Sirrah Enters., LLC v. Wunderlich

• Court: Arizona Supreme Court
• Writing for the Court: JUSTICE TIMMER, opinion of the Court
• Citation: Sirrah Enters., LLC v. Wunderlich, 399 P.3d 89 (Ariz. 2017)
• Decision Date: 09 August 2017
• Docket Number: No. CV-16-0156-PR,CV-16-0156-PR
• Parties: SIRRAH ENTERPRISES, LLC, an Arizona limited liability company, Plaintiff/Counterdefendant/Appellant, v. Wayne and Jacqueline WUNDERLICH, husband and wife, Defendants/Counterclaimants/Appellees.

399 P.3d 89

SIRRAH ENTERPRISES, LLC, an Arizona limited liability company, Plaintiff/Counterdefendant/Appellant,

v.Wayne and Jacqueline WUNDERLICH, husband and wife, Defendants/Counterclaimants/Appellees.

No. CV-16-0156-PR

Supreme Court of Arizona.

Filed August 9, 2017

John J. Belanger (argued), Bremer Whyte Brown & O'Meara, Tempe, Attorneys for Sirrah Enterprises, LLC

Jeffrey R. Adams (argued), The Adams Law Firm, PLLC, Prescott, Attorneys for Wayne and Jacqueline Wunderlich

Stephen E. Richman (argued), Vail C. Cloar, Dickinson Wright PLLC, Phoenix, Attorneys for Amicus Curiae Home Builders Association of Central Arizona

JUSTICE TIMMER authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES BRUTINEL, BOLICK, GOULD, and LOPEZ joined.

JUSTICE TIMMER, opinion of the Court:

¶ 1 The law implies a warranty of workmanship and habitability into every residential construction contract. This Court has wrestled with application of this warranty on several occasions. We reenter the fray and here decide whether the successful party on a claim for breach of the warranty qualifies for an attorney-fee award under either a contractual fee provision or A.R.S. § 12–341.01. Because the warranty is imputed into the construction contract, it is a term of the contract. Any claim for breach of that term arises from the contract. The successful party therefore qualifies for fees under a controlling contractual fee provision or, barring that, § 12–341.01.

BACKGROUND

¶ 2 Wayne and Jacqueline Wunderlich contracted with Sirrah Enterprises, LLC to build "a basement through exterior walls" at the Wunderlichs' home. Sirrah performed the work. The Wunderlichs partially paid Sirrah but refused to pay the full contract amount, claiming construction defects.

¶ 3 Sirrah sued for the unpaid contract amount. The Wunderlichs counterclaimed for breach of the implied warranty of workmanship and habitability (the "Implied Warranty" or "Warranty") and other claims. A jury found in Sirrah's favor on its claim and awarded it $31,374. The jury further found in Sirrah's favor on the Wunderlichs' claims for breach of contract and breach of the covenant of good faith and fair dealing. But the jury found in the Wunderlichs' favor on their claim for breach of the Implied Warranty and awarded them $297,782.

¶ 4 The trial court determined that the Wunderlichs were the prevailing parties and awarded them attorney fees pursuant to a contractual fee provision and § 12–341.01. The court of appeals affirmed the award as authorized by the contractual fee provision. Sirrah Enters., LLC v. Wunderlich , 240 Ariz. 163, 171 ¶ 25, 377 P.3d 360 (App. 2016). (The court variously stated that § 12–341.01 did and did not apply here, but ultimately rested its decision on the contractual fee provision. Id . at 168–69 ¶¶ 11, 15, 171 ¶ 24, 377 P.3d 360.)

¶ 5 We granted review because the recovery of fees under a contractual fee provision or § 12–341.01 for an Implied Warranty claim is a recurring legal issue of statewide importance. This Court has jurisdiction pursuant to article 6, section 5(3) of the Arizona Constitution and A.R.S. § 12–120.24.

DISCUSSION

¶ 6 The parties' contract provides that if either party "is required to retain the services of an attorney to enforce any term or provision of this Agreement, the prevailing party shall be entitled to and the losing party shall pay all expenses and costs including reasonable attorney's fees incurred by the prevailing party." Sirrah argues that the Implied Warranty was not a "term or provision" of the contract but was imposed by law regardless of the contract's existence, and therefore the Wunderlichs' success on only their warranty claim did not trigger the fee provision. The Wunderlichs respond, and the trial and appellate courts agreed, that the law imputed the Implied Warranty into the parties' contract, making the Warranty a "term or provision" of the contract, and fees were properly awarded. See Sirrah , 240 Ariz. at 167–68 ¶¶ 9, 12, 377 P.3d 360.

¶ 7 We review de novo the courts' interpretation of the parties' contractual fee provision as applying to Implied Warranty claims. See Murphy Farrell Dev., LLLP v. Sourant , 229 Ariz. 124, 133 ¶ 31, 272 P.3d 355 (App. 2012).

I. The Implied Warranty is a contract term

¶ 8 Under the Implied Warranty, a residential builder warrants that its work is performed in a workmanlike manner and that the structure is habitable. See Lofts at Fillmore Condo. Ass'n v. Reliance Commercial Constr., Inc. (Lofts ), 218 Ariz. 574, 575 ¶ 5, 190 P.3d 733, 734 (2008). The Warranty "is imposed by law" and serves "to protect innocent purchasers and hold builders accountable for their work." Richards v. Powercraft Homes, Inc. , 139 Ariz. 242, 244–45, 678 P.2d 427, 429–30 (1984) (citation and internal quotation marks omitted). A homeowner is not required to have privity of contract with the builder to sue it for breach of the Implied Warranty. See Lofts , 218 Ariz. at 577 ¶ 15, 190 P.3d at 736 ; Richards , 139 Ariz. at 245, 678 P.2d at 430. Rather, the Implied Warranty "arises from construction of the home," and therefore runs to subsequent purchasers. Lofts , 218 Ariz. at 577 ¶¶ 13–14, 190 P.3d at 736 (reasoning that Richards and other cases "make clear that an implied warranty arises from construction of the home, without regard to the identity of the vendor").

¶ 9 Sirrah argues that because the Implied Warranty "arises from construction of the home," it neither constitutes a contract term nor arises from a contract. We disagree.

¶ 10 Woodward v. Chirco Construction Co., Inc ., 141 Ariz. 514, 687 P.2d 1269 (1984), directs our decision. The homebuilder there, Chirco Construction, argued that the six-year statute of limitations applicable for contract claims, A.R.S. § 12–548(A), did not apply to preserve the purchasing homeowners' claim for breach of the Implied Warranty. Id . at 515–16, 687 P.2d at 1270–71. Relying on Richards 's pronouncement that the Implied Warranty "is imposed by law," Chirco Construction asserted that the Warranty could not arise from the parties' contract and, even if it did, breach of the Warranty only created a tort claim. Id. at 515, 687 P.2d at 1270. This Court disagreed. We decided that negligent construction of a residence can simultaneously support contract damages for breach of the Implied Warranty and tort damages for any personal injury or damaged personal property caused by the contractor's negligence. Id. at 515–16, 687 P.2d at 1270–71. The Court recognized that the Implied Warranty "arises from the contractual relation between the builder and the purchaser." Id. at 516, 687 P.2d at 1271 (citation and internal quotation marks omitted). Significantly, we also clarified Richards :

Our statement in Richards , supra , that the implied warranty of workmanlike performance and habitability "is imposed by law" was not meant to transform the duty arising out of the contract into one based on tort principles alone; instead, it was meant to inform buyers and sellers that the law imputes the warranty into the contact for the construction and sale of the residence. We then held that the warranty runs to subsequent purchasers of the residence. If the warranty did not arise out of the contract and provide for a cause of action in contract, we would have had no cause to be concerned about the absence of privity between Richards and Powercraft Homes, Inc.

Id. The Court concluded that the court of appeals properly applied the six-year statute of limitations to the Implied Warranty claim at issue. Id.

¶ 11 In Lofts , the Court did not retreat from its position in Woodward that the Implied Warranty is imputed into a construction contract and runs to subsequent purchasers. Indeed, the Court cited Woodward for the principle that "[a] claim for breach of the implied warranty sounds in contract." Lofts , 218 Ariz. at 575 ¶ 5, 190 P.3d at 734. Also consistent with Woodward , the Court held that a subsequent homebuyer who lacked contractual privity with a non-vendor builder could nevertheless sue the builder for breach of the Warranty. See id. at 577–78 ¶¶ 13–19, 190 P.3d at 736–37. The only reason for addressing privity was because the Court treated the Implied Warranty as a contract term.

¶ 12 Finally, since deciding Lofts , we have reiterated Woodward 's characterization of the Implied Warranty as a contract term. See Sullivan v. Pulte Home Corp. (Sullivan II ), 232 Ariz. 344, 346 ¶ 13, 306 P.3d 1, 3 (2013) ( "[The] law imputes [the] warranty into [a] construction contract and allows subsequent purchasers a cause of action." (citing Woodward , 141 Ariz. at 516, 687 P.2d at 1271 )). We again confirm that description here.

II. Barmat does not apply

¶ 13 Citing Barmat v. John & Jane Doe Partners A–D , 155 Ariz. 519, 747 P.2d 1218 (1987), Sirrah argues that because the Implied Warranty is imposed by law, breach of the Warranty cannot give rise to a contract-based fee award. We disagree.

¶ 14 Barmat addressed whether a legal malpractice claim "arises out of a contract" for purposes of awarding fees under § 12–341.01(A). Id. at 520, 747 P.2d at 1219. The clients there argued that § 12–341.01(A) applied because the law implies a contract between lawyer and client, which includes a covenant of competent and ethical representation. Id . at 521, 747 P.2d at 1220. After noting that the law implies contracts in several professional relationships and some nonprofessional ones, such as innkeeper-guest and common carrier-passenger, the Court concluded that the legislature did not intend § 12–341.01(A) to reach tort claims arising from these relationships. Id.

¶ 15 The Court labeled a contract implied in law as a "legal fiction," id. at 522, 747 P.2d at 1221, created "without regard to expressions of assent by either words or acts," id. at 521, 747 P.2d at 1220 (citation and internal quotation marks omitted). Such contracts "aris[e] from relationships between professionals...