Zombie Warranties: Courts Resurrecting Disclaimed or Waived Implied Warranties in Home Construction Contracts
Construction and Procurement Law News, Q4 2022
Certain home construction contracts include clauses waiving implied warranties, such as the implied warranty of good workmanship and habitability. However, courts at times refuse to enforce such waivers, as the Arizona Supreme Court demonstrated in Zambrano v. M & RC II LLC. Zambrano provides a timely reminder that contractors should review local law to determine whether a given jurisdiction enforces contractual waivers of implied warranties concerning home construction, and if so, in what circumstances.
On September 28, 2022, the Arizona Supreme Court reminded parties that even if a home construction contract expressly disclaims and/or waives implied warranties, the Court may strike such a disclaimer/waiver for violating “public policy.” Zambrano involved a clash of two public policies recognized by the common law. “On the one hand, parties are generally free to contract on whatever terms they choose…. Thus, unless legislation precludes enforcement of a contract term, [Arizona] courts will uphold it unless ‘the term is contrary to an otherwise identifiable public policy that clearly outweighs any interests in the term’s enforcement…. On the other hand, Arizona implies a warranty of workmanship and habitability in every contract entered into between a builder-vendor and a homebuyer…. This warranty protects the homebuyer and successive purchasers from financial responsibility for latent defects in the home that the buyer could not have reasonably discovered at the time of purchase and holds the builder accountable for the home’s faulty construction.” The Court framed the issue in Zambrano as “whether a builder-vendor and a homebuyer may agree to disclaim and waive the implied warranty [of workmanship and habitability] if they replace it with an express warranty.” Ultimately, the Court held that in this instance “public policy prohibits enforcement of the disclaimer and waiver.”
The dispute in Zambrano concerned a 2013 purchase agreement between Tina Zambrano and M & RC II, LLC (“MRC”) whereby Zambrano agreed to buy a home that MRC’s affiliate would build in a new subdivision. The purchase agreement stated in part that MRC would issue a home builder’s limited warranty at closing and that the limited warranty was the only warranty applicable to the purchase of the property, with certain implied warranties, including the implied warranty of habitability and workmanship, expressly disclaimed by MRC and waived by Zambrano.
Notwithstanding the disclaimer and waiver, in 2017 Zambrano sued MRC and its affiliate for breach of the implied warranty of workmanship and habitability, alleging design and construction defects. MRC and its affiliate moved for summary judgment, arguing Zambrano had waived the implied warranty per the purchase agreement. The trial court agreed and entered judgment for MRC and its affiliate. However, despite noting that the “freedom to contract has long been considered a ‘paramount public policy’ under [Arizona’s] common law that courts do not lightly infringe,” the Arizona Supreme Court reversed, holding that the implied warranty waiver violated public policy and thus was void.
In its reasoning, the Arizona Supreme Court noted that the implied warranty “is limited to latent defects that are undiscoverable by a reasonable pre-purchase inspection.” The Court also noted the warranty exists to protect innocent purchasers and to hold builders accountable for their work. Thus, in sum, the Court found that “the public policy underlying the implied warranty of workmanship and habitability is twofold: (1) protecting buyers of newly built homes and successive owners against latent construction defects that were not reasonably discoverable when the home was initially sold and (2) holding builders accountable for their work.” And the Court found that the implied warranty of workmanship and habitability trumps the competing public policy interest of the freedom of contract when a contract attempts to disclaim or waive the implied warranty because, among other reasons, the implied warranty “serves to protect homebuyers and the public at large in multiple ways.”
As demonstrated, Zambrano serves as a reminder that even if two parties expressly agree in a written contract to disclaim/waive home construction implied warranties, a Court may void such an agreement on public policy grounds. As such, to evaluate and mitigate this risk, contractors should timely review the local jurisdiction’s law regarding implied warranties and home construction before relying on a contractual provision disclaiming and/or waiving any such implied warranties as they may not be worth the paper they are printed on.