Colorado Homebuyers Must be in Privity of Contract with Developer to Assert Breach of Implied Warranty of Suitability.

On April 17, 2017, the Colorado Supreme Court announced its decision in Forest City v. Rogers, No. 15SC1089, 2017 CO 23 (Colo. Apr. 17, 2017). The Court held that privity of contract is necessary for a homebuyer to assert a claim for breach of implied warranty of suitability against a developer. In other words, one must be a party to a contract to pursue a claim for breach of any implied warranty of suitability therein.

Defendant Forest City was the developer of a mixed use property in Stapleton. Forest City subdivided the land and sold the vacant lot at issue to a professional builder, Infinity. Infinity then built a residence and sold it to the plaintiff, Tad Rogers. After moving into the home, Rogers came to believe that the water table beneath the house along with calcite leaching from the road material led to a buildup of calcite in the foundation drain, making the basement uninhabitable and causing the sump pump to work overtime. Rogers sued Forest City on various theories, including breach of the warranty of suitability. In particular, Rogers alleged that Forest City impliedly warranted to him that his lot was suitable for a home with a finished basement, when in fact it was not. He prevailed on this claim at the trial court level.

On appeal, a divided Colorado Court of Appeals held that the implied warranty of suitability can exist between a developer who sells a vacant lot and a homeowner who is not the first purchaser of the lot if (1) the developer improves the lot for a particular purpose and (2) all subsequent purchasers rely on the developer's skill or expertise in improving the lot for that particular purpose. Rogers v. Forest City Stapleton, Inc., 2015 COA167M, ¶ 19 (Dec. 17, 2015). In reaching that determination, the Court of Appeals cited the comparative expertise of the developer to the homebuyer and, in extending protection to subsequent purchasers, adopted the reasoning of an Indiana Court of Appeals case from 1989. Id. at ¶ 16 (citing Jordan v. Talaga, 532 N.E.2d 1174 (Ind. Ct. App. 1989) (theorizing that absent an implied warranty of proper drainage extending from the developer to the homeowner “unscrupulous developers would be vested with impunity to develop marginal and unsuitable land” and “[h]omeowners would be left without a remedy for latent undisclosed defects in real estate not chargeable to the builder.”)) The appellate court did not ultimately reach the issue of whether the implied warranty of suitability existed in the case at hand, however, because the trial court did not properly instruct the jury and the jury did not make the relevant factual findings. Forest City and Rogers both filed petitions for certiorari.

The Colorado Supreme Court reasoned that, by their very nature, implied warranties are contractual obligations – promises implied in contracts – and thus breaches of these implied warranties give rise to contract claims that must be analyzed according to contract principles. Privity of contract is an established contractual principle that requires that one must be a party to a contract to enforce a term in the contract or an implied warranty arising out of the contract. Therefore, for a homebuyer to bring a breach of the implied warranty claim against a developer, the parties must be in privity of contract.

Although privity of contract is not required to bring a claim for implied warranty in product liability matters related to the sale of personal property, such cases are distinguishable from those involving the sale of real property. In the construction context, Colorado courts continue to require privity of contract to bring a claim for breach of the implied warranty of habitability. And, at least one Colorado court previously suggested that the implied warranty of suitability is a subset of the implied warranty of habitability.

In addressing policy arguments, the Court explained, “The policy rationale for imposing an implied warranty between a developer and home buyer does not exist when, as here, the developer sells a lot to a professional builder who in turn improves the lot and sells it to a third-party home buyer.” Rogers contracted with Infinity, a professional builder, and thus, it was Infinity, not Forest City, that had superior knowledge and expertise as to the defect at issue. “In circumstances such as these, there is no reason to presume that a disparity exists in sophistication between the developer and the professional builder, that the builder was in a worse position than the developer to know of and assess potential defects in a lot, or that the professional builder would rely upon the developer - rather than its own investigative resources – to provide lots suitable for the builder’s intended purposes.”

The court concluded by dismissing Rogers’ claim for breach of implied warranty of suitability against Forest City, but left some wiggle room for future plaintiffs by indicating that it might entertain a third-party beneficiary theory. Overall, the decision represents a modest victory for developers of residential construction as it serves to curtail the potential claims against them. In addition, this opinion is likely to reverberate through analysis of other implied warranties and encourage a more practical, examined assessment of relative bargaining power in years to come.

For more information regarding the Forest City v. Rogers case or construction law in Colorado, you can reach Maggie Stewart by telephone at (303) 987-9814 or by e-mail at stewart@hhmrlaw.com.