The Lofts at Fillmore v. Reliance Commercial

• Court: Arizona Supreme Court
• Decided: August 19, 2008
• Status: Published

Opinion

SUPREME COURT OF ARIZONA En Banc

THE LOFTS AT FILLMORE ) Arizona Supreme Court CONDOMINIUM ASSOCIATION, an ) No. CV-07-0416-PR Arizona nonprofit corporation, ) ) Court of Appeals Plaintiff/Appellant, ) Division One ) No. 1 CA-CV 06-0257 v. ) ) Maricopa County RELIANCE COMMERCIAL CONSTRUCTION, ) Superior Court INC., an Arizona corporation, ) No. CV2004-012726 ) Defendant/Appellee. ) ) ) ) O P I N I O N _________________________________ )

Appeal from the Superior Court in Maricopa County The Honorable Kristin C. Hoffman, Judge

REVERSED AND REMANDED ________________________________________________________________

Opinion of the Court of Appeals, Division One ___ Ariz. ___, ___ P.3d ___ (2007)

VACATED ________________________________________________________________

THORSNES BARTOLOTTA McGUIRE San Diego, CA By John F. McGuire, Jr.

And

EKMARK & EKMARK, L.L.C. Scottsdale By Curtis S. Ekmark Quentin T. Phillips Attorneys for The Lofts at Fillmore Condominium Association

BREMER, WHYTE, BROWN & O'MEARA, LLP Phoenix By Jeffrey D. Holland John J. Belanger And

ISRAEL & GERITY, PLLC Phoenix By Kyle A. Israel Jeffrey R. Cobb Attorneys for Reliance Commercial Construction, Inc.

FEINBERG GRANT MAYFIELD KANEDA & LITT, LLP Phoenix By Daniel H. Clifford Bruce Mayfield Charles R. Fenton Attorneys for Amicus Curiae Regatta Pointe Condominium Association

DICKS, COGLIANESE, LIPSON & SHUQUEM, APC Phoenix By Michael D. Dicks Darrien O. Shuquem Attorneys for Amici Curiae Alta Mesa Resort Village Homeowners Association, Inc.; Bella Vista Condominium Homeowners Association; Villages of Chandler: The Boardwalk Homeowners Association, Inc.; Cave Creek Villas Homeowners Association, Inc.; Kennedy Park Homeowners Association, Inc.; Mona Lisa Village Homeowners Association; Scottsdale Abrivado Condominium Association; The Salado Grand Residential Association, Inc.; Tre Bellavia Homeowners Association, Inc.; and The Village at Carefree Conference Resort Condominium Association, Inc.

KASDAN SIMONDS RILEY & VAUGHAN, LLP Phoenix By Kenneth S. Kasdan Stephen L. Weber Michael J. White Attorneys for Amicus Curiae Adobe Villas Condominium Association

ECKLEY & ASSOCIATES, P.C. Phoenix By J. Robert Eckley M. Philip Escolar Attorneys for Amici Curiae National Association of Home Inspectors, Inc. and American Society of Home Inspectors

BOROWSKY LAW, P.C. Scottsdale By Lisa M. Borowsky Attorney for Amici Curiae Arizona Consumers Council and Consumer Federation of America

2 KASDAN SIMONDS RILEY & VAUGHAN, LLP Phoenix By Kenneth S. Kasdan Stephen L. Weber Michael J. White

OSBORN MALEDON, P.A. Phoenix By Thomas L. Hudson Attorneys for Amicus Curiae Frye Park Townhomes Homeowner Association ________________________________________________________________

H U R W I T Z, Justice

¶1 We consider today whether a homebuilder who is not

also the vendor of the residence can be sued by a buyer for

breach of the implied warranty of workmanship and habitability.

We conclude that absence of contractual privity does not bar

such a suit.

I.

¶2 William Mahoney and The Lofts at Fillmore, L.L.C.

(collectively, “the Developer”) contracted with Reliance

Commercial Construction, Inc. (“Reliance”) to convert a building

owned by the Developer into condominiums. The Developer later

sold condominium units to individual buyers, who formed The

Lofts at Fillmore Condominium Association (“the Association”).

Claiming various construction defects, the Association

subsequently sued the Developer and Reliance for breach of the

implied warranty of workmanship and habitability.

3 ¶3 The superior court granted summary judgment to

Reliance. The court of appeals affirmed, finding the implied

warranty claim barred because the Association had no contractual

relationship with Reliance. The Lofts at Fillmore Condo. Ass'n

v. Reliance Commercial Constr., Inc., ___ Ariz. ___, ___ P.3d

____, 2007 WL 3287391 (App. Nov. 6, 2007). That court

distinguished Richards v. Powercraft Homes, Inc., which held

“that privity is not required to maintain an action for breach

of the implied warranty of workmanship and habitability,” 139

Ariz. 242, 244, 678 P.2d 427, 429 (1984), because in Richards

the builder was also the vendor of the property. The Lofts, ___

Ariz. at ___ ¶¶ 6-10, ___ P.3d at ___.

¶4 We granted the Association’s petition for review

because the issue presented is of statewide importance. See

ARCAP 23(c). We have jurisdiction pursuant to Article 6,

Section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24

(2003).

II.

A.

¶5 Arizona courts have long recognized that, “as to new

home construction, . . . the builder-vendor impliedly warrants

that the construction was done in a workmanlike manner and that

the structure is habitable.” Columbia Western Corp. v. Vela,

122 Ariz. 28, 33, 592 P.2d 1294, 1299 (App. 1979). A claim for

4 breach of the implied warranty sounds in contract. Woodward v.

Chirco Constr. Co., 141 Ariz. 514, 516, 687 P.2d 1269, 1271

(1984). “[A]s a general rule only the parties and privies to a

contract may enforce it.” Treadway v. W. Cotton Oil & Ginning

Co., 40 Ariz. 125, 138, 10 P.2d 371, 375 (1932). In Richards,

however, we held that suit on the implied warranty of

workmanship and habitability may be brought not only by the

original buyer of the home, but also by subsequent buyers. 139

Ariz. at 245, 678 P.2d at 430.

¶6 Richards involved claims by homebuyers against a

builder-vendor – a company that built and then sold homes to

residential purchasers. Reliance, in contrast, only built The

Lofts condominiums; the Developer owned the property throughout

and sold the residences to members of the Association. The

issue before us is whether the absence of privity bars the

Association’s suit on the implied warranty against Reliance.

B.

¶7 The threshold question is whether a builder who is not

also the vendor of a new home impliedly warrants that

construction has been done in a workmanlike manner and that the

home is habitable.1

1 The parties have apparently assumed that the condominium conversion constituted new home construction. We also so assume without deciding the issue.

5 ¶8 Although prior Arizona cases do not directly address

this issue, they provide important guidance. It has long been

the rule “that implied warranties as to quality or condition do

not apply to realty.” Voight v. Ott, 86 Ariz. 128, 132, 341

P.2d 923, 925 (1959). In Columbia Western, the court of appeals

recognized this rule, but distinguished Voight:

In our opinion Voight is authority for the proposition that no implied warranties arise from the sale of realty, but is not dispositive of the issue of implied warranties arising out of the construction of new housing which ultimately becomes “realty.”

122 Ariz. at 30, 592 P.2d at 1296.

¶9 Columbia Western then turned to settled Arizona law

holding that “a contractor impliedly warrants that the

construction he undertakes which ultimately becomes realty will

be performed in a good and workmanlike manner.” Id. at 31, 592

P.2d at 1297 (discussing Kubby v. Crescent Steel, 105 Ariz. 459,

466 P.2d 753 (1970); Cameron v. Sisson, 74 Ariz. 226, 246 P.2d

189 (1952); and Reliable Electric Co. v. Clinton Campbell

Contractor, Inc., 10 Ariz. App. 371, 459 P.2d 98 (1969)). These

cases are distinguishable from Columbia Western, as they

involved agreements directly between the contractors and the

plaintiffs for non-residential construction. Nonetheless, the

court of appeals concluded from these cases that Arizona had

abandoned the traditional rule of caveat emptor in suits against

6 contractors for defects in construction incorporated into

realty. Id.

¶10 Based on this understanding, Columbia Western held

that an implied warranty of good workmanship and habitability

was also given in connection with new home construction, noting

that

[b]uilding construction by modern methods is complex and intertwined with governmental codes and regulations. The ordinary home buyer is not in a position, by skill or training, to discover defects lurking in the plumbing, the electrical wiring, the structure itself, all of which is usually covered up and not open for inspection.

Id. at 32, 592 P.2d at 1298 (quoting Tavares v. Horstman, 542

P.2d 1275, 1279 (Wyo. 1975)).

¶11 The Arizona cases upon which the court of appeals

relied in Columbia Western did not involve a sale of the

underlying property. See Kubby, 105 Ariz. at 459-60, 466 P.2d

at 753-54 (involving alleged failure properly to build a roof on

plaintiff’s shed); Cameron, 74 Ariz. at 227-28, 246 P.2d at 189-

90 (involving allegedly defective well drilled on defendant’s

property); Reliable Elec., 10 Ariz. App. at 373, 459 P.2d at 100

(involving faulty construction of electrical system in a kiln

owned by the plaintiff). Given its careful distinction of

Voight, Columbia Western thus rests on the premise that an

7 implied warranty arises from the construction of a new home,

whether or not the builder is also a vendor of the home.2

¶12 Richards is to the same effect. We stated there that

the purpose of the implied warranty “is to protect innocent

purchasers and hold builders accountable for their work.”

Richards, 139 Ariz. at 245, 678 P.2d at 430 (quoting Moxley v.

Laramie Builders, Inc., 600 P.2d 733, 736 (Wyo. 1979)). We also

reiterated the policy considerations that gave rise to the

recognition of the warranty in Columbia Western, noting that

house-building is frequently undertaken on a large scale, that builders hold themselves out as skilled in the profession, that modern construction is complex and regulated by many governmental codes, and that homebuyers are generally not skilled or knowledgeable in construction, plumbing, or electrical requirements and practices.

Id.

¶13 Thus, although Columbia Western and Richards involved

builder-vendors, both opinions – and our prior cases – make

clear that an implied warranty arises from construction of the

home, without regard to the identity of the vendor. Moxley,

2 All parties to this case have assumed that there is a single implied warranty of workmanship and habitability, as opposed to two separate warranties. See Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 444, 690 P.2d 158, 163 (App. 1984) (holding that the Arizona decisions establish one implied warranty). We therefore today make a similar assumption, without deciding the issue. We also assume arguendo, as have the parties, that suit could properly be brought against the Developer on an implied warranty theory.

8 which we cited with approval in Richards, makes this point

expressly:

We can see no difference between a builder or contractor who undertakes construction of a home and a builder-developer. To the buyer of a home the same considerations are present, no matter whether a builder constructs a residence on the land of the owner or whether the builder constructs a habitation on land he is developing and selling the residential structures as part of a package including the land. It is the structure and all its intricate components and related facilities that are the subject matter of the implied warranty. Those who hold themselves out as builders must be just as accountable for the workmanship that goes into a home . . . as are builder-developers.

Moxley, 600 P.2d at 735.

¶14 We therefore conclude that Reliance gave an implied

warranty of workmanship and habitability, even though it was not

also the vendor of the condominiums. We next turn to the issue

of whether suit on this warranty can be brought by residential

homebuyers, like those in the Association, who had no direct

contractual relationship with the builder.

C.

¶15 The courts below held that Richards abrogated the

common law requirement of privity in contract actions only when

the builder of the new home is also the vendor. We disagree.

¶16 We stressed in Richards that, given the policies

behind the implied warranty – to protect innocent buyers and

hold builders responsible for their work – “any reasoning which

9 would arbitrarily interpose a first buyer as an obstruction to

someone equally deserving of recovery is incomprehensible.” 139

Ariz. at 245, 678 P.2d at 430 (quoting Moxley, 600 P.2d at 736).

We also noted that such a rule “might encourage sham first sales

to insulate builders from liability.” Id. And, we emphasized

that the character of our society is such that people and families are increasingly mobile. Home builders should anticipate that the houses they construct will eventually, and perhaps frequently, change ownership. The effect of latent defects will be just as catastrophic on a subsequent owner as on an original buyer and the builder will be just as unable to justify improper or substandard work.

¶17 Identical concerns guide us today. In today’s

marketplace, as this case illustrates, there has been some shift

from the traditional builder-vendor model to arrangements under

which a construction entity builds the homes and a sales entity

markets them to the public. In some cases, the builder may be

related to the vendor; in other cases, the vendor and the

builder may be unrelated. But whatever the commercial utility

of such contractual arrangements, they should not affect the

homebuyer’s ability to enforce the implied warranty against the

builder. Innocent buyers of defectively constructed homes

should not be denied redress on the implied warranty simply

10 because of the form of the business deal chosen by the builder

and vendor.3

D.

¶18 Reliance argues that failure to require privity in

implied warranty actions will expose residential homebuilders to

expanded liability and disrupt an important sector of the

Arizona economy. But homebuilders who do not sell directly to

the public already are liable for defective construction. As

noted above, builders have long been directly liable to those

with whom they contract for breach of the implied warranty of

good workmanship. Therefore, a developer-vendor sued for

defective construction will typically seek indemnity from the

builder; such a defendant may also choose to assign his claim

against the builder to the plaintiff. See Webb v. Gittlen, 217

Ariz. 363, 364 ¶ 6, 174 P.3d 275, 276 (2008) (noting that

unliquidated non-personal injury claims are generally

3 We have no occasion today to decide whether privity is a requirement for enforcement of implied warranties in the context of non-residential construction. See Hayden Bus. Ctr. Condos. Ass’n v. Pegasus Dev. Corp., 209 Ariz. 511, 513 ¶ 14, 105 P.3d 157, 159 (App. 2005) (declining to allow subsequent purchasers of commercial buildings to sue for breach of the implied warranty of good workmanship). We disapprove Hayden Business Center, however, to the extent that it rests on the premise that the Richards exception applies only to homebuilders who are also vendors. Id. ¶ 12.

11 assignable). Our decision today thus does not impose liability

on builders where none existed in the past.4

¶19 Reliance also argues that failure to require privity

will chill salutary attempts between developers and builders to

allocate responsibility for contract damages arising out of

construction defects. But nothing in our opinion today prevents

or discourages such agreements; we hold only that the

Association may bring suit directly against Reliance. Reliance

may not rely upon an agreement it has with the Developer

respecting allocation of eventual responsibility for defective

construction to escape its obligations to the Association on the

implied warranty.5

III.

¶20 For the foregoing reasons, we hold that the superior

court erred in dismissing the Association’s implied warranty

claim for lack of privity. We therefore vacate the opinion of

4 Arizona law also provides builders with protections against actions by those claiming construction defects. See A.R.S. §§ 12-1361 to -1366 (requiring putative plaintiffs to give builders notice and an opportunity to repair defective construction); id. § 12-552 (imposing eight-year statute of limitations from substantial completion of the dwelling, regardless of whether defective construction is discovered during that period). 5 We recognize that if the developer-vendor is financially unable to satisfy a judgment for breach of the implied warranty, the builder may be left with the entire monetary responsibility, notwithstanding any allocation agreements. But under such circumstances, the costs of remedying defective construction most appropriately fall on the builder, rather than on innocent end users.

12 the court of appeals, reverse the judgment of the superior

court, and remand to the superior court for further proceedings

consistent with this opinion.6

_______________________________________ Andrew D. Hurwitz, Justice

CONCURRING:

_______________________________________ Ruth V. McGregor, Chief Justice

_______________________________________ Rebecca White Berch, Vice Chief Justice

_______________________________________ Michael D. Ryan, Justice

_______________________________________ W. Scott Bales, Justice

6 Both parties seek attorneys’ fees pursuant to A.R.S. § 12- 341.01(A). We decline to award fees because the eventual successful party has not yet been determined.