Recently, the Arizona Court of Appeals answered another lingering question of paramount importance to the construction industry – whether homebuilders and other construction industry professionals may be indefinitely subject to negligence claims based on alleged construction defects. In Sullivan v. Pulte Home Corp., No. 1 CA-CV 14-0199, the Arizona Court of Appeals held that homebuilders do not owe a duty of care to subsequent (non-original) homeowners for solely economic losses arising from latent construction defect claims. The ruling helps to quell fears raised after the Arizona Court of Appeals and Arizona Supreme Court recently opened the door to such claims.
Although the dispute between Sullivan and Pulte Homes has continued for years, with two trips to the Court of Appeals and (at least) one to the Supreme Court, the facts of the case continue to be straightforward. Pulte Homes built a new home and sold it in 2000 to the original buyer. In 2003, the original buyer sold the home to the Sullivans. In 2009, the Sullivans claimed they discovered problems with the home’s retaining wall. The Sullivans filed suit against Pulte Homes in 2010 alleging numerous claims for damages. Of importance here, the Sullivans included a claim of negligence against Pulte Homes.
In the first review of this case by the Court of Appeals in 2012, the Court concluded that the Sullivans’ negligence claim was not barred by the economic loss doctrine (ELD). Generally, the ELD bars a plaintiff from pursuing tort actions (such as negligence) seeking monetary damages to property where the parties have a contractual relationship with one another. In those instances, application of the ELD essentially requires that the parties exclusively pursue contractual remedies.
The Court clarified that the ELD applies only when there is privity between the parties; that is, the parties must have contracted with one another. It was not enough that the Sullivans had a contractual remedy against Pulte Homes (i.e., pursuing a breach of the implied warranty of habitability in accordance with Arizona’s statute of repose). The Court explained that because the Sullivans were subsequent purchasers, and did not have a contractual relationship with Pulte Homes, the Sullivans’ negligence claim was not barred by the ELD.
On review, the Arizona Supreme Court in 2013 agreed with the conclusion of the Court of Appeals, leaving in place a construction liability morass for industry professionals. Under this framework, for instance, subsequent homeowners like the Sullivans would be entitled to pursue more legal claims against a homebuilder than the original purchaser of the property who actually negotiated and contracted with the homebuilder. Further, because subsequent homeowner negligence claims are not barred by the ELD, the decision would permit subsequent homeowners to file tort claims 10, 20 or even 30 years (or more) after completion of construction of the home. Needless to say, many were concerned over the potential implications of the Arizona Supreme Court’s decision.
Luckily for the construction industry, the Court of Appeals in its most recent decision resolved some of the lingering issues raised by the prior Sullivan decision. The Court explained that while the ELD does not bar a subsequent homeowner from bringing a negligence claim against a homebuilder for economic loss, the homebuilder nonetheless owes no duty of care to the subsequent homeowner. Therefore, although a negligence claim is not barred by the ELD, it is nonetheless a fruitless effort given that an action for negligence cannot succeed where the defendant owes no duty of care to the plaintiff.
The Sullivans admitted that no duty existed based on common law principles of negligence. Rather, the Sullivans claimed that municipal building codes and Arizona statutes and regulations create a public policy framework by which a duty of care is implied. The Court rejected the theory that the current statutory and regulatory framework forms a sufficient public policy basis for imposing upon homeowners a duty of care to subsequent purchasers. However, the Court noted that such a duty of care could be imposed by Legislative action.
Thus, at least for now – until another appeal to the Arizona Supreme Court or a proposal from the Legislature – the construction industry can rest assured knowing that subsequent homeowners will not prevail in negligence claims based upon construction defects.
