Zambrano v. M & Rc Ii LLC

Facts

ZAMBRANO V. M & RC II LLC

517 P.3d 1168 (2022)

NATURE OF THE CASE: Scott (Ds) appealed from a decision that reversed the holding of the trial court in favor of D wherein Zambrano (P) had waived the implied warranty per the purchase agreement between the parties. 

FACTS: P entered into a preprinted purchase agreement with D to buy a home that D would build in a new subdivision in Surprise, Arizona. The contract stated there was a Seller’s Limited Warranty and that was the only warranty applicable to the purchase of the property. All other warranties of merchantability, fitness for a particular purpose, habitability, and workmanship were disclaimed. D built the home and issued P a forty-page, preprinted 'Builder's Limited Warranty,' which is administered by Professional Warranty Services Corporation (PWC). 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. In 2017, P sued D 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 was either time-barred or outside its coverage. D moved for summary judgment, arguing P had waived the implied warranty per the purchase agreement. The trial court entered judgment for D. The court of appeals reversed. It held that 'the public policy supporting the implied warranty clearly outweighs the freedom-of-contract interest in the waiver's enforcement.' D appealed. 

ISSUE Can the implied warranty of workmanship and habitability in new housing be disclaimed or waived?

RULE OF LAW: The implied warranty of workmanship and habitability in new housing cannot be disclaimed or waived.

HOLDING AND DECISION: (Timmer, Chief Justice) Can the implied warranty of workmanship and habitability in new housing be disclaimed or waived? No. The freedom to contract has long been considered a 'paramount public policy' under our common law that courts do not lightly infringe. Courts will not refuse to enforce a contract merely because one party made a bad deal, even when the terms are harsh. Courts will refuse to enforce a contract term if legislation prohibits the term or when an identifiable public policy clearly outweighs enforcement. Courts are hesitant to declare terms unenforceable on public policy grounds. Courts balance the interests in enforcing the terms against the public policy interest opposing it. Public policy is determined by examining our constitution, legislation, and judicial decisions. This Court has refused to enforce contract terms that were unconscionable, illegal, or otherwise against public policy. In 1979, Arizona eliminated the application of caveat emptor-or 'buyer beware'-to the purchase of newly built homes. We impute the implied warranty of workmanship and habitability into all contracts between builder-vendors and homebuyers as a matter of common law. Under this implied warranty, the builder-vendor guarantees it built the home in a workmanlike manner and that it is habitable. The warranty is limited to latent defects that are undiscoverable by a reasonable pre-purchase inspection and serves 'to protect innocent purchasers and hold builders accountable for their work.' The warranty applies to non-builder-vendors and is enforceable by subsequent purchasers, despite a lack of contractual privity with the builder. Policy considerations gave birth to the implied warranty, not a need to fill in an overlooked 'gap' in contracting. If an express warranty is included in a purchase agreement, it may coexist with the implied warranty; the warranties are not mutually exclusive. The legislature has also recognized the importance of holding builders in general to sufficient workmanship standards by requiring the registrar of contractors to establish 'minimum standards for good and workmanlike construction.' The registrar requires builders to 'perform all work in a professional and workmanlike manner' and 'in accordance with any applicable building codes and professional industry standards.' Establishing workmanship standards for licensed contractors benefit those contractors' customers and the public at large, and aligns with the purposes of the implied warranty of workmanship and habitability. 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. Homebuyers possess vastly unequal bargaining power, expertise, and knowledge as compared with the builder-vendor. Modernly the buyer can either purchase the home under terms directed by the builder-vendor or forego the purchase altogether. P signed D’s form purchase agreement and accepted the PWC warranty with no variation to the preprinted terms in either document, without representation, and without any negotiation about warranties, suggesting she was in a take-it-or-leave-it situation. The ordinary home buyer is not in a position, by skill or training, to discover defects lurking in the plumbing, the electrical wiring, or the structure itself, all of which are usually covered up and not open for inspection. A person who buys a newly built home 'has no opportunity to observe how the [home] has withstood the passage of time.' This inequality in bargaining power, expertise, and knowledge distinguishes the new-home-buying scenario from the ones in which the parties are on similar footing and are thus better able to decide what contract terms serve their individual interests. The implied warranty was created in recognition of this disparity. Warranting that a home was built using minimum standards of good workmanship conforms to a homebuyer's reasonable expectations. The warranty discourages 'the unscrupulous, fly-by-night operator and purveyor of shoddy work,' who might otherwise blight our communities. It protects not only the original buyer but also subsequent purchasers. The warranty shields a purchase that 'is usually the most important and expensive purchase of a lifetime,' thus minimizing the risk of catastrophic financial losses for all homebuyers who purchase a home within eight years of construction. Effectively eliminating the implied warranty would gut a homebuyer's ability to hold a builder responsible for latent defects, increasing the likelihood that homes would be left unrepaired, to the detriment of homebuyers, their neighbors, and the public generally. D argues the PWC warranty adequately satisfies the public interest in protecting homebuyers from shoddy workmanship. The PWC warranty does not protect the same interests as those protected by the implied warranty. The implied warranty protects against a builder's lack of conformity with generally accepted community standards for workmanship and habitability. The PWC warranty protects against nonconformity with tolerances it establishes for certain construction components within the warranty periods, most of which fall into the one-year period. The PWC warranty is an insufficient substitute for the implied warranty and is certainly not superior from the homebuyer's or the public's perspective. The PWC warranty does not apply to latent design defects that may later result in damages. The PWC warranty caps the amount Scott Homes must spend to repair deficiencies. The PWC warranty applies only to select construction components and leaves others uncovered. Although we considered leaving open the possibility that a sophisticated homebuyer in some settings could negotiate to waive the implied warranty, we reject that idea. It would be next to impossible for courts to decide whether a homebuyer was sophisticated 'enough.' Even sophisticated homebuyers need the protection offered by the implied warranty because they cannot spot hidden, latent defects at the time of purchase; and subsequent homebuyers should not be penalized simply because the original owner was sophisticated and chose to waive the implied warranty. Unless the legislature enacts a statute permitting waiver of the implied warranty, our courts will not permit it. The public policy underlying the implied warranty of workmanship and habitability clearly outweighs enforcement of the disclaimer and waiver of that warranty in the purchase agreement and the PWC warranty here. We reverse the summary judgment and remand this matter to the trial court.

Dissenting: (King, J.) The homebuyer is a licensed real estate broker. We reject the majority's bright-line rule today that Arizona's public policy prohibits two competent parties, in all instances, from modifying the implied warranty with specific warranty terms of their own choosing-even when they knowingly, voluntarily, and intelligently do so. The majority acknowledges the implied warranty of workmanship and habitability is a court-made doctrine. The majority then concludes the implied warranty can never-regardless of the circumstances or sophistication of the parties-be waived and replaced with an express warranty. We are generally free to waive implied warranties and protections in other contexts. The implied warranty of workmanship and habitability 'should not be held paramount' where competent parties have agreed to modify the implied warranty with an express warranty. The majority makes clear that no party under any set of circumstances may modify the implied warranty of workmanship and habitability-even if the homebuyer is sophisticated and seeks to purchase a customized home that presents specific risks, for which the homebuyer prefers to negotiate unique coverage in an express warranty. Many other jurisdictions have rejected the categorical rule the majority employs today. Courts already decline to enforce contract terms (1) that are unconscionable or illegal; (2) where there was fraud, duress, coercion, misrepresentation, or mistake; and (3) where a contract of adhesion was unconscionable and outside the reasonable expectations of the parties. P never asserted any such contractual defenses to the formation of her express warranty. Policy considerations are better suited for the legislature to address, as we are not equipped to evaluate offsetting policy considerations such as the impact on home prices or other economic consequences to the public at large. 'In Arizona, our primary source for identifying a duty based on public policy is our state statutes,' and 'in the absence of a statute, we exercise great restraint in declaring public policy.' We disagree with the majority's conclusion that all waivers of the implied warranty are prohibited and that parties must now wait for the legislature to expressly permit such waivers. The legislature has not rendered the implied warranty non-waivable, nor has it mandated the implied warranty in all instances. We would reject a sweeping rule that the public policy in favor of the implied warranty in all cases 'clearly outweighs any interests in the . . . enforcement' of an express warranty to which parties agreed in the course of organizing their private affairs.

LEGAL ANALYSIS: We bolded additional rules of law in the holding. 

Which public policy is bigger and prevails? The court must first determine what public policy is and then balance the competing interests. 

There is the public policy behind the implied warranty related to a new home being built but then again there is also the public policy of the freedom to contract; the freedom to contract is a “paramount” public policy as well. 

The Arizona Supreme Court held that the implied warranty of workmanship and habitability may not be waived, even contractually.

The dissent argues against a complete prohibition. The majority says they have no real way to determine if someone is qualified enough to make a waiver of the implied warrant. 

A very small excerpt from Dean’s Law Dictionary (www.deanslawdictionary.com): The power to invalidate a contract on public policy grounds must be used cautiously and exercised only in cases free from doubt.' Thomas v. Progressive Cas. Ins., 749 N.W.2d 678, 687 (Iowa 2008) (quoting Grinnell Mut. Reins. v. Jungling, 654 N.W.2d 530, 540 (Iowa 2002)). The party claiming the contract is contrary to public policy bears the burden of proof. Walker v. Gribble, 689 N.W.2d 104, 111 (Iowa 2004). 'To strike down a contract on public policy grounds, we must conclude that 'the preservation of the general public welfare . . . outweigh[s] the weighty societal interest in the freedom of contract.'' In re Marriage of Witten, 672 N.W.2d 768, 780 (Iowa 2003) (alteration in original) (quoting Jungling, 654 N.W.2d at 540). 

In construing contracts arguably violative of public policy, courts traditionally begin by determining the intent of the parties and only reach the question of public policy if then necessary. Block v. Mylish, 351 Pa. 611, 41 A. 2d 731 (1945); Pocono Manor Association v. Allen, 337 Pa. 442, 12 A. 2d 32 (1940); Restatement (Second) of Contracts § 233, at 105 (Tent. Draft No. 5, March 31, 1970). 

To be enforceable, a contract must have a 'lawful object.' (Civ. Code, § 1550, subd. 3.) A contract is unlawful if it is contrary to an express provision of law, contrary to the policy of express law, or otherwise contrary to good morals. (Civ. Code, § 1667.) 

An agreement that has a tendency ''to be against the public good, or to be injurious to the public'' violates public policy. King v. Riveland, 125 Wn.2d 500, 511, 886 P.2d 160 (1994) (quoting Marshall v. Higginson, 62 Wn. App. 212, 216, 813 P.2d 1275 (1991)). An agreement that violates public policy may be void and unenforceable. Restatement (Second) of Contracts § 178 (1981). 

Wisconsin courts have long recognized the importance of freedom of contract and have endeavored to protect the right to contract. A contract will not be enforced, however, if it violates public policy. A declaration that the contract is against public policy should be made only after a careful balancing, in the light of all the circumstances, of the interest in enforcing a particular promise against the policy against enforcement. Courts should be reluctant to frustrate a party's reasonable expectations without a corresponding benefit to be gained in deterring 'misconduct' or avoiding inappropriate use of the judicial system. Merten v. Nathan, 108 Wis. 2d 205, 211, 321 N.W.2d 173, 177 (1982); Continental Ins. Co. v. Daily Express, Inc., 68 Wis. 2d 581, 589, 229 N.W.2d 617 (1975); Schaal v. Great Lakes Mutual Fire & Marine Ins. Co., 6 Wis. 2d 350, 356, 94 N.W.2d 646, 649 (1959); Trumpf v. Shoudy, 166 Wis. 353, 359, 164 N.W. 454, 456 (1917); Restatement (Second) of Contracts sec. 178 comments b and e (1981). 

In order to declare a contract, entered by the parties freely and without evidence of fraud, void as against public policy, the contract must be invalid on the basis of the recognized legal principles. Public policy is to be ascertained by reference to the laws and legal precedents and not from general considerations of supposed public interests. Vidal v. Mayor (Aldermen and Citizens) of Philadelphia, 2 How. 127, 197, 198, 11 L.Ed. 205. As the term 'public policy' is vague, there must be found definite indications in the law of sovereignty to justify the invalidation of a contract as contrary to that policy. Twin City Pipe Line Co. v. Harding Glass Co., 283 U.S. 353, 51 S.Ct. 476, 75 L.Ed. 1112; Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 61 S.Ct. 414, 85 L.Ed. 500. It is a matter of public importance that good faith contracts of the United States should not be lightly invalidated. Only dominant public policy would justify such action. In the absence of a plain indication of that policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, the Court should not assume to declare contracts of the War Department contrary to public policy. The courts must be content to await legislative action.' Muschany v. United States, 1945, 324 U.S. 49, 66-67, 65 S.Ct. 442, 451, 89 L.Ed. 744. With a few exceptions, for example, a case involving attorney-client relations, Polkowitz v. Ewing, 115 N.J.L. 93, 178 A. 559 (Sup. Ct. 1935), and a case involving employer-employee relations, Driver v. Smith, 89 N.J.Eq. 339, 104 A. 717 (Chancery 1918), the cases that allow courts to declare a contract void as against public policy fall into three general categories. The first category involves cases that hold that a contract promising compensation to a person for inducing a public official to exercise his discretion in a certain manner are void as tending to corrupt such officials, Tool Company v. Norris, 1864, 1 Wall, 45, 69 U.S. 45, 17 L.Ed. 868; Moffett v. Arabian American Oil Co., D.C.S.D.N.Y. 1949, 85 F.Supp. 174, affirmed, 2 Cir., 1950, 184 F.2d 859, certiorari denied 1951, 340 U.S. 948, 71 S.Ct. 533, 95 L.ed. 683; McCabe v. Kupper, 4 N.j.Super. 178, 66 A.2d 629 (App. Div. 1949). Cf. Stone v. Wm. Steinen Mfg. Co., 133 N.J.L. 16, 42 A.2d 268 (Sup. Ct. 1945), affirmed 133 N.J.L. 593, 45 A.2d 486 (E. & A. 1946).

Typical of this type of case is Tool Company v. Norris, supra. The plaintiff, in that case, sued on a contract whereby he would procure a government order and in which the defendant promised to pay him 'for his services, in obtaining, or causing and procuring to be obtained, such order, all that the Government might, by the terms of their arrangement with the company, agree to above $ 17 for each musket.' Holding such an agreement violated public policy, the Supreme Court stated: 'Other agreements of an analogous character might be mentioned, which the courts, for the same or similar reasons, refuse to uphold. It is unnecessary to state them particularly; it is sufficient to observe, generally that all agreements for pecuniary considerations to control the business operations of the Government, the regular administration of justice, the appointments to public offices, or the ordinary course of legislation, are void as against public policy, without reference to the question, whether improper means are contemplated or used in their execution. The law looks to the general tendency of such agreements; and it closes the door to temptation, by refusing them recognition in any of the courts of the country.' 69 U.S. at pages 55, 56.

The second category of cases concerns contracts the purpose of which was the performance of an illegal act or where the consideration in whole or in part was illegal, Auditorium Kennel Club v. Atlantic City, 199 A. 908, 16 N.J.Misc. 354 (Sup. Ct. 1938) (a lease contemplating use of premises for dog racing, an illegal activity under New Jersey law). The third category of cases advanced by the defendant involves agreements for collusive bidding on government contracts, Brooks v. Cooper, 50 N.J.Eq. 761, 26 A. 978, 21 L.R.A. 617 (N. & A. 1893); Gulick v. Ward, 10 N.J.L. 87 (Sup. Ct. 1828). The latter case involved a contract which provided that the plaintiff would forbear from submitting an offer to the government to carry mail over a certain route provided that if the defendant received the government mail contract he would pay the plaintiff $ 1,000. The court held this contract to be void as against public policy as its arrangement reducing the number of competitors tendering bids for a government contract would defeat the clear purpose of the statute requiring that contracts be given to the lowest bidder. 

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