Zambrano v. M & RC II LLC

• Decision Date: 28 September 2022
• Docket Number: CV-21-0205-PR
• Citation: 80 Arizona Cases Digest 28,517 P.3d 1168
• Parties: Tina ZAMBRANO, Plaintiff/Appellant, v. M & RC II LLC, et al., Defendants/Appellees.
• Court: Arizona Supreme Court

80 Arizona Cases Digest 28
517 P.3d 1168

Tina ZAMBRANO, Plaintiff/Appellant,
v.
M & RC II LLC, et al., Defendants/Appellees.

No. CV-21-0205-PR

Supreme Court of Arizona.

Filed September 28, 2022

Darrien Shuquem (argued), Vial Fotheringham, LLP, Mesa, Attorneys for Tina Zambrano

James E. Holland, Jr. (argued), Michael Vincent, Stinson LLP, Phoenix, Attorneys for M & RC II LLC, et al.

Thomas L. Hudson, Joshua D. Bendor, Osborn Maledon, P.A., Phoenix, Attorneys for Amici Curiae Diamante Condominium Association and Kasdan Turner Thomson Booth LLP

Rosary A. Hernandez, Kenneth Januszewski, Katelyn E. Towe, Burch & Cracchiolo, P.A., Phoenix, Attorneys for Amici Curiae Home Builders Association of Central Arizona and Southern Arizona Home Builders Association

Jeremy R. Alberts, Ryan S. Saldanha, Weinberg, Wheeler, Hudgins, Gunn & Dial, LLC, Las Vegas, NV, Attorneys for Amicus Curiae Home Buyers Warranty Corporation

VICE CHIEF JUSTICE TIMMER authored the Opinion of the Court, in which CHIEF JUSTICE BRUTINEL and JUSTICES LOPEZ, BEENE, and MONTGOMERY joined. JUSTICE KING, joined by JUSTICE BOLICK, dissented.

VICE CHIEF JUSTICE TIMMER, Opinion of the Court:

¶1 This case involves 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. See 1800 Ocotillo, LLC v. WLB Grp., Inc. , 219 Ariz. 200, 202 ¶ 8, 196 P.3d 222, 224 (2008). Thus, unless legislation precludes enforcement of a contract term, our 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." Id.

¶2 On the other hand, Arizona implies a warranty of workmanship and habitability in every contract entered into between a builder-vendor and a homebuyer. See

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Richards v. Powercraft Homes, Inc. , 139 Ariz. 242, 244, 678 P.2d 427, 429 (1984). 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. Id. at 245, 678 P.2d at 430.

¶3 Whether Arizona should continue to imply a warranty of workmanship and habitability into all contracts between builder-vendors and homebuyers is not before us. Rather, the issue here is whether a builder-vendor and a homebuyer may agree to disclaim and waive the implied warranty if they replace it with an express warranty. We hold public policy prohibits enforcement of the disclaimer and waiver.

BACKGROUND

¶4 In 2013, Tina Zambrano entered into a preprinted purchase agreement with M & RC II, LLC, to buy a home that M & RC II's affiliate, Scott Homes Development Company, would build in a new subdivision in Surprise, Arizona. (We refer to M & RC II and Scott Homes Development Company collectively as "Scott Homes"). Relevant here, paragraph fifteen of the agreement states:

SELLER'S LIMITED WARRANTY.

(a) At Closing, Seller shall issue a "Home Builder's Limited Warranty" to Buyer, a sample of which has been provided to Buyer prior to the execution of this Contract. The Home "Builder's [sic.] Warranty is the only warranty applicable to the purchase of the Property.

....

THE HOME BUILDER'S LIMITED WARRANTY REFERENCED ABOVE IS THE ONLY WARRANTY APPLICABLE TO THE PURCHASE OF THE PROPERTY. ALL OTHER EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, HABITABILITY AND WORKMANSHIP ARE HEREBY DISCLAIMED BY SELLER AND ITS AFFILIATES AND WAIVED BY BUYER, ANY IMPLIED WARRANTY THAT MAY EXIST DEPITE [sic] THE ABOVE DISCLAIMER IS HEREBY LIMITED TO A ONE (1) YEAR PERIOD.

Zambrano initialed the first paragraph and another, which confirmed she had read and understood the agreement.

¶5 Scott Homes built the home and, fulfilling its promise, issued Zambrano a forty-page, preprinted "Builder's Limited Warranty," which is administered by Professional Warranty Services Corporation ("PWC"). PWC sells the warranty to homebuilders, claiming the warranty "provide[s] ‘layers of protection to you as a builder’ " and permits builders to "manage [their] risk." Arnold v. Standard Pac. of Ariz. Inc. , No. CV-16-00452-PHX-DGC, 2016 WL 4259762, at *4 (D. Ariz. Aug. 12, 2016). Significantly, the PWC warranty does not generally warrant the workmanship and habitability of the home. Instead, it arranges construction elements into coverage groups; warrants each group, respectively, for one year, two years, or three to ten years against damages from variances in materials or workmanship from defined standards of performance; and establishes responsibilities for the builder and the homebuyer. For example, the warranty here provides that during the first year of ownership, Scott Homes will fill excessively settled areas of ground around the home's foundation that prevent sufficient drainage, and the homebuyer will remove and replace any affected landscaping. As another example, the warranty provides that during the first year of ownership, Scott Homes will repair any floors having more than a one-quarter-inch ridge or depression within thirty inches of the joists. Like the purchase agreement, the PWC warranty disclaims all implied warranties.

¶6 In 2017, Zambrano sued Scott Homes for breach of the implied warranty of workmanship and habitability. She alleged several design and construction defects, including improper grading and soil movement mitigation, separation of windows from cracking stucco, separation of baseboards from the tile and walls, and nail pops in the ceiling. A claim under the PWC warranty to correct these defects was either time barred or outside

517 P.3d 1173

its coverage. Scott Homes ultimately moved for summary judgment, arguing Zambrano had waived the implied warranty per the purchase agreement. The trial court agreed and entered judgment for Scott Homes.

¶7 The court of appeals reversed. Zambrano v. M & RC II LLC , 252 Ariz. 10, 11 ¶ 1, 496 P.3d 789, 790 (App. 2021). It reasoned that "the public policy supporting the implied warranty clearly outweighs the freedom-of-contract interest in the waiver's enforcement." Id. at 13 ¶ 16, 496 P.3d at 792.

¶8 We accepted review of Scott Homes’ petition for review because whether and to what extent the implied warranty of workmanship and habitability can be disclaimed and waived or replaced by an express warranty is a recurring issue of statewide importance.

DISCUSSION

I. Standard of Review

¶9 Summary judgment is appropriate when "no genuine dispute as to any material fact [exists] and the moving party is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(a). "We review de novo a grant of summary judgment, viewing the evidence and reasonable inferences in the light most favorable to the party opposing the motion." Andrews v. Blake , 205 Ariz. 236, 240 ¶ 12, 69 P.3d 7, 11 (2003). We likewise review a contract's meaning de novo. Id.

II. Voiding a Contract Term as Against Public Policy

¶10 The freedom to contract has long been considered a "paramount public policy" under our common law that courts do not lightly infringe.¹ Consumers Int'l., Inc. v. Sysco Corp. , 191 Ariz. 32, 34, 951 P.2d 897, 899 (App. 1997) (quoting Wood Motor Co. v. Nebel , 150 Tex. 86, 238 S.W.2d 181, 185 (1951) ); accord CSA 13-101 Loop, LLC v. Loop 101, LLC , 236 Ariz. 410, 411 ¶ 6, 341 P.3d 452, 453 (2014) ("Our law values the private ordering of commercial relationships and seeks to protect parties’ bargained-for expectations."). Thus, courts will not refuse to enforce a contract merely because one party made a bad deal, even when the terms are harsh. See Goodman v. Newzona Inv. Co. , 101 Ariz. 470, 473–74, 421 P.2d 318, 321–22 (1966) (enforcing refusal of seller to transfer ownership of property to buyer despite partial payment); S.H. Kress & Co. v. Evans , 21 Ariz. 442, 449, 189 P. 625 (1920) (refusing to enforce oral profit-sharing agreement not reflected in a written contract).

¶11 But courts will refuse to enforce a contract term if legislation prohibits the term or when an identifiable public policy clearly outweighs enforcement. 1800 Ocotillo , 219 Ariz. at 202 ¶¶ 7–8, 196 P.3d at 224 ; CSA 13-101 Loop , 236 Ariz. at 411 ¶ 6, 341 P.3d at 453. Because the law generally presumes parties are best situated to decide whether contractual terms are beneficial, especially in commercial settings, courts are hesitant to declare terms unenforceable on public policy grounds. 1800 Ocotillo , 219 Ariz. at 202 ¶ 8, 196 P.3d at 224 ; see 15 Timothy Murray, Corbin on Contracts § 79.4, at 15 (rev. ed. 2020) ("In rare cases, a public policy other than the freedom of contract overrides such freedom."). To do so, courts balance the interests in enforcing the terms against the public policy interest opposing it. See 1800 Ocotillo , 219 Ariz. at 202 ¶ 7, 196 P.3d at 224. "[T]he weight of the public policy interest

517 P.3d 1174

generally focuses on the extent to which enforcement of the term would be injurious to the public welfare." Id. (citing Restatement (Second) of Contracts § 178 cmt. b (Am. L. Inst. 1981)). We identify public policy by examining our constitution, legislation, and judicial decisions. CSA 13-101 Loop , 236 Ariz. at 412 ¶ 8, 341 P.3d at 454 ; 1800 Ocotillo , 219 Ariz. at 202 ¶ 7, 196 P.3d at 224 ; Wagenseller v. Scottsdale Memorial Hosp. , 147 Ariz. 370, 378, 710 P.2d at 1033 (1985), superseded by statute on other grounds, as recognized in Powell v. Washburn , 211 Ariz. 553, 560 ¶ 29, 125 P.3d 373, 380 (2006).

¶12 Consistent with these principles, this Court has refused to enforce contract terms that were unconscionable, illegal, or otherwise against public policy. See, e.g. , Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC , 242 Ariz. 108, 115 ¶¶ 37–38, 393 P.3d 449, 456 (2017) (voiding a contractual late fee as an unenforceable penalty provision); CSA 13-101 Loop , 236 Ariz. at 411 ¶ 1, 341 P.3d at 453 (holding that...