ARIZONA SUPREME COURT PERMITS MORE CLAIMS AGAINST CONTRACTORS
August 2013 - In an opinion released last week, the Arizona Supreme Court expanded the types of claims that homeowners may bring against contractors for construction defects. In Sullivan v. Pulte Home Corporation, the Supreme Court limited application of the Economic Loss Rule to cases where homeowners have a contract directly with the homebuilder.
In Sullivan, there was no such contract. Instead, Pulte constructed the home in 2000, and the original homeowners sold the home to the Sullivans in 2003. In 2009, the Sullivans first noticed issues with a hillside retaining wall, and brought suit against Pulte, alleging breach of the implied warranty of worksmanship and habitability, negligence, and various fraud claims. The Superior Court dismissed the implied warranty claim under A.R.S. 12-552(A), because the claim was brought "more than eight years after substantial completion of the improvement to real property." The Superior Court then applied the Economic Loss Rule to dismiss the homeowners' tort claims.
After appeal, Arizona's Supreme Court reversed the trial court's dismissal of the Sullivans' tort claims. The Supreme Court limited the Economic Loss Rule to situations where there is a contract directly between the homeowner and the builder. Thus, the Economic Loss Rule does not apply to a subsequent homeowners' claims against a builder. "The [economic loss] doctrine protects the expectations of contracting parties, but, in the absence of a contract, it does not pose a barrier to tort claims that are otherwise permitted by substantive law." (emphasis added).
While the Supreme Court's decision recognizes that other legal defenses may apply, the Sullivan opinion is problematic for Arizona contractors. Builders and subcontractors who have carefully negotiated contracts with homeowners that distribute risks will find those contracts may offer no protection against subsequent purchasers. Moreover, Arizona's discovery rule may lead to construction defect cases being brought under the guise of negligence or other tort-based claims far beyond the 8-year period prescribed by statute for implied warranty claims.
For further questions, please contact Schern Richardson Finter Decker, PLC, to discuss.