to balance competing objectives. At the onset, the contractor may be tempted to insist on a limited express warranty and a clear disclaimer of implied warranties. The owner may respond with a longer express warranty in addition to all implied warranties. However, onerous contract provisions rarely benefit either side and usually result in additional insurance premiums and inefficient project management. Instead, three guidelines should help move the warranty discussion back to the middle.

1. First, the parties should consider whether the project is residential in nature. If it is clearly a nonresidential project, then the parties should not get bogged down on the need for a waiver of the implied warranty of habitability.
2. Second, the parties should allocate risk to the responsible parties. In other words, subcontractors should provide express warranties for their work and such warranties should be directly and specifically assigned to the owner. Likewise, all manufacturer warranties should be identified and assigned to the owner to protect the owner against defects on equipment.
3. Third, the project scope should be clearly defined and the applicable standards should be identified whenever possible. If there is a known risk for delay or for a change in circumstances which might require additional resources in order to satisfy the standard of workmanlike performance ( e.g.,winter work), then such risks should be identified in the contract itself and the contract should spell out which party shall bear responsibility for the additional costs.

Conclusion

If nothing else, the parties should at least list and discuss which implied warranties are likely to arise out of the project at issue, and try to deal with the true implications of such implied warranties to the project, one by one. Very little good ever comes out of assuming something is implied, when it is not. However, both sides can gain a lot simply by asking the question, “What is implied?”

Joseph E. Rubas is a partner with the law firm of Senak Keegan Gleason Smith & Michaud, Ltd. in Chicago. He has over 15 years' experience in complex litigation and transactional matters with a particular emphasis in construction law. He has devoted most of his career to the representation of commercial property owners, hospitals, hotels, architects, engineers, and contractors.

The words “implied warranty of habitability” usually give lessors a headache. Most lessors have run across the implied warranty of habitability during a dispute with a tenant of a residential property. This implied warranty may be raised by a tenant seeking to offset rent, which is owed because the tenant claims that a substantial defect renders the premises unsafe or unsanitary. The warranty is implied as a matter of law in all contracts for the lease of residential properties. Jack Spring, Inc. v. Little , 50 Ill.2d 351, 280 N.E.2d 208 (1972); Pole Realty Co. v. Sorrells , 84 Ill.2d 178, 417 N.E.2d 1297 (1981).

Sometimes, however, it is the lessor who is raising the issue of implied warranties. When a lessor decides to build or improve property and hires a contractor, the lessor may find himself in the position of trying to include contract terms so that he, as the property owner, can enforce such implied warranties against a contractor.

The negotiation of clauses in construction contracts dealing with implied warranties tends to draw a lot of heated dispute between the property owner and the contractor, often because neither side really understands what is at stake. The contractor insists on a limited express warranty provision, which is then followed by a provision stating that the owner waives all “implied” warranties. In response, the owner insists that the express warranties be in addition to any implied warranties. However, lost somewhere in the stalemate is an expression of what specific implied warranties are being offered or given up. This article helps explain the implied warranties that arise in a construction project as well as the impact of contract clauses addressing such implied warranties.

The Two Big Implied Warranties

Generally, the two implied warranties that arise out of a construction project are: 1) the implied warranty of habitability; and 2) the implied warranty that the work will be performed in a workmanlike manner. When a contractor asks an owner to waive all implied warranties, the contractor will be targeting these two warranties in hopes of limiting the owner to the express warranties and the specific standards of performance set forth in the contract. Even when the parties agree to a waiver of these two implied warranties in the construction agreement, several factors will determine whether or not the waiver actually bars claims under such theories.

Two other implied warranties, the implied warranty of merchantability and the implied warranty of fitness for a particular purpose, arise out of a construction project on very rare occasions. The courts have consistently held that the implied warranties of merchantability and fitness for a particular purpose do not apply to construction projects since the work involves the sale of a service as opposed to the sale of goods. Nitrin, Inc. v. Bethlehem Steel Corp., 35 Ill.App.3d 577, 342 N.E.2d 65 (1st Dist. 1976). An exception may exist where the owner actually purchases the materials (e.g., windows) from a manufacturer, which in turn sends out a contractor to install the materials. In this case, the implied warranty of merchantability and the implied warranty of fitness for a particular purpose may come back into play.

The Implied Warranty of Habitability

The implied warranty of habitability was created “to protect purchasers of new homes upon discovery of latent defects in their homes.” Redarowicz v. Ohlendorf, 92' Ill.2d 171, 183, 441 N.E.2d 324 (1982). The public policy justifications for the theory are that purchasers of new homes generally do not have the ability to detect latent defects, such purchasers are usually making the largest investment of their lives, and the costs for such repairs should be borne by the responsible builder-vendor. 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc. , 2012 IL App 111474, 974 N.E.2d 279, 285 (1st Dist. 2012).

With this background, it is important to note that the implied warranty of habitability does not arise out of every construction project. In fact, the doctrine's application is significantly limited by two essential requirements for stating a claim under the theory. First, it only applies to the purchase or the renovation of residential properties. Second, it only allows recovery against vendor-builders and general contractors, as opposed to subcontractors and suppliers, except in limited circumstances, discussed below.

Thus, in a commercial, non-residential context, it may not be worthwhile for either side to get hung up in negotiations over the waiver or inclusion of an implied warranty of habitability provision. Illinois courts have repeatedly held that the implied warranty of habitability has no bearing on non-residential projects. See Hopkins v. Hartman , 101 Ill.App.3d 260, 427 N.E.2d 1337 (4th Dist. 1981); Lowrie v. City of Evanston , 50 Ill.App.3d 376, 365 N.E.2d 923 (1st Dist. 1977); Board of Directors of Bloomfield Club Recreation Association v. Hoffman Group, Inc. , 295 Ill.App.3d 279, 692 N.E.2d 825 (2nd Dist. 1998); J.B. Stein & Co. v. Sandberg , 95 Ill.App.3d 19, 419 N.E.2d 652 (1981) (commercial tenant cannot recover for damages to property under warranty); Hopkins, 101 Ill.App.3d 260, 427 N.E.2d 1337 (purchasers of duplex residence that was never occupied by purchasers but was used as rental property were not within class of persons protected by warranty).

That being said, several cases over the years have expanded the doctrine beyond single-family homes and beyond vendor-builders. For example, the doctrine has been applied to general contractors who build residential homes even if the buyer-homeowner entered into a contract with a different party, the seller-developer. See 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc. , 404 Ill.App.3d 611, 936 N.E.2d 1093 (1st Dist. 2010).

The doctrine has also been extended to protect condominium associations for defects found in the common areas. See Briarcliffe West Townhouse Owners Association v. Wiseman Construction Co. , 118 Ill.App.3d 163, 454 N.E.2d 363 (2nd Dist 1983). The doctrine has even been expanded to protect subsequent purchasers of new homes. See Hirsch v. Optima, Inc. , 397 Ill.App.3d 102, 920 N.E.2d 547 (1st Dist. 2009); Redarowicz v. Ohlendorf , 92 Ill.2d 171, 441 N.E.2d 324 (1982).

At one point, it seemed as if the doctrine might be limited to builders who actually built and sold the homes, as opposed to the general contractor who was just hired by the developer. However, in Minton v. The Richards Group of Chicago , 116 Ill.App.3d 852, 452 N.E.2d 835 (1983), the court extended the warranty to contractors where the builder-vendor was insolvent, thereby leaving the purchaser with no available recourse against the builder-vendor. In 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc. (Pratt I), the court went one step further and held that the implied warranty of habitability always applies to general contractors, regardless of the solvency of a developer who actually sold the house to the plaintiff-purchasers. 404 Ill.App.3d 611, 618, 936 N.E. 1093 (2010). The end of the line may have been reached when the court held in 1324 W. Pratt Condo Association (Pratt II) that the doctrine did not apply to subcontractors where the purchasers still had an available recourse against a solvent general contractor. 2012 IL App (1st) 111474, 974 N.E.2d 279 (1st Dist. 2012).

In addition to the expansion of the warranty of habitability to more parties, the courts have also expanded the doctrine to include more types of structures. The courts have interpreted the doctrine's public policy interest in protecting new homeowners to mean that the warranty also applies to new additions to existing buildings ( VonHoldt v. Barba & Barba Construction, Inc ., 175 Ill.2d 426, 677 N.E.2d 836 (1997), new houses built on preexisting foundations ( McClure v. Sennstrom , 267 Ill.App.3d 277, 642 N.E.2d 885 (1994), and vacant common lots of townhouse developments ( Briarcliffe West Townhouse Owners Association v. Wiseman Construction Co. , 118 Ill.App.3d 163, 454 N.E.2d 363 (1983).

Given these parameters by the courts, it appears that property owners and contractors should not worry much about the implied warranty of habitability if the project involves clearly non-residential property. However, where the project may be characterized as a residential one, the doctrine may be invoked against developers, general contractors, and in certain instances, subcontractors. In such circumstances, the contract language should be drafted in a way that anticipates that the doctrine will be applied and, therefore, balances the concerns of property owners on one side, and developers and contractors on the other side.

The Implied Warranty of Workmanlike Performance

Perhaps more broadly applicable, the implied warranty of workmanlike performance is incorporated by law into every construction contract. Every contractor impliedly warrants that he will perform his work “skillfully, carefully, diligently and in a workmanlike manner.” Dean v. Rutherford , 49 Ill.App.3d 768, 364 N.E.2d 625, 626 (4th Dist. 1977); Zielinski v. Miller , 277 Ill.App.3d 735, 740, 660 N.E.2d 1289, 1293 (1995); Meyers v. Woods , 374 Ill.App.3d 440, 451, 871 N.E.2d 160, 170-171 (3rd Dist. 2007). The courts have held that the failure to perform the work in such a manner results in a breach of the implied warranty of workmanlike performance and the contractor is liable for the cost of the needed repairs. Id.

The implied warranty of workmanlike performance could expose a contractor to significant liability on a project where the contractor intended to play a smaller role or to limit its scope of the project. For example, a project intended for summer might require additional resources, materials, and expenses if the same project were undertaken in the winter in order for the work to be performed in a workmanlike manner. If the contract implies this standard and the project is delayed, who bears the additional costs, the property owner or the contractor?

In Stark Excavating, Inc. v. Carter Construction Services, Inc., the court grappled with this issue of the additional costs incurred by a subcontractor in order to satisfy the workmanlike standard. 2012 IL App (4th) 110357, 967 N.E.2d 465 (4th Dist. 2012). In Stark Excavating, Inc., an excavating subcontractor sought additional compensation after it incurred costs due to a delay into the winter months on a warehouse expansion project. The subcontractor argued that in order to do the work properly in the winter, the subcontractor needed to warm the subgrade, supply heated enclosures, and add chemicals to the concrete mixtures. The trial court granted summary judgment in favor of the general contractor, finding that the work was outside of the contract and if the subcontractor decided the extra measures were needed, it “voluntarily” incurred such extra costs. The trial court found that the subcontractor could have chosen not to perform the work in a workmanlike manner.

The appellate court disagreed. On appeal, the court held that the subcontractor was required under the implied warranty of workmanlike performance to provide winter protection. The court specifically disagreed with the trial court's conclusion that the subcontractor could have chosen to perform the work in “an unworkmanlike manner.” Since the winter measures may have been required in order to satisfy the implied warranty of workmanlike performance, and since such costs fell outside the scope of the original contract, the court held that the subcontractor could maintain a cause of action for additional compensation.

One strange result of the Stark Excavating, Inc. case is that the implied warranty of workmanlike performance might now be used against property owners, when the intent of the doctrine was to protect property owners.' While this doctrine is important for property owners to set a threshold standard for contractors, if the scope of the work is not clearly defined, the costs of meeting such standards might mean the contractor is obligated to undertake additional measures and use additional materials. As the court found in Stark Excavating, Inc., the satisfaction of this implied standard by the contractor may result in an additional compensation claim against the owner.

Drafting Provisions to Deal with Implied Warranties

As is the case with almost any well-drafted construction contract provision, the trick to drafting an effective provision for implied warranties is to balance competing objectives. At the onset, the contractor may be tempted to insist on a limited express warranty and a clear disclaimer of implied warranties. The owner may respond with a longer express warranty in addition to all implied warranties. However, onerous contract provisions rarely benefit either side and usually result in additional insurance premiums and inefficient project management. Instead, three guidelines should help move the warranty discussion back to the middle.

1. First, the parties should consider whether the project is residential in nature. If it is clearly a nonresidential project, then the parties should not get bogged down on the need for a waiver of the implied warranty of habitability.
2. Second, the parties should allocate risk to the responsible parties. In other words, subcontractors should provide express warranties for their work and such warranties should be directly and specifically assigned to the owner. Likewise, all manufacturer warranties should be identified and assigned to the owner to protect the owner against defects on equipment.
3. Third, the project scope should be clearly defined and the applicable standards should be identified whenever possible. If there is a known risk for delay or for a change in circumstances which might require additional resources in order to satisfy the standard of workmanlike performance ( e.g.,winter work), then such risks should be identified in the contract itself and the contract should spell out which party shall bear responsibility for the additional costs.

Conclusion

If nothing else, the parties should at least list and discuss which implied warranties are likely to arise out of the project at issue, and try to deal with the true implications of such implied warranties to the project, one by one. Very little good ever comes out of assuming something is implied, when it is not. However, both sides can gain a lot simply by asking the question, “What is implied?”

Joseph E. Rubas is a partner with the law firm of Senak Keegan Gleason Smith & Michaud, Ltd. in Chicago. He has over 15 years' experience in complex litigation and transactional matters with a particular emphasis in construction law. He has devoted most of his career to the representation of commercial property owners, hospitals, hotels, architects, engineers, and contractors.