By David Degnan

In many respects, a defense lawyer’s primary obligation is to limit the scope of–and the number of plaintiffs in–litigation.   Construction defect cases are no different.  These cases often pit hundreds and even thousands of plaintiffs against a builder—that in turn sues the dozens of subcontractors— for providing allegedly defective work.  The recent Pulte case shows one strategy a builder used to limit the scope of litigation and provides a good summary of the confusing economic loss rule.

Pulte v. Sullivan Potentially Extends the Length of Time that Homeowners Have to Sue for Construction Defects

In 2000, Pulte built a home for the original purchaser. Pulte v. Sullivan, — P.3d —, 667 Ariz. Adv. Rep. 36, 2013 WL 3929151, at *1 (2013).  In 2003, the original purchaser sold the home to a subsequent purchaser, the Plaintiffs. Id.  In 2009 (roughly 10 years later), the Plaintiffs, through their expert, discovered that the hillside retaining wall was failing and was built in a “dangerously defective manner,” resulting in significant damage to the home and expense to the homeowner. Id.  The same year, the Plaintiffs sued Pulte for breach of implied warranty (contract), negligence (tort), and fraudulent concealment (fraud), among others, to force the builder and others to pay money to fix the defective retaining wall. Id.

Pulte’s counsel moved to dismiss the case. Id.   Pulte argued that A.R.S. § 12-552(A) prohibits the Plaintiffs from bringing an implied warranty claim against a contractor “more than 8 years after the substantial completion of the improvement to real property.” The trial court agreed and dismissed the Plaintiffs’ implied warranty claim. Id. Pulte further argued that the economic loss rule bars the Plaintiffs’ negligence claims. Id. Again, the trial court agreed and dismissed the Plaintiffs’ negligence claims.   Finally, Pulte argued that the Plaintiffs failed to meet their burden to support a fraudulent concealment theory, because as a subsequent purchaser, “Pulte had never made any representations to” the Plaintiffs.  The trial court again agreed with Pulte. Id.  Having dismissed each claim asserted, the trial court dismissed the complaint, leaving the Plaintiffs without a remedy (or money) to repair the “dangerously defective” retaining wall.  See id.  Plaintiffs appealed, and this case reached the Arizona Supreme Court.  Id.

Without disturbing the trial court’s contract and fraud findings, the Arizona Supreme Court sat to determine if the economic loss rule bars subsequent purchasers from bringing negligence claims in construction defect cases. Id. at *2. The Court explained that the economic loss doctrine “limits contracting parties to their agreed upon [contractual] remedies for purely economic losses.” Id at *1. However, the Court declined “to extend the [economic loss] doctrine to non-contracting parties.” Id. *2.  As a result, the Court held that “the economic loss doctrine does not bar the [subsequent purchaser’s] negligence claims to recover damages resulting from construction defects.” Id. at *1.  The Court reasoned in dicta that the economic loss doctrine “protects the expectations of contracting parties, but, in absence of a contract, it does not pose a barrier to tort claims that are otherwise permitted by substantive law.”  Id. at *2

Interestingly, the Court rejected Pulte’s argument that the economic loss rule should apply because the Plaintiffs had a contractual remedy in its implied warranty of workmanship and habitability claim. Id. at *3. The Court found this argument unpersuasive because the Plaintiffs’ “implied warranty claim . . . was barred by the Arizona statute of repose, A.R.S. § 12-552, before they filed this action.”  Id.

A New Era or A New Way of Thinking?

After the Court published this opinion, many builders lamented over the potential fallout from this ruling. Insurers urged that this ruling creates a new level of uncertainty, allowing subsequent purchasers (not original purchasers) to sue for construction defects for a potentially unlimited number of years. They argued that this uncertainty will cause insurance premiums to skyrocket, increase the cost of building homes, and make the dream of owning a home ultimately unaffordable and unattainable. Builders will leave town and construction will cease to exist as we know it, they argue.  Such arguments are well taken, yet slightly overstated.

Again, the Arizona Supreme Court limited the builder’s ability to rely on the economic loss doctrine as a defense to a negligence action against subsequent purchasers that do not have a contract with the builder. Id. at *1.  The Arizona Supreme Court noted in dicta that allowing the Plaintiffs’ tort claims does not guarantee that these claims will be successful.  Id at *3.

Plead Negligence At Your Own Peril

Insurers, builders, and subcontractors are largely concerned with this case’s implications. Addressing those concerns, the sole issue here is what happens if subsequent purchasers start pleading construction defect cases under a traditional negligence theory.   In that respect, the Plaintiffs run into two significant hurdles: fewer available remedies and a two year statute of limitation.

First, Plaintiffs have fewer remedies in tort. Plaintiffs that sue the builder under a negligence theory may not recover costs and attorney’s fees. Of course, Plaintiffs may recover compensatory and punitive damages by pleading negligence.  But a court must find that the Defendant acted with an evil mind to award punitive damages. Thus, punitive damages are likely unavailable for parties that are suing for latent (previously undiscovered) defects that manifested themselves years after construction was completed.  Moreover, construction defect cases are long and costly and often drag out for years. Without the possibly of recovering costs and attorneys’ fees, these cases may become unprofitable for the plaintiffs (and their attorneys) in all but the worst of circumstances.

Second, the statute of limitations may prevent this and other negligence (tort) claims from going forward. A.R.S. § 12-542 provides that tort claims involving injuries “shall be commenced and prosecuted within two years after the cause of action accrues.” In this case, the Plaintiffs must show that they did not discover the defective retaining wall at any point in the past ten years. Of course, wise counsel will look to the subsequent purchaser’s inspection report and closing documents to determine whether the “dangerous condition” was discovered (or known) at the time of purchase or at any subsequent point since then.  Given that the Plaintiff’s expert suggested that the wall was built in a “dangerously defective manner,” the subsequent purchaser may have known of these defects many years ago. If true, this ruling may have created a Pyrrhic victory for the Plaintiffs.

Certainly, the statute of limitations and the inability to recover fees and costs are the primary impediments to moving forward with a negligence claim, but they are not the only concerns.  A full treatment of each available defense is outside the scope of this short article.

Concluding thoughts:

Builders have legitimate concerns about the possible implications of the Pulte case.  But the fear caused by this case may be misplaced.  This case provides builders with one less defense and reflects the Court’s continued desire to protect innocent homebuyers that otherwise would not have a remedy.  For those that disagree, they should lobby the legislature to revise A.R.S. § 12-552 to bar all construction defect related claims after eight years (or nine, if the defect is discovered in the eighth year). But to those that wish to proceed in negligence when no other contractual remedy is available, do so at your own peril.