Daily Development for Thursday, September 9, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

VENDOR/PURCHASER; WARRANTY OF QUALITY; IMPLIED WARRANTY OF HABITABILITY; WAIVER: Texas Supreme Court clarifies nature of implied warranty and holds that it cannot be waived, although warranty of quality can be disclaimed.

Centex Homes v. Buscher, 2001 WL 1946128 (Tex. 8/29/02)

Hard on the heels of an Illinois decision affirming that the implied warranty of habitability in new homes can be waived, but only very carefully Board of Mangers v. Wilmette Partners, 760 N.E.2d 976 (Ill.

2001) ( Dirt DD for 9/4/02), we have a decision from the Texas Supreme Court that redefines that state's implied warranty and, as redefined, makes the warranty mostly non-waivable.

The Texas implied warranty of habitability has been part of Texas common law since 1968, when the court declared the existence of an implied warranty in new home sales that the home "is constructed in a good and workmanlike manner and is suitable for human habitation." In 1982 the court held that this warranty (actually two warranties conflated into one) could be disclaimed or waived. But in 1987, the court held that an implied warranty for repair services to homes could not be waived or disclaimed, and overruled the prior case on implied warranties on new home construction to the extent that there was a conflict between the two opinions.

Since the later case dealt only with home repairs, there remained some ambiguity as to whether the builder's implied warranty of habitability remained waivable, although many in Texas felt that it could not be waived. Now the Supreme Court of Texas has tackled the difficult task of sorting out the strands.

The court concluded that it should unwind the "conflation" of the two implied warranties: the warranty of good workmanship and the warranty of habitability. Although they are related, and sometimes overlap, it stated, they cover different concerns, and the public policy concerning consumer interests differs as well. The distinction drawn by the court is worth quoting at length:

"The implied warranty of good workmanship focuses on the builder's conduct, while the implied warranty of habitability focuses on the state of the completed structure. . . [The] implied warranty [of good workmanship] requires that the builder construct the home in the same manner as would a generally proficient builder engaged in similar work and performing under similar circumstances. . . The implied warranty of habitability, on the other hand, applies to the finished product rather than the builder's performance . . . This implied warranty is more limited in scope, protecting the purchaser only from those defects that undermine the very basis of the bargain. It requires the builder to provide a house that is safe, sanitary and otherwise fit for human habitation. . . In other words, this implied warranty only protects new home buyers from conditions that are dangerous, hazardous or detrimental to their life, health or safety. . .

These two implied warranties parallel one another, and they may overlap. For example, a builder's inferior workmanship could compromise the structure and cause the home to be unsafe. But a builder's failure to perform good workmanship is actionable even when the outcome does not impair habitability. . . Similarly, a home could be well constructed and yet unfit for human habitation if, for example a builder constructed a home with good workmanship but on a toxic waste site. . . "

The court goes on to affirm that the implied warranty of habitability is a deliberate shifting of the risk of defects that make homes unlivable from consumers to the building industry. It is strict liability, and, as it is based upon a policy based shifting of risk, the parties are not permitted to undermine that policy by entering into waivers or disclaimers of this warranty.

Notwithstanding this holding by the court, it went on to say that in one limited area there can be a waiver of the warranty - where the defects in question have been disclosed specifically and the parties are bargaining with respect to those defects. The idea here apparently is that it is helpful on occasion for a consumer to bargain to pay a lower price and to accept the responsibility to repair known and disclosed problems with the house. Here the waiver can apply even to "substantial defects."

The court says later that the implied warranty of habitability extends only to "latent defects." But it is apparently using the term "latent" more narrowly than the traditional legal definition. Here the court appears to be saying that the defect must be more than discoverable - it must be specifically disclosed to or known by the buyer and knowingly accepted.

On the other hand, the implied warranty of good workmanship was described by the court as a "gap filler." It sets forth the standard of quality that the buyer is entitled to expect unless the parties have stipulated otherwise. This warranty cannot be completely disclaimed by agreement, but it can be substituted by another standard of care: "when [the] agreement provides sufficient detail on the manner and quality of the desired construction."

It is not clear whether express limited warranties for identified periods are an adequate justification for disclaimer or waiver of the implied warranty of good workmanship. A normal written warranty does not state a different "manner and quality of the desired construction," but states simply that the borrower can make claims for defects within a limited period of time. Drafters of disclaimers will have to find different ways of stating that the buyer expects and accepts construction at a different, lower standard than "workmanlike."

A dissenter argues, with some justification, in light of the hole in the opinion identified above, that these issues are far too broad, and their economic impact too uncertain, for courts to resolve them without armies of economists, building industry experts, safety engineers and consumer advocates. In other words, this issue is a problem for the legislature.

The dissent notes that the net impact of the court's efforts here might be to in fact degrade the quality of home construction in Texas, not to improve it.

Comment 1: The court's separation of the implied warranty in home construction into two constituent elements is very helpful to the analysis.

Further, the ruling on the waivability of the implied warranty of habitability is clear and consistent with the policy objectives behind that concept.

Comment 2: The editor has a cavil, as noted, about the uncertainty of the standards for waiver of the implied warranty of workmanlike construction. Recognizing waivers but holding them to strict standards has proven a difficult task for courts. Witness the Illinois decision cited above, which, in the editor's view, would have made more sense for all concerned if it had just denied the availability of waivers altogether.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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