In a recurring issue of statewide importance, the Supreme Court of Arizona in Zambrano v. M & RC II, LLC, No. CV-21-0205-PR (Sept. 28, 2022) decided that it is against public policy to waive or disclaim the implied warranty of workmanship and habitability in a purchase agreement with a homebuyer. This rule extends to circumstances in which a builder simultaneously provides express warranties providing similar protections.
It is generally accepted under Arizona law that parties may contract and agree to any terms they mutually agree to uphold. Unless a contract term is in violation of a law, or an identifiable public policy, the courts will deem it enforceable. Arizona's common law also implies a warranty of workmanship and habitability in contracts between builders and buyers. In practice, this implied warranty provides a layer of protection for original and subsequent buyers of a home who discover latent defects that could not have been reasonably discovered at the time of purchase. The issue before the court in this case was whether a builder-vendor and a homebuyer can agree to disclaim and waive the implied warranty if the contract contains an express warranty. A divided court held that it is against public policy to allow the disclaimer and waiver, irrespective of the purported protections provided by such express warranties.
Background Facts
Tina Zambrano bought a home from M7 RC II's affiliate, Scott Homes Development Company (Scott Homes), in 2013. The home was in a new subdivision located in Surprise, Arizona. Zambrano signed a preprinted purchase agreement that contained a "SELLER'S LIMITED WARRANTY." That warranty stated in relevant part that, "At closing, seller shall issue a 'Home Builder's Limited Warranty' to Buyer, which has been provided to buyer prior to the execution of this contract. The 'Home Builder's Limited Warranty' is the only warranty applicable to the property." This document specifically stated that all other, "express or implied warranties of merchantability, fitness for a particular purpose, habitability and workmanship are hereby disclaimed by seller and its affiliates and waived by buyer. Any implied warranty that may exist despite the above disclaimer is hereby limited to a one year period." Zambrano initialed this paragraph and acknowledged that she had read and understood it.
Zambrano's home was completed by Scott Homes and she was issued the "Home Builder's Limited Warranty", which was administered by Professional Warranty Services Corporation (PWC). The PWC warranty (an express warranty) does not include a warranty for workmanship or habitability of the home. Its provisions separated the various construction elements into coverage groups. Each group had its own warranty and coverage period. It also outlined the obligations between builder and buyer should any defects or problems with the home be discovered.
Zambrano brought a claim against Scott Homes in 2017 for design and construction defects. She could not make a claim under the PWC warranty because her claims were time barred or not covered under the agreement. Scott Homes filed a motion for summary judgment asserting that Zambrano had waived all implied warranties. The trial court granted Scott Homes' motion, but the court of appeals reversed. It found that "the public policy supporting the implied warranty clearly outweighs the freedom of contract interest in the waiver's enforcement." Zambrano v M & RC II LLC, 252 Ariz. 10,11 ¶ 1(App. 2021).
The Supreme Court accepted review of the petition filed by Scott Homes in order to resolve the issue of whether an implied warranty of workmanship and habitability can be waived or replaced by an express warranty.
Under What Circumstances May a Contract Term be Voided as Against Public Policy?
Arizona law enjoys a long-standing rule of honoring contracts made between parties. "Our law values the private ordering of commercial relationships and seeks to protect parties' bargained-for expectations." CSA13-101 Loop, LLC v. Loop 101, LLC, 236 Ariz. 410, 411 (2014). Courts also will not invalidate a contract simply because one party "made a bad deal, even when the terms are harsh." Goodman v. Newzona Inv. Co., 101 Ariz. 470, 473-74 (1966). Courts will generally only invalidate a contact if:
- A contract term is against the law, or
- An identifiable public policy outweighs enforcement. 1800 Octotillo, LLV v. WLB Group, Inc., 219 Ariz., 200, 202 ¶¶ 7-8 (2008).
When considering whether a contract term should be invalidated on public policy grounds, courts will weigh the interests of enforcement against the underlying policy that the term infringes upon. "The weight of the public policy interest generally focuses on the extent to which enforcement of the term would be injurious to the public welfare." Restatement (Second) of Contracts §178 cmt.b (Am. L. Inst. 1981). Public policies are found in the state constitution, legislation, and case law. Contracts that prove "unconscionable, illegal, or otherwise against public policy" will not be enforced. Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 Ariz. 108, 115 ¶¶ 37–38 (2017).
What is the Underlying Public Policy of the Implied Warranty of Workmanship and Habitability?
The elimination of caveat emptor "buyer beware", which basically afforded no protection to a purchasing homeowner duped by an unscrupulous seller, provided homebuyers additional protection. With the implementation of the implied warranty of workmanship and habitability, the state imputed those doctrines into all builder- buyer contracts as a common law principle. Sirrah Enter, LLC v. Wunderlich, 242 Ariz. 542, 544 ¶ 8. The warranties are limited, however, to latent defects that are undiscoverable by a reasonable inspection. The public policy purpose is "to protect innocent purchasers and hold builders accountable for their work." Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 678 P.2d 427 (1984). The warranty not only applies to contracts between builders and vendors with original homebuyer, but also applies to subsequent purchasers even though there is no privity of contract between the parties.
It is clear from an assessment of legislative history and case law that Arizona courts do not consider implied warranties as mere gap fillers. Further, even if a contract also contains an express warranty, the implied warranty may still exist alongside it as an enhancement of the outlined provisions. "If an express warranty is included in a purchase agreement, it may coexist with the implied warranty; the warranties are not mutually exclusive." Columbia Western. Corp. v. Vela, 122 Ariz. 28 (1979).
The legislature has not codified the implied warranty of workmanship and habitability, but has acknowledged such a claim via the Purchaser Dwelling Act found in A.R.S. § 12-1362(E); § 12-552 (E )(F). This statute specifically provides:
- Allows causes of action based on the implied warranty
- Includes it within the statute of repose for contract claims against builders and vendors, and
- Provides for a one year statute of repose for home purchasers to bring a claim for damages allegedly caused by latent defects discovered in the eighth year after purchase.
In addition to the Purchaser Dwelling Act, the Arizona legislature also requires home builders to abide by "minimum standards for good and workmanlike construction." A.R.S. § 32-1104(A)(5). In practice, this means that builders must provide products that comply with state law in regard to building codes as well as industry standards. This codification of minimum standards and expectations of good workmanship quality is in alignment with the underlying purpose of the implied warranty for workmanship and habitability. The public policy at stake here involves the desire of the state to:
- Protect buyers of new homes as well as subsequent owners against latent construction defects that were not reasonably discoverable when the home was built, and
- Hold builders and vendors accountable for their work. Richards, 139 Ariz. at 244-45.
Does Public Policy Warrant Zambrano's Implied Warranty of Habitability Claim?
Although the court prefers to err on the side of enforcing contract terms between parties, it found that in the facts presented in the current case, public policy outweighed enforcement of the contract. In coming to this conclusion, one factor the court looked to was the relative bargaining powers and knowledge of the parties. Zambrano purchased a home that was one amongst many in a large housing development. The documents provided to homebuyers were form contracts presented in a "take it or leave it" spirit. Zambrano signed the preprinted contract agreement for the home without making any changes. She also did not have an attorney read over the document, or engage in any negotiation regarding the warranties. These facts led the court to the conclusion that Zambrano felt she was in a "take it or leave it" situation. Zambrano relied on Scott Homes representation and knowledge of the quality of construction of the home, and did not have the skills or training to determine the truth of the representation independently. "A homebuyer must rely heavily on a builder-vendor's knowledge of construction quality, as builders are skilled in the profession… modern construction is complex and regulated by many governmental codes, and… homebuyers are generally not skilled or knowledgeable in construction, plumbing, or electrical requirements and practices." Richards, 139 Ariz. at 245.
The court found that this lack of knowledge on the part of the home buyer lends itself to the circumstance of unequal buying power. The legislature's purpose in creating the implied warranty of workmanship and habitability was to equalize this inherent issue in homebuying transactions. "The warranty reflects the homebuyers' reasonable expectations that a newly constructed home would be properly designed and built." Columbia W. Corp., 122 Ariz. at 33. Public policy serves an important role in this case. The implied warranty attempts to protect the public in several important ways:
- Warranting that the home was built using minimum standards of good workmanship according to a homebuyers reasonable expectations. Columbia W, Copr., 122 Ariz. at 33.
- The warranty "discourages the unscrupulous, fly-by-night operator and purveyor of shoddy work who may otherwise blight our communities." Humber v. Morton, 426 S.W.2d at 554 (1968).
- Protects not only the original buyer, but subsequent purchasers. Richards, 139 Ariz. at 245.
- Warranty "shields a purchase that is usually the most important and expensive purchase of a lifetime." Columbia W. Corp., 122 Ariz. at 33.
A choice by the court to enforce the disclaimer and waiver in the current case would run contrary not only to the best interest of the homebuyers in this case, but also to the public interest as a whole. It would effectively eliminate the efficacy of implied warranties and nullify the protections listed above that the legislature intended to implement on behalf of the home-buying public. Contractors and builders could take advantage of such a decision and make it a practice to include disclaimers and waiver in every purchase agreement with new homebuyers who already have an unequal bargaining power in the negotiation of the contract. They could also record the disclaimer and waiver to prevent subsequent buyers from bringing a claim pursuant to an implied warranty as well.
The effect of such a ruling would be to seriously handicap a buyers' right to ask a builder to remedy or compensate them for any latent defects. Needed repairs may be neglected and the court reasoned that this is a detriment not only to the homeowner, but also to the neighborhood and the larger public. The Court's lack of faith in the building community utilizing the freedom of contract to provide robust warranties in order to prevail in the marketplace signals a belief that such freedoms create an untenable moral hazard. Whether the Court embraces a policy of protectionism expanding to standardized agreements as a whole remains unclear as any attempt to minimize tort or contractual liability may be susceptible to such an analysis.
The Purchase Dwelling Act and Other Statutory Options Were Deemed to Provide Insufficient Protections
The provisions of the Purchase Dwelling Act permits a homebuyer to bring a claim for breach of the implied warranty of workmanship and habitability against the builder or subcontractor vendors for defects that "violate the construction code, use defective materials, or failure to adhere to generally accepted workmanship standards in the community." A.R.S. § 12-1361(4); § 12-1362(A)- (B). The difficulty the Court grapples with is that the law itself does not provide a legal cause of action for these types of claims. Without a method of enforcement, there is no legal cause of action available. Homebuyers in Arizona may not bring a negligence action against a builder or vendors for economic damages caused by defects, unless the claim involves some element of personal injury or damage to other property. Sullivan v. Pulte Home Corp., 232 Ariz. 344, 345-46 ¶¶ 8-9 (2013).
Homeowners may sue for fraud, misrepresentation and material omission in Arizona, but these causes of action were available even before the establishment of an implied warranty of workmanship and habitability. Echols v. Beauty Built Homes, Inc. 132 Ariz. 498, 499 (1982). These claims require the builder to commit an intentional act that harms the homebuyer and would not help a plaintiff who had suffered damage as a result of latent defects.
Pursuant to A.R.S. § 32-1131 to 1140, homebuyers may also file a complaint against the contractor's license with the registrar of contractors, but recovery is limited to $30,000 and would be unlikely to address any consequential damages, or attorney fees. These types of claims also have a two year window from the time of the wrongful act by the builder, which would not account for undiscoverable defects that are found later down the road and well past the two year time limit.
Scott Homes' Arguments in Defense of the Waiver and Disclaimer Regarding the Implied Warranties Failed to Prevail in Face of the Public Policy Considerations
Scott Homes asserts that the PWC warranty is in alignment with the public policy protecting home purchasers from below standard workmanship. It also argues that the express warranty goes even further than the implied warranty of workmanship and habitability and actually provides buyers an added layer of protection that they would not otherwise enjoy. It points out that it extends the warranty for up to ten years for some types of defects, which is longer than buyers are afforded under the implied warranty.
The court disagreed with Scott Homes and did not find that the PWC warranty protects the same rights that the implied warranty of workmanship and habitability does. The PWC warranty protects against "nonconformity with tolerances it established for certain construction components within the warranty periods, most of which fall into the one-year period portion. A violation of the PWC warranty tolerances might not violate the implied warranty and vice versa."
In other words, the court found that the protection offered by the implied warranty of habitability involves good workmanship generally, while the PWC warranty involved specific standards and tolerances for only specified elements within the home. Therefore, the court found that the PWC warranty covered alternate issues and that the express warranty was not superior or added protections to the homebuyer.
For example, under the PWC, the majority of the defects had to be reported within one year of purchase and no accommodation was made for latent defects that may appear in those categories after the time limit had expired. The PWC also does not cover all defects, but only those mentioned in the covered areas. Many areas that could sustain potential defects are not covered by the provisions of the express warranty in the buyer's purchase agreement. Finally, the amount of damages Scott Homes is on the hook for should defects be reported is also limited by the express warranty, and that is not the case with an implied warranty.
Scott Homes makes the argument that not allowing builders to have a disclaimer and waiver of the implied warranty will disincentivize builders from offering a fair and comprehensive express warranty. The court rejected this argument as well finding that this decision would not dissuade builders from offering attractive express warranties that exceeds the minimum standards required by the implied warranty of habitability and workmanship. Builders would simply be prevented from offering warranties falling below protections provided by the implied warranty of workmanship and habitability.
The defense asserts that the implied warranty of habitability should be allowed to be waived much like its counterpart the implied warranty of merchantability and fitness for a particular purpose. The court dismissed this theory also reasoning that the implied warranty of merchantability and fitness for a particular purpose applies to consumer goods, which can generally be easily discarded and/or replaced. A home, however, is a more significant purchase and a defective home could equal financial ruin for the homebuyer. Even a homebuyer well-versed in the home construction industry can benefit from the implied warranty of habitability and workmanship because the latent defects it protects against cannot be immediately discovered at the time of purchase.
Conclusion
Therefore, without a statute to the contrary passed by the Legislature, the courts of Arizona will not allow builders and vendors to waive the implied warranty of habitability and workmanship in purchase contracts with buyers. The public policy of protecting homebuyers from latent defects that may appear over time as a result of shoddy workmanship have been determined to outweigh the freedom of contract. We recommend that builders and vendors immediately update their purchase contracts to remove any language attempting to disclaim implied warranties.
Pursuant to A.R.S. § 44-1522, the use or employment of any deception, deceptive or unfair act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with the intent that others rely upon same is considered an unlawful practice. The inclusion of contractual provisions seeking a disclaimer of claims that may not be disclaimed have the potential to be construed as deceptive practice because it encourages members of the public to believe they lack recourse, when in fact, such recourse is available. In the event a Court were to find a willful violation, the Arizona Attorney General may recover a civil penalty up to ten thousand dollars per violation. See A.R.S. § 44-1531. A willful violation occurs when the party committing the violation knew or should have known that his conduct was of the nature prohibited by A.R.S. § 44-1522.
Further, special care should be taken with regard to standardized express warranties provided by third-party vendors to ensure that the warranties they provide do not suggest that implied warranties have been waived or disclaimed.