Iowa Supreme Court Limits Liability for Breach of Implied Warranty of Workmanlike Construction

The Iowa Supreme Court recognized an implied warranty of workmanlike construction for residential buildings in a 1985 decision, Kirk v. Ridgway. The court recently had an opportunity to clarify the limits of the implied warranty in two cases. This article provides an overview of the implied warranty doctrine and summarizes the recent developments in this area of Iowa law.

There are two types of warranties recognized by the law: express and implied. An express warranty is an oral or written representation about the quality or condition of something sold. An implied warranty is a representation about the quality or condition of something sold the law implies because of circumstances surrounding the transaction.

In the context of construction contracts, there is an implied warranty that the structure will be built in a “reasonably good and workmanlike manner and that it will be reasonably fit for the intended purpose.” The implied warranty of workmanlike construction in residential construction runs between the builder-vendor and the homebuyer. This judicially created warranty is aimed at redressing “the disparity in bargaining power and expertise between homeowners and professional builders, and to provide a remedy for consumers living in defectively constructed homes.”

In order to prevail on a claim for breach of the implied warranty of workmanlike construction the homebuyer must prove all of the following:

• the house was constructed to be occupied by the buyer as a home;
  the house was purchased from a builder-vendor, who had constructed it for the purpose of sale;
• when sold, the house was not reasonably fit for its intended purpose or had not been constructed in a good and workmanlike manner;
• at the time of purchase, the buyer was unaware of the defect and had no reasonable means of discovering it; and
• by reason of the defective condition the buyer suffered damages.

In 2008 the Iowa Supreme Court extended the implied warranty to subsequent homebuyers as well. So far the implied warranty of workmanlike construction has not been recognized to run between subcontractors and homebuyers.

In two court decisions handed down last month, Rosauer Corporation v. Sapp Development et al. and Luana Savings Bank v. Pro-Build Holdings, Inc. et al., the Iowa Supreme Court declined to broaden the class of plaintiffs who can sue for breach of the implied warranty of workmanlike construction.

In Rosauer the Iowa Supreme Court was asked to extend the implied warranty of workmanlike construction to the sale of residential lots without homes. A developer, Rosauer Corporation, had purchased a lot within a residential subdivision from another developer for $50,000 in order to build two townhomes for sale. A post-sale soil test revealed the lot had soil problems. There was evidence the soil problems were caused by defects in the grading, backfill, and compaction of the soil. The developer spent $76,858 fixing the soil problems and then sued to recover the cost.

The Iowa Supreme Court decided not to extend the implied warranty to the sale of a residential lot without a dwelling to a developer. One of the reasons was because developers can protect themselves through soil tests and drafting contract provisions. In fact, the developer in Rosauer did protect itself by including contract provisions that would allow it to walk away if post-sale soil tests revealed soil problems in other lots it purchased.

In the second case the Iowa Supreme Court was asked to extend the implied warranty of workmanlike construction to protect a foreclosing lender from construction defects on properties obtained through a deed in lieu of foreclosure. In Luana Savings Bank, a lender discovered black mold in apartment complexes after obtaining them from the borrower. The lender sued the builder because there was evidence the mold was caused by construction defects.

The Iowa Supreme Court refused to recognize a claim by the foreclosing lender against the builder for breach of the implied warranty of workmanlike construction for several reasons. One of the most significant reasons was because “a sophisticated financial institution can protect itself through other measures,” such as taking an assignment of the borrowers claims upon default, arranging inspections, or by purchasing warranties. Therefore, unlike homebuyers, banks “do not need the protection of judicially created implied warranties.”

The decisions in Rosauer and Luana Savings Bank are favorable to contractors and builders in that they limit the class of plaintiffs who can sue for breach of the implied warranty of workmanlike construction. These decisions also emphasize the importance to sophisticated entities of the need to consider the risk of defects in contracts relating to construction.