by Timothy R. Pack
I must make a confession: Sometimes I am dead wrong. I have misstated a rule or legal principle to a client before, insisted to my wife that pizza is best eaten cold, and lectured friends that this year was Greg Ostertag’s year. And sometimes, just sometimes, after I realize my mistake and the bone-headedness of my statements, I admit that I was wrong and see the good sense and reasonableness in the right answer. Although I have not been practicing law for very long, I have found, surprisingly, that it is hard to get lawyers to admit that they were wrong. So when the Utah Supreme Court admits that it was wrong, and goes so far as to publicly state it, and in writing no less, I take notice and commend the court.
This article discusses the Utah Supreme Court’s opinion in Davencourt v. Davencourt, 2009 UT 65, 221 P.3d 234 only as it relates to the implied warranties in the sale of new residences. This issue only comprises a small part of the Davencourt opinion as it covers many issues with an insightful discussion on the economic loss rule.
It had been well established that Utah Courts do not recognize an implied warranty of habitability nor an implied warranty of workmanlike manner in the context of new residential sales. However, the Utah Supreme Court’s recent opinion in Davencourt said sayonara to the anachronistic doctrine of caveat emptor. Historically, the Utah Supreme Court has held tight to the doctrine of caveat emptor which was so very sheik in the first half of the twentieth century. See id. ¶ 51. “‘Underlying this almost universal doctrine was the theory of equal bargaining power in contract and the ability and opportunity to inspect.’” Id. ¶ 51 (quoting 12 Thompson on Real Property § 99.06(a)(2) (David A. Thomas ed., 2d Thomas ed. 2008)). Even into the 1990s the Utah Supreme Court reiterated this principle for upholding the doctrine of caveat emptor:
The purchaser has the right to inspect the house before the purchase as thoroughly as that individual desires, and to condition purchase of the house upon a satisfactory inspection report. Further, if there are particular concerns about a home, the parties can contract for an express written warranty from the seller. Finally, if there are material latent defects of which the seller was aware, the buyer may have a cause of action in fraud.
Am. Towers Owners Ass’n v. CCI Mechanical, Inc., 930 P.2d 1182, 1193 (Utah 1996) (quoting Maack v. Res. Design & Constr., Inc., 875 P.2d 570, 582-83 (Utah Ct. App. 1994)).
However, every state in the union, except Utah, has established, by common law or statute, the implied warranty of workmanlike manner or the implied warranty of habitability in new residential home sales. See Davencourt, 2009 UT 65, ¶ 52.
Forty-five states have adopted an implied warranty in some form and Hawaii appears to have done so in dicta. Forty-three states provide for an implied warranty of habitability. Besides the four states that do not recognize any implied warranty, only Delaware, Nebraska, and Ohio expressly reject the implied warranty of habitability; yet those three states each provide for an implied warranty of workmanlike manner. Out of the four states that have not adopted any implied warranty, two states, New Mexico and North Dakota, have not directly addressed or answered the issue. The two remaining states, Georgia and Utah, have expressly rejected implied warranties. But Georgia does so because it allows recovery under negligence theory. This leaves Utah in a minority of one.
Id. The court makes a point of illustrating how lagging Utah was on this point. One can almost sense a tinge of embarrassment underlying Chief Justice Durham’s opinion.
The primary reason for abandoning the doctrine of caveat emptor in this context, according to the Davencourt court, is the unequal bargaining power between a new home buyer on the one hand, and the builder-vendor or developer on the other. Before the Davencourt decision, the court only recognized an implied warranty of habitability in the residential lease context. See Wade v. Jobe, 818 P.2d 1006, 1010 (Utah 1991). The Utah Supreme Court’s historical reasoning for not extending the implied warranty of habitability to the sale of new homes is that buyers of homes do not have to the same degree of unequal bargaining power as do lessees. In other words, because lessees are more disadvantaged than new homebuyers, the implied warranty of habitability was simply inapplicable in the context of new home sales. See Maack, 875 P.2d at 583. The Utah Supreme Court, in 1994, found that “the circumstances presented to the purchaser of a residence are not closely analogous to those of a relatively powerless lessee.” Id.
However, the court in Davencourt appropriately recognized that the construction of a new home is a complex undertaking which requires the expertise of many different tradespeople as well as knowledge of the applicable building codes and regulations. The builder-vendor/developer is regularly engaged in the sale of new homes, “whereas for a buyer the purchase of a new home is a significant and unique transaction.” Davencourt v. Davencourt, 2009 UT 65, ¶ 53, 221 P.3d 234. The court noted, as the plaintiff in Maack also argued, that “the purchase of a home is not an everyday transaction for the average family, and in many instances is the most important transaction of a lifetime.” Id.
The builder-vendor/developer is also in a better position to prevent and correct the harm and should therefore bear the risk of loss. See id. In addition, an implied warranty would hopefully prevent sloppy and unskilled labor and construction of new homes. See id. Furthermore, the imposition of an implied warranty is “‘consistent with the expectations of the parties’” 61 ¶ 54 (quoting Sloat v. Matheny, 625 P.2d 1031, 1033 (Colo. 1981), because the purchaser always expects to receive “‘a house suitable for habitation.’” Id. ¶ 54 (quoting Yepsen v. Burgess, 525 P.2d 1019, 1022 (Or. 1974)). The court further reasoned that to apply the doctrine of caveat emptor on a new homebuyer is “‘manifestly a denial of justice.’” Id. (quoting Bethlahmy v. Bechtel, 415 P.2d 698, 710 (Idaho 1966)).
The court expressly overruled American Towers as it applies to the implied warranties, which only allowed an implied warranty of habitability in the context of leases, and held that “[u]nder Utah law, in every contract for the sale of a new residence, a vendor in the business of building or selling such residences makes an implied warranty to the vendee that the residence is constructed in a workmanlike manner and fit for habitation.” Id. ¶ 55. The court set forth five elements that a plaintiff must show in order to establish breach of the implied warranty of workmanlike manner or habitability: “(1) the purchase of a new residence from a defendant builder-vendor/developer-vendor; (2) the residence contained a latent defect; (3) the defect manifested itself after purchase; (4) the defect was caused by improper design, material, or workmanship; and (5) the defect created a question of safety or made the house unfit for human habitation.” Id. ¶ 60.
As the title of this article suggests, the Davencourt court’s holding is long overdue. Moreover, when compared with the implied warranties that have existed in the sale of goods under the Utah Uniform Commercial Code (UCC), the court’s ruling seems especially tardy. To illustrate, suppose I purchase a brand new toaster from my local appliance store. Now after I bring my new toaster home and begin to operate it according to the manufacturer’s specifications, the toaster malfunctions in that it barely warms my slices of bread. But as the purchaser of the defective toaster, I can take comfort that I am protected by the implied warranty of merchantability or perhaps the implied warranty of fitness for particular purpose. See Utah Code Ann. §§70A-2-314, 315 (2009).
Now suppose I purchase a newly constructed house from Joe the Contractor. After two years of living in the house, I find that the stucco on the outside of the house has not been applied properly and now moisture is seeping into the walls. Unless I bargained for an express warranty for more than two years with Joe the Contractor, I had no recourse against Joe for his poor workmanship. See Utah Code Ann. §78B-4-513 (2008) (codifying the economic loss rule). Although this result seems odd and inequitable when compared with the toaster purchase, it was nevertheless true that, prior to Davencourt, a purchaser of a toaster in Utah had greater protections, in terms of implied warranties, against latent defects, than a new homebuyer did.
According to the Davencourt court, the complexity of the transaction, the sophistication of the purchaser, the expectation of the parties, and the determination of which party is best positioned to prevent the harm dictates whether an implied warranty should exist. Applying these policy considerations to the transaction of buying a toaster, we find that (1) purchasing a toaster is a relatively simple event; (2) toasters are relatively simple machines and do not require an expertise in toasters to make an informed purchase; (3) both parties expect the toaster to effectively toast bread into a delicious golden hue; and (4) the manufacturer or seller of the toaster is in the best position to prevent any defects. Applying these factors, to the much more complicated and important transaction of purchasing a home, it certainly seems that the implied warranties of workmanlike manner and habitability ought to be more deserving of recognition than the warranties provided under the UCC. Although this is not a perfect analogy, it hopefully illustrates the cognitive dissonance that results from not implementing implied warranties in the purchase of new homes.
Other Considerations
Because the implied warranties of workmanlike manner and habitability are two separate warranties, they should carry separate and distinct meanings. The court in Davencourt does recognize that there could be a distinction between the two and seems to define the implied warranty of workmanlike manner as “the quality of work that would be done by a worker of average skill and intelligence.’” Davencourt v. Davencourt 2009 UT 65, ¶ 56 (quoting Nastri v. Wood Bros. Homes, Inc., 690 P.2d 158, 163 (Ariz. Ct. App. 1984)). As for the warranty of habitability, the court stated that “if a new residence does not keep out the elements because of a defect of construction, such a residence is not habitable or that the new residence must ‘provide inhabitants with [a] reasonably safe place to live, without fear of injury to person, health, safety, or property.’” Id. (quoting Nastri, 690 P.2d at 163).
But a builder-vendor/developer need not construct a perfect home so as to “make [it] an insurer against any and all defects in a home.” Id. ¶ 59. The court in Davencourt understood that “‘no house is built without defects’” and held that the implied warranties do not “‘protect against mere defects in workmanship, minor or procedural violations of the applicable building codes, or defects that are trivial or aesthetic.’” Id. (quoting Bethlahmy v. Bechtel, 415 P.2d 698, 711 (Idaho 1966), and Albrecht v. Clifford, 767 N.E.2d 42, 47 (Mass. 2002)). Again, as the fifth element in the breach of implied warranty cause of action states, the defect must raise a question of safety or make the house unfit for human habitation.
The court also noted that the protection of the implied warranties are “not intended to alleviate purchasers of their due diligence and opportunity to inspect a residential construction.” Id. Therefore, an argument could be made that if a new homebuyer fails to reasonably inspect the home, the implied warranties may be unavailable to them in some degree.
Although the Davencourt decision abolishes the doctrine of caveat emptor in the context of new residential housing, the doctrine is still very much alive in the purchase and sale of a used home. The reasoning for this is, that in the sale of a used home, the buyer is not contracting with the builder-vendor/developer. Therefore, the implied warranties of workmanlike manner and habitability will only exist in a transaction between a builder-vendor/developer and a buyer for new construction or inventory. Utah courts, and particularly the court in Davencourt, take great efforts not to blur the lines between contract and tort. See id, ¶¶ 20-48. The court stresses that an implied warranty arises under contract, and therefore, “privity of contract is required to bring a claim for breach” of one of the implied warranties. Id. ¶ 57.
The court also notes that the implied warranties survive the effect of merger. The merger doctrine “‘is applicable when the acts to be performed by the seller in a contract relate only to the delivery of title to the buyer.’” Id. (quoting Stubbs v. Hemmert, 567 P.2d 168, 169 (Utah 1977)). Basically, when the parties execute a deed, the terms of the underlying contract are merged into the deed, and the contract is superseded. However, collateral acts to the conveyance of title by the seller “‘survive the deed and are not extinguished by it.’” Id. (quoting Stubbs, 567 P.2d at 169); see also id., ¶¶ 64-74 (discussing the collateral rights exception to the merger doctrine). The Court held that these implied warranties are independent and collateral to the conveyance of title, and therefore survive merger. See id. ¶ 58. Furthermore, the implied warranties cannot “be waived or disclaimed, because to permit the disclaimer of a warranty protecting a purchaser from the consequences of latent defects would defeat the very purpose of the warranty.” Id. (quoting Albrecht, 767 NE 2d at 47).
Finally, the court in Davencourt held that a claim for breach of the implied warranties “must be brought in accordance with Utah Code Section 78B-2-225.” Davencourt\, 2009 UT 65 ¶ 61. That section imposes statute of limitation of six years for “all causes of action by or against a provider arising out of or related to the design, construction, or installation of an improvement.” Utah Code Ann. § 78B-2-225(2)(e)(2008).
Conclusion
The Davencourt decision represents a major shift in the judicial protection of purchasers of new homes. The Utah Supreme Court has recognized that purchasing a home is an incredibly significant and complicated event, an event which homebuyers undertake only a few of times in their lives. Therefore, compared with a builder, vendor, or developer of new housing, the homebuyer stands on very unequal footing, and justice requires judicial protection that is best accomplished through the recognition of the implied warranties of workmanlike manner and habitability.
But what I really admire about the Davencourt opinion is the court’s readiness to recognize and admit it had been wrong. Most telling of the court’s character, if a court can, in fact, have a character, is its willingness to adopt the following maxims:
The law should be based on current concepts of what is right and just and the judiciary should be alert to the never-ending need for keeping its common law principles abreast of the times. Ancient distinctions which make no sense in today’s society and tend to discredit the law should be readily rejected .…
Davencourt, 2009 UT 65 ¶ 55 (quoting Schipper v. Levitt & Sons, Inc., 207 A.2d 314, 325 (N.J. 1965)).