The recent Illinois case 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc. reminds contractors to be mindful of state policy considerations which may affect their risk assessments when con-structing condominiums or high profile projects.

The case involved the construction and sale of an eight unit residential building in Chicago, Illinois. The project developer contracted with a general contractor for construction of the building, who then hired a num-ber of trade subcontractors to perform the majority of the work.

After completion of the building in March 2005, the developer sold the eight units in the building as condo-minium units, entering into real estate contracts with each of the individual condominium unit owners. The general contractor and trade subcontractors had no direct contracts with the individual unit owners and were not involved in the sale of the units.

After sale of the condominium units, the developer became insolvent and entered bankruptcy. Shortly there-after, leaks developed in the condominium building. The condominium association alleged that these leaks caused structural damages to the building and also caused mold to grow throughout the building with resultant medical problems for some of the owners. Because the developer had gone out of business, the condo association notified the general contractor of the leaks and requested that it repair the problems. The general contractor ignored these requests; so, the condo association sued the gener-al contractor and some of its subcontractors asserting various causes of action, including breach of the implied warranty of habitability.

The general contractor first asked the Illinois trial court to dismiss the case because it had no contract with the unit owners or the condo association. While the trial court accepted this argument, on appeal the Illinois ap-peals court held that the implied warranty of habitability is meant to protect homeowners from improper con-struction and therefore, the implied warranty applied against the general contractor even when there was no contract between the general contractor and the unit owner.

On its second visit to the trial court, the general contractor attempted to rely on a provision in the real estate sales contract between the developer and the individual unit owners whereby the unit owners "dis-claimed" the implied warranty of habitability. Again, the lower court accepted the general contractor’s argument and ruled in favor of the general contractor. The unit owners again appealed.

Upon review, the appellate court noted that the real estate purchase contracts were between the individual unit owners and the developer; the general contractor was not a party to the contract. The court then noted that disclaimers of the implied warranty of habitability are strictly construed under Illinois law, as a matter of pub-lic policy. Here, the disclaimer of the implied warranty of habitability was only between the "Purchaser" and the "Seller" – between the unit owners and the developer. The court held that by its plain terms, this disclaimer could not apply to the general contractor. Therefore, the general contractor could still be held liable for breach of the implied warranty of habitability.

This case reminds contractors to be careful when constructing multi-unit residential buildings and other properties that may be subject to important "policy con-siderations" under a given state’s law. To remain prof-itable, it is important that contractors put in place effect-ive contractual mechanisms for assigning and disclaim-ing risks that will be effective under the applicable law. To do so, contractors must have a solid understanding of the legal structures under which they operate. While there is no "sure" answer here, the contractor might have been successful in having its contractual partner agree to place a disclaimer favorable to the contractor and its subcontractors in the condominium sales contracts.