McTexLaw McPherson and Associates Real Estate Asset Protection Law Firm Attorney

If You're in Construction, You're Now in the Insurance Business Too

Seven individuals in Texas-the Malignant Seven-just re-wrote Texas law in a huge way. These individuals are not members of our Legislature, they are Texas Supreme Court justices. And they just made building anything much more risky for the builder. This decision has the potential to infect and cripple builders all over this state like a cancer.

Here are the basic rulings by the Malignant Seven:

the implied warranty of habitability This warranty requires the builder to provide a house that is safe, sanitary, and otherwise fit for human habitation. It protects new home buyers from conditions that are dangerous, hazardous, or detrimental to their life, health or safety. This focuses on the state of the completed structure, and it is a form of "strict liability." Either the completed structure is habitable, or it isn't, and if it isn't, no matter why, the builder is liable. This warranty cannot be waived except to the extent that defects are "adequately disclosed." In other words, the builder must disclose to a buyer any defective condition before a waiver of that condition will be effective. Buyers can only waive what they know they have to waive.
the implied warranty of good workmanship This warranty requires the builder to construct the home in the same manner as would a generally proficient builder engaged in similar work and performing under similar circumstances. This focuses on the builder's conduct, and applies if the contract does not have enough detail about how the builder is to perform. In other words, while it is not waivable, it can be "superceded" by a written contract IF the written contract is specific enough about how the construction will be performed.

The court applied this rule retroactively against Centex, thereby voiding the waivers obtained in express warranties in hundreds of thousands of home sales over decades. Do you sympathize with Centex yet? Keep reading, because it gets worse.

How Did We Get Here?

Read all the statutes passed by our Legislature that you want, you won't find either the warranty of habitability or the warranty of good workmanship in any of them. The Texas courts made these two warranties up back in 1968, in Humber v. Morton, 426 S.W.2d 554, 555 (Tex. 1968). Fourteen years later, in 1982, the Texas Supremes held that these two warranties COULD be waived by clear language, in G-W-L, Inc., v. Robichaux, 643 S.W.2d 392, 393 (Tex. 1982). Unfortunately, in 1987 the Texas Supremes at that time cast some doubt on that waiver holding, in Melody Home Manufacturing, Inc., v. Barnes, 741 S.W.2d 349, 355 (Tex. 1987). And that's where it all stayed for 34 years, until 2002, with this Centex case.

Listen to Justice Hecht discuss the meaning of time in his dissent:

It is certainly this Court's prerogative to expound the common law of Texas, and toward that end, to determine sound legal policy. But the responsible exercise of this prerogative can never be grounded in the personal views of those who happen to be serving on the Court at that time. The contrary position, stated by Justice Mauzy in Melody Home [in 1987], has been rejected by the people of Texas in judicial elections since.

As an aside, this is what we call an "active judiciary," something Texas was once known for, but not so much now. "Conservatives," including President Bush, want judges that interpret law enacted by the Legislature, not judges that make up laws as though they are the Legislature. We have three branches of government, each with a different function. This is basic U. S. Government 101. But "judicial activists" want judges to do exactly this.

So what do you call a judicial activist who gets elected to a legislature? Lazy, and perhaps too cowardly to step up and take a stand that might not be politically popular with some interest group. The buck definitely does not stop with them. The judicial activists in Congress recently defeated the appointment of Judge Owens to the federal court of appeals. Why? Because she doesn't make up the law for them and binds herself to the laws already on the books.

My apologies for the soapbox but our federal judicial branch is suffering right now, unable to dispense justice as it should be dispensed, because Congress won't step back into their proper Constitutional role and approve the judges appointed by the President, so long as the appointees are competent. And as a business lawyer, I don't want an active judiciary because that makes the rules unpredictable. In the world of contracts, we have to rely on the law really being what we read in cases and statutes, not changeable at the whim of any judge. That is a huge part of what makes our justice system legitimate. In any event......

The Really Scary Part

Here are some of the obvious questions raised by the Malignant Seven's opinion, according to the Two Texas Minors (Justices Hecht and Enoch-remember those names for the next judicial election and keep them on this bench):

Does the implied warranty of habitability ever terminate? Does it extend to subsequent purchasers? Can an action for breach ever be time-barred? What is the limitations period? When does an action for breach accrue? Does the discovery rule apply? Does the warranty cover defects that do not manifest themselves until long after the sale? What if the builder could not possibly have known of the defect? Are non-economic damages recoverable, such as for mental anguish? These uncertainties, which can be avoided by express warranties, are necessarily part of the implied warranty package.

The answer to every one of those questions, right now, is in the hands of the plaintiff's lawyers, and the only way to change the answer for any future case is to take the case to trial and hope the courts begins to chip away at the breadth of what the Malignant Seven did with this opinion. And you know how the plaintiff's lawyer will answer those questions, meaning that this one case will turn out to be very, very expensive for the building community over the next several years.

What To Do?

All this brings to head the only question that can be asked: how in the world do I, as a builder, limit my exposure on this warranty of habitability? It will take some more water under the bridge to answer this, but one thing that can be done immediately is to insert a mandatory arbitration provision in each building contract, preventing lawyers from using state court procedural rules to bring a class action lawsuit against the builder. Another option to consider is to disclose to the buyer everything imaginable, in as much detail as possible, so as to fit into the small loophole created by the Malignant Seven, that this warranty can be waived for defects known by or expressly disclosed to the buyer. So, disclose, Disclose, DISCLOSE!!!!

The warranty of good workmanship is, I think, a trap for the unwary. If you use construction methods that are different than "normal" methods used by most of the industry, you must somehow disclose that to supercede and replace this warranty. Otherwise, if something goes wrong, the test will be whether you were normal, and the answer will, of course, be "no" and you will lose. The interesting aspect to this result is that it discourages ingenuity and finding better ways to do things, which is the exact opposite of the American Way.

In any event, for every builder, now is the time to review the form of contract you use, and to revise it in order to limit the effects of this decision on your bottom line. And the sooner you do this, the better.