Home, bittersweet home: while defects in newly built homes have risen to unprecedented levels, recent legal developments have blunted homeowners' ability to sue for shoddy materials and workmanship. But all is not lost.

A house is the most expensive commodity most people will buy in their lifetimes, yet almost all other goods sold carry with them more meaningful rights and protections for the purchaser. Manufacturers and sellers of cars, appliances, and many other consumer products all have a greater legal duty to ensure the quality of their products than do general contractors and other members of the building trade.

Until recently, homeowners trying to recover property damages arising from defective construction had a powerful arsenal of legal weapons. For example, the implied warranty of habitability requires general contractors to build dwellings that satisfy the building code and meet prevailing standards of workmanship. For decades, homeowners have recovered substantial damages against builders for violation of this standard. In recent years, however, legislatures and courts have become more hostile toward homeowners seeking restitution for defective construction.

In 2004, Americans purchased almost 1 million new homes, at an average price of about $250,000. (1) The residential construction market is robust, with housing starts and industry profits steadily increasing.

Consumer complaints about the quality of construction--and about the prevalence and impact of construction defects--have also increased. (2) Several major newspapers have published lengthy stories about widespread reports of defective residential construction. (3) The problem has spawned new consumer rights organizations--like Homeowners Against Deficient Dwellings (HADD) and HomeOwners for Better Building (HOBB)--that specifically target home builders' shoddy practices. (4)

Several factors have contributed to the increase in defective home-building. For example, the escalating pace of construction has prompted builders to cut comers. Subcontractors are often insufficiently skilled or trained. Building components are more complex, requiring greater care and coordination--which is frequently lacking--among the subcontractors. Houses are more energy-efficient and airtight, trapping moisture and causing rot and mold infestation. And government inspection departments are poorly funded, understaffed, and overworked.

Ironically, as these forces have exacerbated the problems of defective residential construction, judicial opinions and statutory initiatives have stripped homeowners of the legal tools they need to hold builders, subcontractors, and manufacturers accountable.

Elusive warranty

The implied warranty of habitability arises from the common law and imposes strict liability on a builder to construct a house in a workmanlike manner, free from structural defects. (5) The warranty has been construed expansively to cover a wide range of deficiencies. It has long been the homeowner's most powerful tool in seeking recovery for building defects.

To avoid construction defect litigation, some general contractors now include language in their standard contracts providing that the habitability warranty is either excluded or waived. Most courts have upheld contracts that include this language as long as it is "clear and unambiguous." (6)

Building companies that insert this language into their construction contracts almost always provide a separate, limited warranty issued by an insurer. These warranties are full of exclusions, impose cumbersome procedures, and generally require that disputes be arbitrated in a forum dominated by the construction industry. Even worse, unsuspecting purchasers rarely have a practical opportunity to read the fine print and thus do not realize that they may be relinquishing important rights to recover for construction defects. (7)

Several strategies may be effective in ensuring that the implied warranty of habitability is viable in client's case. First, check the case law in your state to see if it is one of the few that does not allow the warranty to be waived or excluded. (8)

If your jurisdiction does permit exclusion or waiver, you may be able to establish that the language in your client's contract is not clear and unambiguous because it does not include the words "implied warranty of habitability." (9) But even the use of this specific phrase may not end the argument.

While some courts have held that the habitability warranty may be deemed excluded or waived if certain language appears in the contract, others have held that builders must meet additional requirements. An Illinois court held that mere use of "magic" language is not sufficient; the exclusion or waiver must be brought to the buyer's attention. (10) Some jurisdictions require the language to be in large, bold type. (11)

The North Carolina Supreme Court took another approach. In that case, the contract between the builder and the homeowners did not include language excluding the habitability warranty. Three weeks after the buyers closed on the purchase, the builder provided them with a limited warranty that did contain the purported exclusion. The court held that the latter document was "separate and apart" from the primary contract and could not be used to deny the plaintiffs their rights under the implied warranty of habitability. The court further concluded that the builder had failed to use clear, unambiguous language excluding the warranty. (12)

You may be able to defeat the exclusion/waiver argument if your jurisdiction is one of the 11 states that prohibit arbitration clauses in insurance contracts. (13) Because limited warranties are usually issued by insurance companies, it may be possible to argue that they are, in fact, insurance contracts. And because they also typically contain mandatory arbitration provisions, they may then be struck down as violating the state's prohibition against arbitration clauses in insurance contracts.

Notwithstanding these options, builders' counsel have become increasingly savvy in drafting contractual provisions that pass muster and effectively exclude the implied warranty. Ultimately, the only recourse in many jurisdictions may be laws prohibiting the exclusion or waiver of the implied warranty of habitability.

Restrictive rule

Perhaps the most disturbing development in construction defect litigation is the tide of cases interpreting the economic-loss rule to prevent claims for negligence or strict liability against manufacturers of building products. Generally, the rule precludes a plaintiff from bringing these claims when a product defect causes only economic loss, and not personal injury or damage to other property.

Unfortunately, the rule is more simply stated than applied, and judicial opinions vary wildly. It stems from Seely v. White Motor Co., a seminal California case that held that the buyer of a defective truck could assert contractual claims against the manufacturer but had no viable claims in tort. (14) The plaintiff's only losses were economic: the cost of repairing the defective truck and a loss of income while the truck was out of service.

The court decided that because the damage alleged was to the truck itself--not to "other property"--and caused purely economic loss, the plaintiff's legal remedies were limited to those listed in the contract between the parties. This case was the beginning of a string of legal authority recognizing that "the fundamental policy behind [the economic-loss] rule is to restrict parties in commercial transactions to contractual remedies based simply upon the foreseeability of loss of financial expectancies." (15)

For years, attorneys representing homeowners viewed damages caused by defective building components as injury to the rest of the house--other property--and thus recoverable in tort. For example, a defective synthetic stucco system may damage sheathing or framing; defective polybutylene pipes could damage adjacent ceilings and walls.

A growing number of courts have concluded that building components (for example, siding materials, shingles, and windows) used in the construction of a home lose their separate identity when the dwelling is completed. Thus, any damage one component causes to the entire house is not damage to "other property." (16) In these states, homeowners have no right to sue manufacturers in negligence for the defective products.

As irrational, unfair, and misguided as this interpretation is, it has gained favor among judges in the last few years. Alabama, Florida, Kansas, North Carolina, and Virginia are just a few of the jurisdictions that have unequivocally read the economic-loss rule as preventing negligence or strict liability suits by homeowners against building products manufacturers. (17)

Nevertheless, relief still may be available in some states. Some courts have concluded that while the economic-loss rule is appropriate in commercial contracts between sophisticated parties, the principle should not play a role in consumer transactions. (18) Other courts have held that the rule does not apply to residential construction defects because the products used in building a house can indeed cause damage to other parts of the house, or "other property." (19)

California courts have adopted this view but also clarify that there is no recovery for defects without damages. Specifically, in Aas v. Superior Court, the California Supreme Court held that violations of the building code that have not yet caused property damage are purely economic losses not recoverable in negligence or strict liability. (20)

Other jurisdictions permit recovery even though no property damage has occurred. In these states, diminution of value and stigma damages--considered economic losses--are available in construction defect cases. (21)

Even in states that have adopted the strict interpretation--effectively barring tort claims against manufacturers--you may have opportunities to challenge the rule. In North Carolina, for example, older cases that permit negligence actions against subcontractors for residential construction defects are flatly at odds with recent decisions precluding claims against manufacturers. (22) Recent rulings like these that cannot be reconciled with established authority are open to challenge.

Similarly, decisions that permit subsequent purchasers to sue builders for negligence (rather than breach of contract) cannot be squared with the newer cases that apply the economic-loss rule strictly. (23) If a subsequent purchaser can sue a builder in negligence for construction defects, but all the conceivable damages are to the product itself (the house) and are thus unrecoverable economic losses, the purchaser's right to sue is meaningless.

The courts that have embraced the restrictive approach have mistakenly ignored manufacturers' duty and the foreseeability of their harmful conduct, relying instead on a convoluted and tortured definition of property damage. (24)

Lawyers seeking to avoid strict application of the economic-loss rule should make this argument and, if applicable, point out the inconsistencies among lower court holdings. Even jurisdictions with the harshest decisions may entertain the argument that manufacturers are liable when the product defects cause personal injury or present serious risk of harm, as is the case with toxic mold. (25)

Finally, it is possible that draconian application of the economic-loss rule may be addressed legislatively. Because general contractors probably agree that manufacturers of building materials should be held accountable for defects, homeowners and builders may be able to forge an alliance on this point.

Legislative limitations

Sweeping legislative changes in many states have further restricted homeowners' ability to seek redress for construction defects. Most of these laws require homeowners to participate in cumbersome and time-consuming processes before filing a lawsuit.

For example, the Texas legislature considered both a consumer-based home "lemon law" and a bill drafted by the Texas Association of Builders. Refusing even to grant a hearing on the consumer legislation, the lawmakers passed the industry bill. That statute requires homeowners to bring their complaints to a new state commission, whose nine-member board is dominated by general contractors. The commission selects inspectors who evaluate the grievances. (26)

Some states require that before they sue, homeowners must give builders an opportunity to cure defects. (27) A court may dismiss a complaint if the owner fails to supply this notice to the builder. Other jurisdictions, such as Colorado, have placed limitations on damages available in residential construction defect cases. (28) California has enacted measures mandating that a homeowner go through alternative dispute resolution procedures before filing suit. (29)

The well-financed and formidable general contractors' lobby has been instrumental in imposing these restrictions. And because homeowners as a group are not well organized or collectively powerful, states that do not have similar statutory schemes yet will probably enact them.

However, there may be unique ways to fight this type of tort "reform." For instance, homeowners and builders may find common ground on certain issues, including homeowner rights against manufacturers and subcontractors, builders' rights of indemnity against such third parties, and the need to lift limitations on general contractors' insurance coverage.

Also, the burgeoning grassroots efforts of homeowner groups like HADD and HOBB could begin to turn the tide against the construction-defect tort "reform" movement. Even if homeowners favor tort "reform" in general, they do not favor interference with their property rights, and this issue may provide fertile ground for swaying public opinion. Other groups with similar interests--property managers, community associations, consumer groups, and lenders--are natural allies in efforts to thwart legislative "reforms" that limit homeowners' ability to recover in order to repair defects and restore the value of their properties.

The most enduring, concrete American dream is to own a home. That dream is shattered when building defects ruin what is often a homeowner's single greatest financial investment. The deck of legal rights is stacked sharply against homeowners who have legitimate claims for inferior construction against builders, subcontractors, and manufacturers. (30)

Without meaningful legal reforms and protections, the dream of home ownership will remain unfulfilled for too many people.

Notes

(1.) NAT'L ASS'N OF HOME BUILDERS, HOUSING FACTS, FIGURES & TRENDS 2004, 2, 3 (2004).

(2.) Housewrecked, CONSUMER REP., Jan. 2004, available at www.consumerreports.org (click on "Personal finance," then on "Home construction" under "Ratings and Reports") (last visited Dec. 22, 2004).

(3.) See, e.g., Dan Tracy, Building Homes: Building Problems (8-part series), ORLANDO SENTINEL, Oct. 31-Dec. 4, 2003; Walter V. Robinson et al., Luxury by Design, Quality by Chance (4-part series), BOSTON GLOBE, Apr. 29-May 2, 2001.

(4.) See Homeowners Against Deficient Dwellings home page, at www.hadd.com (last-visited Dec. 22, 2004); HomeOwners for Better Building home page, at www.hobb.org (last visited Dec. 22, 2004).

(5.) Medlin v. Fyco, Inc., 534 S.E.2d 622,627 (N.C. Ct. App. 2000).

(6.) See, e.g., Tyus v. Resta, 476 A.2d 427, 432 (Pa. Super. Ct. 1984); Axline v. Kutner, 863 S.W.2d 421, 424 (Tenn. Ct. App. 1993).

(7.) See Press Release, Public Citizen, Public Citizen Calls for 12 States to Investigate Insurers' Use of Questionable Arbitration Firm (Aug. 17, 2004), available at www.citizen.org/pressroom/ release.cfm?ID=1775 (last visited Dec. 22, 2004).

(8.) See, e.g., Albrecht v. Clifford, 767 N.E.2d 42 (Mass. 2002); Nastri v. Wood Bros. Homes, Inc., 690 P.2d 158 (Ariz. Ct. App. 1984).

(9.) See, e.g., Pontiere v. James Dinert, Inc., 627 A.2d 1204 (Pa. Super. Ct. 1993); Tusch Enters. v. Coffin, 740 P.2d 1022 (Idaho 1987); Belt v. Spencer, 585 P.2d 922,925 (Colo. Ct. App. 1978).

(10.) Briarcliffe West Townhouse Owners Ass'n v. Wiseman Constr. Co., 480 N.E.2d 833, 838 (Ill. App. Ct. 1985).

(11.) See, e.g., VA. CODE. ANN. [section]55-701 (Michie 2003).

(12.) Brevorka v. Wolfe Constr., Inc., 597 S.E.2d 671 (N.C. 2003) (per curiam).

(13.) These are Arkansas, Georgia, Hawaii, Kentucky, Louisiana, Nebraska, Oklahoma, South Carolina, South Dakota, Virginia, and Washington. Press Release, supra note 7.

(14.) 403 P.2d 145 (Cal. 1965).

(15.) See Calloway v. City of Reno, 993 P.2d 1259, 1274 (Nev. 2000).

(16.) See, e.g., Wilson v. Dryvit Sys., Inc., 206 F. Supp. 2d 749 (E.D.N.C. 2002), aff'd, 71 Fed. Appx. 960 (4th Cir. 2004).

(17.) Keck v. Dryvit Sys., Inc., 830 So. 2d 1 (Ala. 2002); Casa Clara Condo. Ass'n, Inc. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993); Prendiville v. Contemporary Homes, Inc., 83 P.3d 1257 (Kan. Ct. App. 2004); Land v. Tall House Bldg. Co., 602 S.E.2d 1 (N.C. Ct. App. 2004); Sensenbrenner v. Rust, Orling & Neale Architects, Inc., 374 S.E.2d 55 (Va. 1988).

(18.) See, e.g., Blackward v. Simplex Prods. Div., No. 221066, 2001 WL 1255924 (Mich. Ct. App. Oct. 19, 2001).

(19.) See, e.g., Jimenez v. Superior Court, 58 P.3d 450 (Cal. 2002).

(20.) 12 P.3d 1125 (Cal. 2000).

(21.) See, e.g., Santorv. A&M Karagheusian, Inc., 207 A.2d 305 (N.J. 1965).

(22.) See Sullivan v. Smith, 289 S.E.2d 870 (N.C. Ct. App. 1982); Shoffner Indus., Inc. v. W.B. Lloyd Constr. Co., 257 S.E.2d 50 (N.C. Ct. App. 1979).

(23.) See Oates v. JAG, Inc., 333 S.E.2d 222 (N.C. 1985).

(24.) See Kennedy v. Columbia Lumber & Mfg. Co., 384 S.E.2d 730, 737 (S.C. 1989) ("We find that this legal framework [focusing only on the type of damage incurred] generates difficulties. This is so because the framework's focus is on consequence[s], not action.").

(25.) Wilson, 206 F. Supp. 2d 749, 753.

(26.) TEX. PROP. CODE ANN. [section] 27.001 (Vernon 2004); see also David G. Savage, The Race for the White House: Texans Still at Odds over Bush's Legal Reforms, LOS ANGELES TIMES, Sept. 22, 2004, at A1.

(27.) See, e.g., N.Y. GEN. BUS. LAW ART. 36-B, [section] 777-a (McKinney 2004).

(28.) COLO. REV. STAT. [section] 13-20-801 (2004); see also. Christine Tatum, The Legal Bane of Homebuilders, DENVER POST, Sept. 26, 2004 (on file with author).

(29.) CAL. CIV. CODE [section] 1375 (Deering 2002).

(30.) This article discusses the primary restrictions on homeowners' recovery for defective construction. There are others. Many states have statutes of repose that require homeowners to bring suits well before a defect is or can be detected, some as short as six years. See, e.g., N.C. GEN. STAT. [section] 1-50(a)(5)(a) (2004). Some courts have held that builders' insurance policies do not cover construction disputes. ,See, e.g., L-J, Inc. v. Bituminous Fire & Marine Ins. Co., No. 25854, 2004 WL 1775571 (S.C. Aug. 9, 2004). in some states, subsequent purchasers have no rights against builders, even if the home is purchased within a few years of construction. See, e.g., Lee v. Clark & Assoc. Real Estate, Inc., 512 So. 2d 42 (Ala. 1987).

GARY W. JACKSON practices law in Charlotte, North Carolina.