Dennis I. Wilenchik

1. Dennis I. Wilenchik Wilenchik & Bartness, P.C. 2810 North Third Street Phoenix, Arizona 85004 (602) 606-2810 (T) (602) 606-2811 (F) diw@wb-law.com

2. What is a Construction Defect?

3. 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?

4. 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 • NAHB’s Residential Construction Performance Guidelines

5. 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

6. Time Limits

7. 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 nineyear 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.

8. 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.

9. 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.”

10. Express Warranties

11. 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.

12. 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.

13. 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 builder’s correspondence with the customer.

14. Express Warranties • Without a written record of the promise, the customer’s 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.

15. 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.

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

17. 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

18. 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).

19. 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.

20. 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 owner’s failure to maintain or service.

21. 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.

22. 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.

23. Implied Warranties

24. 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.

25. 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.

26. 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

27. 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.

28. 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.).

29. 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

30. 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.

31. Notice and Right to Repair Laws

32. 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.

33. 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.

34. 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)

35. 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.”

37. Alternatives to Notice and Right to Repair Laws

38. Alternatives to Notice and Right to Repair Laws • Limitation of Buyer’s remedies: • Limit Buyer’s 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

39. Alternatives to Notice and Right to Repair Laws • Limitation of Buyer’s 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

40. Alternative Dispute Resolution

41. 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.  

42. 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

43. How to Handle Homeowner Claims

44. How to Handle Homeowner Claims—Pre-Closing of Home • Educate salespersons • Document communications in writing • Keep organized, complete, and accurate records • Create a paper trail

45. How to Handle Homeowner Claims—Walkthrough • 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

46. 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

47. How to Handle Homeowner Claims: Customer Service and Warranty Claims • Don’t allow spoliation of evidence where appropriate • Get the subcontractors and insurance companies involved where appropriate • Hire experts where appropriate

48. How to Handle Homeowner Claims • Be Proactive! • Follow up! • Don’t promise too much and deliver too little! • Exceed expectations! • Protect the attorney-client privilege • If appropriate, communicate with homeowner before and during litigation