                                      2016 IL 119365



                                        IN THE
                               SUPREME COURT
                                            OF
                          THE STATE OF ILLINOIS



                                   (Docket No. 119365)

              JOHN FATTAH, Appellee, v. MIREK BIM et al., Appellants.


                                Opinion filed May 19, 2016.



        JUSTICE BURKE delivered the judgment of the court, with opinion.

        Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Karmeier, and
     Theis concurred in the judgment and opinion.



                                        OPINION

¶1       In Petersen v. Hubschman Construction Co., 76 Ill. 2d 31 (1979), this court
     held that, in a contract for sale from a builder-vendor to the first purchaser of a
     newly constructed house, there is an implied warranty that the house will be free
     from latent defects that unreasonably interfere with its intended use. We also held
     that this “implied warranty of habitability” may be waived by the purchaser if
     certain conditions are met. Id. at 43. Three years after Petersen, in Redarowicz v.
     Ohlendorf, 92 Ill. 2d 171 (1982), we held, in a case where there was no waiver of
     the implied warranty of habitability by the first purchaser of a house, that the
     warranty should be extended to a second purchaser of the house.
¶2       In this case, we address a question left unanswered by Redarowicz: May the
     implied warranty of habitability be extended to a second purchaser of a house when
     a valid, bargained-for waiver of the warranty was executed between the
     builder-vendor and the first purchaser? For the reasons that follow, we conclude
     that it may not.



¶3                                         BACKGROUND

¶4       Defendant Mirek Bim was the president and owner of Masterklad, Inc., a
     corporation engaged in the business of building houses. 1 In 2005, Masterklad
     began construction of a single-family house in Glenview, Illinois. When
     completed, the house included a patio made of paver bricks that extended off the
     rear of the house. Because the ground underneath the patio sloped down as it moved
     away from the house, dirt and gravel were placed underneath the patio to support
     the bricks and make them level with the rear entrance to the house. A retaining wall
     was built around the patio to contain the fill.

¶5       In 2007, the house was sold by Masterklad to a woman named Beth Lubeck for
     $1,710,000. Attached to the real estate sales contract was a “Waiver and Disclaimer
     of Implied Warranty of Habitability.” In this document, Lubeck “knowingly,
     voluntarily, fully and forever,” waived the implied warranty of habitability in
     exchange for an express warranty provided by Masterklad. The express warranty
     itself is not included in the record on appeal, but other filings of record indicate that
     this warranty had a term of one year. There is no dispute between the parties that
     Lubeck’s waiver of the implied warranty of habitability in exchange for an express,
     one-year warranty was valid and enforceable, and there is no dispute that
     Masterklad honored the terms of the express warranty while it was in effect.

¶6        In May 2010, Lubeck sold the house to the plaintiff, John Fattah, for
     $1,050,000. Attached to the real estate sales contract was a rider captioned, “ ‘As
     Is’ Addendum.” This document stated that the house was being sold to plaintiff “as
     is” and that the seller, Lubeck, made no representations or warranty to plaintiff
     regarding the condition of the house. The document also indicated that plaintiff had
     been advised to seek appropriate counsel regarding the risks of buying property “as
     is.” Closing on the sale of the house occurred in November 2010.
         1
          Defendant Alina Bim is the wife of Mirek Bim. Her relation to Masterklad is not clear from the
     record.
                                                   -2-
¶7         In February 2011, parts of the retaining wall around the rear patio of the house
       gave way, and, as a result, a portion of the patio collapsed. Five months later, in
       July 2011, plaintiff filed a one-count complaint against defendants, in their
       personal capacities, in the circuit court of Cook County. The complaint alleged that
       an implied warranty of habitability extended from defendants to plaintiffs and that
       defendants had breached this warranty by constructing a patio retaining wall that
       contained latent defects. The complaint sought damages in excess of $86,000.
       Shortly after plaintiff filed his complaint, Masterklad was voluntarily dissolved.

¶8         Defendants initially appeared in the circuit court pro se and provided the court
       with an address for service. After filing an answer to plaintiff’s complaint,
       defendants hired an attorney who prepared a motion for summary judgment. When
       that motion was denied, counsel withdrew. Defendants then filed a substitute
       appearance pro se with a new, updated address for service.

¶9         Following a bench trial, the circuit court found, on the basis of the testimony
       presented, that the patio wall had given way due to latent defects in its construction.
       Nevertheless, the circuit court held that plaintiff could not recover. The court
       emphasized that Masterklad had executed a valid, enforceable waiver of the
       implied warranty of habitability with Lubeck. Noting that no “builder or developer
       can predict who will buy” a newly constructed house after its first purchaser, the
       circuit court determined that imposing liability on defendants in this case would
       “frustrate the policy favoring the enforcement of knowing waivers” of the implied
       warranty of habitability. The court therefore denied plaintiff relief.

¶ 10       Plaintiff filed notices of appeal in the circuit and appellate courts. The parties
       dispute whether proof of service on defendants was properly filed or whether
       defendants were actually served with any notice of appeal. Thereafter, various
       other filings by plaintiff in the appellate court were erroneously sent to defendants’
       old address rather than the updated service address which they had provided.
       Defendants did not file a brief in the appellate court or otherwise appear.

¶ 11        In the absence of briefing from defendants, the appellate court proceeded under
       the principles of First Capitol Mortgage Corp. v. Talandis Construction Corp., 63
       Ill. 2d 128, 133 (1976), and reversed the judgment of the circuit court. 2015 IL App
       (1st) 140171. Citing to Redarowicz v. Ohlendorf, 92 Ill. 2d 171 (1982), the
       appellate court stated that the implied warranty of habitability extends from a
       builder-vendor to a second purchaser of a house, such as plaintiff. The appellate

                                                -3-
       court then concluded that Lubeck’s waiver of the implied warranty of habitability
       did not preclude plaintiff’s claim against defendants and, further, that the “as is”
       rider in plaintiff’s contract with Lubeck did not affect any rights plaintiff had
       against defendants. The appellate court therefore held that plaintiff could proceed
       on his claim for breach of the implied warranty of habitability against defendants.
       The appellate court remanded the cause back to the circuit court to determine
       whether the latent defects in the patio wall identified by the circuit court interfered
       with the reasonably intended use of plaintiff’s house and whether those defects had
       manifested within a reasonable period of time so as to come with the scope of the
       implied warranty of habitability. 2015 IL App (1st) 140171, ¶ 41.

¶ 12       We granted defendants’ petition for leave to appeal. Ill. S. Ct. R. 315 (eff. Jan.
       1, 2015).



¶ 13                                             ANALYSIS

¶ 14       Defendants raise three arguments before this court: (1) the appellate court erred
       in holding that plaintiff had a cause of action for breach of an implied warranty of
       habitability; (2) the appellate court erred in holding defendants personally liable to
       plaintiff when Masterklad, a corporate entity, was the builder of plaintiff’s house;
       (3) because of service problems in the appellate court, defendants had no
       meaningful opportunity to participate in the appellate court proceedings, and,
       hence, their due process rights were violated. 2 We begin with defendants’ first
       argument.

¶ 15       The appellate court’s reasoning with respect to the implied warranty of
       habitability was essentially in two steps. First, relying on Redarowicz, the court
       assumed that the implied warranty of habitability extends from a builder-vendor to
       a second purchaser of a house as a matter of course. 2015 IL App (1st) 140171,
       ¶ 23. Plaintiff was a second purchaser of the house at issue, and, therefore,
       according to the court, the warranty was applicable to him.

¶ 16      Second, the appellate court concluded that plaintiff never waived any implied
       warranty of habitability. As the appellate court observed, plaintiff never had any
           2
             At oral argument counsel for plaintiff acknowledged that there were service irregularities in
       this case. He apologized for the errors but contended that they did not warrant granting defendants
       relief.

                                                     -4-
       written or verbal agreement with defendants to waive the warranty, and the “as is”
       rider in plaintiff’s contract with Lubeck had no bearing on plaintiff’s rights with
       respect to defendants. Id. ¶¶ 28-38. Accordingly, the appellate court concluded that
       plaintiff’s complaint for breach of the implied warranty of habitability could
       proceed. We disagree.

¶ 17       The appellate court erred in the first step of its analysis by assuming, without
       discussion, that the implied warranty of habitability extends automatically to all
       second purchasers of a house. The implied warranty was extended to a second
       purchaser in Redarowicz under a particular set of facts, where there had been no
       waiver of the warranty by the first purchaser. It is not a given that the implied
       warranty may be extended to a second purchaser when a waiver of the warranty
       exists.

¶ 18      Thus, the initial question we must address in this case is whether the implied
       warranty of habitability may be extended to plaintiff in the first place, given that
       Lubeck executed a valid, bargained-for waiver of the warranty. To answer that
       question, we need to review the reasons behind the implied warranty of habitability
       and why, in Redarowicz, we concluded the warranty could be extended to a second
       purchaser.

¶ 19       In Petersen v. Hubschman Construction Co., 76 Ill. 2d 31 (1979), this court
       held that an implied warranty of habitability protects the initial purchaser of a new
       house against latent defects that would render the house not reasonably fit for its
       intended use. Recognition of this warranty was justified, the court explained, by the
       significant changes in the construction methods and marketing of new houses that
       had arisen in the modern era. The court noted that many “new houses are, in a
       sense, now mass produced” and that the buyer often purchases the house “from a
       model home or from predrawn plans.” Id. at 40. The court further observed that the
       buyer of a newly constructed house “has little or no opportunity to inspect” and
       “must rely upon the integrity and the skill of the builder-vendor.” Id. The court
       concluded that the “vendee has a right to expect to receive that for which he 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. Accordingly,
       the court determined that recognition of an implied warranty of habitability was
       appropriate.



                                               -5-
¶ 20       Petersen stressed that the implied warranty of habitability is based in the
       contract of sale and arises “by virtue of the execution of the agreement between the
       vendor and the vendee.” Id. at 41. It exists, the court stated, “as an independent
       undertaking collateral to the covenant to convey” that relaxes the rule of caveat
       emptor and the doctrine of merger and “is implied as a separate covenant between
       the builder-vendor and the vendee because of the unusual dependent relationship of
       the vendee to the vendor.” Id. It is, in short, “an implied covenant by the
       builder-vendor that the house which he contracts to build and to convey to the
       vendee is reasonably suited for its intended use.” Id.

¶ 21       In addition to recognizing the implied warranty of habitability, Petersen held
       that the warranty may be waived and that such a waiver would not be against public
       policy. Id. at 43. The court also determined, however, that the language of any
       waiver provision will be strictly construed against the builder-vendor and that, to be
       valid, the waiver must be a conspicuous provision that fully discloses its
       consequences and establishes that the waiver was in fact the agreement reached by
       the parties. Id. See also Board of Managers of the Village Centre Condominium
       Ass’n v. Wilmette Partners, 198 Ill. 2d 132 (2001) (to be valid, a waiver of the
       implied warranty of habitability must refer to the warranty by name).

¶ 22       In Redarowicz, this court was confronted with the issue of whether the implied
       warranty of habitability could be extended to a second purchaser of a house. Courts
       addressing this issue have reached differing results. Some courts have concluded
       that, where the implied warranty is deemed to arise out of a contract of sale, it
       cannot be extended to a second purchaser. These courts have reasoned that, because
       there is no sales agreement between the builder-vendor and the second purchaser
       and hence no privity of contract, there can be no implied warranty. See, e.g., Long
       Trail House Condominium Ass’n v. Engelberth Construction, Inc., 2012 VT 80,
       ¶ 31, 59 A.3d 752 (“Our case law plainly contemplates the existence of contractual
       privity before a breach of implied warranty claim can be raised.”); Davencourt at
       Pilgrims Landing Homeowners Ass’n v. Davencourt at Pilgrims Landing, LC, 2009
       UT 65, ¶ 57, 221 P.3d 234 (“Privity of contract is required to bring a claim for
       breach of the implied warranty.”). One court, in declining to extend the implied
       warranty to a second purchaser, determined that, while there were reasonable
       arguments in favor of extending the warranty, those arguments were
       “predominately grounded in policy considerations” outside the realm of contract
       law and thus required “judgments reserved to the legislature.” Conway v. The
       Cutler Group, Inc., 99 A.3d 67, 72 (Pa. 2014).
                                               -6-
¶ 23       Other courts, however, including this court in Redarowicz, have held that the
       implied warranty of habitability may be extended to a second purchaser. In
       Redarowicz, the defendant builder completed the construction of a house for its
       original owners in early 1976. Approximately one year later, the house was sold to
       the plaintiff. Shortly thereafter, the plaintiff discovered defects in the exterior
       chimney and brick wall. He then filed a complaint against the builder-vendor,
       alleging liability under both tort theories and the implied warranty of habitability.
       The complaint was dismissed by the circuit court, and, in relevant part, that
       judgment was affirmed on appeal. Redarowicz, 92 Ill. 2d at 174-76.

¶ 24       This court began its analysis by first holding that, under the economic loss rule,
       the builder-vendor could not be subject to liability in tort. The economic loss rule,
       which was adopted by this court in Moorman Manufacturing Co. v. National Tank
       Co., 91 Ill. 2d 69 (1982), holds that a plaintiff may not recover for solely economic
       loss in tort. As Redarowicz noted, a buyer’s desire to enjoy the benefit of his
       bargain is protected by the law of contracts and is “not an interest that tort law
       traditionally protects.” Redarowicz, 92 Ill. 2d at 177. Thus, to recover in tort, there
       must be a showing of harm “above and beyond disappointed expectations.” Id. See
       also, e.g., East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858,
       870 (1986) (the failure of a purchaser to receive the benefit of its bargain is
       “traditionally the core concern of contract law”). Applying the economic loss rule,
       Redarowicz held that the plaintiff was seeking only damages for the cost of repair
       and replacement of the damaged chimney and adjoining structures, and, while the
       damage to these structures meant that he received less than what he bargained for
       when he purchased the house, the complained-of economic losses were not
       recoverable in tort. Redarowicz, 92 Ill. 2d at 178.

¶ 25       With respect to the implied warranty of habitability, however, this court
       concluded that the plaintiff’s complaint could proceed. In so holding, Redarowicz
       emphasized the short time period—approximately one year—between the
       completion of the construction of the house and the time the plaintiff, the second
       purchaser, bought it. Id. at 183. This short time period was significant because it
       meant that the plaintiff occupied the house during a time when the original owners
       would still have been covered by the implied warranty of habitability if they had
       remained in the house. That being the case, allowing the plaintiff to pursue a cause
       of action for breach of the implied warranty would not alter the burdens or risks that
       were already placed on the builder-vendor and, importantly, would not alter the
       builder-vendor’s reasonable expectations. As this court explained, we “are an
                                               -7-
       increasingly mobile people,” and, thus, “a builder-vendor should know that a house
       he builds might be resold within a relatively short period of time and should not
       expect that the warranty will be limited by the number of days that the original
       owner chooses to hold onto the property.” Id. at 185. Concluding that the
       “compelling public policies underlying the implied warranty of habitability should
       not be frustrated because of the short intervening ownership of the first purchaser”
       (id. at 183), this court held that contractual privity was not required to sustain a
       cause of action for breach of the implied warranty of habitability and that the
       warranty could be extended to the plaintiff under the facts presented.

¶ 26        Redarowicz stands for the proposition that it is fair to require a builder-vendor
       to pay a second purchaser of a house for the cost of repairing latent defects—even
       in the absence of any tort liability or contractual obligation to the second
       purchaser—so long as the second purchaser is seeking only to recover for damages
       that would have been available to the first purchaser. In such a case, it makes no
       difference from the builder-vendor’s perspective whether the plaintiff is a first or
       second purchaser; the builder-vendor’s burdens are not changed, and it is held to
       nothing more than those obligations that arose from its original contract with the
       first purchaser.

¶ 27       Notably, other courts have similarly concluded that it is reasonable to extend
       the implied warranty of habitability to a second purchaser when doing so does not
       alter the burdens already placed on the builder-vendor. See, e.g., Speight v. Walters
       Development Co., 744 N.W.2d 108, 114 (Iowa 2008) (the “builder-vendor’s risk is
       not increased by allowing subsequent purchasers to recover for the same latent
       defects for which an original purchaser could recover”); Lempke v. Dagenais, 547
       A.2d 290, 295 (N.H. 1988) (“The builder already owes a duty to construct the home
       in a workmanlike manner. [Citation.] And extension to a subsequent purchaser,
       within a reasonable time, will not change this basic obligation.” (Internal quotation
       marks omitted.)); Keyes v. Guy Bailey Homes, Inc., 439 So. 2d 670, 673 (Miss.
       1983) (because a builder-vendor “already owes a duty to construct the home in a
       workmanlike manner,” extension of liability to a second purchaser will require “no
       greater effort [by] *** the builder to protect himself”); Nichols v. R.R. Beaufort &
       Associates, 727 A.2d 174, 180 (R.I. 1999) (“allowing subsequent owners to
       maintain a similar cause of action *** will not drastically enlarge this basic
       obligation of the home builder”). See also William K. Jones, Economic Losses
       Caused by Construction Deficiencies: The Competing Regimes of Contract and
       Tort, 59 U. Cin. L. Rev. 1051, 1081 (1991) (“Absent express language to the
                                                -8-
       contrary, courts should assume that a sale of property is a comprehensive
       transaction and that the buyer obtains from the seller all rights possessed by the
       seller. *** [A]nd, since the assignee obtains only the rights of the assignor, the
       obligations of the builder are not enlarged by assignment.”).

¶ 28       In this case, however, plaintiff is not simply seeking to recover those damages
       that would have been available to Lubeck, the first purchaser of the house, under
       the implied warranty of habitability. Instead, because Lubeck waived the implied
       warranty, plaintiff is seeking to recover more than what Lubeck would have been
       entitled to. Extending the implied warranty in these circumstances would
       significantly alter the burdens and expectations of defendants and would be
       inequitable.

¶ 29       A builder-vendor offers the purchaser of a new house a bargained-for waiver of
       the implied warranty of habitability in order to obtain a date certain on which the
       builder-vendor’s exposure to financial risk relating to the house will end. Obtaining
       this certainty, however, comes at a cost. The builder-vendor must either offer the
       purchaser a reduction in the price of the house or, as in this case, some other
       consideration, such as an express warranty, in exchange for the waiver.

¶ 30       If the implied warranty is extended to a second purchaser even in the face of a
       valid waiver, the financial certainty, which the builder-vendor bargained for and
       assumed it had obtained, is lost. The builder-vendor has no means of knowing when
       the house might be sold by the first purchaser or to whom and, thus, no way of
       knowing when, or if, liability for latent defects in the construction of the house will
       reappear. Thus, in this case, extending the implied warranty of habitability to
       plaintiff would mean that defendants paid the price to obtain the waiver of the
       implied warranty from Lubeck, by providing and performing under an express
       warranty, but face liability anyway. This is unreasonable.

¶ 31       Moreover, because a waiver of the implied warranty of habitability is
       effectively meaningless if liability may be revived at any time the house is sold, we
       think it fair to say that allowing the implied warranty to extend to second
       purchasers under the facts of this case would ensure that no builder-vendor would
       ever enter into waiver agreements in the future. A practice we expressly authorized
       in Petersen and that has been utilized in the housing industry for almost 40 years
       would thus be eliminated.


                                                -9-
¶ 32       Other reasons also counsel against extending the implied warranty of
       habitability to a second purchaser when there has been a valid waiver. For example,
       assume a husband and wife purchase a new house in the wife’s name and, in
       exchange for the builder-vendor lowering the purchase price of the house, the wife
       agrees to waive the implied warranty of habitability. The day after the sale closes,
       the wife transfers ownership of the house to the husband, thereby reviving the
       implied warranty. The couple would receive the benefits of both the lower price of
       the house and the implied warranty of habitability.

¶ 33       In addition, unlike a first purchaser, who often faces a “take it or leave it”
       decision when buying from a model home or predrawn plans, a second purchaser is
       in a much stronger position to negotiate with the seller for a warranty, to inquire
       about whether the implied warranty has been waived, or to get a reduction in
       purchase price to reflect the risk of latent defects. In this case, however, plaintiff
       knowingly chose not to do these things but, instead, to purchase the house from
       Lubeck “as is.”

¶ 34       Finally, it is important to again note that, under Illinois law, a second purchaser
       of a house may receive the benefit of an implied warranty of habitability that arises
       out of a sales contract between the first purchaser and the builder-vendor—a
       contract to which the second purchaser was not a party—because he is merely
       stepping into the shoes of the first purchaser. Along with that benefit, however,
       necessarily comes the flip side of the coin: if there is valid, bargained-for waiver by
       the first purchaser, the implied warranty cannot fairly be extended to the second
       purchaser.

¶ 35       We hold that the implied warranty of habitability may not be extended to a
       second purchaser of a house when a valid, bargained-for waiver of the warranty has
       been executed between the builder-vendor and the first purchaser. The appellate
       court therefore erred in holding that plaintiff could pursue his claim for breach of an
       implied warranty against defendants. Because we have granted defendants relief on
       this basis, we need not address their remaining arguments.



¶ 36                                      CONCLUSION

¶ 37      For the foregoing reasons, the judgment of the appellate court is reversed. The
       judgment of the circuit court in favor of defendants is affirmed.

                                               - 10 -
¶ 38   Appellate court judgment reversed.

¶ 39   Circuit court judgment affirmed.




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