Construction Law

This article appeared in the May 2011 issue of "The Construction Advisor" published by Lang Baker & Klain, PLC. Free Subscription to the Construction Advisor View the Construction Advisor index

In the early 2000s, Vern Haugen owned a mountainside residential lot in Scottsdale. He also owned a construction company, North Peak Construction, LLC. Haugen planned to build on the lot a home situated in such a way that its residents could enjoy an attractive view of the city. He hired an architectural firm, Architecture Plus, Ltd., to design the home.

The contract required Architecture Plus, in designing the home, to consider Haugen’s requirements. In addition to discussing with Architecture Plus the importance of properly orienting the home to take advantage of the view, Haugen gave Architecture Plus a topographical map and marked the “limited view corridor” within which the home was to be designed and aligned.

Shortly thereafter, Haugen sold the lot and the preliminary architectural plans, and the buyer separately contracted with Architecture Plus. That contract contained the same terms as the original contract, plus some provisions for design alterations. The final construction plans for the home were signed and sealed by the architect. The buyer contracted with Haugen’s company, North Peak Construction, to the build the home.

In 2006, after construction began, North Peak discovered that the architect’s plans aligned the home so that, rather than overlooking the city, it faced a mountain and a water tank. North Peak demolished the work it had already performed and rebuilt the home, incurring nearly $165,000 in additional expenses.

Lawsuit. In 2009, North Peak sued Architecture Plus and the architect personally for breach of implied warranty and for negligence. In its complaint, North Peak also requested payment of its attorneys’ fees, per A.R.S. § 12-341.01(A), claiming that its implied warranty claim arose out of contract.

In response, Architecture Plus sought to dismiss the breach of implied warranty claim on the basis that North Peak’s real claim was for negligence and that there was “no contractually-based claim for breach of implied warranty insofar as design professionals are concerned.” Architecture Plus argued that, in essence, North Peak’s implied warranty claim was a back-door attempt to “convert an action for which attorneys’ fees are not recoverable into one in which attorneys’ fees are recoverable” [emphasis added].

The Superior Court judge agreed with Architecture Plus and dismissed North Peak’s implied warranty claim, noting that North Peak’s professional negligence claim was based in tort, not in contract, and thus not eligible for recovery of attorneys’ fees.

Architecture Plus then asked the court to dismiss North Peak’s negligence claim, arguing that the statute of limitations had run out. The judge granted that motion, too, and dismissed North Peak’s entire claim.

North Peak appealed the dismissal of its claim for breach of implied warranty. The Arizona Court of Appeals found North Peak’s claim against Architecture Plus to be valid and sent the case back for trial in Superior Court. (Read the court's opinion in North Peak Construction, LLC v. Architecture Plus, Ltd.)

Legal Reasoning. In considering North Peak’s appeal, the Court of Appeals agreed with Architecture Plus that North Peak had no contract-based claim for breach of implied warranty.

However, the court relied on the Arizona Supreme Court’s 1984 opinion in Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, which provided that a claim for breach of an implied warranty may be brought against a design professional even in the absence of “privity,” i.e., when there is no written contract between the parties, which was the case with North Peak and Architecture Plus.

In Donnelly, the Supreme Court held that a contractor does not need to be in privity with an architect in order to sue the architect for negligence and breach of implied warranty, and the Court of Appeals applied that conclusion in North Peak.

“Because Donnelly recognizes that breach of an implied warranty is a valid cause of action against a design professional and can be brought in addition to a claim of negligence,” wrote the Court of Appeals in its opinion, “we must conclude that the [trial] court erred in dismissing North Peak’s implied warranty claim.”

The Court of Appeals also cited the Arizona Supreme Court’s 2008 ruling in The Lofts at Fillmore v. Reliance Commercial Construction (see related article), which concluded that “a claim for breach of an implied warranty of habitability and workmanlike performance sounds in contract rather than tort.”

Personal Liability. The Court of Appeals also found that, if North Peak prevailed in Superior Court, the architect could bear personal liability for North Peak’s claim for breach of implied warranty.

“North Peak’s implied warranty is not based on [the buyer’s] contract with Architecture Plus, Ltd.,” wrote the Court. “Rather, the implied warranty is based on (1) North Peak’s alleged reliance on the architectural plans and specifications, (2) Donnelly’s recognition that ‘design professionals’ warrant ‘that they have exercised their skills with care and diligence and in a reasonable, non-negligent manner,’ and (3) the alleged signing and sealing by [the architect] of the plans and specifications.”

Conclusion. For contractors and design professionals, the main lesson in North Peak is this: If a design professional’s error causes a contractor to suffer damages, the contractor may sue the design professional for breach of implied warranty even if there is no contract between the two parties.