Subcontractors Can’t Be Sued—For Now

There is a delicate balance between prime contractors and subcontractors: the prime has the contract with the owner but the subcontractors do much of the work. So if there is a claim of defective construction, who can the owner pursue? That question was recently presented to the Iowa Supreme Court.

In The Village of White Birch Homeowners Association v. Goodman Associates, Inc., et al., the White Birch Homeowners Association (HOA) sued for alleged multiple construction defects. The HOA, however, was in a difficult position. The prime contractor, Triton Homes, had filed for bankruptcy and was insolvent. Therefore, the HOA decided to sue the subcontractors that had done the work in question.

The HOA acknowledged that it had no direct contract with any of the subcontractors (that contract was solely between Triton and the subs), but argued that the subs provided the labor and materials and were fully paid for their services. As such, the HOA thought the subs should be held responsible if their work could be shown to be defective. The HOA argued that there should be an implied warranty of workmanlike construction for the work of the subs. Alternatively, the HOA thought that it should be able to sue the subs for negligence for any defective work that they did.

The problem for the HOA is that Iowa case law has ruled that direct actions against subcontractors are prohibited. Since it is the prime contractor who controls and directs the construction of the structure and has the ultimate responsibility for completion of the entire building, the responsibility and liability for defective construction is with the prime contractor. Based on the prior rulings, the District Court and the Court of Appeals ruled that the HOA could not sue the subcontractors on a theory that there was a breach of an implied warranty.

Further, long-standing Iowa law has determined that subs cannot be sued under a theory of negligence because the economic loss being complained of should be addressed through a contract action. The fact that the prime contractor could not be sued because it was in bankruptcy did not alter the Court’s view that it must follow Iowa law, and ruled against the HOA. The case then went to the Iowa Supreme Court, which agreed with the District Court and Court of Appeals—sort of.

The Iowa Supreme Court is a seven person court. In this case, Justice Mansfield decided he would not take part in the decision, and the remaining Justices split 3-3. Under these circumstances, the ruling of the lower court stands, so the subcontractors could not be sued. I should note that this decision will not be controlling if the issue is raised in another case.

The result of the decision is that, for the time being, it continues to be the law of Iowa that a homeowner cannot sue subcontractors for allegedly defective construction. Rather, the suit must be brought against the prime contractor and if the prime contractor is not available as a defendant, then the homeowner is without a claim. The caveat here is that subcontractors should realize that the decision rests on the fact that one judge did not take part in the decision. The same issue could come before the Court again at any time and there could be a contrary result.