Second purchasers of new homes held to have limited rights against original developer

This case, Carlile v. Harbour Homes, Inc., arose out of a development project in Snohomish County, which consisted of a number of single family homes built by Harbour Homes. At issue in the case was whether the owners of ten of the homes in the development could sue Harbour for breach of the implied warranty of habitability, misrepresentation, breach of contract, and Consumer Protection Act (CPA) violations. Each of the ten sets of homeowners were not the original purchasers of the homes from Harbour.

The Court first addressed the homeowners’ claim for breach of the implied warranty of habitability. In Washington, the doctrine of the implied warranty of habitability protects the first occupants of residential property against the “risk of fundamental defects in the structure of a home.” However, in this case, each of the ten plaintiffs were not the original purchasers of homes from Harbour. The homeowners argued their claims were nonetheless valid because each had been assigned the original homeowners’ claim. The Court ruled in favor of Harbour and held that the assignment did not cure the fact that the homeowners were not original purchasers.

Harbour next argued that the homeowners’ claims for fraud and misrepresentation were barred by the economic loss rule. The economic loss rule applies to hold parties to their contractual remedies when a loss potentially implicates both tort and contract relief. The Court held that the homeowners’ fraud and misrepresentation claims were contract based claims and barred by the economic loss rule. [However, the Court recognized that prior case law held that claims for fraudulent concealment were not barred by the economic loss rule].

Harbour was not so successful as to the homeowners’ claims for CPA violations. The homeowners’ alleged that Harbour’s plainly deficient construction of the homes, together with Harbour’s affirmative representations of high quality and workmanship, constituted an unfair or deceptive act of practice. The Court held that the homeowners had shown genuine issues of material fact for trial on the CPA claims.

The homeowners also alleged that Harbour had breached it contracts with the owners by violating its duty of good faith and fair dealing. The Court recognized that the duty of good faith and fair dealing obligates the parties to cooperate with each other so each may obtain the full benefit of performance. But, the duty of good faith does not “inject substantive terms into the parties’ contract.” Rather, it “requires only that the parties perform in good faith the obligations imposed by their agreement.” The duty exists only in relation to performance of a specific contract term. In this case, the Court held that Harbour did not breach a specific term of its agreement with the homeowners and therefore their claims for breach of the duty of good faith and fair dealing failed as a matter of law.

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