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WSHB Arizona Update – Subsequent Purchasers May Now Have More Rights Against Homebuilders Than Original Purchasers

December 7, 2012

Following the Arizona Supreme Court’s ruling in Richards v Powercraft permitting subsequent purchasers to pursue implied warranty claims even in the absence of privity, Arizona courts have had a difficult time determining whether to categorize this creature of public policy as a tort or a contract claim.  If the claim arises out of contract, legal reasoning suggests that litigants could be entitled to recover attorneys’ fees pursuant to A.R.S. § 12.341.01, with potential liability constrained by both Arizona’s Statute of Repose and the Economic Loss Doctrine which would work in tandem to limit the pursuit of non?contractual remedies and define the time period for filing such claims. Conversely, if the implied warranty is considered a tort claim,the recovery of fees pursuant to A.R.S. § 12.341.01 would be prohibited and the time period for pursuing claims would be determined by when the alleged defect was discovered.

The Arizona Supreme Court decisionsin Woodward v. Chirco, Lofts at Fillmore Condo. Ass’n v. Reliance
Commercial Constr., Inc., and Flagstaff Affordable Housing Ltd. P’Ship v. Design Alliance all appeared to
adoptthe prevailing view thatthe implied warranty “soundsin contract” ratherthan tort. However,the
Arizona Court of Appeals, Division One, has issued a pair of decisions blurring the distinction between
contract and tort, potentially resulting in a home builder’s obligations to a subsequent purchaser being greater than what is owed to the original purchaser.  

North Peak Constr., LLC v. Architecture Plus, Ltd

In North Peak, a contractor, not in privity of contract with the architect of record, asserted an implied warranty and negligence claim. The architect moved for summary judgment on the contractor’s implied warranty claim. The architect argued that the contractor’s implied warranty claim was an “attempt to convert an action for which attorneys’ fees are not recoverable (negligence) into one in which attorneys’ fees are recoverable (contract).” The Court of Appeal disagreed and held that, “the implied warranty at issue in this case…sounds in contract,” but drew a distinction between implied in fact contracts and implied in law contracts. Implied in law contracts,such as the implied warranty, may “sound in contract,” but the Court of Appeals determined the claim does not “arise out of contract” within the meaning of A.R.S. § 12.341.01.  

By drawing a distinction between obligations imposed by law and those based upon the conduct of the parties,the Court of Appeals created uncertainties as to whether contractually based defenses such as the Economic Loss Rule and Statute of Repose would continue to be viable. Both of these questions were answered by the Arizona Court of Appeals in Sullivan v. Pulte Home Corporation, decided on December 4, 2012. 

Sullivan v. Pulte Home Corporation 

Pulte Home Corporation (“Pulte”) sold a home with a retaining wall to the original purchaser in 2000 and the Sullivans purchased the home in 2003.  In March of 2009, the Sullivans allegedly discovered problems with the retaining wall and retained experts who concluded that the construction of the wall and grading of the lot did not meet appropriate standards. Thereafter, in February of 2010,the Sullivans filed their Complaint alleging causes of action for negligence and implied warranty.

Pulte filed a Motion to Dismiss, contending that as a contract claim,the implied warranty was time barred by the Statute of Repose and that the negligence claim was barred by the Economic Loss Rule since the Sullivans had contractual remedies, although no longer actionable.  In Flagstaff Affordable Housing, a bright line rule prohibiting the assertion of a negligence claim between contracting parties was established, and Pulte argued the extension of the Economic Loss Rule where contractual remedies are/were available was the logical progression of this rule.  The Court of Appeals held that the implied warranty claim was indeed a contract claim barred by the Statute of Repose, but recognized that the Sullivans never had the “opportunity to negotiate with Pulte to allocate the risk of future losses or attempt to protect themselves in the event latent defects in the  construction were discovered” and refused to apply the Economic Loss Rule to bar their negligence claim.  The Court of Appeals concedes that their decision creates a paradox as an original purchaser would have fewer remedies than a subsequent purchaser, but contends this result is required by the bright line rule established in Flagstaff Affordable Housing.  

How this Decision Will Impact Exposure for Home Builders

By providing subsequent purchasers a tort based remedy, home builders will no longer be able to rely upon the eight year State of Repose (nine years if discovered within the eighth year) if the original purchaser sells their home, because the State of Repose now only applies to contract based claims.  Tort based claims are accompanied by a two year statute of limitations period as opposed to the six year limitations period for contract claims, but application of the discovery rule may result in the claim not accruing until fifteen years after the home is constructed, and in some cases, even longer.  

Home builders may also be denied common law protections as Arizona’s Purchaser Dwelling Act does not distinguish between tort and contract based actions and provides a mechanism for a subsequent purchaser to recover attorneys’ fees and expert witness fees.  In the absence of such statutory authority, litigants would potentially be responsible for their own fees and costs,reducing the likelihood of marginal claims being pursued.  

Finally, this decision could have adverse consequences on a home builder’s ability to transfer risks associated with construction defects to its subcontractors. Since the Statute of Repose applies to claims between a home builder and its subcontractors, claims brought by subsequent purchasers beyond the Statute of Repose could potentially result in a home builder’s indemnity claims being time barred.  The only way to ensure recovery is the existence of prior contractual agreements extending the subcontractor’s obligations beyond the repose period.

Given that the implied warranty was originally designed as a matter of public policy to provide subsequent purchasers protections not otherwise available at law, this decision appears to undermine the utility of the implied warranty and creates important questions the Supreme Court is likely to accept jurisdiction to resolve.

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