In the current climate, conscientious builders spend a lot of time trying to reasonably protect themselves from potentially devastating liability to their customers. The primary method they use to do this is through their sales contracts. For instance, most well drafted sales contracts include limitations on the types of damage which may be recovered, mediation and arbitration clauses, and provisions regarding when claims must be asserted. However, little time is spent thinking about what might happen after a home is sold and the builder’s potential liability to subsequent purchasers.
In Colorado, subsequent purchasers of a home may sue a builder for construction defects. Since subsequent purchasers never had a contract with the builder they are precluded from suing for breach of contract and instead must sue the builder based upon its alleged negligent construction of the home. As the damages recoverable in negligence are generally broader than the damages recoverable for breach of contract, the effect is that the builder’s liability to a subsequent purchaser is potentially greater than the builder’s liability to its own purchaser and all of the protections included in the sales contract, such as the arbitration clause and contractual limitations clause are worthless.
As a lawyer who has spent many days drafting and revising sales contracts, I have spent much time thinking about and questioning why a builder’s potential liability to a stranger, i.e. the subsequent purchaser, should be greater than their potential liability to the people with whom they contracted. As a result, I have also spent a lot of time considering how we might be able to put subsequent purchasers in the same position as the builder’s original customer. Based upon the general legal principle that only parties to a contract are bound to its terms, this is easier said than done.
The first step in trying to bind a subsequent purchaser to the sales contract is to reject the long-held belief that the sales contract should be personal to the builder and customer only. While it is true the sales contract should not be able to be freely assignable by the purchaser prior to closing, if the contract is well drafted and offers the builder protections it otherwise does not have under the law, the builder should be eager to have the terms of the contract be for the benefit of the purchaser’s successors in interest. By specifically indicating subsequent purchasers of the home are intended beneficiaries of the sales contract, if a problem arises later, they might pursue a claim against the builder under the sales contract. If this occurs, the builder may be able to enforce the contractual limitations with respect to claims and damages and may be able to force the dispute into arbitration. In order to increase the chances of this occurring, builders might consider requiring that the sales contract be provided by their customers to subsequent purchasers.
The legal duties a builder owes to a subsequent purchaser are primarily derived from the original sales contract. As such, a non-party may be bound by the agreement if the contracting parties intended. Therefore, builders should also consider modifying their arbitration clauses to provide that it is the intent of the parties that subsequent purchasers be obligated to arbitrate any claims they have against the builder. Since arbitration is generally a more favorable forum for builders, if builders only succeed in making subsequent purchasers arbitrate their disputes they have achieved a substantial victory. However, builders should be aware that the above suggestions represent an untried approach. They do however, offer builders more arguments for defense against subsequent purchasers which they otherwise would not have.
Builders should not let their best laid plans of protecting themselves against claims through their contracts be destroyed by a claim of a subsequent purchaser. Instead, they should consider modifying those contracts in an attempt to bind subsequent purchasers to the terms of the sales contract, particularly disputes clauses.
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