Parker A. Allred | Snell & Wilmer | July 16, 2018
In recent years, a few law firms have made a cottage industry of enticing condominium home owners associations to sue the project developers over many issues, very often for alleged construction defects. Numerous homeowners’ associations have filed lawsuits against developers, contractors, and builders for purportedly defective work. The recent Utah Supreme Court ruling in Gables v. Castlewood-Sterling, 2018 UT 04, reiterates what many courts seem to have forgotten. Specifically, Gables is a good reminder that unless a plaintiff has contractual rights, or has been assigned such rights, it cannot maintain a cause of action when privity of contract is an essential element of a claim.
In Gables, a developer planned a large residential development. Once the development was completed, the developer drafted and recorded the Declaration of Covenants, Conditions, and Restrictions (CC&Rs), by which the developer retained control of the HOA until a certain number of units were sold. In 2008, the target number of units had been sold and the developer turned over control of the HOA to the members. A short time later, the HOA claimed it began noticing many purported construction defects in the structural components of the development. As it investigated the extent of the damages, the HOA retained an expert who estimated that the damages exceeded $4,600,000.00. As a result, over the next several years, the HOA levied assessments on its members to pay for such costs, but then ultimately decided to sue the developer for damages.
Several parties were named in the suit, but whether the HOA was in privity of contract with the developer, and thus had standing to assert a claim for breach of implied warranty, was a key issue. There was no contract between the developer and the HOA; so, the HOA argued that the CC&Rs and the Real Estate Purchase Contracts created privity of contract. The trial court disagreed with the HOA and granted summary judgment in favor of the developer, finding that the HOA had no right to sue third parties for damages on behalf of its members. An appeal ensued.
On appeal, the HOA raised additional arguments, but the Utah Supreme Court really only considered whether the CC&Rs somehow established privity of contract between the HOA and the developer. Utah law requires privity of contract to assert a claim for breach of the implied warranty of workmanlike manner and habitability. In fact, Utah Code §78B–4–513 provides that “an action for defective design or construction may be brought onlyby a person in privity of contract with the original contractor, architect, engineer, or the real estate developer” (emphasis added), but that “[n]othing in this section precludes a person from assigning a right under a contract to another person, including to a subsequent owner or a homeowners association.” Ignoring this statutory proclamation of Utah policy, the HOA argued that the CC&Rs granted the HOA broad authority to act on behalf of its members, and inferred that under the CC&R’s, the members had effectively assigned the HOA their rights to assert claims against third parties.
Although the court recognized that claims could be assigned in this context, it also made clear that under Utah law, an assignment of claims required specific language that demonstrated a manifestation that the parties intended something be transferred or assigned. And here, the CC&Rs demonstrated no such intent. In particular, the court noted that if a contractual provision lacked the words “assumes” “assigns,” “transfers,” or “conveys” of a specific subject matter, then that provision fails to manifest an intent to transfer or assign a right. In other words, words matter. Thus, because nothing in the CC&Rs demonstrated any intent whatsoever of the HOA’s members to assign, transfer, or convey their contract rights to the HOA, the HOA had no rights to pursue against third parties. The Utah Supreme Court affirmed the lower court, and ruled that the HOA could not maintain an action against the developer for lack of privity.
While this case transcends construction litigation, it is a useful reminder that the participants in construction projects, from owner to the finish subcontractor, need to mind the contract p’s and q’s to keep and understand their rights.