Duty to Perform Good Workmanship Extends Beyond Parties to Contract

On August 19, 2008, the Arizona Supreme Court ruled, in The Lofts at Fillmore v. Reliance Commercial Construction, that a contractor is responsible for defects in a condo project that it built but did not sell. The ruling overturned a Court of Appeals decision that the contractor's implied warranty did not extend to subsequent owners with whom it had not contracted.

That case involved the builder of a Phoenix condo project, the Lofts at Fillmore. The developers contracted with Reliance Commercial Construction to build the project, then sold completed units to individual residents.

The development has a condo association, The Lofts at Fillmore Condominium Association, made up of the owners of the individual condos. At some point, members of the association became unhappy with the quality of the condos’ construction, and the Lofts association sued Reliance for breach of implied warranty, alleging construction defects.

Important to this case is that a breach of implied warranty of good workmanship is a contract claim, and the doctrine of privity provides that only the parties to a contract are bound by its provisions or entitled to its protections.

Thus, when the Lofts condo association hauled Reliance into court for alleged construction defects, the association quickly ran into a legal hurdle, i.e., neither the association nor its members had a contractual relationship with Reliance . Each owner had a contract with the developer, and the developer had a contract with Reliance, but that’s as far as it went.

Reliance asked the trial court for a dismissal. The court, finding that the association and its members had no contract with – and, thus, no claim against – Reliance, granted Reliance’s motion for summary judgment.

The Lofts association appealed. At the Court of Appeals, the association argued that, in its decision in Richards v. Powercraft Homes, the Arizona Supreme Court abolished the privity requirement for an implied warranty claim. In the Richards case, the plaintiffs were owners of homes in a Powercraft subdivision. Some were original owners who bought directly from Powercraft; others had purchased their homes from the original owners.

In Richards , the Supreme Court ruled that the implied warranty of habitability that Powercraft made to original buyers should also extend to subsequent buyers of those homes. Subsequent purchasers should have the same remedies as the original purchasers, even though they had no contract with Powercraft.

In the view of the Court of Appeals, the association’s Richards argument failed because Reliance did not sell the condominiums. The warranty of habitability, the Court found, is implied only when the builder of homes also sells them to owners who intend to live in them.

The Supreme Court ruled disagreed, affirming the applicability of Richards to this case, and remanded the case back to Maricopa County Superior Court for retrial. In its opinion, the Court determined that "absence of contractual privity does not bar such a suit."

The opinion also noted that failure to extend the implied warranty to subsequent buyers "might encourage sham first sales to insulate builders from liability. [...] 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."