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Construction Law

Construction Warranties

The following article was published as Chapter 3.9 ("Construction Warranties") of the Arizona Construction Law Practice Manual, 3rd Ed. 2016, State Bar of Arizona.

§ 3.9.1 Introduction and Scope

The topic of construction warranties can be complex and requires thoughtful consideration when workmanship issues arise. Due to the significant amount of construction defect litigation over the past several decades, this area of construction law has become well developed in Arizona. A contractor is vulnerable to a breach of construction warranty claim under four separate and distinct bodies of law:

1. By Contract – Express Warranties;

2. By Administrative Regulation – Registrar of Contractors’ Standards;

3. By the Appellate Courts – Implied Warranties; and

4. By Statute – Warranties Under the Uniform Commercial Code (UCC).

In any given situation, one, or perhaps all, of these warranties may apply. The practitioner must, therefore, analyze each type of warranty to determine whether a breach of warranty has occurred in a particular case.

This chapter addresses each of these areas of warranty law and discusses various ways in which warranties may be defended or limited, including disclaimers, statutes of limitation and the statute of repose.

 

§ 3.9.2 Warranties by Contract – Express Warranties

§ 3.9.2.1 Generally

The first place to look to determine whether a contractor is bound by a warranty is the general contract between the owner and contractor. Most standard form construction contracts contain express warranty provisions.

An express warranty is an assurance by one party to a contract of the existence of a fact upon which the other party may rely. [1] This type of warranty is intended to relieve the other party of any duty to ascertain the warranted fact for itself. The warranty amounts to an obligation to indemnify the other party for any loss that results if the warranted fact is not as promised. The Arizona Supreme Court has ruled that an express warranty must be construed “according to the clear and natural import of the language used.”[2]

§ 3.9.2.2 Express Warranties under the AIA Standard Form of Agreement

The General Conditions of the Contract for Construction between Owner and Contractor, AIA A201 (2007), contain two main express warranties. The first is set forth in Section 3.5 and provides as follows:

3.5 WARRANTY

The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage. If required by the Architect, the Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment.[3]

Essentially, the foregoing provision is a general warranty in which the contractor provides the following three express warranties:

1. That all the material and equipment for the project will be new and of good quality, unless the parties otherwise specify;

2. That all work will be of good quality, free from faults and defects; and

3. That the work will be done in conformity with the contract documents.

In addition to the warranties contained in Subparagraph 3.5, AIA A201 also includes a one-year repair warranty. AIA A201, Section 12.2.2.1 provides:

12.2.2.1 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct it in accordance with Section 2.4.

This warranty is nothing more than a repair obligation that generally takes effect on the date of substantial completion. If the owner discovers a defect within the one-year period and provides notice to the contractor, the contractor is obligated to repair the defect. If the owner discovers a defect within the one-year period and fails to notify the contractor, the owner waives the right to have the defect corrected and to make a claim for breach of warranty.

The question that often arises under AIA A201 is whether the one-year repair warranty under Subparagraph 12.2.2.1 is a limitation on the general warranty provided in Section 3.5. AIA Document A201, Section 12.2.5 answers this question by specifically stating that Section 12.2 is not a limitation on other obligations the contractor might have under the contract documents. Consequently, the warranties provided for in the AIA A201 are cumulative such that the owner retains a warranty claim under the general warranty provision for a defect that is discovered after the one-year period lapses.[4] The only limitations on the general warranty, therefore, are the statute of limitation for contract actions (which runs from the discovery of the defect) and the statute of repose.[5]

§ 3.9.2.3 Express Warranties Under the ConsensusDOCS Standard Form of Agreement

The Associated General Contractors of America’s Standard Agreement and General Conditions Between Owner and Contractor, ConsensusDOCS No. 200 (2007), contains two main express warranty provisions that are very similar to the warranty provisions discussed above with respect to AIA A201. The ConsensusDOCS general warranty provision provides as follows:

3.8 WARRANTY

3.8.1 The Contractor warrants that all materials and equipment shall be new unless otherwise specified, of good quality, in conformance with the Contract Documents, and free from defective workmanship and materials. At the Owner’s request, the Contractor shall furnish satisfactory evidence of the quality and type of materials and equipment furnished. The Contractor further warrants that the Work shall be free from material defects not intrinsic in the design or materials required in the Contract Documents. The Contractor’s warranty does not include remedies for defects or damages caused by normal wear and tear during normal usage, use for a purpose for which the Project was not intended, improper or insufficient maintenance, modifications performed by the Owner or Others, or abuse. The contractor’s warranty pursuant to this Paragraph 3.8 shall commence on the Date of Substantial Completion.[6]

ConsensusDOCS No. 200 also provides a one-year repair warranty that is equivalent to AIA A201 Section 12.2.2.1.[7] Unlike AIA A201, however, ConsensusDOCS No. 200 specifically states that if any defective work is discovered after the one-year correction period, the contractor has the option to correct the work or to allow the owner to correct the work and charge the contractor for the reasonable cost of the correction.[8] The limitation on that obligation is the applicable contract statute of limitation and, in Arizona, the statute of repose. Thus, while the AIA and ConsensusDOCS documents have the same effect, ConsensusDOCS No. 200 specifically states the contractor’s obligation for defects discovered after the one-year repair warranty expires.

Under both standard forms of agreement, an owner may accept non-conforming work and elect, instead, to receive an equitable adjustment to the contract sum.[9] Under AIA A201 Section 12.3, the owner may unilaterally choose this option, even after final payment has been made. Under ConsensusDOCS No. 200 Section 3.9.7, the contractor must agree to this option and it is only available prior to final payment.

§ 3.9.2.4 Nonstandard Express Warranties

Express warranty provisions in nonstandard contract forms are limited only by the imagination of the drafter of the provision. Typically, a general contractor will seek to limit its express warranties or perhaps provide no express warranty at all. Consequently, it is not uncommon for a general contractor to limit its express warranty to a one-year repair warranty, being careful to exclude any type of general warranty that could extend beyond the one-year time frame. In such circumstances, the practitioner may need to rely on one of the other types of warranty claims when a defect in the work is discovered after one year.

§ 3.9.2.5 Defenses

Defenses to express warranties are those available in any typical contract dispute and may include impossibility, impracticality, and first material breach, or non-payment. Significantly, express warranties are not available to subsequent purchasers who have no privity of contract with the builder. As discussed in § 3.9.4 below, implied warranties may apply to subsequent purchasers who have no privity of contract with the builder. Finally, the equitable concept of “economic waste” may apply, allowing the builder to provide an appropriate credit to the owner, in lieu of the removal and replacement of defective work, when correction would be unreasonably destructive.[10]

 

§ 3.9.3 Administrative Regulation – Registrar of Contractor Standards

§ 3.9.3.1 Generally

Although the parties to a construction contract for the most part enjoy freedom of contract, a contractor who performs faulty work may be held accountable by a governmental agency for defective work beyond the express warranties stated in its contract with the owner. In Arizona, the state legislature has created the office of the Arizona Registrar of Contractors to regulate the quality of work and building practices of contractors. The Registrar has been given the power to:

[m]ake rules he deems necessary to effectually carry out the provisions and intent of this chapter. Such rules shall include the adoption of minimum standards for good and workmanlike construction. In the adoption of such rules of minimum standard, the Registrar shall be guided by established usage and procedures found in the construction business in [Arizona].[11]

Pursuant to this authority, the Registrar has enacted administrative regulations that state “[a]ll work shall be done in a workmanlike manner.”[12]

§ 3.9.3.2 The “Workmanlike Manner” Requirement

Arizona’s Supreme Court has defined “workmanlike manner” as work performed in an “ordinarily skilled manner as a skilled workman should do it.”[13] Thus, minimum workmanship standards imposed on contractors by the Registrar act as an implied warranty that the contractor will perform its work according to those standards. The contractor may not avoid the minimum workmanship standards by limiting its warranty obligations in its contract form.[14] Under the requirements set forth by the Registrar, every contractor will be held to the minimum standard of doing work in an ordinarily skilled manner as skilled workmen should do it. This is true even if the parties have not bargained specifically for such a provision.

§ 3.9.3.3 Remedies at the Registrar of Contractors

If a contractor fails to build a project or part of a project in a “workmanlike manner,” the owner may file a complaint with the Registrar of Contractors. Arizona statutory law empowers the Registrar to “temporarily suspend, . . . or permanently revoke any or all licenses issued . . . if the holder of the license issued pursuant to this chapter is guilty of or commits any of the acts or omissions set forth in [the statute].”[15] The statute prohibits a contractor from violating any rule adopted by the Registrar, so a contractor that fails to build a project in a workmanlike manner is subject to having its license suspended or revoked. The owner, therefore, has a powerful remedy against a contractor in the event the contractor’s license is suspended or revoked for failing to build a project in a workmanlike manner, as a contractor may be criminally prosecuted and is subject to civil penalties for engaging in contracting without a license in good standing.[16]

Typically, when an owner files a complaint against a contractor with the Registrar of Contractors, the Registrar’s office will send a copy of the complaint to the contractor. If the complainant owner does not provide the contractor an opportunity to investigate its work within fifteen days of receipt of the complaint, then the Registrar is precluded from issuing a citation on that complaint.[17] If the contractor has had an opportunity to inspect, and no resolution is made, the Registrar will investigate the complaint, and if it finds that the work does not meet the minimum workmanship standards, it will issue a corrective work order to the contractor. If the contractor satisfactorily repairs the work, the complaint will be dismissed. If the contractor does not repair the work, then the contractor is subject to having its license suspended or revoked.[18]

In addition to requiring the contractor to repair faulty work, the Registrar may also require the contractor to make restitution to an owner in certain situations.[19] On occasion, the Registrar will give the contractor the option of correcting the defective work or simply paying restitution to the owner before suspending or revoking the contractor’s license. An additional remedy that is available to a residential owner is a recovery from the Residential Contractors’ Recovery Fund.[20] This Fund is only available to those who have been damaged by a contractor in the construction of their personal residence, and the contractor has refused or has been unable to pay for the damages. Currently, the most that a single homeowner may recover from the Fund is $30,000.00.[21]

§ 3.9.3.4 The Limitations Period for Enforcement

If an owner decides to file a complaint against a contractor with the Registrar of Contractors, the owner must do so within two years of the “earlier of the close of escrow or actual occupancy for new home or other new building construction ... [or] … completion of the specific project.”[22] Therefore, regardless of any contract provision that warrants workmanship for a period of less than two years, an owner has a minimum two-year workmanship warranty period on licensed contractors through the Registrar. However, the Registrar of Contractors has no jurisdiction over defects or poor workmanship discovered more than two years after the earlier of the close of escrow or actual occupancy.

 

§ 3.9.4 Implied Warranties Imposed Under Arizona Law

§ 3.9.4.1 Generally

An implied warranty is one created by the law without any express statement of warranty in the contract between the parties. Such warranties are created by court decisions, otherwise known as the common law. According to Arizona court decisions, even in the absence of a specific contractual provision, the law implies a requirement that a contractor must perform its work in a good, workmanlike manner and in a manner befitting a skilled contractor.[23]

As discussed below, Arizona law is well developed with respect to implied warranties in the home building context. The same cannot be said in the commercial building context. This may be due to the fact that with respect to most commercial buildings, the parties’ bargaining power is more equalized, resulting in an express warranty that the work will be performed in a workmanlike manner (see the discussion of AIA A201 and ConsensusDOCS No. 200 supra). Thus, the owner of the commercial building does not normally need to rely on an implied warranty of good workmanship. Nevertheless, several Arizona case decisions support the proposition that a commercial builder is subject to an implied warranty that its work will be performed in a workmanlike manner.[24]

As early as 1952, Arizona’s appellate courts began recognizing and applying the doctrine of implied warranty with respect to construction contracts. In 1952, the Supreme Court of Arizona ruled that, notwithstanding the absence of an express warranty in a contract for the drilling and casing of a well, an implied warranty arose, making it incumbent upon a contractor who undertakes to build a structure to do so in a manner befitting a skilled workman.[25]

Similarly, in 1969, the Arizona Court of Appeals recognized the implied warranty of good workmanship when it ruled that an electrical contractor who had designed and installed the electrical system for a massive brick kiln for a brick manufacturer had failed to perform its work in a workmanlike manner.[26] Along the same lines, in 1970 the Supreme Court of Arizona ruled in a matter involving the construction of a storage shed that a contractor impliedly warranted that he would perform in a workmanlike manner, even though the contract itself did not contain an express warranty of good workmanship.[27]

§ 3.9.4.2 Implied Warranties for New Home Construction: Caveat Emptor No More

Before 1979, no Arizona case had specifically held that the law imposed an implied warranty of good workmanship and habitability on contractors of new homes. To the contrary, the general assumption was that the governing principle was caveat emptor (buyer beware). This assumption was based on the case of Voight v. Ott,[28]which stated that “[i]t is the general rule of law that implied warranties as to quality or condition do not apply to realty.” Under the doctrine of caveat emptor, once the buyer accepted the deed to the property, the contract of sale merged with the deed and only the rights and remedies contained in the deed were available to the purchaser.[29]

§ 3.9.4.3 Arizona Judicially Recognizes Implied Warranties for Builder/Vendors

In 1979, the Arizona Court of Appeals decided Columbia Western Corp. v. Vela,[30] which was the first case in Arizona to recognize implied warranties with regard to the construction of new housing. The court addressed the basic issue of whether the law would impose an implied warranty upon the builder of new home construction, following the sale of that home by the builder.

In Vela, the purchasers of a new home began having problems shortly after the purchase, primarily because the walls of the structure began to crack. Subsequently, the purchaser sued the builder/vendor on a theory of breach of implied warranty of habitability. The builder/vendor argued that based on Voight v. Ott, the judgment could not be supported under a theory of breach of implied warranty because implied warranties as to quality or condition did not apply to realty. The court, however, distinguished Voight on the basis that it involved only the sale of realty as opposed to the construction of new housing that ultimately became realty. The court, therefore, relying on previous Arizona cases that imposed an implied warranty of good workmanship on contractors, held “that the builder-vendor impliedly warrants that the construction was done in a workmanlike manner and that the structure is habitable.”[31]

In reaching its decision, the court also recognized that the trend in other jurisdictions was to reject the doctrine of caveat emptor with respect to the builder-vendor of new construction. In so doing, it quoted the following statement set forth in a Texas appellate decision:

The caveat emptor rule as applied to new houses is an anachronism patently out of harmony with modern home buying practices. It does a disservice not only to the ordinary prudent purchaser but to the industry itself by lending encouragement to the unscrupulous, fly-by-night operator and purveyor of shoddy work.[32]

Based on the above stated policy, the court followed the nationwide trend and concluded that an implied warranty of good workmanship and habitability should be imposed on the builder/vendor of new home construction.

§ 3.9.4.4 Implied Warranties Extended to Subsequent Purchasers

In 1984, the Supreme Court of Arizona held, in Richards v. Powercraft Homes, Inc.,[33] that the same policy considerations that led to the decision that an original homebuyer could rely on a builder/vendors implied warranty should be equally applicable to subsequent homebuyers. The court reasoned that people and families are increasingly mobile in our society, and homebuilders can anticipate that the houses they construct will eventually, and perhaps frequently, change ownership.

In Richards, several individually-named plaintiffs purchased homes in a subdivision built by Powercraft Homes. After occupying the houses, each plaintiff discovered numerous defects, including faulty water pipes, improperly leveled yards, cracking of the interior and exterior walls, separation of the floors from the walls, separation of sidewalks, and misaligned doors and windows that were stuck closed or could not be locked. The homeowners filed suit against Powercraft, alleging violation of the Consumer Fraud Act and breach of the implied warranty that houses be habitable and constructed in a workmanlike manner.

The court rejected the contractor’s main argument that privity of contract was required to maintain an action for breach of the implied warranty of workmanship and habitability.[34] The court, however, restricted the subsequent purchasers’ recovery to damages caused by latent defects that became manifest after the subsequent owners purchased the structure and that were not discoverable had a reasonable inspection of the structure been made prior to purchase.[35]

The court also set forth the standard to be applied when determining whether there was a breach of warranty. The court stated:

The standard . . . is one of reasonableness in light of surrounding circumstances. The age of a home, its maintenance, the use to which it has been put, are but a few factors entering into this factual determination at trial.[36]

In Nastri v. Wood Brothers Homes, Inc.,[37] the Arizona Supreme Court further explained the implied warranty of workmanship and habitability available to subsequent purchasers. In Nastri, second purchasers of a home brought suit against the builder alleging that latent defects in construction had caused numerous cracks in the ceiling, walls and foundation of the home. The builder argued that since the home was not “structurally unsound,” as demonstrated by the fact that the owner was living in it, the home was not uninhabitable. The builder thus concluded that it had not breached the implied warranty of habitability. The court rejected this argument stating that the implied warranty was one of workmanship and habitability, and that the test was whether the home was reasonably suited for its intended purpose.[38] The court reasoned that “it would be the height of cynicism to allow a shoddy builder to escape liability because his work was not shoddy enough.”[39]

§ 3.9.4.5 Implied Warranties Not Limited to Builder-Vendors

Prior to 2008, the exception to privity recognized by Vela and Richards only extended as far as subsequent purchasers against vendor-builders. However, the supreme court in Lofts at Fillmore Condominium Association v. Reliance Commercial Construction, Inc.[40] stated that it was “clear that an implied warranty arises from construction of the home, without regard to the identity of the vendor.”[41] The Lofts at Fillmore case involved a lawsuit filed by a residential condominium association against the general contractor Reliance. A developer, William Mahoney and The Lofts at Fillmore, L.L.C., contracted with Reliance to convert an existing building into condominiums. Subsequently, the developer sold the units to individual buyers, who formed the condominium association. After defects began to surface, the condo association sued Reliance, despite the fact that there was no direct contract between Reliance and the individual buyers or the association. The Arizona Supreme Court in Lofts at Fillmore, in finding that Reliance’s implied warranties extended to the association, stated the following:

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 because of the form of the business deal chosen by the builder and vendor.[42]

The Supreme Court seemed to determine that its decision in Lofts at Fillmore was a logical extension of Richards, but it abrogated prior case law that appeared to limit a subsequent purchaser’s implied warranty claims to builders who are also vendors.[43]

§ 3.9.4.6 What is “New Home Construction” After Lofts at Fillmore?

As discussed above, the Vela court held 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.”[44] While that language has been cited often by subsequent appellate court decisions, the courts have not elaborated on what “new home construction” means. In Lofts at Fillmore, the supreme court expressly avoided the question by stating in footnote 1:

The parties have apparently assumed that the condominium conversion constituted new home construction. We also so assume without deciding the issue.[45]

While the supreme court in the Lofts at Fillmore noted that the project involved a residential condominium conversion of an existing building, it was not brought up that the condos were converted from an existing apartment building that had been originally built in 1929, seventy-one years prior to its conversion.[46] Whether the narrow exception to privity afforded subsequent purchasers is only available for a new house, or simply new construction on that house, is yet to be decided at the appellate level as of the date of this edition. This issue will most likely arise in the residential remodel context when older homes are updated and sold. However, all of the factors weighing in favor of extending the exception to homebuyers, as cited in Richards, Hayden, and Lofts at Fillmore, would seem to equally apply in the case of a purchaser of a remodeled home.

§ 3.9.4.7 The Far Reach of Implied Warranties as a Contract Claim: Six Year Statute of Limitations and the Discovery Rule

Negligence actions, including actions that allege negligent injury to real estate, must be commenced within two years after the cause of actions accrues. [47] On the other hand, an action for a debt that is evidenced by or founded upon a contract in writing must be commenced within six years after the cause of action accrues.[48]

Under what theory is a breach of implied warranty brought? Is it under the theory of negligent injury to real estate? Is it a contract claim? Can it be brought under both theories? A string of cases has determined that the claim is an action under contract law.

This was precisely the issue that was before the Arizona Supreme Court in Woodward v. Chirco Construction Co., Inc.[49] In Woodward, purchasers of a home sued the builder/vendor five years after the purchase. They claimed that the builder/vendor had been negligent in failing to perform a soil analysis prior to construction and had breached its implied warranty of workmanlike performance and habitability. The trial court dismissed both claims for being filed after the statute of limitations had expired. On appeal, the court of appeals affirmed the dismissal of the negligence claim, but reversed with respect to the claim based upon the implied warranty, finding that the implied warranty claim was a contract action so that the six-year statute of limitations applied.[50] On further appeal, the Supreme Court of Arizona affirmed the appellate court’s decision and held that because “the cause of action based on the implied warranty of workmanlike performance and habitability was based on the contract between [the purchasers and the builder/vendor], the court of appeals properly concluded that the six-year statute of limitations should apply.”[51]

In reaching its decision, the court stated:

The purchaser of a home can seek to recover in contract for defects in the structure itself as such defects render the home less than the purchaser bargained for . . . The purchaser can also seek to recover in tort for injuries sustained due to the contractor’s failure to construct the home as a reasonable contractor would. For example, if a fireplace collapses, the purchaser can then sue in contract for the cost of remedying the structural defects and sue in tort for damage to personal property or personal injury caused by the collapse. Each claim will stand or fail on its own; a distinct statute of limitations applied to each.[52]

This result was adopted, and the principle further refined in Matusik v. Dorn.[53] In Matusik, the owners of a home brought an action against a builder nine years after they had purchased the home, but only four years after they had discovered the defects. The trial court granted the builder’s motion for summary judgment based on the conclusion that the statute of limitations had run. On appeal, the issue was whether the “discovery rule” applied to a breach of contract against the builder of improvements to real estate. The court held “in an action based upon either tort or contract claims arising out of allegedly deficient design or construction of improvements to real estate, the cause of action does not accrue until the plaintiff knows, or in the exercise of reasonable diligence, should know, of the injury.”[54]

The court reasoned that it would be unjust to require a person to bring an action for damages to either his person or property if he does not know or have reason to know the facts giving rise to the claim.[55] Further, with respect to the implied warranty contract claim, the court reasoned that buyers have a right to rely upon the warranties of sellers of products or services, and that this very reliance underlies the reason for the application of the discovery rule.[56]

§ 3.9.4.8 The Duration of The Implied Warranty of Workmanship and Habitability: The Rule of Reasonableness and The Statute of Repose

Following the decisions in Richards, Woodward and Matusik, contractors became worried that their liability under the implied warranty of workmanship and habitability was virtually limitless. After all, those cases supported the proposition that a subsequent purchaser had six years after discovering a defect to bring an implied warranty claim. Two cases decided after the Matusik case involved just how long after building a home a contractor could be sued for breach of the implied warranty of workmanship and habitability. One of the cases eased the contractors’ worries; the other inflamed the contractors’ worst nightmares.

1. Sheibels: The Rule of Reasonableness Prevails

In Sheibels v. Estes Homes,[57] a homeowner brought an action fourteen years after the home was constructed, but only four years after purchasing the home. The action was for termite damage resulting from a crack in the slab into which moisture was leaking, thereby hampering termite control. The court held that the implied warranty, as extended to subsequent purchasers, did not run indefinitely, but only for a reasonable length of time.[58] The evidence presented in the case showed that treatment for termites for a newly built home could not be expected to last longer than five years. Accordingly, the court stated that it was unreasonable to extend the builder’s implied warranty for termite damage beyond the five-year time frame.[59]

The court also re-emphasized the limitations of the implied warranty as expressed in Richards. The court in Richards stated that the implied warranty for subsequent purchasers was limited to latent defects that were not discoverable by a reasonable inspection prior to purchase.[60] There was no evidence in Sheibels that the subsequent purchaser had the ten-year old house inspected for termite damage prior to the purchase. Accordingly, the court further concluded that the builder was not responsible for termite damage that could have been discovered by a reasonable inspection had the subsequent purchaser chosen to conduct one prior to purchasing the home.[61]

2. Hershey: Taking Implied Warranties Too Far?

While the decision in Sheibels provided homebuilders with some sense of reasonableness when it came to the implied warranty of workmanship and habitability, the decision in Hershey v. Rich Rosen Construction Co.,[62] only two years later, left homebuilders wondering if there was any limit to their potential liability. In Hershey, a contractor was sued for having allegedly installed defective stucco twelve years earlier. The suit had been brought by the third purchaser of the house, who, of course, had never had a contract with the contractor.

The issue on appeal was whether the twelve years between the stucco installation and the filing of the complaint was an unreasonable time to extend a homebuilder’s implied warranty of habitability and workmanship for a stucco installation. The court applied the rule of reasonableness set forth in the Powercraft and Sheibels decisions, stating that “the duration that an implied warranty will exist is a factual determination that will depend, in part, on the life expectancy of the questioned component in a non-defective condition.” The court then held that because expert testimony had shown that a stucco exterior has a normal life expectancy of 30 to 50 years, twelve years was not an unreasonable period for an implied warranty of habitability and workmanship to exist.[63]

The court further held that the reasonable inspection requirement did not require the subsequent purchaser to hire an expert or professional home inspection service to inspect the house. Instead, the court stated that the implied warranty would not be applied only if the defect could have been discovered during an inspection made by the average purchaser, not an expert.[64] Because the evidence established that the damage for the defective stucco was not discoverable by a reasonable inspection until it was actually discovered, the homeowner was covered under the implied warranty.[65]

§ 3.9.4.9 Relief to Builders: Arizona’s Statute of Repose

Quite obviously, contractors did not like the idea that they could be subject to the implied warranty of workmanship and habitability for 30 to 50 years after completing the construction of a home. In 1989, approximately one year after the original lawsuit in Hershey was filed; however, the Arizona Legislature enacted a statute of repose to limit the time within which implied warranty suits could be brought.[66] While the statute was not enacted in time to help the contractor in Hershey, the statute limited the duration of implied warranty claims to a maximum of nine years after the completion of the structure.

The statute of repose states that no action based in contract (which includes implied warranty claims) may be instituted against “a person who develops or develops and sells real property, or performs or furnishes the design, specifications, surveying, planning, supervision, testing, construction or observation of construction of an improvement to real property more than eight years after substantial completion of the improvement to real property.”[67] If a latent defect is not discovered until the eighth year after substantial completion, an action may be brought within one year thereafter. Accordingly, the longest period during which an action may be brought is nine years.[68]

The statute of repose has not completely eliminated the rule of reasonableness set forth in Richards and applied in Sheibels and Hershey. For instance, the decision in Sheibels, which ruled that the owner could not pursue an implied warranty claim more than five years after the completion of the home, would still be decided the same after the statute of repose. That is because under the facts of that case, five years was determined to be the reasonable length of time in which the claim could be brought. The statute of repose merely places an outside limit on the time within which an implied warranty claim may be instituted, but it does not establish the minimum time if the facts of the particular case demonstrate that a shorter time is more reasonable.

§ 3.9.4.10 The Statute of Repose is Limited to Contract Actions

Is an action sounding exclusively in tort subject to the statute of repose if the action is generated by a contractual relationship between the parties? That was the issue before the Arizona Court of Appeals in Fry’s Food Stores of Arizona, Inc. v. Mather and Associates.[69] In Fry’s, the plaintiffs filed an action alleging that the project architect, structural engineer, general contractor, and canopy subcontractor had negligently selected and installed connectors that held a canopy in place. The canopy was installed in 1974, and a windstorm in 1989 lifted the 500 foot canopy from the wall of Fry’s warehouse onto the roof causing exterior and interior damage. The defendants argued that the action arose from a contract to construct an improvement to real property and was therefore barred by the eight-year construction statute of repose.

The trial court found that the parties’ relationships, which had generated the defendants’ duty of care, were based in contract and dismissed the case. The court of appeals disagreed, stating that to adopt the trial court’s reasoning would render the statute unconstitutional and abrogate a common-law negligence action. Thus, the court narrowly interpreted the statute to apply only to those claims truly “based in contract,” and held that the statute did not apply to negligence claims.[70]

Based on the decision in Fry’s, the duration in which an injured party may bring a claim against a contractor based in negligence is limited only by the two-year statute of limitations for negligence actions. Because the two-year statute of limitations does not begin to run until the date of the injury is discovered, contractors can be subject to negligence actions for many years after the completion of a structure. As the decision in Woodward v. Chirco Constr. Co., Inc. instructs, however, the claim must truly arise out of negligence. For instance, in Fry’s, the claim for the damage done to the warehouse was based in negligence, but any claim to repair the canopy itself would have been based in contract and barred by the statute of repose.[71]

 

§ 3.9.5 Limitations on Implied Warranties

§ 3.9.5.1 Contract Disclaimers of Implied Warranties Are Against Public Policy and Are Void

One of the issues that arises with respect to implied warranties is whether a contractor can limit the implied warranty of workmanship and habitability through an express warranty or a specific disclaimer in its contract with the owner. That issue was raised in Nastri v. Wood Bros. Homes, Inc.[72] In Nastri, the contract with the original owner provided for a one-year repair warranty and stated that no other warranties, expressed or implied, were given, including a warranty of fitness for habitation.[73]

The original purchasers sold the home two years after purchasing it. Shortly after the second purchasers moved into the home, they observed many problems with the foundation of the home and numerous cracks in the walls and ceilings. When the second purchasers sued the builder under the implied warranty of workmanship and habitability, the builder argued that the implied warranty did not apply because its contract with the original purchaser negated all implied warranties.[74]

The court, relying on the guiding principle set forth in Richards v. Powercraft Homes, Inc., that innocent purchasers should be protected and builders held accountable for their work, ruled that it would be against public policy in Arizona to allow a builder to disclaim the implied warranty of workmanship and habitability.[75] The court’s ruling, however, was limited to innocent subsequent purchasers of a home. In fact, the court stated that “[w]e do not decide in this case whether a knowing disclaimer of the implied warranty is void as against the public policy of Arizona.”[76]

Although Nastri was limited by its facts to subsequent purchasers, its reasoning was extended to original purchasers in Buchanan v. Scottsdale Environmental Construction & Development Co. Inc.[77] Buchanan involved the sale of an improved homesite rather than the home itself. Nevertheless, the court stated that “[i]f one constructing homes is required to warrant fitness of both the house and the land on which it is built, we see no reason why one constructing a homesite should not be required to warrant that it is fit for the purpose for which it is sold.”[78] The court also stated that due to the same policy reasons that led to the decision in Richards v. Powercraft Homes, Inc., “any attempt by the seller to disclaim by contract the liability imposed by law [is] void.”[79] Accordingly, absent any special circumstances, a disclaimer of the implied warranty of workmanship and habitability in a contract between an owner and contractor is void in Arizona as to both an original purchaser and subsequent purchasers.

§ 3.9.5.2 Vendors Not Engaged in the Business of Building

While the implied warranty of workmanship and habitability may extend for as long as nine years and may not be excluded by contract, Arizona’s courts had recognized for decades that “accountability for construction defects should be limited to builders and only to those vendors who build the home or at least work in tandem with builders.” [80] Thus, the implied warranty theory does not extend to a bank that, through foreclosure, acquired six homes under construction and subsequently sold the homes to third parties after completing the construction. Similarly, the theory of implied warranty does not extend to a homeowner who built his home, originally intending the property for his own use, then sells it but was never engaged in the business of building.[81]

§ 3.9.5.3 No Exception to Privity in Commercial Construction

Prior to the Lofts at Fillmore case, it was generally understood that subsequent purchasers only had implied warranty claims against a vendor-builder for latent defects in a residential construction project.[82] The vast majority of the cases involving implied warranty claims involved residential construction projects. In deciding those cases, the courts often turned to public policy discussion to help mold the nature and application of implied warranties. However, because of the general lack of the same public policy concerns in commercial construction, the courts have rejected claims by subsequent purchasers absent a contractual relationship with the contractor.

Richards involved implied warranties in the residential context. The court was clear that the residential aspect to the facts was very important in coming to its decision to extend implied warranties to subsequent purchasers. The court stated that considerations applicable to new homebuyers, including “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,” are equally applicable to subsequent homebuyers.[83] These considerations do not seem to have any application to the purchaser of commercial structures.

The Hayden Business Center Condominiums Association v. Pegasus Development Corp. case involved breach of implied warranty claims relating to defective construction by a condominium association against the builder of a business condominium complex. In rejecting the association’s plea that the exception to privity be applied to it, the court stated the following:

Based upon the public policy considerations in Richards, we see no basis to extend an implied warranty of good workmanship claim to subsequent purchasers of commercial buildings. Unlike the parties to a home sale, no gross disparity in sophistication generally exists between the buyers and sellers of commercial real estate. Moreover, unlike new homes, commercial buildings generally are not mass-produced.”[85]

The Hayden court also found that “the Richards exception applies only to homebuilder-vendors.”[86] This statement was based in part on the 1991 appellate court decision Menendez v. Paddock Pool Construction Co., which held that “Richards and its progeny expanded implied warranty liability for the homebuilder-vendor but failed to address non-owner subcontractors like Paddock.”[87] Therefore, the court in Hayden concluded that a subsequent purchaser had no claim for breach of implied warranties against a builder who was not also the vendor. This conclusion was specifically overruled by the supreme court in the Lofts at Fillmore.[88]

While the rule in Hayden is weakened by Lofts at Fillmore, its policy discussion as to why the exception to privity does not apply in a commercial context still appears sound. In Highland Village Partners, LLC v. Bradbury & Stamm Construction Co., Inc.,[89] the court of appeals reaffirmed the policy that subsequent purchasers of commercial structures have no implied warranty claims. The court stated that “the Hayden court declined to extend the Richards exception to the commercial property context because the public policy concerns present in residential homebuilding did not exist.”[90] However, the Lofts at Fillmore case could open the door to application of the privity exception to commercial development as well as to owners’ claims against subcontractors. While the structure in Lofts at Fillmore was ultimately sold as residential units, the conversion project performed by Reliance, in contract with the developer, was entirely a commercial transaction. It can be said that the lines between commercial and residential have been blurred a bit by Lofts at Fillmore.

§ 3.9.5.4 Exception to Privity is Not Extended to Claims Against Subcontractors

After the Lofts at Fillmore decision, one may have assumed that the next logical step in the evolution of implied warranty law would be to hold subcontractors liable to subsequent purchasers (or original purchasers for that matter) for their implied warranties. That assumption would have been wrong. In 2013, the court of appeals expressly rejected the argument that the Richards and Lofts at Fillmore cases abolished a requirement of privity in new home cases.[91] The court in Yanni stated the following:

Although an implied warranty flows from the construction of a residence and applies to all of its individual components, the exceptions to the general privity requirement found in Richards and Lofts have never been extended to a homebuyer’s claims against a builder’s subcontractors.[92]

The court of appeals reasoned that a purchaser’s remedies against developers and general contractors involved with the construction of the house was sufficient to protect purchasers.

 

§ 3.9.6 Damages

Damages for a breach of the implied warranty of workmanship and habitability are fact specific and, thus, determined on a case-by-case basis. The measure of damages in an action for breach of the implied warranty is the cost of remedying the defects.[93] The exception to this rule is where economic waste would occur as a result of repairing the defect, in which event, the plaintiff receives the difference in value between the structure received and a comparable structure without defects.[94] However, no reported Arizona case has specifically dealt with the issue of residual loss of market value after a defect has been repaired due to the stigma that is inherent in some types of defects. For example, owners who have incurred the expense of repairing a defective foundation or remediating a serious mold problem caused by defective construction will often find that, despite their repair efforts, purchasers are not willing to pay as much for a building with a history of mold or foundation defects as they would for a building without such a history. There is a significant amount case law outside of Arizona that supports a recovery of residual loss of market value on top of actual repair costs.[95] The United States Court of Appeals for the Third Circuit in In re Paoli Railroad Yard PCB Litigation v. Southeastern Pennsylvania Transportation Authority stated the following:

This approach is normally consistent with the view that, when physical damage is temporary, only repair costs are recoverable, because in a perfectly functioning market, fully repaired property will return to its former value. Thus, an award of repair costs will be fully compensatory. And it makes sense to award repair costs rather than the equivalent diminution of value absent repair, because it is easier to measure repair costs. Hence, normally, it is only when property cannot be repaired that courts must award damages for diminution of value in order to fully compensate plaintiffs. However, the market sometimes fails and repair costs are not fully compensatory. In such cases, according to the principles of the Wade court, plaintiffs should be compensated for their remaining loss. Absent such an approach, plaintiffs are permanently deprived of significant value without any compensation. (emphasis added).[96]

§ 3.9.6.1 Attorney’s Fees Are Not Recoverable in Implied Warranty Cases

In 2012, the court of appeals issued its first decision in Sullivan v. Pulte Home Corp.[97] That case involved tort and implied warranty claims by a subsequent purchaser of a house related to defective construction of a retaining wall. The implied warranty claims were barred by the statute of repose, but the court denied an award of attorneys’ fees and stated the following:

The fact that an implied warranty claim sounds in contract “does not compel the conclusion that it ‘arises out of contract’ within the meaning of § 12–341.01(A).” North Peak, 227 Ariz. at 170, ¶ 26, 254 P.3d at 409. The Arizona Supreme Court’s analysis in Barmat v. John and Jane Doe Partners A–D, 155 Ariz. 519, 521, 747 P.2d 1218, 1220 (1987), is controlling. The supreme court determined that A.R.S. § 12–341.01(A) applies to actions arising out of express contracts and implied-in-fact contracts, but not implied-in-law contracts. Id. at 521–24, 747 P.2d at 1220–23. The implied warranty of workmanship and habitability is implied-in-law, not implied-in-fact. See North Peak, 227 Ariz. at 170, ¶ 26, 254 P.3d at 409. Accordingly, we conclude that § 12–341.01(A) is not applicable to the Sullivans’ breach of implied warranty claim.[98]

Thus, while the implied warranty of workmanship and habitability sounds in contract for purposes of the statute of repose, it does not necessarily arise out of contract for purposes of A.R.S. § 12-341.01.

 

§ 3.9.7 The General Inapplicability of Products Liability in Construction Cases

Although, technically speaking, a claim alleging products liability is not an issue involving an implied warranty, there are similarities. In Arizona, as in most every jurisdiction, the appellate courts have formulated a special cause of action known as “products liability” or “strict tort liability” with regard to personal injury sustained through the use of a mass-produced or manufactured product. Under this claim for relief, a plaintiff must merely demonstrate that the product was defective, i.e., unreasonably dangerous, to recover damages. Neither negligence nor privity of contract are essential elements to a products liability claim.[99] Thus, manufacturers of mass-produced products, in a sense, impliedly warrant that their products will be safe when used for their intended purposes.

The elimination of privity as a requirement to a products liability claim allows subsequent purchasers or even non-purchasers who use the product to recover against the retailer, distributor and manufacturer of defective products. As noted in Nastri, product liability and strict tort liability theories of recovery are generally inapplicable in construction defect cases. In its opinion, the court ruled that a claim for damages caused to a residence by latent structural defects was not actionable on a products liability theory, finding that there was no evidence that suggested that the construction defects made the property unreasonably dangerous.[100]

 

§ 3.9.8 Master Planner Beware: Contractor’s Potential Liability Under a Theory of Products Liability in Planned Community

In Menendez v. Paddock Pool Construction,[101] the Arizona Court of Appeals considered the issue of whether the company that had constructed a shallow swimming pool could be held liable under a theory of strict products liability. The court held that the contractor was not liable, but suggested that a builder/vendor of mass-produced tract homes could possibly be found strictly liable for injuries resulting from defective construction. The court concluded that the custom pool at issue in that case was not a “product” for purposes of strict liability in tort as it was not a standardized model constructed, assembled, or manufactured by a mass-production process analogous to that used in tract housing.[102]

Although the Menendez court did not find the contractor liable, it applied the reasoning of a New Jersey case where the New Jersey Supreme Court held that a builder/vendor of mass-produced tract homes was strictly liable for injuries resulting from a defect in a water distribution design that allowed excessively hot water into a bathroom faucet.[103] In Schipper, the court found that there were no meaningful distinctions between the contractor’s mass-production and sale of homes and the mass-production and sale of automobiles and that the pertinent overriding policy considerations were the same. The Menendez court, quoting Schipper stated:

[i]f there is improper construction such as a defective heating system or a defective ceiling, stairway and the like, the well-being of the vendee and others is seriously endangered and serious injury is foreseeable. The public interest dictates that if such injury does result from the defective construction, its cost should be borne by the responsible developer who created the danger and who is in the better economic position to bear the loss rather than by the injured party who justifiably relied on the developer’s skill and implied representation.[104]

Accordingly, Menendez leaves open the possibility that a contractor of mass-produced construction, such as tract homes, could be liable in Arizona under a theory of products liability.

 

§ 3.9.9 Warranties Under the Uniform Commercial Code

§ 3.9.9.1 Generally

The Uniform Commercial Code (“UCC”) was developed as a recommended code of laws governing commercial conduct. All the states have adopted the UCC except Louisiana. Article Two of the UCC’s nine articles governs the sale of goods. Article Two applies to construction contracts, where the predominant feature of the contract is the sale of equipment as opposed to the performance of labor.[105]

§ 3.9.9.2 Express Warranties Under the UCC

Similar to the common law, the Uniform Commercial Code recognizes both express and implied warranties. Section 47-2313 of the Arizona Revised Statutes states, “[a]ny affirmation of fact or promise made by the seller to the buyer, which relates to the goods and becomes part of the basis of the bargain, creates an express warranty that the goods shall conform to the affirmation or promise.”[106] Further, any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.[107] Warranties may arise by simple actions such as the contractor describing the goods. Reliance on a sample or model may also create an express warranty. Anything that is used as “the basis of the bargain” creates “an express warranty that the goods shall conform to that description or to the sample or model.” In order to create an express warranty, the seller of the goods need not use formal words such as “warrant” or “guarantee” nor have a specific intention to make a warranty. However, an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.[108]

Express warranties should be in writing, and should incorporate everything the seller intends to warrant and everything the buyer expects to receive. Further, warranties should flow through [i.e., when the subcontractor makes specific warranties to the general contractor regarding goods, the seller of the good’s (subcontractor’s supplier) should expressly warrant performance of the buyer’s (subcontractor’s) warranty given to the general contractor.]. It is important to incorporate by reference the warranty given by the subcontractor to the general contractor into the contract of sale including modifications to ensure that the responsibility flows through the supplier. In particular, the warranty period of the supplier should be made clearly coextensive with the period committed to by the subcontractor.

§ 3.9.9.3 Implied Warranties Under the UCC

The UCC also recognizes implied warranties of merchantability and fitness for a particular purpose. Goods are merchantable if they “pass without objection in the trade under the contract description and, if fungible goods, are of fair, average quality within the description and are fit for the ordinary purpose for which such goods are used.”[109]

An implied warranty of fitness for a particular purpose arises when the seller at the time of contracting has reason to know the particular purpose for which the goods are required and that the buyer is relying on the seller’s skills or judgment to select or furnish suitable goods.[110] This warranty arises in construction situations when the seller has a special expertise regarding the goods and the buyer relies on the seller to supply what is required. An example is if a subcontractor supplies specifications to the seller and the sales contract required the seller to supply goods to meet those specifications.

Implied warranties under the UCC are defined by statute. A.R.S. § 47-2314 states, “[u]nless excluded or modified . . . a warranty that the goods shall be merchantable is implied in a contract for their sale as if the seller is a merchant with respect to goods of that kind.”[111] The statute further states:

[w]here the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is . . . an implied warranty that the goods shall be fit for such purpose.

Unlike the common law of implied warranties of workmanship and habitability, the parties to a contract can limit or exclude the UCC warranties of merchantability and fitness for a particular purpose. A.R.S. § 47-2316(B), in pertinent part, provides:

[t]o exclude or modify the implied warranty of merchantability or any part of it, the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness, the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that ‘there are no warranties which extend beyond the description on the face hereof.’

§ 3.9.9.4 Limitations of Actions

The time during which a party can bring suit for breach of warranty under the Uniform Commercial Code has been limited by statue. A.R.S. § 47-2725 states that “[a]n action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement, the parties may reduce the period of limitation to not less than one year but may not extend it.”[112] (Emphasis added). The section further provides:

[a] cause of action accrues when the breach occurs, regardless of the grieved parties’ lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance, the cause of action accrues when the breach is or should have been discovered.[113]

One additional difference between common law implied warranties and those defined by the UCC is that a buyer of goods must give reasonable notice to the seller after a breach of the warranty is discovered or should have been discovered.[114]

Remedies for breach of warranty under the UCC are either specified in the warranty, or if not specified or limited, the measure of damages is the difference between the value of the goods accepted and the value they would have had if they had been as warranted. [115]

 

§ 3.9.10 Owner Warranties

Although this chapter deals primarily with contractor liability, an owner, too, may be liable to a builder for breach of warranty. A contractor is not liable for damages which are the direct result of plans and specifications furnished by the owner, an owner impliedly warrants the accuracy of the plans and specifications he provides to the contractor.[116] Further, a contractor who relies on defective plans provided by an architect has a direct cause of action against that architect for breach of an implied warranty “that they have exercised their skills with care and diligence and in a reasonable, non-negligent manner.”[117]

 

§ 3.9.11 Warranty Checklist

The following issued checklist can be used by either the contractor or the owner in the event a problem arises:

1. Look to the express warranty for assurances made to the owner.

2. What is the clear and natural import of the language?

3. What was excluded from the express warranty?

4. What defenses are available to the contractor (examples, impossibility, impracticability, failure of consideration, design defect, etc.)?

Registrar of Contractors:

1. Has a compliant been filed with the Registrar of Contractors?

2. Are there arguments that support the finding of the work meeting the workmanlike standard requirement?

3. Look at the Registrar of Contractors’ Minimum Workmanship Standards for Contractors to find acceptable levels of workmanship and specific instances of work and tolerances.

4. Has the 2-year statute of limitations expired?

5. Has the contractor complied with Registrar of Contractor orders such as restitution for defective work, in order to avoid suspension or revocation of license?

Implied Warranties:

1. A disclaimer or express warranty cannot be used to relieve a contractor from implied warranty liability.

2. Subsequent purchasers are protected in residential construction.

3. Is the contractor a master planner? If so, there is a potential for liability under a products liability claim.

4. Has the statute of limitations expired? (6 years from occupancy or 6 years from discovery of the defect. Take into account discovery rule, but this rule only applies for a reasonable time).

5. Has the Statute of Repose cut-off implied warranty claim?

6. Does the Statute of Repose apply? (Statute of repose does not apply to negligence claims).

Warranties Under Uniform Commercial Code:

1. Has an express warranty under the UCC been created? (Formal words such as ‘warrant’ or ‘guarantee’ need not be used, but any description of goods which is made part of the basis of the bargain creates an express warranty.)

2. Has an implied warranty of fitness for a particular purpose been created? (i.e., did seller know the particular purpose for which the goods were required?)

3. Did the contract exclude UCC warranties of merchantability and fitness for a particular purpose?

4. Has the statute of limitations expired? (4 years after goods delivered unless limited by agreement).

Owner Liability:

1. Did the owner supply contractor with defective plans and specifications?

2. Did the contractor have notice of the defects? If so, contractor must have notified owner.

 

§ 3.9.12 Conclusion

Regarding express warranties, the contractor will be bound by the clear import of the language used in the construction agreement. If a contractor warrants that all of the materials and equipment furnished will be new, or meet other requirements, under the express warranty law, courts will require the contractor to meet its stated quality standards.

In addition to any express warranties included in the construction agreement, the Registrar of Contractors requires that a contractor must perform its work in an ordinarily skilled manner as a skilled workman. A complaint for failure to satisfy the Registrar of Contractors’ requirements, however, must be filed in most cases within two years of completion of the project.

In addition, contractors impliedly warrant that all construction will be done in a workmanlike manner and that the structure will be habitable. This implied warranty runs to subsequent purchasers of a residence, but under the Statute of Repose, no action for breach of the implied warranty of habitability may be brought more than eight/nine years after substantial completion of the work. Arizona case law suggests that in some cases mass producers of tract homes may be held liable for injuries to third persons under product liability theory. Therefore, contractors who build and sell mass produced tract homes should be aware of the emerging trend of strict liability, and should take appropriate steps to guarantee high quality workmanship.

Further, if a contractor sells goods to another party, the contractor may be liable for breach of the implied warranty of merchantability and fitness for a particular purpose under the Uniform Commercial Code. An action for breach of either an express or implied warranty under the Uniform Commercial Code must be brought within four years of the date when tender of delivery of the goods is made.

A property owner usually has several potential warranty claims available when faced with construction problems. Contractors need to recognize their potential liability based on well drafted express warranties, implied warranties, Registrar of Contractor’s rules and regulations, and the Uniform Commercial Code. Both the common law and statutory law must be analyzed together in order to determine the best approach to take in the event of a warranty dispute.


[1] Hoover v. Nielson, 110 Ariz. 329, 331, 518 P.2d 990, 992 (1974).

[2] Id.

[3] American Institute of Architects, AIA Document A-201 (hereinafter “AIA A201”) ¶ 3.5. (2007).

[4] See Burton-Dixie Corp. v. Timothy McCarthy Constr. Co., 436 F.2d 405 (5th Cir. 1971); see also Badgett Constr. & Dev. Co. v. Kan-Build, Inc., 102 F. Supp. 2d 1098 (S.D. Iowa 2000); Baker-Crow Constr. Co. v. Hames Electric, Inc., 566 P.2d 153 (Okla. Ct. App. 1976).

[5] The discovery rule for the statute of limitations and the statute of repose are discussed below.

[6] Associated General Contractors of America, ConsensusDOCS Document No. 200, ¶ 3.8.1 (2000).

[7] ConsensusDOCS No. 200, ¶ 3.9.1.

[8] ConsensusDOCS No. 200, ¶ 3.9.4.

[9] AIA A201, ¶ 12.3; ConsensusDOCS No. 200, ¶ 3.9.7.

[10] Blecick v. Sch. Dist. No. 18 of Cochise County, 2 Ariz. App. 115, 406 P.2d 750 (1965); Fairway Builders, Inc. v. Malouf Towers Rental Co., 124 Ariz. 242, 603 P.2d 513 (Ct. App. 1979), overruled on other grounds.

[11] A.R.S. § 32-1104.

[12] A.A.C. R4-9-108(A).

[13] J.W. Hancock Enter., Inc. v. Registrar of Contractors, 126 Ariz. 511, 617 P.2d 19 (1980).

[14] See A.R.S. § 32-1154.

[15] A.R.S. § 32-1154(B).

[16] See A.R.S. §§ 32-1121(C). Additionally, a contractor may not file a lawsuit to recover payment for work performed unless the contractor has a valid contractor’s license. A.R.S. § 32-1153.

[17] A.R.S. § 32-1155(C)(1).

[18] A.R.S. § 32-1154(A)(23).

[19] A.R.S. § 32-1156.01.

[20] A.R.S. §§ 32-1131 et seq.

[21] A.R.S. § 32-1132.

[22] A.R.S. § 32-1155(A).

[23] Cameron v. Sisson, 74 Ariz. 226, 246 P.2d 189 (1952); Kubby v. Crescent Steel, 105 Ariz. 459, 466 P.2d 753 (1970); Reliable Elec. Co. v. Clinton Campbell Contracting, Inc., 10 Ariz. App. 371, 459 P.2d 98 (1969).

[24] Id.

[25] Cameron v. Sisson, 74 Ariz. 226, 246 P.2d 189 (1952).

[26] Reliable Elec. Co., 10 Ariz. App. 371, 459 P.2d 98.

[27] Kubby v. Crescent Steel, 105 Ariz. 459, 466 P.2d 753 (1970).

[28] Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959).

[29] Id.

[30] 122 Ariz. 28, 592 P.2d 1294 (1979).

[31] Id. at 33, 592 P.2d at 1299.

[32] Id. at 32, 592 P.2d at 1298.

[33] 139 Ariz. 242, 678 P.2d 427 (1984).

[34] Id. at 245, 678 P.2d at 430.

[35] Id.

[36] Id.

[37] 142 Ariz. 439, 690 P.2d 158 (Ct. App. 1984).

[38] Id. at 444, 690 P.2d at 163.

[39] Id.

[40] 218 Ariz. 574, 190 P.3d 733 (2008) TA \s "Lofts at Fillmore."

[41] Id. at 577, P.3d at 736.

[42] Id.

[43] Id. at note 3.

[44] Vela, at 33, P.2d at 1294 (double emphasis added).

[45] Lofts at Fillmore at 576, P.3d at 735.

[46] http://www.eastvalleyurban.com/phoenix/lofts-at-fillmore/

[47] A.R.S. § 12-542(3).

[48] A.R.S. § 12-548.

[49] 141 Ariz. 514, 687 P.2d 1269 (1984).

[50] A.R.S. § 12-548.

[51] Woodward v. Chirco Constr. Co., Inc., 141 Ariz. 514, 516, 687 P.2d 1269, 1271 (1984).

[52] Id.

[53] 157 Ariz. 249, 756 P.2d 346 (Ct. App. 1988).

[54] Id. at. 251, 756 P.2d at 348.

[55] Id. at 250, 756 P.2d at 347.

[56] Id. at 251, 756 P.2d at 348.

[57] 161 Ariz. 403, 778 P.2d 1299 (Ct. App. 1989).

[58] Id. at 405, 778 P.2d at 1301.

[59] Id. at 406, 778 P.2d at 1302.

[60] Richards, 139 Ariz. 242, 245, 678 P.2d 427, 430.

[61] Sheibels, 161 Ariz. 403, 406, 773 P.2d 1299, 1302.

[62] 169 Ariz. 110, 817 P.2d 55 (Ct. App. 1991).

[63] Id. at 116, 817 P.2d 55, 61.

[64] Id. at 114, 817 P.2d 55, 59.

[65] Id. at 116, 817 P.2d 55, 61.

[66] A.R.S. § 12-552.

[67] A.R.S. § 12-552(A).

[68] A.R.S. § 12-552(B).

[69] 183 Ariz. 89, 900 P.2d 1225 (Ct. App. 1995).

[70] Id. at 91-92, 900 P.2d at 1227-28.

[71] See Woodward v. Chirco Constr. Co., Inc., 141 Ariz. 514, 687 P.2d 1269 (1984).

[72] 142 Ariz. 439, 690 P.2d 158 (Ct. App. 1984).

[73]Id. at 440, 690 P.2d at 159.

[74] Id. at 441, 690 P.2d at 160.

[75] Id. at 442, 690 P.2d at 161.

[76] Id. at 443, 690 P.2d at 162.

[77] 163 Ariz. 285, 787 P.2d 1081 (Ct. App. 1989).

[78] Id. at 286, 787 P.2d at 1082.

[79] Id. at 287, 787 P.2d at 1083.

[80] Smith v. Cont’l Bank, 130 Ariz. 320, 636 P.2d 98 (1981).

[81] Dryden v. Bell, 158 Ariz. 164, 761 P.2d 1068 (Ct. App. 1988).

[82] Nastri, 142 Ariz. at 444, P.2d at 163.

[83] See Richards, 139 Ariz. at 245, 678 P.2d at 430.

[84] 209 Ariz. 511, 105 P.3d 157 (Ct. App. 2005).

[85] Richards, 139 Ariz. at 245, 678 P.2d at 430.

[86] Hayden, 209 Ariz. at, 513, 105 P.3d at 159.

[87] 172 Ariz. 258, 270, 836 P.2d 968, 980 (Ct. App. 1991).

[88] Lofts at Fillmore, 218 Ariz. 574, 578, n.3, 190 P.3d 733, 737.

[89] 219 Ariz. 147, 195 P.3d 184 (Ct. App. 2008).

[90] Id. at 150, 195 P.3d 187.

[91] Yanni v. Tucker Plumbing, Inc., 233 Ariz. 364, 368, 312 P.3d 1130, 1134 (Ct. App. 2013), review denied (Apr. 22, 2014).

[92] Id. at 368, P.3d at 1134.

[93] Fairway Builders, Inc. v. Malouf Towers Rental Co., Inc., 124 Ariz. 242, 253, 603 P.2d 513, 524 (Ct. App. 1979).

[94] Blecick v. Sch. Dist. No. 18 of Cochise County, 2 Ariz. App. 115, 406 P.2d 750 (1965), overruled on other grounds.

[95] See Anderson v. Bauer, 681 P.2d 1316 (Wyo. 1984) (water damage); Rinkel v. Lee’s Plumbing & Heating Co., 99 N.W.2d 779 (Minn. 1959) (water damage); McAlonan v. U.S. Home Corp., 724 P.2d 78 (Colo. Ct. App. 1986) (foundation cracks); In re Paoli Railroad Yard PCB Litig. v. S.E Pennsylvania Transp. Auth., 35 F.3d 717 (3d Cir. 1994) (chemical contamination); Terra‑Products, Inc. v. Kraft Gen. Foods, Inc., 653 N.E.2d 89, 93–94 (Ind. Ct. App. 1995); Bonnette v. Conoco, Inc., 837 So. 2d 1219, 1240 (La. 2003); Jacob v. West Bend Mut. Ins. Co., 553 N.W.2d 800, 807 (Wis. Ct. App. 1996); Mayer v. Sto Industries, Inc., 132 P.3d 115, 124 (Wash. 2006).

[96] 35 F.3d 717, 797-98 (3rd Cir. 1994).

[97] Sullivan v. Pulte Home Corp., 231 Ariz. 53, 290 P.3d 446 (Ct. App. 2012), vacated in part, 232 Ariz. 344, 306 P.3d 1 (2013).

[98] Id. at 62, P.3d at 455.

[99] O.S. Stapley Co. v. Miller, 103 Ariz. 556, 447 P.2d 248 (1968).

[100] Nastri, 142 Ariz. at 445, 690 P.2d at 164.

[101] 172 Ariz. 258, 836 P.2d 968 (Ct. App. 1991).

[102] Id.

[103] Schipper v. Levitt & Sons, Inc., 207 A.2d 314 (N.J. 1965).

[104] Menendez, 172 Ariz. 258, 264 836 P.2d 968, 974.

[105] Bouebrake v. Cox, 499 F.2d 951 (8th Cir. 1974).

[106] A.R.S. § 47-2313(A)(1).

[107] A.R.S. § 47-2313(A)(2) .

[108] A.R.S. § 47-2313(B) .

[109] A.R.S. §§ 47-2314.

[110] A.R.S. § 47-2314(B).

[111] A.R.S. § 47-2315.

[112] A.R.S. § 47-2725(A).

[113] A.R.S. § 47-2725(B).

[114] A.R.S. § 47-2607(C)(1).

[115] A.R.S. § 47-2714.

[116] Kubby v. Crescent Steel, 105 Ariz. 459, 466 P.2d 753 (1970); see also Chaney Bldg. Co. v. City of Tucson, 148 Ariz. 571, 716 P.2d 28 (1986); see also United States v. Spearin, 248 U.S. 132, 136 (1918).

[117]Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984); see also North Peak Constr., LLC v. Architecture Plus, Ltd., 227 Ariz. 165, 254 P.3d 404 (Ct. App. 2011).

          

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