Developing Issues in Utah Construction Defect Litigation

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Following the Utah Supreme Court’s decision in Davencourt at Pilgrim’s Landing Homeowners’ Association v. Davencourt at Pilgrim’s Landing, which clarified the law regarding the claims for which homeowner’s associations (HOAs) could sue developers and builders for construction defects, a number of lawsuits have been filed on behalf of HOAs throughout the state. These suits, which typically involve first and third-party actions and multiple defendants, have proved extremely complex and costly.

Privity

The Davencourt decision established that an HOA acting on behalf of homeowners can sue a developer or builder for breach of the implied warranty of workmanlike manner and habitability, but only where there is privity of contract between the parties. This requirement comports with Utah’s statutory scheme in construction defect cases which provides that “[a]n action for defective design or construction may be brought only by a person in privity of contract” as set forth in Utah Code Ann. § 78B-4-513(4). However, Davencourt’s privity requirement has led to some interesting rulings from trial courts that have either eliminated or limited the claims asserted by plaintiff HOAs. For example, one trial court held that the HOA could not establish privity of contract based on a provision in the HOA’s declaration stating that the HOA shall provide for exterior maintenance of the living units in the townhome development at issue. The HOA argued that the provision gave it authority to act on behalf of the homeowners with regard to any damage to association property, including damage to the exterior of living units due to alleged construction defects. The court found that the declaration did not contemplate the right of the HOA to sue third parties on behalf of the homeowners for damage to the living units and therefore did not provide either any authorization from the homeowners to pursue the breach of implied warranty claims at issue or any independent authority of the HOA to pursue such claims. The plaintiff HOA requested interlocutory review of this decision. In another case, the trial court found that a claim for breach of the implied warranty of workmanlike manner and habitability applied only to purchasers of new construction from the developer and not to subsequent purchasers. Accordingly, the court found that the plaintiff HOA could not establish privity with subsequent purchasers. These decisions emphasize the importance for plaintiff HOAs to ensure that they have the necessary authority to bring their claims prior to filing suit and for defendants to target discovery at determining whether a plaintiff HOA has such authority and standing to bring the claims being asserted as it may be possible to eliminate or at least curtail the claims.

Statute of Repose and Equitable Tolling

The time period that governs when a suit for a construction defect must be brought in Utah is found in Utah Code Ann. § 78B-2-225(3)(a), which provides that: “an action by or against a provider based in contract or warranty shall be commenced within six years of the date of completion of the improvement[.]” The Utah Supreme Court has established that Utah Code Ann. § 78B-2-225(3)(a) is a statute of repose. This means that Utah Code Ann. § 78B-2-225(3)(a) cuts off claims six years after “completion of construction” and it is not based of the “time of an injury.” Utah trial courts have applied these rulings and similarly found that Utah Code Ann. § 78B-2-225(3)(a) is a statute of repose and applies to the construction defect cases being brought by HOAs. Typically, courts have held that any claim against a developer, builder or subcontractor brought more than six years after the certificate of occupancy is issued for a given unit or home will be barred by the statute. Where Utah trial courts have differed in their decisions regarding the statute is in determining whether or not equitable tolling can be applied to toll the six-year repose period. Several trial courts have held that equitable tolling cannot apply to a statute of repose, because such a statute is not the same as a statute of limitations and creates an absolute bar not subject to tolling of any kind. At least one trial court, however, has held the exact opposite, finding that equitable tolling based on “exceptional circumstances” does apply under certain sets of facts. Where equitable tolling has been applied, the determination has turned on when a party had enough information to constitute sufficient notice that a potential defendant could be liable for the alleged construction defects and should be brought into the suit. The takeaway on this issue is that it is critical for a plaintiff to evaluate the basis for bringing in potential defendants as soon as possible, while for a defendant a critical issue is to obtain the documentation needed regarding completion dates as soon as possible in discovery to evaluate whether the statute may bar the plaintiff’s claims.

Breach of Fiduciary Duty

Recently, plaintiff HOAs and third-party plaintiff developers have begun asserting that breach of fiduciary duty claims by an HOA against a builder or developer can be passed through to third-party defendants via contract-based claims. Again, the basis for the breach of fiduciary duty claims lies in the Davencourt decision. A key issue in Davencourt was whether and how the economic loss doctrine should apply to negligence claims based on construction defects. The Utah Supreme Court made clear in Davencourt that the economic loss rule applied to construction defect claims. However, Davencourt did carve out a limited exception to the economic loss rule for breach of fiduciary duty tort claims brought by an HOA against a developer. It is via this limited exception to the economic loss rule that plaintiff HOAs and third-party plaintiff developers are now asserting that first-party breach of fiduciary duty claims against a developer or builder can be passed through to third-party defendants based on contractual breach of warranty and indemnity claims. Trial courts have taken differing positions on this issue. One trial court found that there was a link between breach of warranty claims for construction defects and breach of fiduciary duty claims for failure to set aside sufficient reserves to maintain and repair the units. In another case, the plaintiff HOA requested that the court reconsider a summary judgment ruling dismissing all claims against the third-party subcontractors, claiming the ruling should be reversed because the fiduciary duty claims passed through to the third-party defendants and had not been dismissed. The court upheld its prior ruling. This issue is continuing to play out in the trial courts and litigants should be aware of the pertinent arguments on both sides, particularly in the context of bringing and defending against summary judgment motions.

Conclusion

In sum, while it is likely these issues will eventually be clarified by appellate court decision, awareness of these developing issues can help guide owners, developers, general contractors, subcontractors and design professionals to best position themselves in these complex and specialized construction defect cases.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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