Evolution of the Implied Warranty of Workmanship and Habitability in Arizona

UPDATE: The Arizona Supreme Court recently held that the implied warranty of workmanship and habitability could not be waived or disclaimed via contract. Zambrano v. M & RC II LLC, et al., No. CV-21-0205-PR (Ariz. S. Ct., Sept. 28, 2022). According to the Court, “the public policy underlying the implied warranty clearly outweighs enforcement [any] disclaimer [or] waiver” that parties may have previously agreed to. As a result, the implied warranty claim will likely remain a mainstay of construction defects litigation in the State.

Over the past forty years, purchasers of new homes in Arizona have been able to assert a claim for breach of the implied warranty of workmanship and habitability (“implied warranty”) against the builder and/or vendor of the home in construction defects cases. Woodward v. Chirco Const. Co., 141 Ariz. 514, 515, 687 P.2d 1269, 1270 (1984) (recognizing that the implied warranty claim arises out of contract). Generally, once the homeowners sue the builder-vendor under various tort and contract theories, the builder-vendor will assert – as a third-party plaintiff or in a separate suit – independent claims against its subcontractors. In that situation, the builder-vendor will often assert the same claims against its subcontractors as the homeowners have asserted, including breach of the implied warranty.

Usually the contract/indemnity claims asserted by the builder-vendor against the subcontractors will drive the suit, and the implied warranty claim will be pled in the alternative, often without any substantive impact on the litigation. However, certain situations could arise where the implied warranty claim is the driving force behind a case; e.g., in the absence of an express contract between the builder-vendor and the subcontractor, and where the statute of limitations precludes recovery in tort. But, the availability of the implied warranty claim to the builder-vendor has not been decided upon by the Arizona courts. Which begs the question: can a builder-vendor of residential property assert against its subcontractors a claim for breach of the implied warranty where the builder-vendor no longer retains ownership of the subject property?

In 1979, the Arizona Court of Appeals established that purchasers of a new home could assert against the builder-vendor a claim for breach of the implied warranty. Columbia W. Corp. v. Vela, 122 Ariz. 28, 592 P.2d 1294 (App. 1979). The court predicated the implied warranty claim upon “Arizona cases that have found 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. According to the court, the builder-vendor is in the best position to observe how the building was constructed, and the new home purchaser should be able to rightfully rely on the builder-vendor’s superior knowledge when purchasing the home. Id. at 32, 592 P.2d at 1298. Thus, the implied warranty arose out of that established public-policy consideration.

In Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 678 P.2d 427 (1984), the Arizona Supreme Court relied upon the same policy considerations present in Columbia, and extended the implied warranty claim to subsequent purchasers of a new home. The Court explained “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”. Id. at 245, 678 P.2d at 430. However, “[t]he implied warranty [claim] is not unlimited”, and “[i]t does not force the builder-vendor to act as an insurer to subsequent [purchasers]”. Id. Nonetheless, “the purpose of [the] warranty is to protect innocent purchasers and hold builders accountable for their work.” Id. (citation omitted and emphasis added).

2008 marked the last time that the ambit of the implied warranty doctrine was expanded by the Arizona Supreme Court. Relying on the same policy considerations, the Court held that “a homebuilder who is not also the vendor of the residence can be sued by a buyer for a breach of the implied warranty”. Lofts at Fillmore Condo. Ass'n v. Reliance Commercial Const., Inc., 218 Ariz. 574, 575, 190 P.3d 733, 734 (2008). Again, the focus revolved solely around protecting “innocent buyers of defectively constructed homes”. Id. at 577, 190 P.3d at 736.

In Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364, 312 P.3d 1130 (App. 2013), the Court of Appeals contemplated whether the implied warranty claim could be asserted by homeowners against plumbing subcontractors who worked on the homes under a general contractor, but nonetheless lacked contractual privity with the homeowners. Id. at 365, 312 P.3d at 1131. In determining whether contractual privity was a necessary prerequisite of the implied warranty claim, the Court of Appeals declined to find “that Richards and Lofts changed the rule requiring privity to bring suit for breach of the implied warranty”. Id. at 367, 312 P.3d at 1133. Even though “the construction of the home[ ]gives rise to the subject matter of an implied warranty . . . there is a distinction between the creation of an implied warranty by virtue of construction of a structure and the contractual relationship required to assert its breach as a cause of action.” Id. at 367-68, 312 P.3d at 1133-34. In other words, the implied warranty claim at all times arises from the construction of a residence, but the extension of the doctrine in Richards and Lofts was approved in order to provide the homeowner with a remedy, even where certain business arrangements between a builder and a vendor – albeit, common in the construction industry – had deprived the homeowner of a direct contractual relationship with the entity ultimately responsible for the construction of the home as a whole. Id. at 368, 312 P.3d at 1134. Even without the implied warranty claim, though, the homeowners would not be deprived of a remedy because they “may still sue [the] developer, general contractor, or vendor, who may then seek indemnity from other responsible parties”. Id.

Thus, homeowners can only assert the implied warranty claim against the builder and/or vendor of the home. The implied warranty claim has at all times been predicated upon a strong public policy of providing homeowners with a remedy for addressing construction defects because the builder and/or vendor was at all times in the best position to detect and correct such defects. Only in Yanni have the courts declined to expand the doctrine. There, the court made clear that the general parameters of the implied warranty claim will only be expanded where an innocent home purchaser is somehow deprived of a remedy for latent defects discovered in the purchase of a new home.

With these considerations in mind, it is difficult to imagine that the courts would be willing to allow a builder-vendor to independently assert a breach of the implied warranty claim against its subcontractors, especially where the builder-vendor no longer retains ownership of the subject property. Even though the warranty arises out of the construction and sale of new homes, the overarching policy consideration throughout the cases has been for the protection of homeowners, who at all times are in an inferior position to that of the builder-vendor regarding the discovery of defects during construction.

Such policy considerations are nearly non-existent, though, when a builder-vendor attempts to hold its subcontractors liable for a breach of the implied warranty. See Richards, supra (cautioning against requiring builders to be the insurers of their workmanship). Both entities are intrinsically involved in the construction of new homes, and the dichotomy between the information available to the builder-vendor and the subcontractors is minimal. The builder-vendor – an inherently more sophisticated party than the average homebuyer – commonly negotiates all potential remedies with its subcontractors in advance of construction. Indeed, construction contracts “have detailed provisions allocating risks of loss and specifying remedies”; e.g., express indemnity and warranty provisions. Flagstaff, 223 Ariz. at 325, 223 P.3d at 669. “In this context, allowing [additional] claims poses a greater danger of undermining the policy concerns of contract law”, especially where the common law makes available certain remedies – such as implied indemnity and negligence – to the builder-vendor even in the absence of a contract. Id.

The availability of the implied warranty claim to builder-vendors against subcontractors, though, is not completely foreclosed. The Arizona Court of Appeals recently held that a contractor’s implied warranty claim against its subcontractor – in the absence of an express, written agreement – was subject to the three-year limitations period governing oral agreements. Wood Bros. v. W. Techs., Inc., No. 1 CA-CV 19-0014, 2019 WL 7176319, at *3–4 (Ariz. Ct. App. Dec. 24, 2019). However, that case did not involve residential construction, and the subcontractor did not challenge the availability of the implied warranty claim, as a matter of law, to the builder-vendor.

Certain policy considerations could support a finding that the implied warranty claim is available to builder-vendors. Indeed, Columbia and Richards cautioned against allowing builders to escape liability for their defective workmanship. Precluding a builder-vendor from asserting the implied warranty claim could, in certain situations, allow a subcontractor to perform sub-standard workmanship without consequence. Certainly, homeowners would not be protected under a jurisprudential scheme that arguably insulates subcontractors from liability, and in turn encourages shoddy workmanship. But see, Flagstaff, 223 Ariz. at 325, 223 P.3d at 669 (“The policies of accident deterrence and loss-spreading . . . have less force when parties to a site-specific construction contract have allocated the risk of loss and identified remedies for non-performance.”).

Ultimately, the issue of whether a builder-vendor can assert against its subcontractors a claim for breach of the implied warranty remains unsettled. However, the underlying policy considerations could provide a basis for a challenge to the availability of the claim to builder-vendors in Arizona.