2012 VT 80


Long Trail House Condominium
Association v. Engerberth Construction, Inc.
(2011-345)
 
2012 VT 80
 
[Filed 28-Sept-2012]
 
NOTICE:  This opinion is
subject to motions for reargument under V.R.A.P. 40 as well as formal revision
before publication in the Vermont Reports.  Readers are requested to
notify the Reporter of Decisions by email at: JUD.Reporter@state.vt.us or by
mail at: Vermont Supreme Court, 109 State Street, Montpelier, Vermont
05609-0801, of any errors in order that corrections may be made before this
opinion goes to press.
 

2012 VT 80

 

No. 2011-345

 

Long Trail House Condominium
  Association


Supreme Court


 


 


     v.


On Appeal from


 


Superior Court, Windham Unit,


Engelberth Construction, Inc.


Civil Division


 


 


     v.


February Term, 2012


 


 


Morgan’s Roofing & Construction, et al.


 


 


 
John P. Wesley, J.

 
Hans G. Huessy
of Kenlan, Schwiebert &
Facey, P.C., Rutland, for Plaintiff-Appellant.
 
Robert R. McKearin, Shapleigh
Smith, Wm. Andrew MacIlwaine and Samuel Hoar, Jr. of
  Dinse Knapp & McAndrew, P.C., Burlington for Defendant-Appellee Engelberth
  Construction, Inc.
 
 
PRESENT:   Skoglund and
Burgess, JJ., and Kupersmith
and Davenport, Supr. JJ., and 
                    
Johnson, J. (Ret.), Specially Assigned
 
 
¶ 1.            
SKOGLUND, J.   This litigation stems from the
construction of a 143-unit condominium complex known as the Long Trail House at
Stratton Mountain, Vermont.  Plaintiff Long Trail House Condominium
Association appeals from the trial court’s order granting summary judgment to
defendant general contractor Engelberth Construction, Inc. on its complaint.
 The Association argues that the court erred in: (1) applying the economic
loss rule to bar its negligence claim; and (2) dismissing its breach of implied
warranty claim.  We affirm.
¶ 2.            
In granting judgment to Engelberth, the trial court relied on the
following undisputed facts.  In January 1997, Stratton Corporation and
Engelberth entered into a preconstruction agreement, which articulated
preconstruction terms and services that Engelberth would supply to
Stratton.  This included recommendations on construction feasibility,
consultation as to the selection of materials and equipment, assistance with
zoning requirements and permits, and cooperation with the “design team” to
provide valuable engineering services.  Engelberth specifically disclaimed
any “responsibility to ascertain that the Drawings and Specifications [were] in
accordance with applicable laws, statutes, ordinances, building codes, rules
and regulations,” and disclaimed responsibility for the design team’s designs,
errors, or omissions.  
¶ 3.            
In March 1998, the Stratton Corporation and Intrawest Corporation
(collectively “Stratton”) and Engelberth entered into a standard owner and
contractor form agreement with modified general conditions, outlining the scope
and terms of the project.  This contract explicitly stated that it represented
“the entire and integrated agreement between the parties hereto and
supersede[d] prior negotiations, representations or agreements, either written
or oral.”  The agreement provided that the contract documents “shall not
be construed to create a contractual relationship of any kind” between anyone
other than the owner and contractor.  
¶ 4.            
The Long Trail House Condominium Association was incorporated in March
1999.  Following completion of the construction project, it notified
Stratton of alleged defects.  Condominium owners had at first experienced
minor problems, such as water leakage.  Structural engineers, however,
found significant further damage that would likely lead to personal property
loss and personal injury if not promptly remediated.  This included:
(1) water penetrating exterior walls; (2) improperly supported
trusses, which could lead to roof collapse; (3) severe water damage to the
balconies, which could result in their collapse within a year; (4) unsupported
load-bearing walls that could collapse; and (5) improperly braced gable
end walls in the roof area of both the North and South building that could
collapse in a high wind event.  The Association asserted that Stratton was
responsible for repairing the damaged elements of the complex.  
¶ 5.            
In May 2007, Stratton, Intrawest, and the Association entered into a
“Settlement Agreement and Release of Claims” pursuant to which the parties
settled the Association’s design and construction defect claims for
$7,025,000.  The agreement required Intrawest to pursue a claim against
Engelberth “to recover part or all of the payment paid to the Association under
the Agreement.”  Stratton subsequently sued Engelberth, alleging that
Engelberth was responsible for the construction defects in the buildings, the
bulk of which were caused by water damage stemming from leaks throughout the
building as a result of alleged faulty workmanship.  As of March 2012, the
Stratton/Engelberth case was still in the discovery phase.  
¶ 6.            
The Association thereafter retained contractors to conduct extensive
remediation work.  This work cost approximately $1,500,000 more than the
settlement amount.  In October 2008, the Association sued Engelberth,
alleging that Engelberth was negligent in constructing the project and breached
express and implied warranties by failing to construct and repair the project
in a good workmanlike manner free of defects.  The defects alleged by the
Association mirrored those in Stratton’s lawsuit, and included additional
defects in the buildings’ HVAC and electrical systems.  
¶ 7.            
Based on these undisputed facts, the court concluded that Engelberth was
entitled to summary judgment in its favor.  As discussed in additional
detail below, it concluded that the Association’s negligence claim was barred
by the economic loss rule and that the absence of contractual privity was fatal to the warranty claims.  This appeal
followed. 
¶ 8.            
On review, we apply the same standard as the trial court.  Richart
v. Jackson, 171 Vt. 94, 97, 758 A.2d 319, 321 (2000).  Summary
judgment is appropriate when, taking all allegations made by the nonmoving
party as true, there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law.  V.R.C.P. 56(c); Richart, 171 Vt.
at 97, 758 A.2d at 321.  We conclude that summary judgment was
properly granted to Engelberth here.  
I. 
Negligence and the Economic Loss Rule
¶ 9.            
We begin with the Association’s negligence claim.  In its
complaint, the Association alleged that Engelberth owed it a duty to use
“professional care” in performing general contractor services and in
constructing the project, and that Engelberth could foresee with reasonable
certainty that the Association would be injured by its failure to do so. 
According to the Association, Engelberth was careless and negligent in the
performance of its duties, and failed to use the reasonable care, skill, and
ability ordinarily required of general contractors.  The Association
alleged that as a result of Engelberth’s negligence,
it incurred significant cost and expense to remedy the defects resulting from Engelberth’s failure to properly construct and/or repair
defects in construction of the project. 
¶ 10.         The
trial court concluded that the economic loss rule barred the Association’s
negligence claim.  We agree.  The economic loss rule “prohibits
recovery in tort for purely economic losses.”  EBWS, LLC v. Britly Corp., 2007 VT 37, ¶ 30, 181 Vt. 513, 928 A.2d 497.  The rule serves to maintain a
distinction between contract and tort law.  Id.  As we have
explained:
  
In tort law, duties are imposed by law to protect the public from harm, whereas
in contract the parties self-impose duties and protect themselves through
bargaining.  Thus, negligence actions are limited to those involving
unanticipated physical injury and claimants cannot seek, through tort law, to
alleviate losses incurred pursuant to a contract.  Id.
(citations omitted); see also Gus’ Catering, Inc. v. Menusoft
Sys., 171 Vt. 556, 558, 762 A.2d 804, 807 (2000) (mem.)
(“Negligence law does not generally recognize a duty to exercise reasonable
care to avoid intangible economic loss to another unless one’s conduct has
inflicted some accompanying physical harm, which does not include economic
loss.” (citation omitted)). 
 
¶ 11.         In
this case, the Association sought economic damages for Engelberth’s
alleged negligence.  As the trial court found, these damages consisted
almost entirely of the costs of repair that stemmed from the alleged faulty
construction, including: (1) replacement of certain components of the complex
that were properly installed and undamaged but which needed to be removed and
replaced as part of the remediation, such as siding; and (2) costs incurred in
relation to water damage to interior walls and painted surfaces inside specific
units.  Indeed, the amount sought represented the difference in market
value between the units as built and as they should have been built.  As
we stated in Heath v. Palmer, the remedy for purely economic losses
resulting from “the reduced value or costs of repairs of . . . construction
defects sound[s] in contract rather than tort.”  2006 VT
125, ¶ 15, 181 Vt. 545, 915 A.2d 1290 (mem.). 

¶ 12.         The
Association advances various reasons why the economic loss rule should not
apply in this case.  It first asserts that the rule does not apply unless
the parties share contractual privity. 
According to the Association, the economic loss rule should not “strip a
plaintiff of its tort remedies if the plaintiff has no other recourse and the
defendant owed the plaintiff a duty.”  It complains that it had no
opportunity to negotiate the allocation of the risks with Engelberth, and suggests
that it did not have an alternate remedy here, notwithstanding its settlement
with Stratton.  The Association also argues that this case falls within
the “professional services and/or special relationship” exception to the
economic loss rule.  Alternatively, it asserts that the rule is
inapplicable because there was a threat of imminent harm.
¶ 13.         We
find these arguments unpersuasive.  Privity, or lack thereof, is not the determining factor, nor are we
persuaded that the rule’s application turns on whether the parties had the
opportunity to allocate risks, as the Association suggests.  Instead, the
focus is more appropriately on duty in cases such as this one.  See
generally S. Barrett, Jr., Recovery of Economic Loss in Tort for
Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891, 895 (1989)
(“The crux of the [economic loss] doctrine is not privity
but the premise that economic interests are protected, if at all, by contract
principles, rather than tort principles.”); see also Gus’ Catering, Inc.,
171 Vt. at 558, 762 A.2d at 807.  The exceptions to the economic loss rule
advanced by the Association also turn on the existence of a duty separate and
apart from a contractual duty.  We have recognized, for example, that
there “might be recovery for purely economic losses in a limited class of cases
involving violation of a professional duty.”  EBWS,
2007 VT 37, ¶ 30 (citation omitted).  To fit within this
exception, the parties must have “a special relationship, which creates a duty
of care independent of contract obligations. . . . [T]he key is not
whether one is licensed in a particular field . . . ; rather, the determining
factor is the type of relationship created between the parties.”  Id. ¶ 31.
¶ 14.         We
have applied the economic loss rule in the absence of contractual privity and the significance of a duty is apparent in those
cases.  In Springfield Hydroelectric Co. v. Copp,
172 Vt. 311, 312, 779 A.2d 67, 69 (2001), for example, the owners of commercial
hydroelectric facilities sued former employees of the Vermont Power
Exchange.  They alleged that the employees negligently administered a
power purchase agreement, which resulted in economic damages.  Id. 
Rather than privity (which was lacking), we explained
that “[t]he underlying analysis turns on whether there is a duty of care independent
of any contractual obligations.”  Id. at 316, 779 A.2d at 71-72
(citations omitted).  
 
Even where courts have permitted parties recovery for economic loss, they have
required a special relationship between the alleged tortfeasor
and the individual who sustains purely economic damages sufficient to compel
the conclusion that the tortfeasor had a duty to the
particular plaintiff and that the injury complained of was clearly foreseeable
to the tortfeasor.  Id.
at 316, 779 A.2d at 71 (quotation omitted).  
 
In Springfield, we found
that “neither privity of contract, nor a special
relationship, exist[ed]
between [the parties] which would permit a finding of duty on the part of
[defendants].”  Id., 779 A.2d at 72. 

¶ 15.         We
conducted a similar analysis in Hamill v.
Pawtucket Mutual Insurance Co., 2005 VT 133, 179 Vt. 250, 892 A.2d
226.  In that case, we considered whether an insured homeowner, Hamill, whose residence allegedly became uninhabitable due
to water damage, had a cause of action in negligence against independent
adjusters hired by his insurer to investigate the insured’s initial
claim.  As in Springfield, there was no contractual relationship
between the parties.  We concluded that the adjusters owed no cognizable
legal duty to the homeowner with respect to the economic damages claimed, and
that the homeowner’s only remedy was against his insurer.  
¶ 16.         As in
the instant case, Hamill asserted that because he was
a foreseeably affected third party, the adjusters
owed him a legal duty.  He maintained that no sound public policy
considerations justified denying his common-law negligence action against the
defendant adjusters.  We rejected these arguments.  We explained that
a cognizable legal duty in tort “depends on a variety of public policy
considerations and relevant factors,” where foreseeability
is but one factor to be considered.  Id. ¶ 6 (citing Charleston
Dry Cleaners & Laundry, Inc. v. Zurich Amer. Ins. Co., 586 S.E.2d 586,
588 (S.C. 2003) (“Foreseeability of injury, in
and of itself, does not give rise to a duty.”)).  “Ultimately,
whether a duty exists is a question of fairness that depends on, among other
factors, the relationship of the parties, the nature of the risk, and the
public interest at stake.”  Id.  We stated that one
“significant factor in determining whether there is a cognizable duty . . . is whether the plaintiff seeks
damages for only economic loss.”  Id. ¶ 7. 

¶ 17.         In Hamill, we found that the homeowner was “seeking
recovery for losses stemming from the failure of his expectations regarding
insurance coverage,” which constituted damages for economic loss generally
available under contract law, but not tort law.  Id.
¶ 9.  We found no cognizable legal duty under those circumstances,
concluding that public policy did not favor the creation of a separate duty on
the part of independent adjusters that would subject them to common-law tort
actions by insureds who have suffered economic loss
as the result of allegedly mishandled claims.  Id.
¶ 14.  
¶ 18.         The
Association argues that Hamill is
distinguishable.   It asserts that the holding in Hamill
is limited to the circumstances presented, namely whether an insured has a
right to sue an independent claims adjuster.  We reject this narrow
construction.  While certainly the facts differ from the instant case, Hamill stands for the principle that the existence
of a duty is a prerequisite to recovery of economic damages in a negligence
case.  That critical element is lacking in the instant case, as discussed
further below.  While the absence of a duty is fatal to the Association’s
claim, we also reject the notion that the Association was denied a
remedy.  The Association recovered damages for construction defects from
Stratton.  We find nothing unfair about the application of the economic
loss rule here, and in light of our case law, we reject the Association’s
assertion that contractual privity must be present
before the economic loss rule applies.  
¶ 19.         We
similarly reject the Association’s argument that the “professional services”
exception to the economic loss doctrine applies here.  Indeed, we have
twice rejected the notion that contractors owed a special duty of care for
purposes of this exception, separate and apart from their contractual
obligations.  See, e.g., EBWS, 2007 VT 37, ¶ 29 (rejecting argument
that designing and building a creamery was a professional service akin to
architecture that should fall within a professional-services exception to the
economic loss rule); Heath, 2006 VT 125, ¶ 15 (finding claim of
“contractor’s negligence” in construction of a new home barred by the economic
loss rule).
¶ 20.         This
case is very similar to EBWS.  As indicated above, the plaintiff in
EBWS sued the defendant for alleged defects in the construction of a
creamery.  The plaintiff sought solely economic damages, arguing that the
defendant’s work was an exception to the economic-loss rule because it was a
professional service.  We rejected this argument.  We recounted that
in a prior decision, we had found it significant for purposes of the exemption
that the defendants “did not hold themselves out as providers of any licensed
professional services,” notwithstanding the fact that the defendants
“maintained complex and highly specialized responsibilities.”  EBWS, 2007 VT 37, ¶ 30 (citing Springfield, 172 Vt.
at 316-17, 779 A.2d at 72).  Nonetheless, we clarified that “the
key is not whether one is licensed in a particular field,” but “rather, the
determining factor is the type of relationship created between the
parties.”  Id. ¶ 31.  While “a
license may be indicative of this relationship,” we explained, “it is not
determinative.”  Id.  
¶ 21.         We
found no “special relationship” between the parties in EBWS.  As we
explained, the defendant “presented itself as a construction contractor and not
as a provider of a specialized professional service,” and the plaintiff “did
not rely on [the defendant] to provide it with a professional service.”  Id. ¶ 32.  It followed that the plaintiff “paid
for the services of a contractor not a professional architect.”  Id.
 We thus concluded that there was no special duty of care created beyond
the terms of the construction contract and that no exception to the economic
loss rule applied.  Id.; see also Heath, 2006 VT 25, ¶¶
15-16 (concluding in case where plaintiffs alleged “contractor’s negligence”
that the “plaintiffs’ remedy for the purely economic losses resulting from the
reduced value or costs of repairs of the construction defects sounded in
contract rather than tort,” and finding “[t]he limitation to contract remedies
in this context [to be] the general rule in most other jurisdictions”) (citing
cases upholding dismissal of negligence claims for purely economic losses
resulting from alleged construction defects).  
¶ 22.         We
reach a similar conclusion here, putting aside the question of whether privity is required before the “professional services”
exception may apply.  Like the defendant in EBWS, Engelberth
presented itself as a contractor and it operated as a contractor, not as a
provider of a specialized professional service.  We are not persuaded that
the reference to “value engineering” or the other services identified by the
Association in the preconstruction agreement changes this result.  Indeed,
as the trial court pointed out, the actual construction agreement between
Engelberth and Stratton specifically superseded the preconstruction agreement. 
In any event, both agreements make plain that Engelberth was hired to perform
the services of a contractor, not an engineer, architect or other
professional.  We note that the trial court did not base its decision
solely on the fact that there was an architect involved in the project, as the
Association suggests.  The court merely observed that both the
preconstruction agreement and the later agreement referenced third-party
architects/design teams that were expected to participate in the project, which
reinforced its conclusion that Engelberth, in fact and by contract, functioned
as a general contractor.  We agree.  
¶ 23.         In a
somewhat related vein, the Association argues that it was “foreseeable” that
its members would take ownership of the project.  Accordingly, they
maintain, they had a special relationship with Engelberth, and Engelberth had a
duty to exercise care in the provision of professional services it contracted
to provide.  As we have explicitly held, however, foreseeability
alone is not sufficient to warrant the imposition of a professional duty. 
See Hamill, 2005 VT 133, ¶ 6; see also S.
Barrett, Jr., supra, at 908 (“Under traditional negligence concepts,
purely economic losses are outside the scope of recovery regardless of how
foreseeable those losses are.”).  We find no basis to distinguish this
case from EBWS.  
¶ 24.         We
similarly reject the Association’s assertion that the economic loss rule does
not apply because there was a “threat of imminent harm.”  Citing Council
of Co-Owners Atlantis Condominiums, Inc. v. Whiting-Turner Contracting Co.,
517 A.2d 336, 341-42 (Md. 1986), the Association argues that a contractor
should be liable for purely economic losses “where the defective condition
complained of creates an unreasonable risk of harm to persons or property.” In Atlantis
Condominiums, the Maryland court held that the defendant architects and
builders had a duty “to use due care in the design, inspection, and
construction of [a] condominium[, which] extended to
those persons foreseeably subjected to the risk of
personal injury created . . . by a latent and unreasonably dangerous condition
resulting from their negligence.”  Id. at 343-44. 
The court’s holding did not encompass an imminent risk of harm to property
only.  See id. at 344 (stating that court
was not required to, and did not, “reach the question of whether a risk of
property damage alone will support the recognition of a tort duty”).  The
court found that there must be a risk of death or personal injury before it
would allow an action to recover the reasonable cost of correcting the
dangerous condition.  Id. at 345, n.5 (stating that “conditions
that present a risk to general health, welfare, or comfort but fall short of
presenting a clear danger of death or personal injury will not suffice”).
 
¶ 25.         In Atlantis
Condominiums, the plaintiffs alleged that certain latent construction
defects created a fire hazard that presented a threat to the owner’s and
occupants’ safety and to their personal and real property.  After finding
that a duty existed despite the absence of privity,
the court concluded that a negligence action could be maintained where only the
risk of personal injury existed, but no actual physical injury had
resulted.  Id. at 344.  It reasoned
that a party should not have to wait to suffer actual physical injury before
recovering damages for the reasonable cost of correcting the dangerous
condition.  Id. at 338, 345.  
¶ 26.         We
find the Maryland court’s approach inconsistent with basic negligence
principles and our application of the economic loss rule, and we decline to
follow it.  We require actual injury, not simply risk of harm, before one
can recover in negligence.  See, e.g., Zukatis
v. Perry, 165 Vt. 298, 301, 682 A.2d 964, 966 (1996) (“Common law
negligence has four elements: a legal duty owed by defendant to plaintiff, a
breach of that duty, actual injury to the plaintiff, and a causal link
between the breach and the injury.”)(emphasis added));
see also Crowell Corp. v. Topkis Constr. Co.,
280 A.2d 730, 731 (Del. Super. Ct. 1971) (rejecting argument that owner of
building should be able to recover economic damages due to alleged negligent
workmanship to cure allegedly “dangerous condition . . . before a catastrophe
of some kind takes place”); W. Prosser & Keaton, The Law of Torts § 92, at
659 n.15 (5th ed. 1984) (“Tort liability is in general limited to situations
where the conduct of the builder causes an accident out of which physical harm
occurs to some person or tangible thing other than the building itself that is
under construction.”).  To hold otherwise would vastly expand tort
liability.  
¶ 27.         This
sentiment was echoed in Paquette v. Deere & Co., 168 Vt. 258, 719
A.2d 410 (1998).  In Paquette, the owners of an allegedly defective
and unsafe motor home sued the manufacturer for damages due to the reduced
value of the product.  Their claim rested on the doctrine of strict
products liability as embodied in Restatement (Second) of Torts § 402A, which
this Court has adopted.  See Paquette, 168 Vt. at 260, 719 A.2d at
412 (citing Restatement (Second) of Torts § 402A(1)
(1965) (One who sells any product in defective condition unreasonably dangerous
to user or user’s property is “subject to liability for physical harm thereby
caused to the ultimate user . . . or to his property.” (emphasis
added)).  We noted that “[s]ome jurisdictions
have allowed recovery for damage to the product itself, though most often only
if the loss occurred in the context of a dangerous situation such as an
accident,” but “[v]ery few jurisdictions . . . have
allowed recovery based on claims of commercial or economic loss.”  Id.
(citing authorities including 2 M. Madden, Products Liability § 22.23, at
340-41 (2d ed. 1988), which states that economic loss, including damage to
product itself unaccompanied by injury to person or damage to other property,
is generally not recoverable in products liability actions).  
¶ 28.         While
we allowed for the possibility that under certain circumstances, the Court
might permit recovery for damages resulting from physical harm only to the
defective product itself, we found that the owners in Paquette were not
seeking damages for any physical harm.  Instead, they were seeking damages
for purely economic losses—the reduced value of the motor home resulting from
its defective wiring system and related problems.  Similar to the instant
case, the plaintiffs argued that it was bad public policy to prohibit them from
bringing their products liability claims because it would encourage people to
operate dangerously defective vehicles until they suffered physical harm as the
result of an accident.  We found this argument unpersuasive.  “If we
were to allow recovery for purely economic losses in products liability actions
absent any physical harm based solely on claims that an alleged defect could
have endangered persons or their property, warranty law would, in effect,
be subsumed into tort law.”  Id. at 264, 719 A.2d at 414 (emphasis
added).  
¶ 29.         We
reach an analogous conclusion here.  The Association has suffered only
economic harm.  To allow it to recover damages for this harm based on a
theory that the building defects “could have” caused an accident would subvert
the actual injury requirement and provide an end run around the economic loss
rule.  As the Crowell court observed, “[t]he great weight of
authority does not yet permit tort recovery . . . in the absence of physical
injury to a person or dramatic incident such as accident, collapse or
explosion.”  280 A.2d at 732.  “Though negligence may endanger the person or property of another,
no actionable wrong is committed if the danger is averted.”  Id.
(quotation omitted).  We note, moreover, that in this case the Association
did recover damages from Stratton in 2007, which allowed it to fix the defects
it apparently considered most dangerous.  We reject the Association’s
claim that it should be allowed to recover economic damages pursuant to its
negligence claim.
II.
Implied Warranty Claims
¶ 30.         We
turn next to the Association’s implied warranty claims, which rest on the
construction contract between Engelberth and Stratton.  As noted above,
the trial court dismissed the Association’s claim that Engelberth breached
implied warranties of habitability and good workmanship due to the lack of
contractual privity between Engelberth and the
Association.  On appeal, the Association asserts that these implied
warranties were included as part of the contract between Engelberth and
Stratton, and that it is entitled to bring this cause of action because such
warranties “pass from a developer to a subsequent purchaser.”  The
Association cites Meadowbrook Condominium Ass’n v.
South Burlington Realty Corp., 152 Vt. 16, 565 A.2d 238 (1989), as support
for this proposition.
¶ 31.         We
reject this argument.  Our case law plainly contemplates the existence of
contractual privity before a breach of implied
warranty claim can be raised.  We first recognized a cause of action for
breach of an implied warranty of habitability and good workmanship in Rothberg
v. Olenik, 128 Vt. 295, 305, 262 A.2d 461, 467
(1970).  In that case, the plaintiffs had entered into a contract with the
defendant for the sale of a new home, and the plaintiffs subsequently
discovered structural defects in the foundation.  Id. at 296, 262 A.2d at 462.  We rejected the defendant’s argument
that the ancient doctrine of caveat emptor—let the buyer beware—defeated the
plaintiffs’ action.  Instead, after reviewing numerous cases from other
jurisdictions, we concluded that in cases involving the sale of a new house by
a builder-vendor to a purchaser, the law would imply a warranty that the house
was built in a good and workmanlike manner and was suitable for
habitation.  Id. at 305, 262 A.2d at 467; see also Smith v. Foerster-Bolser Constr., Inc., 711 N.W.2d 421, 425-26
(Mich. Ct. App. 2006) (concluding that implied warranty of habitability applies
only to new homes sold as part of a real estate transaction by
builder-vendors, and that the underlying rationale for implying such warranty
is to protect new home purchasers, who often do not have bargaining leverage
with the builder-vendor, from the harshness of the caveat emptor rule.).
 It is through the act of selling the house that such warranties
arise.    
¶ 32.         We
reiterated this holding in Meadowbrook, adding that “the law will
recognize an implied warranty only with respect to defects that were latent at
the time of purchase.”  152 Vt. at 19, 565 A.2d at 241 (emphasis
added).  Like Rothberg, the plaintiff in Meadowbrook, a
condominium association, brought suit for breach of implied warranties after
discovering latent defects in its common areas.  As in Rothberg,
the builder-developer in Meadowbrook actually sold the
condominium units at issue to the unit owners and it thus shared contractual privity with them.  See id. at
18, 565 A.2d at 239.  Privity was also present
in Bolkum v. Staab,
133 Vt. 467, 470, 346 A.2d 210, 211-12 (1975), another case where the
purchasers of a newly constructed house brought an action against the vendors
for breach of implied warranty against structural defects.  
¶ 33.         The
Association cites no specific language in Meadowbrook to show that the
implied warranties of good workmanship and habitability “pass from a developer
to a subsequent purchaser” in the absence of contractual privity,
and we find none.[1] 
The existence of implied warranties in these cases, and the rationale underlying
them, are founded on a sale, and there was no sale between Engelberth and the
Association here.  See id. at 470, 346 A.2d at 211 (stating that
implied warranty against structural defects in sale of a newly constructed
house “arises from the business of selling, rather than the business of
manufacture”); see also Kinney v. Goodyear Tire & Rubber Co., 134
Vt. 571, 576, 367 A.2d 677, 680 (1976) (stating that where there is no
contractual relationship between the parties, claim for breach of express
warranty would not lie).
¶ 34.         The
dissent argues that there is no logical or equitable reason to deny recovery to
the Association as a subsequent purchaser notwithstanding the lack of
contractual privity between Engelberth and the
Association.  However “logical” that concept may be, the cases cited in
support involve single-family homeowners and a builder-vendor and all stress
the importance of the “reasonableness” of the time from construction to
discovery of latent defects and apply a statute-of-limitations overlay. 
Though raised in the answer to the complaint, the decision in this case neither
addressed the latent nature of any defect as regards to when the Association
assumed ownership, nor did it look to the statute-of-limitations defense raised
below.  The larger problem left unaddressed by the dissent is the economic
exposure that would result from elimination of the privity
requirement.  The cases cited are all single plaintiff cases.  Here, Engleberth Construction is already being sued by Stratton. 
This Court will not create an infinite implied warranty on the record in this
case.
¶ 35.         The
Association’s warranty remedy lies against the entity that sold it the
condominium units and implicitly warranted through the sale that the units were
built in a good and workmanlike manner and that they were suitable for
habitation.  Its remedy does not lie against Engelberth.  In reaching
our conclusion, we do not find it useful to discuss provisions of the Uniform
Commercial Code, cited by the Association, as we are not here dealing with the
sale of moveable goods or indeed, with any sale at all between Engelberth and
the Association.[2] 

Affirmed.

 
 


 


FOR THE COURT:


 


 


 


 


 


 


 


 


 


 


 


Associate
  Justice

 
¶ 36.         KUPERSMITH,
Supr. J., Specially Assigned, dissenting.  Oliver
Wendell Holmes famously observed that it was “revolting to have no better
reason for a rule of law” than its ancient lineage and worse still “if the grounds
upon which it was laid down have vanished . . . and the rule simply persists
from blind imitation of the past.”  O. Holmes, The
Path of the Law, 10 Harv. L. Rev. 457, 469
(1897).  The privity requirement to which the
Court today adheres falls, in my view, in this category.  Courts and
commentators alike have observed that any reasons for allowing new home
purchasers to recover from builder-vendors for breach of the implied warranty
of workmanship while denying the same protection to a subsequent purchaser have
long since vanished; adherence to the rule merely perpetuates an arbitrary
distinction, promotes poor social policy, and results in economic
injustice.  That the subsequent purchaser here managed to obtain a partial
settlement from the initial purchaser before suing the builder-vendor provides
no sound basis for concluding otherwise.  Accordingly, I respectfully
dissent from that portion of the Court’s decision affirming summary judgment
for Engelberth on the implied warranty claim.[3]
¶ 37.         In Rothberg
v. Olenik, 128 Vt. 295, 262 A.2d 461 (1970), the
seminal Vermont decision recognizing an implied warranty against structural
defects in the construction of new homes, the Court concluded that the
venerable rule of caveat emptor had no place in a modern market economy. 
“Conditions have radically changed since the origin of the common law
rule.  Homes are being constructed on a large scale by persons engaged in
the building business for the purpose of selling them to individual
homeowners.  The ordinary purchaser is in not in a position to discover a
latent defect by inspection, no matter how thoroughly his scrutiny may be,
because usually he lacks sufficient familiarity with the complexities of
building construction and the intricacies of applicable
regulations.”   Id. at 301, 262 A.2d at 465
(quotation omitted).  Noting that this and other courts had
recognized an implied warranty of merchantability in the sale of goods, and
finding “no rational doctrinal basis” for differentiating between the sale of a
new home and a car or other manufactured product, the Court ruled that “the law
will imply a warranty against structural defects” in the sale of new
homes.  Id. at 305, 362 A.2d at 467. 
The vast majority of states today recognize a similar warranty of quality or
workmanship.  See L. Libertucci, Comment, Builder’s
Liability to New and Subsequent Purchasers, 20 Sw. U. L. Rev. 219, 223
(1991) (noting that most states “have abolished caveat emptor in favor of an
implied warranty of quality for the purchaser of a new
home”).         
¶ 38.         The
Association today asks the Court to extend the logic of Rothberg and
permit subsequent purchasers of homes to recover for breach of the implied
warranty of good workmanship.  As noted, many courts and commentators have
endorsed this additional step.  See Speight v. Walters Dev. Co.,
744 N.W.2d 108, 112 n.2 (Iowa 2008) (listing nineteen state court decisions
allowing recovery by subsequent purchasers); see generally S. O’Brien, Note, Caveat
Venditor: A Case for Granting Subsequent Purchasers a
Cause of Action Against Builder-Vendors for Latent Defects in the Home, 20
J. Corp. L. 525, 527, 530 (1995) (observing that the “increasing trend is to
recognize a cause of action for subsequent home buyers” and that predicating
recovery “on whether the plaintiff was the original or subsequent purchaser . .
. is unjust and illogical”); Libertucci, supra,
at 219 (noting that the “current trend” is to extend implied warranty
protection to subsequent purchasers and concluding that “[p]ublic
policy demands that builder-vendors be held liable to both new and subsequent
purchasers for hidden defects in housing”).
¶ 39.         The
principal doctrinal objection to affording subsequent purchasers the same
protection as new-home purchasers is the lack of contractual privity.  This is the ground cited by the majority
here.  Many courts have recognized, however, that the implied-warranty
obligation is one imposed by operation of law, and thus contractual privity between the parties is no more essential in this
context than in product liability.  See O’Brien v.
Comstock Foods, Inc., 125 Vt. 158, 160-61, 212 A.2d 69, 70-71 (1965)
(explaining that implied warrant of merchantability is “imposed by law . . .
apart from considerations entirely contractual” and thus rejecting “illogic and
injustice” of applying contractual privity to
restrict liability).  As the Iowa Supreme Court has explained, “the
implied warranty of workmanlike construction is a judicial creation and does
not, in itself, arise from the language of any contract between the
builder-vendor and the original purchaser.”  Speight, 744 N.W.2d at 114.  Thus, “there is no contractual
justification for limiting recovery to the original purchaser.”  Id. 
The Illinois Supreme Court reached a similar conclusion, observing that, while
the implied warranty “has roots” in the contract of sale, it is a “judicial
innovation that has evolved” to protect home purchasers, “exists
independently,” and thus “[p]rivity of contract is
not required.”  Redarowicz v. Ohlendorf, 441 N.E.2d 324, 330
(Ill. 1982). 
¶ 40.         Viewed
in this light, there is no logical or equitable reason to deny recovery to a
subsequent purchaser who has no more opportunity to scrutinize the methods and
standards used in constructing their home than the original buyer, and who must
rely to the same extent on the knowledge and experience of the
builder-vendor.  Many courts have therefore concluded that the mere
fortuity of an intervening owner—often, as here, for only a short time—provides
no basis for denying a home buyer the protection afforded by the implied
warranty of good workmanship.  See, e.g., Redarowicz,
441 N.E.2d at 330 (“The compelling public policies underlying the implied
warranty of habitability should not be frustrated because of the short
intervening ownership of the first purchaser.”); Speight, 744 N.W.2d at
113 (“[T]he public policy justifications supporting our decision to recede from
the doctrine of caveat emptor in the sale of new homes by builder-vendors
equally apply to the sale of used homes to subsequent purchasers.”); Lempke v. Dagenais,
547 A.2d 290, 294 (N.H. 1988) (“The mitigation of caveat emptor should not be
frustrated by the intervening ownership of the prior purchasers.”); Aronsohn v. Mandara,
484 A.2d 675, 680 (N.J. 1984) (“The contractor should not be relieved of
liability for unworkmanlike construction simply
because of the fortuity that the property on which he did the construction has
changed hands.”); Terlinde v. Neely,
271 S.E.2d 768, 770 (S.C. 1980) (holding that “[t]he only logical application”
of the principles underlying the implied warranty of workmanship requires a
holding that it “extends to subsequent home purchasers for a reasonable amount
of time”); Sewell v. Gregory, 371 S.E.2d 82, 85-86 (W. Va. 1988)
(holding that all of the reasons for recognizing an implied warranty of
workmanship in the sale of a new home “apply with equal strength to used
homes”); Moxley v. Laramie Builders, Inc.,
600 P.2d 733, 736 (Wyo. 1979) (“[A]ny reasoning which
would arbitrarily interpose a first buyer as an obstruction to someone equally
as deserving of recovery is
incomprehensible.”).       
¶ 41.         A
more practical objection to extending implied-warranty protection to a
subsequent owner is the concern that it might expand the risks for
builder-vendors beyond those for which they contracted, and ultimately increase
the costs of construction.  The concern, however, is unfounded.  As
the New Hampshire Supreme Court succinctly explained, since “[t]he builder
already owes a duty to construct the home in a workmanlike manner . . .
extension to a subsequent purchaser, within a reasonable time, will not change
this basic obligation.”  Lempke, 547 A.2d
at 295 (quotation omitted); see also Speight, 744 N.W.2d at 114 (“The
builder-vendor’s risk is not increased by allowing subsequent purchasers to
recover for the same latent defects for which an original purchaser could
recover.”); Keyes v. Guy Bailey Homes, Inc., 439 So. 2d 670, 673 (Miss.
1983) (reasoning that builder “already owes a duty to construct the home in a
workmanlike manner” so that extension of liability to subsequent home purchaser
will require “no greater effort [by]. . . the builder to protect himself”); Nichols
v. R.R. Beaufort & Assocs., 727 A.2d 174, 180 (R.I. 1999) (concluding
that “allowing subsequent owners to maintain a similar cause of action . . .
will not drastically enlarge this basic obligation of the home builder”). 
The risk is also clearly one that builder-vendors should foresee.  As the
Illinois Supreme Court has observed, “[w]e are an increasingly mobile people”
and a builder-vendor should therefore “know that a house he builds might be resold
within a relatively short period of 

time and
should not expect that the warranty will be limited by the number of days that
the original owner chooses to hold onto the property.”  Redarowicz, 441 N.E.2d at 331.     

¶ 42.         Most
courts, moreover, have limited a builder-vendor’s exposure by requiring that
claims for latent defects be brought within a reasonable period of time after
completion of the construction.  See, e.g., Lempke,
547 A.2d at 297 (“The implied warranty of workmanlike quality for latent
defects is limited to a reasonable period of time.”); Nichols, 727 A.2d
at 181-82 (holding that, to avoid unlimited exposure, “we restrict the coverage
of the implied warranties  .  .  . to
those latent defects that subsequent owners discover within a reasonable period
of time after these home contractors have substantially completed their work”);
Terlinde, 271 S.E.2d at 769 (stating that
“[t]he length of time for latent defects to surface . . . should be controlled
by the standard of reasonableness”); Moxley,
600 P.2d at 736 (holding that a home builder’s implied warranty “extends to
subsequent purchasers for a reasonable length of time”).  The same rule
applies in Vermont for initial home buyers, and would apply with equal force to
subsequent purchasers.  See Heath v. Palmer, 2006 VT 125, ¶ 7, 181
Vt. 545, 915 A.2d 1290 (mem.)
(noting that “the general rule is that the duration of
the implied warranty of habitability and good workmanship is determined by a
standard of reasonableness” (quotation omitted)).    
¶ 43.         In
holding that the law will imply a warranty against structural defects to
protect the purchaser of a new home, this Court explained that its duty was to
keep “common law principles abreast with the times” and to reject those “[a]ncient distinctions which make no sense in today’s society
and tend to discredit the law.”  Rothberg, 128 Vt. at 305, 262 A.2d at 467.  That same duty today impels the
rejection of privity as a basis for denying the
equivalent protection to a subsequent purchaser of the same
home.    
¶ 44.         Accordingly,
I would reverse the summary judgment in favor of Engelberth on the implied
warranty claim. 
¶ 45.         I am
authorized to state that Justice Johnson joins this dissent.  

 


 


 


 


 


Superior Judge, Specially
  Assigned


 





[1] 
The Association also cites a trial court order in Smiel
v. Cardinal Builders, LLC, No. 236-5-06 Rdcv,
2008 WL 4829420 (Vt. Super. Ct. Aug. 7, 2008), as support for
this proposition.  The trial court ruling is not binding on this
Court, but in any event, we find nothing in Smiel
to support the Association’s position.  Like Meadowbrook, Smiel involved a breach of contract claim between a
vendor and a purchaser.  We are equally unpersuaded by Beachwalk
Villas Condominium Ass’n, v. Martin, 406 S.E.2d
372, 374 (S.C. 1991), also cited by the Association, to support its assertion
that lack of privity is not fatal to a breach of
implied warranty claim.  This case is inconsistent with our case law
concerning implied warranty claims discussed above.
 


[2] 
We recognize that there is “an increasing trend” among state courts to
recognize a cause of action by a subsequent home purchaser against a
builder/vendor for breach of the implied warranties of workmanship and
habitability.  S. O’Brien, Note, Caveat Venditor:
A Case for Granting Subsequent Purchasers a Cause of Action Against
Builder-Vendors for Latent Defects in the Home, 20 J. Corp. L. 525, 530
(1995).  Here, however, the record shows that the Association entered into
a significant settlement agreement with Stratton, and we need not, therefore,
consider whether the privity requirement should be
abrogated in circumstances where the purchaser would otherwise lack any
meaningful legal or financial recourse.    


[3] 
While my dissent is limited to the contract/warranty issue, I note that a
number of jurisdictions have also extended a tort recovery to subsequent home
purchasers on the basis that builder-vendors owe them the same duty of care as new
purchasers, and that the so-called “economic loss” rule serves no sound policy
purpose.  See, e.g., A.C. Excavating v. Yacht Club II Homeowners Ass’n, 114 P.3d 862, 864 (Colo. 2005) (holding that
economic loss rule did not bar negligence action by homeowners against
subcontractor who owed independent duty of care); Navajo Circle, Inc. v.
Dev. Concepts Corp., 373 So. 2d 689, 691-2 (Fla. Dist. Ct. App. 1979)
(holding that condominium association could maintain negligence action against
project architect and  contractor).  In
light of the Court’s consistent adherence to the economic loss rule, however, I
confine my dissent to the implied-warranty issue, which this Court has not
addressed in the context of subsequent home
purchasers.        



