Contract Terms Vs. Public Policy

Builders in Arizona may not limit the scope of implied warranty of workmanship and habitability

December 15, 2022 Photo

In a recurring issue of statewide importance, the Supreme Court of Arizona, in Zambrano v.  M & RC II, LLC, No. CV-21-0205-PR (Sept. 28, 2022), decided that it is against public policy to waive or disclaim the implied warranty of workmanship and habitability in a purchase agreement with a homebuyer. This rule extends to circumstances in which a builder simultaneously provides express warranties providing similar protections.

It is generally accepted under Arizona law that parties may contract to any terms they mutually agree to uphold. Unless a contract term is in violation of a law or identifiable public policy, the courts will deem it enforceable. Arizona’s common law also implies a warranty of workmanship and habitability in contracts between builders and buyers. In practice, this implied warranty provides a layer of protection for original and subsequent buyers of a home who discover latent defects that could not have been reasonably discovered at the time of purchase.

The issue before the court in this case was whether a builder-vendor and a homebuyer can agree to disclaim and waive the implied warranty if the contract contains an express warranty. A divided court held that it is against public policy to allow the disclaimer and waiver, irrespective of the purported protections provided by such express warranties.

Background Facts

Tina Zambrano bought a home from M7 RC II’s affiliate, Scott Homes Development Company (Scott Homes), in 2013. The home was in a new subdivision located in Surprise, Arizona. Zambrano signed a preprinted purchase agreement that contained a “seller’s limited warranty.” That warranty stated, in relevant part, “At closing, seller shall issue a ‘Home Builder’s Limited Warranty’ to buyer, which has been provided to buyer prior to the execution of this contract. The ‘Home Builder’s Limited Warranty’ is the only warranty applicable to the property.”

This document specifically stated that all other, “express or implied warranties of merchantability, fitness for a particular purpose, habitability, and workmanship are herby disclaimed by seller and its affiliates and waived by buyer. Any implied warranty that may exist despite the above disclaimer is hereby limited to a one year period.” Zambrano initialed this paragraph and acknowledged that she had read and understood it.

Zambrano’s home was completed by Scott Homes and she was issued the “Home Builder’s Limited Warranty,” which was administered by Professional Warranty Services Corporation (PWC). The PWC warranty (an express warranty) does not include a warranty for workmanship or habitability of the home. Its provisions separated the various construction elements into coverage groups. Each group has its own warranty and coverage period. It also outlined the obligations between builder and buyer should any defects or problems with the home be discovered.

Zambrano brought a claim against Scott Homes in 2017 for design and construction defects. She could not make a claim under the PWC warranty because her claims were time barred or not covered under the agreement. Scott Homes filed a motion for summary judgment asserting that Zambrano had waived all implied warranties. The trial court granted Scott Homes’ motion, but the court of appeals reversed. It found that “the public policy supporting the implied warranty clearly outweighs the freedom of contract interest in the waiver’s enforcement.”

The Supreme Court accepted review of the petition filed by Scott Homes in order to resolve the issue of whether an implied warranty of workmanship and habitability can be waived or replaced by an express warranty.

Against Public Policy

Arizona law enjoys a longstanding rule of honoring contracts made between parties. “Our law values the private ordering of commercial relationships and seeks to protect parties’ bargained-for expectations.” [CSA13-101 Loop, LLC v. Loop 101, LLC, 236 Ariz. 410, 411 (2014)]. Courts also will not invalidate a contract simply because one party “made a bad deal, even when the terms are harsh.” [Goodman v. Newzona Inv. Co., 101 Ariz. 470, 473-74 (1966)]. Courts will generally only invalidate a contact if:

  • A contract term is against the law.
  • An identifiable public policy outweighs enforcement.

When considering whether a contract term should be invalidated on public policy grounds, courts will weigh the interests of enforcement against the underlying policy that the term infringes upon.

Although the court prefers to err on the side of enforcing contract terms between parties, it found that, in the facts presented in the current case, public policy outweighed enforcement of the contract. In coming to this conclusion, one factor the court looked to was the relative bargaining powers and knowledge of the parties. Zambrano purchased a home that was one amongst many in a large housing development. The documents provided to homebuyers were form contracts presented in a “take it or leave it” spirit. Zambrano signed the preprinted contract agreement for the home without making any changes. She also did not have an attorney read over the document, or engage in any negotiation regarding the warranties. These facts led the court to the conclusion that Zambrano felt she was in a “take it or leave it” situation. Zambrano relied on Scott Homes’ representation and knowledge of the quality of construction of the home, and did not have the skills or training to determine the truth of the representation independently.

A choice by the court to enforce the disclaimer and waiver in the current case would run contrary not only to the best interest of the homebuyers in this case, but also to the public interest as a whole. It would effectively eliminate the efficacy of implied warranties and nullify the protections listed above that the legislature intended to implement on behalf of the home-buying public.

Scott Homes asserts that the PWC warranty is in alignment with the public policy protecting home purchasers from below-standard workmanship. It also argues that the express warranty goes even further than the implied warranty of workmanship and habitability and actually provides buyers an added layer of protection that they would not otherwise enjoy. It points out that it extends the warranty for up to 10 years for some types of defects, which is longer than buyers are afforded under the implied warranty.

The court disagreed with Scott Homes and did not find that the PWC warranty protects the same rights that the implied warranty of workmanship and habitability does. The court found that the protection offered by the implied warranty of habitability involves good workmanship generally, while the PWC warranty involved specific standards and tolerances for only specified elements within the home. Therefore, the court found that the PWC warranty covered alternate issues, and that the express warranty was neither superior nor did it add protections for the homebuyer.

Scott Homes makes the argument that not allowing builders to have a disclaimer and waiver of the implied warranty will disincentivize builders from offering a fair and comprehensive express warranty. The court rejected this argument as well, finding that this decision would not dissuade builders from offering attractive express warranties that exceed the minimum standards required by the implied warranty of habitability and workmanship. Builders would simply be prevented from offering warranties falling below protections provided by the implied warranty of workmanship and habitability.

The defense asserts that the implied warranty of habitability should be allowed to be waived much like its counterpart, the implied warranty of merchantability and fitness for a particular purpose. The court dismissed this theory, also reasoning that the implied warranty of merchantability and fitness for a particular purpose applies to consumer goods, which can generally be easily discarded and/or replaced. A home, however, is a more significant purchase and a defective home could equal financial ruin for the homebuyer. Even a homebuyer well-versed in the home construction industry can benefit from the implied warranty of habitability and workmanship because the latent defects it protects against cannot be immediately discovered at the time of purchase.

Therefore, without a statute to the contrary passed by the legislature, the courts of Arizona will not allow builders and vendors to waive the implied warranty of habitability and workmanship in purchase contracts with buyers. The public policy of protecting homebuyers from latent defects that may appear over time as a result of shoddy workmanship have been determined to outweigh the freedom of contract.

We recommend that builders and vendors immediately update their purchase contracts to remove any language attempting to disclaim implied warranties.

About The Authors
Jason R. Mullis

Jason Mullis is a partner at Wood Smith Henning & Berman’s Arizona office.

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