Dennis I. Wilenchik

1
Dennis I. Wilenchik

• Wilenchik Bartness, P.C.
• 2810 North Third Street
• Phoenix, Arizona 85004
• [phone] (T)
• [phone] (F)
• diw_at_wb-law.com

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What is a Construction Defect?
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What is a Construction Defect?

• Defects in original design
• Defects in construction or workmanship
• What effect do express or implied warranties have
  on construction defects?
• Does substantial conformity to the plans and
  specifications suffice?

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What is a Construction Defect?

• Various Construction Standards
• Registrar of Contractors standards
• Industry Standards and Guidelines prepared by
  local HBA
• Local Building Code or IBC
• NAHBs Residential Construction Performance
  Guidelines

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What is a Construction Defect?

• What defects are typically not covered by
  warranties
• Consumer products
• Damages caused by ordinary wear and tear
• Damages caused by lack of maintenance or improper
  maintenance
• Damages caused by homeowner or by others
• Damages caused by acts of God or nature
• Damages to items expressly listed as not
  warranted and that are not latent

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Time Limits

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Time Limits

• The Statutes of Limitations place a two-year
  limit for personal injury claims (A.R.S.
  12-542) and a six-year limit for claims based on
  the contract claims (A.R.S. 12-548).
• The Statute of Repose places an eight or nine
  year limit on claims against those who develop
  and sell real property, or perform or furnishes
  the design, specifications, surveying, planning,
  supervision, testing, construction or observation
  of construction of an improvement to real
  property. See, A.R.S. 12-552.

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Time Limits

• In Evans Withycombe, Inc. v. Western Innovations,
  Inc., CA-CV 04-0196 (Ariz.App. Div. 1 5/11/06),
  the Arizona Court of Appeals affirmed the
  dismissal of Evan Withycombe's contract claims,
  warranty claims, negligence claims, and its
  claims for indemnity based on contract against
  its subcontractors where Evans Withycombe waited
  until after the expiration of A.R.S. 12-552 to
  file a third-party complaint against its
  subcontractors.    

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Time Limits

• Senate Bill 1374 (currently pending in Arizona
  Legislature)
• A.R.S. 12-552 will be changed to provide that
  it does not apply to an action or arbitration
  based on indemnity that is brought by a person
  against whom a timely action or arbitration was
  brought.

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Express Warranties

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Express Warranties

• An express limited warranty provides a
  Homebuilder the opportunity to specifically
  exclude or to place monetary limits or caps on
  any additional damage or expense claims that may
  arise as a consequence of a construction defect.

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Express Warranties

• Express Warranties can limit
• The length of time that the warranty remains in
  effect
• The specific components that are covered
• The extent of liability for damage and
• The available methods of resolving disputes.

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Express Warranties

• The possibility of an express warranty is being
  extended every time a Homebuilder makes a
  statement regarding the quality of the work, or
  about fixing problems after completion.
• Additional promises concerning quality or
  customer service may be found in sales
  advertisements or in the builders correspondence
  with the customer.

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Express Warranties

• Without a written record of the promise, the
  customers expectation definitely could differ
  from that of the Homebuilder.
• The Homebuilder may be unaware of particular
  statements made by employees that could be
  interpreted as an express warranty.
• There may be other promises or legally imposed
  responsibilities that can supplement or amend the
  written express warranty.

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Express Warranties

• These situations can be potentially avoided if,
  by its terms, the written express warranty
  document is acknowledged to be the sole and
  exclusive warranty provided by the warrantor.

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Express Warranties

• CAUTION To avoid a claim of misrepresentation,
  or a possible violation of the states consumer
  protection laws, take extra care to assure that
  advertised promises do not conflict with the
  express written warranty terms.

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Express Warranties

• Typical Express Warranties
• Usually one year for all covered items.
• Some items carry longer warranties
• Foundations or load bearing components (5-10
  years)
• Plumbing and electrical (often 2 years)
• Some items are not warranted by the Homebuilder
  at all
• Appliances
• Consumer goods

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Express Warranties

• Non-warranted items such as appliances and
  consumer goods are covered by the Magnuson Moss
  Act, 15 USC 2301-2312 (2000) However, the Act
  requires a sale of consumer product by a supplier
  to a buyer for purposes other than resale. See
  e.g., Parrot v. DaimlerChrysler Corp., 212 Ariz.
  255, 130 P.3d 530 (3/21/06) (holding that because
  buyer purchased vehicle for resale and leased to
  plaintiff he had no warranty claim).

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Express Warranties

• The Magnuson Moss Act does not require builders
  to provide their customers with any warranty.  
• By excluding consumer products entirely from the
  warranty provided Homebuilders will avoid
  triggering the requirements of the Magnusson Moss
  Act.

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Express Warranties

• Other typical exclusions
• Exterior features such as landscape and driveways
  
• Damage caused by third parties or owners or from
  acts of God such as storms, floods and fires or
  from owners failure to maintain or service.

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Express Warranties

• Other typical exclusions
• Lodging expenses while repairs made
• Lost wages for time spent away from work
• Payment for mental anguish
• Medical Bills and damage awards for personal
  injury
• Cost of inspections or experts hired by owner
• Expenditures for third party repairs and
• Legal fees.

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Express Warranties

• DISPUTE RESOLUTION Homebuilders can specify the
  method of repair, the method of dispute
  resolution, and procedures to be employed prior
  to initiating formal dispute resolution.
• An arbitration provision vitiates the Right To
  Cure Statutes (A.R.S. 12-1361 et seq.) and
  allows Homebuilders to create their own right to
  written notice of defect, right to inspect and
  right to exclusive repair or replacement.

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Implied Warranties

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Implied Warranties

• Work should be done in a workmanlike manner and
  reasonably fit for its intended use.
• Warranty of habitability provides that a home
  must be sufficiently safe and sound to be
  actually lived in and to serve its function as a
  residence.
• Warranty of workmanlike construction goes further
  and provides the workmanship must meet the
  standards of quality that prevail at the time of
  construction.

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Implied Warranties

• Applies only to latent defects that affect use
  or livability of the home. An implied warranty
  will not extend to defects that the average
  purchaser could have discovered.

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Implied Warranties

• The implied warranty applies to subsequent
  purchasers without notice who had a reasonable
  inspection occurred. Richards v. Powercraft, 139
  Ariz. 242, 678 P.2d 427 (1984). Reasonable
  inspection does not require an expert or
  professional home inspector.
• A house can pass all code requirements and still
  subject to implied warranty claims

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Implied Warranties

• Provision of alternative homeowner warranties
  will not necessarily obviate the implied
  warranty.
• The implied warranty is not unlimited it does
  not require builder to act as an insurer for
  subsequent vendees.

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Implied Warranties

• Claims are subject to Statute of Repose, codified
  at A.R.S. 12-552. The Statute of Repose lasts
  8 or 9 years depending upon the knowledge of the
  homeowner.
• The standard to determine whether a breach has
  occurred is one of reasonableness in light of the
  surrounding circumstances (i.e., the age of home,
  maintenance, the use to which it has been put,
  etc.).

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Implied Warranties

• Disclaimers of implied warranty are generally not
  allowed as a matter of public policy unless they
  are negotiated and clear and unequivocal and
  knowingly obtained

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Implied Warranties

• An Arizona Appellate Court ruled that an
  otherwise valid disclaimer of an implied warranty
  between the builder and the original buyer was
  void and against public policy as to an innocent
  subsequent buyer who lacked knowledge of the
  disclaimer. Nastri v. Wood Bros. Homes, 142 Ariz.
  439, 620 P.2d 159 (App. Div. 2 1984).
• Under this reasoning a recorded disclaimer or
  release would be helpful.

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Notice and Right to Repair Laws

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Notice and Right to Repair Laws

• Codified at A.R.S. 12-1361 et seq.
• Widespread construction defect litigation has
  created a liability insurance crisis.

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Notice and Right to Repair Laws

• Generally allow a Homebuilder to able to inspect
  the structure(s) to determine the nature and
  cause of the alleged defects, and to assess
  possible repairs and replacements before
  homeowner can file a lawsuit.
• Allows Homebuilder to make an offer to repair or
  replace any alleged defects, to have the alleged
  defects repaired or replaced or to provide
  monetary compensation to the purchaser.

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Notice and Right to Repair Laws

• 90 days before filing suit, purchaser shall give
  written notice to the seller specifying in detail
  the basis of the dwelling action.
• After receipt of the written notice the seller
  may inspect the dwelling. Within 60 days after
  receipt of the written notice, the seller shall
  send to the purchaser a written response to the
  purchaser's notice. (If the seller does not
  provide a written response the purchaser may file
  a dwelling action without waiting for the
  expiration of 90 days)

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Notice and Right to Repair Laws

• Within 20 days after receipt of the seller's
  offer, the purchaser shall provide a good faith
  written response.
• Within 10 days after receipt of the purchaser's
  response, the seller may make a best and final
  offer to the purchaser in writing.
• If no resolution is reached within 90 days, the
  purchaser can file a lawsuit against the seller.

36
Notice and Right to Repair Laws

• Senate Bill 1374 (currently pending in Arizona
  legislature)
• A.R.S. 12-1363 will be changed to provide as
  follows For the purposes of this subsection,
  reasonable detail includes a detailed and
  itemized list that describes each alleged defect
  and the location of each alleged defect in EACH
  dwelling THAT IS THE SUBJECT OF THE NOTICE.

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Alternatives to Notice and Right to Repair Laws

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Alternatives to Notice and Right to Repair Laws

• Limitation of Buyers remedies
• Limit Buyers remedies to repair and/or
  replacement of alleged defective item
• As part of the contract, provide Seller with
  automatic right to inspect and/or conduct testing
  
• As part of contract, provide Seller with
  automatic right to repair and/or replace any
  alleged defect.
• Eliminate class action lawsuits by contract

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Alternatives to Notice and Right to Repair Laws

• Limitation of Buyers remedies (continued)
• Propose mediation of claims
• If mediation is not successful, binding
  arbitration should be the final venue of claim
• Each party should bear their own attorneys fees,
  or fees and costs should be expressly provided
  for in the contract
• Consider allowing limited discovery and joinder
  of subcontractors or other parties and
  consolidation with other claims

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Alternative Dispute Resolution
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Alternative Dispute Resolution

• Provide for a mandatory confidential mediation
  with shared costs
• If mediation is unsuccessful, provide for
  mandatory arbitration
• Arbitration clauses have been routinely upheld
  (Pulte Case)
• Courts can refer cases to mandatory arbitration
  in state court if claim is under 50,000.
• American Arbitration Association has a fast track
  program for cases under 75,000. Completion
  within 60 days.  

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Additional Venues

• Small Claims Court for claims under 2,500.
  Typically cannot have an attorney present.
• Office of Administrative Hearings for claims
  where homeowner files a Complaint with the
  Registrar of Contractor. OAH typically does not
  award costs or fees

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How to Handle Homeowner Claims

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How to Handle Homeowner ClaimsPre-Closing of Home

• Educate salespersons
• Document communications in writing
• Keep organized, complete, and accurate records
• Create a paper trail

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How to Handle Homeowner ClaimsWalkthrough

• Provide buyer with contact information of
  Homebuilder and subcontractors
• Review warranty obligations of Homebuilder with
  buyer (including information re consumer
  appliances)
• Review areas of maintenance
• Have a knowledgeable representative conduct
  walk-through
• Document walkthrough
• Provide buyer with notebook of information to
  review about the home

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How to Handle Homeowner Claims Customer Service
and Warranty Claims

• Avoid damaging admissions
• Timely investigate all complaints
• Timely respond to complaints in writing 
• Document all communications in writing
• Keep organized, complete, and accurate records
• Procure signed waivers before entering a home
  and/or conducting inspections or repairs

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How to Handle Homeowner Claims Customer Service
and Warranty Claims

• Dont allow spoliation of evidence where
  appropriate
• Get the subcontractors and insurance companies
  involved where appropriate
• Hire experts where appropriate

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How to Handle Homeowner Claims

• Be Proactive!
• Follow up!
• Dont promise too much and deliver too little!
• Exceed expectations!
• Protect the attorney-client privilege
• If appropriate, communicate with homeowner before
  and during litigation