HAYDEN BUS. CENTER v. Pegasus Development

• Decision Date: 25 January 2005
• Docket Number: No. 1 CA-CV 03-0143.,1 CA-CV 03-0143.
• Citation: 105 P.3d 157,209 Ariz. 511
• Parties: HAYDEN BUSINESS CENTER CONDOMINIUMS ASSOCIATION, an Arizona non-profit corporation, Plaintiff-Appellant, v. PEGASUS DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellee.
• Court: Arizona Court of Appeals

105 P.3d 157

209 Ariz. 511

HAYDEN BUSINESS CENTER CONDOMINIUMS ASSOCIATION, an Arizona non-profit corporation, Plaintiff-Appellant, v. PEGASUS DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellee.

No. -0143.

Court of Appeals of Arizona, Division 1, Department D.

January 25, 2005.

Slaton Law Office By Sandra Lynn Slaton, Scottsdale, Attorneys for Plaintiff-Appellant.

Jones, Skelton & Hochuli, P.L.C. By Michael A. Ludwig, Randall H. Warner, Phoenix, Attorneys for Defendant-Appellee.

OPINION

THOMPSON, Presiding Judge.

¶ 1 Hayden Business Center Condominiums Association (the Association) appeals the grant of summary judgment on its claim for breach of the implied warranty of good workmanship and challenges the trial court's denial of its motion to amend the complaint. We have jurisdiction and affirm.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 Hayden Airpark Venture, L.L.C. (HAV) developed and built the Hayden Business Center, a commercial building in Scottsdale. Pegasus Development Corporation (Pegasus) performed construction-related services for HAV in exchange for a flat monthly fee. The parties dispute whether Pegasus was a general contractor or a construction manager for HAV.

¶ 3 HAV sold condominium interests in the Hayden Business Center to various persons who now claim that the building contained construction defects. These buyers assigned their claims to the Association. The Association then sued HAV and Pegasus for breach of the implied warranty of good workmanship.

¶ 4 Pegasus successfully moved for summary judgment. The trial court acknowledged that a fact question existed as to whether Pegasus served as a general contractor or a construction manager. If Pegasus were a construction manager, there could be no implied warranty of good workmanship that could run to subsequent purchasers. The trial court determined that even if Pegasus had been the general contractor, the Association's claim still failed because no Arizona authority extends the implied warranty of good workmanship to claims by subsequent purchasers of commercial property.

¶ 5 The trial court also considered whether the Association could bring a tort claim. In a pleading, the Association conceded that it had no tort claim because the bulk of its damages consisted of expenses to remedy and repair defective work. Applying the economic loss rule, the trial court concluded that the Association was barred from recovering under a tort theory.

¶ 6 After the grant of summary judgment, the Association moved to amend the complaint to add a negligence count and re-characterized some of its repair costs as property damage. The trial court denied the Association's motion to amend, and entered a Rule 54(b) judgment in favor of Pegasus. This appeal followed.

DISCUSSION

A. As a Matter of Law, the Association Has No Implied Warranty Claim Against Pegasus.

¶ 7 This court reviews a grant of summary judgment de novo. Great Am. Mortgage, Inc. v. Statewide Ins. Co., 189 Ariz. 123, 125, 938 P.2d 1124, 1126 (App.1997). We view the facts and the evidence in the light most favorable to the non-moving party, drawing all reasonable inferences in favor of that party. AROK Constr. Co. v. Indian Constr. Svcs., 174 Ariz. 291, 293, 848 P.2d 870, 872 (App.1993).

1. Arizona Law Does Not Support Extending the Claim Beyond the Home-Building Context.

¶ 8 An implied warranty of good workmanship claim is a contract claim, and it has long been the law that only parties to a contract may maintain an action on it. Treadway v. Western Cotton Oil & Ginning Co., 40 Ariz. 125, 138, 10 P.2d 371, 375 (1932); Leal v. Allstate Ins. Co., 199 Ariz. 250, 254, ¶ 21, 17 P.3d 95, 99 (App.2000)(stranger to an insurance contract could not sue the insurer in tort for a bad faith breach); Stratton v. Inspiration Consolidated Copper Co., 140 Ariz. 528, 531, 683 P.2d 327, 330 (App.1984)(as a matter of law, a subcontractor could not sue the owner absent privity of contract). Exceptions exist, as in the case when the contracting parties specify a non-party as the intended beneficiary. See Sherman v. First Am. Title Ins. Co., 201 Ariz. 564, 567, ¶ 6, 38 P.3d 1229, 1232 (App.2002).

¶ 9 The Arizona Supreme Court created one such exception in Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 678 P.2d 427 (1984). The Richards plaintiffs bought homes in a Casa Grande subdivision only a few years after Powercraft built them. The plaintiffs did not, however, purchase their homes from Powercraft; they bought from previous owners. When construction defects appeared, the plaintiffs sued Powercraft for breach of the implied warranties of habitability and good workmanship. The supreme court held that the Richards plaintiffs could bring this claim even though they had no contractual relationship with the homebuilder. Id. at 245, 678 P.2d at 430.

¶ 10 The court grounded its holding in Richards on the public policy considerations pertaining to new home construction. Home building, it noted, "is frequently undertaken on a large scale" and "homebuyers are generally not skilled or knowledgeable in construction, plumbing, or electrical requirements." Id. It also noted that:

the character of our society is such that people and families are increasingly mobile. Home builders should anticipate that the houses they construct will eventually, and perhaps frequently, change ownership. The effect of latent defects will be just as catastrophic on a subsequent owner as on an original buyer and the builder will be just as unable to justify improper or substandard work.

Id. Based upon these considerations, the Richards court held that the homebuilder's implied warranty of good workmanship runs to subsequent purchasers. Id.

¶ 11 The progeny of Richards make two things clear. First, a subsequent purchaser's claim sounds in contract. See Woodward v. Chirco Constr. Co., 141 Ariz. 514, 516, 687 P.2d 1269, 1271 (1984)

(a home purchaser can bring a contract claim for the cost of repairing defects, but can bring a tort claim only for injuries to person or personal property).

¶ 12 Second, the Richards exception applies only to homebuilder-vendors. For example, a plaintiff injured in a subdivision's common pool sued the swimming pool contractor in Menendez v. Paddock Pool Construction Co., 172 Ariz. 258, 270, 836 P.2d 968, 980 (App.1991). The Menendez court held that the accepted work doctrine barred the claim. In response to the argument that Richards abolished the accepted work doctrine, the Menendez court explained that: "Richards and its progeny expanded implied warranty liability for the homebuilder-vendor but failed to address non-owner subcontractors like Paddock." Id.

¶ 13 The language in Menendez indicates that Richards would not apply where a homebuilder was not also a vendor. If a landowner hired a contractor to build a custom home for his own use, and later sold the home, Menendez suggests that the subsequent purchaser would have no implied warranty claim against the contractor. Id. This result is consistent with Richards, which was grounded in both the mass-production of homes and in the gross disparity in sophistication between homebuilders and home buyers. Richards, 139 Ariz. at 245, 678 P.2d at 430.

¶ 14 Based upon the public policy considerations in Richards, we see no basis to extend an implied warranty of good workmanship claim to subsequent purchasers of commercial buildings. Unlike the parties to a home sale, no gross disparity in sophistication generally exists between the buyers and sellers of commercial real estate. Moreover, unlike new homes, commercial buildings generally are not mass-produced. If, as Menendez suggests, the Richards exception does not apply to the residential contractor who is not a builder-vendor, then similarly it should not apply to the builder of a single commercial building.

2. Other Jurisdictions Decline to Extend the Claim to Commercial Construction as a Matter of Policy.

¶ 15 Other jurisdictions have likewise refused to extend the cause of action to commercial construction, noting significant differences between commercial and residential construction. For example, in Boston Investment Property v. E.W. Burman, Inc., a developer hired a general contractor to build a commercial building, and then sold it to the plaintiff. 658 A.2d 515 (R.I.1995). When construction defects appeared, the plaintiff sued the general contractor for the costs of remedying the defects. The Rhode Island Supreme Court held that the plaintiff could not bring suit absent a contractual relationship with the contractor. Id. at 518.

¶ 16 The Boston Investment court reasoned that buyers of commercial property have the opportunity to inspect and inquire into defects prior to purchase, or can protect themselves from economic damages through contractual arrangements. Id. at 517. "In the case of sophisticated commercial entities in the commercial real estate market," it noted, "contract law is the proper device to allocate economic risk." Id. at 518.

¶ 17 Four years later, the same court abolished the privity requirement for subsequent purchasers of residential property, yet left Boston Investment intact. See Nichols v. R.R. Beaufort & Associates, Inc., 727 A.2d 174, 178 (R.I.1999)

. Like Richards, the Nichols decision is grounded in public policy considerations unique to homebuilding. Id. at 179-81. Quoting Boston Investment, the court distinguished between residential and commercial construction:

Recently . . . this Court affirmed the need for contractual privity in a commercial setting . . .

. . .

Accordingly, in [Boston Investment], we held that in the absence of any privity of contract with the builder, a subsequent purchaser of a commercial building in Rhode Island was not entitled to recover economic damages resulting from the general contractor's alleged negligence in constructing the building.

Id. at 178.

¶ 18 For similar reasons, the Missouri Court of Appeals declined to allow a...