Construction Contract

Privity of Contract is Still the Rule...For Breach-Of-Implied-Warranty Claims Against Subcontractors, Even For New Home Construction

Jon Barnes | Jones, Skelton & Hochuli

Arizona has long recognized the existence of an implied warranty arising out of new home construction. In Columbia Western Corp. v. Vela., the Arizona Court of Appeals expanded implied warranty liability to cover builder-vendors with overarching responsibility for “new home construction.” The Court viewed such an implied warranty as necessary to protect new-home buyers because: (1) modern building construction is complex; (2) the builder holds himself out as an expert in building houses for individual new-home buyers; and (3) ordinary homebuyers are not sophisticated enough to discover latent defects in a new home.

Typically, enforcement of an implied warranty requires privity of contract. Because implied warranty claims sound in contract, the general rule is that only parties and privies may enforce them. However, this rule proved to be inequitable in some “new home construction” cases arising under Columbia Western. Courts were faced with concerns that builders might escape the implied warranty by hiding behind the first purchaser, thus encouraging “sham first sales.”

An exception to the rule requiring privity emerged. In Richards v. Powercraft Homes, Inc., the Arizona Supreme Court held that subsequent purchasers of a home can enforce Colombia Western against the builder vendor regardless of privity. The Court later took this exception one step further in Lofts at Fillmore Condominium Assoc. v. Reliance Commercial Construction, Inc. In Lofts, the Court allowed purchasers to enforce Colombia Western against non-vendor builders, regardless of privity. Both cases reasoned that the purpose for the implied warranty—to protect innocent buyers and hold builders responsible for their work—would be defeated unless an exception to the privity requirement applied under the circumstances.

In Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364, 312 P.3d 1130 (App. 2013), a group of plaintiff-homeowners discovered allegedly defective plumbing components in their homes. Instead of suing the general contractor in charge of the homes’ construction, the homeowners sued the plumbing subcontractors. They argued that the Richards/Lofts exception completely abrogated the rule requiring privity in implied warranty cases. Thus, according to the homeowners, they could sue the defendant-subcontractors directly, regardless of privity.

The subcontractors, including one represented by JSH, successfully argued that Richards and Lofts did not completely abandon the privity requirement for all implied warranty claims. They prevailed on summary judgment, arguing that the Richards/Lofts exception applied only in a very narrow context. As the subcontractors explained, the Richards/ Lofts exception developed in response to very specific policy concerns. Because these policy concerns are unique to implied warranty claims arising under Columbia Western, the Richards/Lofts exception should only apply in that context—namely, when the implied warranty covers “newly constructed buildings, completed at the time of contracting.”

The subcontractors further argued that Columbia Western’s implied warranty for “new home construction” runs only to the general contractor with overarching responsibility for the entire project—not to each individual subcontractor who may have hammered a nail or installed a pipe. Because the subcontractors were not in charge of the entire project, having worked only on the plumbing, they could not have warranted any particular home as a whole, only their specific work. This specific warranty also ran only to the general contractor, who warranted the entire home under Columbia Western. Although the Richards/Lofts exception would have applied to a claim against the general contractor, it did not apply to the homeowners’ claim against the subcontractors.

The Court of Appeals agreed with the subcontractors, affirming summary judgment in a published Opinion. The Arizona Supreme Court denied the homeowners’ petition for review. Thus, privity of contract is still the rule for breach-of-implied-warranty claims against subcontractors, regardless of whether the work involves new home construction. Homeowners with implied warranty claims must sue the general contractor in charge of “new home construction” if they are to find any recourse.

The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.

SOURCE: www.jshfirm.com

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