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Is a Builder Liable for Construction Defects to a Homeowner Who is Not the Original Owner
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Published: August 24, 2011
Author: Robert Procter
The Wisconsin Builders Association Hot Line is a service provided for the Wisconsin Builders Association by the law firm of Axley Brynelson, LLP. Legal Hot Line Answers should be considered a general statement of applicable legal information. Given this format, it is impossible to fully address all potential legal issues which might apply in any particular situation. A determination of any individual's legal rights in a transaction can only be obtained after a complete analysis of the law and its applicability to the particular fact situation. Please contact the author of the article if additional information is needed, or private counsel, if legal advice is needed.
Is a general contractor that contracts with a developer to construct a residential dwelling (whether a condominium building or a single family residential house) liable to a third party that purchases the residential dwelling from the developer for alleged construction defects?
A: There are a number of assumptions that we will make to answer this question. First, we will assume that the general contractor is not also the developer. Second, we will assume that the general contractor did not provide a warranty to the third party that purchased the unit from the developer. Third, we will assume that the developer did not legally assign any warranty that the builder gave to the developer to the homeowner.
Assume that a developer hires a builder to build a ten unit condominium building. The developer is a limited liability company that accepts the completed building from the builder with a one year standard warranty. The developer then sells the completed condominium units to individual buyers using a standard form offer to purchase. There is no contract between the builder and the condominium unit buyers. After the developer finishes selling the units, the developer dissolves his or her limited liability company. A number of years pass and there is an alleged construction defect. The developer is no longer a viable entity, and the condominium unit owners cannot look to the developer to repair the alleged defect. However, the builder is still a viable entity so the unit owners (or the association) pursue a claim against the builder.
There are significant obstacles to the condominium unit owner (or the association) making such a claim against the builder. First, there is not a contract between the builder and the individual unit owner so the unit owner cannot claim that the builder breached the terms of the contract or the terms of the warranty. Second, without a valid contract claim, the unit owner would need to make either a negligence or strict liability claim against the builder. However, the Economic Loss Doctrine precludes a purchaser of a condominium unit from employing negligence or strict liability theories to recover from the builder loss which is solely economic (i.e., money damages). The reason for the Economic Loss Doctrine is that the purchaser has the power to allocate the risk of economic loss as part of his or her contract to purchase the unit. Thus, the courts are reluctant to allow persons that purchase products via contract other legal avenues to pursue claims outside of the terms of the contracts.
In other words, the courts have said that if you enter into a contract to purchase a product such as a house, then you need to look to the contract itself when alleging a claim for damages. In this case, the unit owner (or the association's) most valid claim is a contract claim against the developer.
This is not to say that some creative claims could not be made against a builder based on the specific facts of a situation. However, there would be significant hurdles for the homeowner to overcome in order to make the customary claims against the builder.
For more information about the Wisconsin Builders Association Hot Line, contact Robert Procter at 608.283.6762 or rprocter@axley.com.
Axley Brynelson is pleased to provide articles, legal alerts, podcasts and videos for informational purposes, but we are not giving legal advice or creating an attorney/client relationship by providing this information. The law constantly changes, and our publications may not be currently updated. Before relying on any legal information of a general nature, please consult legal counsel as to your particular situation. While our attorneys welcome your comments and questions, keep in mind that any information you provide us, unless you are now a client, will not be confidential.
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