The Arizona Supreme Court recently issued an opinion on the scope of the implied warranty of workmanship and habitability (the “implied warranty”) in contracts between homebuyers and builder/vendors that provides clear guidance of the law in this area, specifically on the issue of whether the implied warranty can be waived or disclaimed. It is also an interesting and helpful read for those who engage in new home residential sales and real estate transactions generally.
The case: Zambrano v. M & RC, II LLC, 254 Ariz. 53 (2022). The takeaway holding: the implied warranty of workmanship and habitability cannot, under any circumstances, be disclaimed or waived.
From a practice perspective, the foregoing is likely all one needs to ultimately know. However, the majority opinion (authored by Justice Timmer) and the dissent (authored by Justice King, and joined by Justice Bolick) are in these authors’ opinions worth a read for those who want a better understanding of the contours of how “public policy” plays into the analysis of the enforceability of contract terms, especially in the real estate context and even more particularly in connection with contracts for the sale of new homes. The careful analysis of both the majority opinion and the dissent provides an excellent history of the implied warranty, the public policy behind it, and its scope and application in the context of competing public policies, most notably the freedom to contract.
Zambrano involved a buyer (whom the dissent observes was herself a licensed real estate broker) who purchased a new home in a “new subdivision” via a sales contract that included an express warranty from the builder relating to the home. The express warranty (contained in a separate forty-page preprinted form) was to be the “only warranty applicable” to the home. The contract further clarified that the buyer was expressly disclaiming (and, thus, waiving) the implied warranty. The home subsequently developed alleged “design and construction defects” that were “either time barred or outside the coverage” of the express warranty. The buyer thus filed suit for the alleged defects based on the implied warranty, and the trial court granted summary judgment to the builder based on the buyer’s waiver/disclaimer of the implied warranty in the purchase agreement.
After a thorough analysis of the issues and arguments, the Arizona Supreme Court decided to adopt a bright line rule. It held that the disclaimer—any disclaimer or waiver—of the implied warranty is unenforceable as matter of law—as a matter of public policy and the common law—in Arizona. The Court further held that the implied warranty could not be disclaimed or waived unless and until the Arizona legislature expressly declared it to be a right that buyers could waive or disclaim. The Court concluded that “[e]nforcing the disclaimer and waiver here would grievously injure homebuyers and the public welfare as doing so would likely spell the end of the implied warranty . . . .” The Court acknowledged that it had “considered leaving open the possibility that a sophisticated homebuyer in some settings could negotiate to waive the implied warranty,” but rejected “that idea.” The Court observed that “it would be next to impossible for courts to decide whether a homebuyer was sophisticated enough” and the Court nevertheless concluded that “[e]ven sophisticated homebuyers need the protection offered by the implied warranty.”
The dissent took issue with this analysis and, in particular, the Court’s bright line rule. Relying on the long-established public policy behind the freedom to contract, among other things, the dissent appeared troubled by the Court’s intrusion into “the parties’ ability to determine their own best interests” in the contractual context, and in particular when parties agree to an express warranty in lieu of the implied warranty. The dissent, for example, listed hypotheticals that it believed should not cause concern to anyone, from a public policy perspective or otherwise. For example, a “sophisticated” homebuyer who “seeks to purchase a customized home that presents specific risks for which the homebuyer prefers to negotiate unique coverage in an express warranty,” “a homebuyer who prefers a contractual term that is less protective than the implied warranty as to one section or component of the home, in exchange for greater and broader protection in another area of the home,” and a homebuyer who “negotiate[s] a reduced purchase price in exchange for a warranty more limited than the implied warranty.”
The back and forth between the majority and the dissent on the issues goes on. But ultimately (and unless and until the legislature says otherwise) the law is clear. Caveat vendor: the implied warranty cannot be waived, disclaimed or modified in Arizona under any circumstances.