Redsidential Construction Liability and the Texas

RESIDENTIAL CONSTRUCTION LIABILITY ANDTHE TEXAS RESIDENTIAL CONSTRUCTION

COMMISSION: A COMPARISON OF IMPLIEDWARRANTIES AND THE NEW STATUTORY

WARRANTIES OF WORKMANSHIP ANDHABITABILITY

1. INTRODUCTION ......................................... 23411. RESIDENTIAL CONSTRUCTION OVERVIEW AND CONSTRUCTION

HISTORY ............................................... 235A. The History of Implied Warranties on Real Property ....... 236B. Distinguishing the Warranties of Workmanship and

H abitability ...................................... 239III. THE TEXAs RESIDENTIAL CONSTRUCTION COMMISSION ........ 241

A. Commission Rules ................................. 242B. Registration and Regulation of Homebuilders ............ 243C. Registration of New Homes .......................... 244D. Registration of Third-Party Inspectors .................. 245E. Inspection and Dispute Resolution ..................... 246F. Registration of Residential Arbitrators and Arbitrations of

D isputes ......................................... 248G. Third-Party Warranty Companies ..................... 249H. Approved Rules Establishing a Limited Statutory Warranty

and Building and Performance Standards for ResidentialConstruction ...................................... 2491. Statutory Warranty of Workmanship and Building

Performance Standards ......................... 2492. Statutory Warranty of Habitability ................. 2513. Scope of Warranties ............................ 2524. Cause of Action ............................... 2525. Dam ages ..................................... 254

IV. THE FUTURE OF CONSTRUCTION LIABILITY IN TEXAS .......... 255A. Comparison of the Statutory Warranties and Implied

W arranties ....................................... 255B. Applying the Statutory Warranties and Building and

Performance Standards ............................. 257V. CONCLUSION .......................................... 260

234 TEXAS TECH JOURNAL OF TEXAS ADMINISTRATIVE LAW [Vol. 6:233

1. INTRODUCTION

In 2003, Texas counties issued more than 137,000 residential buildingpermits with an average cost of $128,800 per home.1 Each homebuyer nodoubt anticipated that a qualified contractor would build them a high-quality,well-constructed home meeting all of the minimum building coderequirements.2 The overwhelming majority got exactly what they anticipated,and a few found construction defects that were subsequently repaired in atimely manner.3 However, those who discovered a construction defect andfaced a contractor who would not repair it in a timely manner were confrontedwith an uncertain and expensive course of litigation made worse by confusingcase law and little statutory guidance.4 Prior to 2004, construction liabilitywas mainly governed by the Residential Construction Liability Act (RCLA).5

Contractors were neither regulated nor required to be licensed.6 Warranties ofworkmanship and habitability were implied, but the exact standards were leftto case law interpretation.7

The Texas Residential Construction Commission (TRCC orCommission), created in 2003 by the Texas Residential ConstructionCommission Act (Act), requires registration of all residential contractors andnew homes. 8 TRCC provides a complaint procedure and a state-sponsoreddispute resolution process (SIRP) for disputes between homebuyers andbuilders.9 The legislature also granted TRCC rulemaking authority to createstatutory warranties of workmanship and habitability.'" For the first time inTexas, the public and contractors have an exact definition of these previouslyelusive terms and a roadmap to settle disputes. 1 In theory, the rules shouldprotect homebuyers and provide certainty as to whom is liable, the period oftime for which they will be held liable, and the procedures the homeownershould follow in order to obtain needed repairs. 2 In reality, the statutorywarranties may operate to provide more benefit to contractors by reducing

1. Real Estate Center, available at http://recenter.tamu.edu/data/bps/sfs48a.htm (last visited Mar.9, 2005).

2. FISCAL NOTE, Tex. HB 730,78th Leg., R.S. (2003) (estimating 155,300 new housing starts andan increase from 18,000 to 36,000 contractor complaints after the initial fiscal year).

3. See id.4. See SEN. COMM. ON BUS. & COMMERCE, BILL ANALYSIS, Tex. HB 730, 78th Leg., R.S. (2003).5. TEX. PROP. CODE ANN. § 27.001 (Vernon 2002).6. See TEX. OCC. CODE ANN. § 51.051 (Vernon 2004).7. Humber v. Morton, 426 S.W.2d 554, 559 (Tex. 1968) (holding that new homes contain an

implied warranty "that the home was built in workmanlike manner and is suitable for habitation").8. TEX. PROP. CODE ANN. §§ 416, 426.003 (Vernon Supp. 2004-2005).9. § 428.001.

10. § 408.001(2).11. 29 Tex. Reg. 9760 (2004), adopted 30 Tex. Reg. 669 (2005) (to be codified at 10 TEx. ADMIN.

CODE §§ 304.1- 100) (Tex. Residential Constr. Comm'n) [hereinafter Approved Rules]; TEx. PROP. CODEANN. §§ 428.001-.005 (Vernon Supp. 2004-2005).

12. TEx. PROP. CODE ANN. § 409.001(a) (Vernon Supp. 2004-2005).

RESIDENTIAL CONSTRUCTION LIABILITY

their liability and limiting possible actions by homeowners. 3 The stated

legislative purpose may actually result in a disregard for the public policyconsiderations utilized by the courts as they developed implied warranties.' 4

Part II of this comment will provide an overview of contractors, theconstruction industry, and discuss the previous law surrounding impliedwarranties. Part III will examine the TRCC, its policies and procedures, and

examine how the legislature is now attempting to define construction liabilitythrough the newly approved rules of statutory warranties. Part IV provides acomparison between the previous implied warranties and the new statutorywarranties, discusses the possible effects on future construction liability cases,

and analyzes these statutory warranties in an attempt to determine if they willprovide more or less protection for the homebuyer and the contractor than theprevious implied warranties.

II. RESIDENTIAL CONSTRUCTION OVERVIEW AND CONSTRUCTION HISTORY

The Texas Department of Licensing and Regulation currently regulatestwenty types of occupations, including barbers and auctioneers. 5 However,until the addition of Title 16 of the Property Code, the state neither regulatednor licensed contractors.1 6 Prior to this Act, the qualifications required for anoccupation as a contractor could easily be described as "no experiencenecessary."" To become a residential contractor it was only necessary tohave a willing customer.'8 Any able body could define themselves as acontractor and set up shop; a new home was only a building permit away.' 9

While the majority of contractors build homes with high standards, it isinevitable that some new homes will contain one or more construction defects.Defects in the final construction could only be resolved by ordinary litigationor by arbitration clauses the contractors placed in their standard consumerbuilding contract.2" While local building codes required minimumconstruction standards, the uninformed consumer had no method to determinewhat may or may not be a construction defect and what should normally becovered by the builder.2 ' The RCLA required contractors to provide disclosure

13. See discussion infra Part IV.B.14. See discussion infra Part II.B.15. TEX. OCC. CODE ANN. § 51.051 (Vernon 2004).

16. TEx. PROP. CODE ANN. § 416.001 (Vernon Supp. 2004-2005) (requiring registration of all

residential contractors).17. Compare § 416.001 (requiring all builders to be registered), with Act of June 15, 1989, 71st

Leg., R.S., ch. 1072, 1989 TEX. GEN. LAWs 4339 (amended 2003) (current version at TEX. PROP. CoDEANN.§ 27.004 (Vernon Supp. 2004-2005)) (explaining that no registration or qualification requirements existedfor contractors).

18. See supra note 17 and accompanying text.19. See supra note 17 and accompanying text.20. See infra Parts I.A-B and note 57.21. See Act of June 15, 1989, 71st Leg., R.S., ch. 1072, 1989 TEx. GEN. LAws 4339 (amended

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statements on their sales contracts to notify buyers about the proceduresinvolved in construction disputes, but case history reveals such disclosures areusually not fully understood by the consumer.22 This lack of definitiontypically left the consumer with no definite route or affordable means forresolving claims of alleged construction defects.2 3

Before the TRCC, the RCLA mandated the procedures consumers shouldfollow for "construction defects," and the Deceptive Trade Practices andConsumer Protection Act ("DTPA") sought to "protect consumers againstfalse, misleading, and deceptive business practices. '24 Although local buildingcodes stated minimum requirements for construction materials, their respectivefunctions, and required result, residential contractors were given no specificstatutory guidance or instruction in providing homes to the public.25 Inaddition to the lack of regulation for contractors or their companies, no easilydiscemable standards existed for the finished product beyond minimumbuilding code requirements and industry practice. 6

A. The History of Implied Warranties on Real Property

In 1968, the Texas Supreme Court held that sales of new homes werecovered by warranties of workmanship and habitability, implied by law, whichimposed duties on the builder under tort law.27 Different courts construedthese implied warranties differently, which led to confusion as to the exactstandards.28 With no discernable standards, disputes often resulted in litigationas opposed to being settled earlier in alternative dispute resolutionproceedings.29

In Humber v. Morton, the court explicitly rejected the common lawdoctrine of caveat emptor in favor of an implied warranty.3" The court foundthat since the 1850s, in an effort to provide more protection to the buyer, thelaw began moving away from the caveat emptor doctrine toward implied

2003) (current version at TEX. PROP. CODE ANN. § 27.001 (Vernon Supp. 2004-2005)); see also infra textaccompanying note 69 (explaining that the ordinary buyer usually relies on builder expertise).

22. § 27.007. See Centex Homes v. Buecher, 95 S.W.3d 266, 273 (Tex. 2003) (discussing thepublic policy considerations which resulted in the implied warranty of habitability).

23. See SEN. COMM. ON Bus. & COMMERCE, BILL ANALYSIS, Tex. HB 730, 78th Leg., R.S. (2003).24. § 27.002; TEx. Bus. & COM. CODE ANN. § 17.41 (Vernon 2004).25. See Act of June 15, 1989, 71st Leg., R.S., ch. 1072, 1989 TEx. GEN. LAws 4339 (amended

2003) (current version at TEX. PROP. CODE ANN. § 27.004 (Vernon Supp. 2004-2005)).26. See SEN. COMM. ON Bus. & COMMERCE, BiLLANALYStS, Tex. HB 730, 78th Leg., R.S. (2003).27. Humber v. Morton, 426 S.W.2d 554, 554 (Tex. 1968).28. Centex Homes v. Buecher, 95 S.W.3d 266, 266 (Tex. 2003) (discussing how the courts have

failed to differentiate between the warranties of workmanship and habitability).29. SEN. COMM. ON Bus. & COMMERCE, BiLL ANALYsis, Tex. HB 730,78th Leg., R.S. (2003).30. Humber, 426 S.W.2d at 558. Caveat Emptor, "Let the buyer beware," is the common law

doctrine "in which the parties deal at arms' length, and each exercises or relies on his or her own judgment."65 Tex. Jur. 3d Sales § 303 (1996).


warranties by enlarging the responsibility of the seller. 31 In line with then-recent decisions by the supreme courts of Colorado, New Jersey, and Idaho,the Humber court held the implied warranty of fitness more appropriate for thesale of new houses.3" The court recognized that implied warranties in realproperty sales provided more protection for the buyer and found the doctrineof caveat emptor did not allow for the difference in experience between thebuilder and the consumer.33 The court found that the older doctrineencouraged the "unscrupulous, fly-by-night operator and purveyor of shoddywork."3 4 However, no specific definition of the implied warranty existedbeyond performing work in a good and workmanlike manner.35 Under thissystem, builders discerned the standard and the courts applied the impliedwarranties, deciding what qualified as a construction defect, when contractorswere liable, and to what extent.36 In the absence of a written warranty from thebuilder, no specifics were available to discern the consumer's entitlementunder an implied warranty.37 After the courts provided clarification thatimplied warranties attached to a new home sale, contractors began providingexpress warranties to replace the implied warranties.38 The contracts requiredthe buyer to expressly disclaim the implied warranties in favor of the expresswarranty, but the waiver was commonly in small print and inconspicuous. 3 9

Thus, contractors created their own warranties that could arguably providemore or less protection than the implied warranty, depending on how the courtapplied the implied warranty.' The express warranties typically providedmuch less protection, but the court approved of this scheme in G-W-L, Inc. v.Robichaux when it stated that buyers should protect themselves by reading thecontract before signing.4' Five years later, in Melody Home ManufacturingCo. v. Barnes, the court expanded the implied warranties to service

31. Humber, 426 S.W.2d at 554.

32. E.g., id. at 554; Carpenter v. Donohoe, 388 P.2d 399 (Colo. 1964); Schipper v. Levitt & Sons,207 A.2d 314 (N.J. 1965); Bethlahmy v. Bechtel, 415 P.2d 698 (Idaho 1966).

33. Humber, 426 S.W.2d at 554. "The purchase of a home is not an everyday transaction for theaverage family, and in many instances is the most important transaction of a lifetime. To apply the rule of

caveat emptor to an inexperienced buyer, and in favor of a builder who is daily engaged in the business of

building and selling houses, is manifestly a denial of justice." Id. at 561.34. Id. at 562.

35. See id. at 554.36. See Kamarath v. Bennett, 568 S.W.2d 658, 661 (Tex. 1978) (defining a breach of the implied

warranty to be a defect "of a nature which will render the premises unsafe, or unsanitary, or otherwise unfit

for living therein").37. Id.

38. See G-W-L, Inc. v. Robichaux, 643 S.W.2d 392 (Tex. 1982). "This note... constitute[s] the

entire agreement between the parties hereto with reference to the erection of said improvements, there beingno oral agreements, representations, conditions, warranties, express or implied, in addition to said writteninstruments." Id. at 393.

39. See id.40. See id.41. Id.

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transactions to cover repair services performed on existing homes. 2 The courtdiscussed the public policy considerations of consumer protection, the inferiorbargaining position of the homeowner, and homeowner's reliance on theexpertise of the service provider, as well as the provider's superior financialposition and ability to absorb the cost of damages. 3 The court also defined"good and workmanlike manner as that quality of work performed by one whohas the knowledge, training, or experience necessary for the successfulpractice of a trade or occupation and performed in a manner generallyconsidered proficient by those capable of judging such work."" While thiscase was important for the extension to service transactions, the mostimportant part of the decision in Melody Home was that the implied warrantycould not be waived or disclaimed by contract.4" The court stated that whendisclaimers were allowed, adhesion contracts became commonplace and thepubic policy requiring an implied warranty would not be served if disclaimerswere allowed.' The court then expressly overruled Robichaux, which allowedfor waiver of implied warranties, "[t]o the extent that it conflicts with thisopinion. 47 Melody Home extended the implied warranty to repair services inan existing home and Robichaux allowed waiver of the implied warranty ona new home but only when the waiver was "clear and free from doubt. 48 Thus,the overruling of Robichaux only to the extent it conflicted with Melody Homecontinued to leave the courts and builders wondering, 1) whether the impliedwarranties could be disclaimed on new construction, if the buyer was awareof the waiver and expressly consented to it (clear and free from doubt), 2)whether waiver was disallowed for only repair services on existing homes, or3) whether waiver did not exist for any type of construction, new or existing.49

Additionally, each of the courts either failed to distinguish between thewarranty of workmanship and the warranty of habitability or discussed themas one and the same. ° The court made this distinction in Centex v. Buecherand defined the warranties differently for the first time.5

42. 741 S.W.2d 349, 353 (Tex. 1987).

43. Id.44. Id. at 354.45. Id. at 355.46. Id.47. Id.48. Id. at 354; G-W-L, Inc, v. Robichaux, 643 S.W.2d 392, 393 ('Tex, 1982).49. See Jason Hoyt Hayes, Comment, Centex Homes v. Buecher: Separating the Conjoined Humber

Warranties and Providing Disclaimer Requirements for Each, 55 BAYLOR L. REv. 1137 (2003).50. Centex Homes v. Buecher, 95 S.W.3d 266, 272 (Tex. 2003).51. Id. at 272-73.


B. Distinguishing the Warranties of Workmanship and Habitability

The difference between the warranties becomes especially apparent upona discussion of waiver and the public policy surrounding it." Assumingarguendo that warranties exist to protect the buyer from latent defects, publicpolicy would not be advanced by prohibiting their waiver, that is, if the waiverwas given in return for a more express and protective warranty." Certainly,if consumer protection is the goal, an express warranty which is moreprotective of the buyer advances public policy more than a limited impliedwarranty that could be less protective as interpreted by certain courts.54

Therefore, the exchange of warranties between the contractor and theconsumer seems to be in conformance with the public policy considerationsand goals of consumer protection, and prohibiting waiver of the lesser impliedwarranty will only serve the interests of contractors by not allowing for thehigher warranty the customer could achieve through their own bargainingpower.55 This issue was addressed by the court in their last decision onimplied warranties.56

In Centex, the builder provided an express warranty in the sales contractwhich replaced the implied warranties of workmanship and habitability. 7 Thecourt began by differentiating between the warranties.58 The court defined theimplied warranty of workmanship as a focus on the builder's conduct, whichrequired the builder to construct the home in a manner consistent with agenerally proficient builder operating under similar circumstances.59 Thismeant the builder should perform with at least a minimal standard of care."°

The warranty of workmanship operates as a "gap-filler" or default warrantythat attaches only if the consumer fails to specify and contract for the level of

52. Id. at 274.53. See discussion infra Parts IV.A-B.54. See discussion infra Parts IV.A-B.

55. See discussion infra Parts 1V.A-B.56. Buecher, 95 S.W.3d at 266.57. Id. at 268. The warranty initialed by the buyers provided:

At closing Seller will deliver to Purchaser, Seller's standard form of homeowner's LimitedHome Warranty against defects in workmanship and materials, a copy of which is available toPurchaser. PURCHASER AGREES TO ACCEPT SAID HOMEOWNER'S WARRANTY ATCLOSING IN LIEU OF ALL OTHER WARRANTIES, WHATSOEVER, WHETHER

EXPRESSED OR IMPLIED AT LAW, AND INCLUDING BUT NOT LIMITED TO THEIMPLIED WARRANTIES OF GOOD WORKMANLIKE CONSTRUCTION ANDHABITABILITY. PURCHASER ACKNOWLEDGES AND AGREES THAT SELLER ISRELYING ON THIS WAIVER AND WOULD NOT SELL THE PROPERTY TOPURCHASER WITHOUT THIS WAIVER.

Id. at 268.

58. Id. at 272-73.59. Id. at 273.60. Id.

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proficiency he or she objectively desires.6 When applied, the warranty ofworkmanship requires the contractor to build at a level that would beacceptable to others, an objective level of workmanship. 62 The focus here isclearly on the contractor and the contractor's abilities to construct aresidence.63 Given that it is reasonable for contracting parties to bargain foran alternate level of performance than that which is normally assumed-usually a higher standard-the court concluded that the warranty ofworkmanship can be waived in the presence of a more exacting standard, butit cannot be disclaimed completely.' In the absence of an express warrantyof workmanship, contractors were held to the objective standard of theimplied warranty of workmanship.65 It appears the court assumed a consumerwould only bargain for a higher level of workmanship than the one implied bylaw and also that the consumer was educated in the construction industryenough to specify the manner, performance, or quality of the desiredconstruction.66 The objective standard definition of workmanship draws onthe principles of contract law as opposed to the public policy considerationswhich play a larger role in the definition of the warranty of habitability.67

Basing its decision mainly on public policy considerations, the courtdefined the warranty of habitability by focusing on the state of the finishedproduct.6 8 The public policy considerations included: shifting the costs ofdefective construction from consumers to builders, the fact that the consumeris purchasing a manufactured product, the buyer's inferior bargaining position,the risk of harm to the buyer, the possibility of latent defects, and a consumer's

69reliance on builder expertise. While not expanding previous case law, thecourt defined the warranty of habitability as a requirement that a house be"safe, sanitary, and otherwise fit for human habitation., 70 This treated thewarranty as creating strict liability because the focus was on the finishedproduct as opposed to the performance of the builder as in the warranty ofworkmanship.7

A home that is not safe, sanitary, or fit for human habitation is thusuninhabitable by any standard and the builder will be held strictly liable.72

This is described as a more limited warranty because it only applied toconditions that made a house completely unsuitable for its intended use as a

61. Id. at 279.62. See id.63. See id.

64. Id. at 274-75.65. Id.66. Id. at 280 (Hecht, J., dissenting).67. Id. at 268.68. Id. at 273.69. Id.70. Id. (quoting Kamarath v. Bennett, 568 S.W.2d 598, 660 (Tex. 1978)).71. Id.72. Id.


home.73 The court then held that because of the very nature of the warranty-fitness for human habitation-the warranty could not be waived generallybut could, in limited circumstances, be waived to the extent the defects weredisclosed to the buyer.74 This narrow exception left open the option for abuyer to obtain a "problem house" as long as the buyer was aware of thehome's problems.75 This case did not discuss the possibility, indeed theprobability, in which a buyer in need may not object to waiving the warrantyof habitability in lieu of disclosure if their need were so great that they wouldbe willing to disclaim anything to get a new home.76 Thus, it seems apparentthat this court defined "fit for human habitation" as "safe and sanitary," but didnot adequately address the fact that what is not fit for habitation for one isquite possibly more than acceptable for others.77

Arguably, the public policy considerations, which mandated this warrantyand were noted by the court, were ignored when they held this warranty couldbe disclaimed upon full knowledge.78 Subsequently, builders and consumerswere again left to their own interpretations of the warranty, which would bedefined by the courts only upon further litigation.79 With no specific definitionof what the warranty entailed beyond "safe, sanitary and otherwise fit forhuman habitation"-terms readily open for differing interpretations-it couldbe argued that any dispute resolution process could not be effective under thistype of law. 0

II. THE TEXAS RESIDENTIAL CONSTRUCTION COMMISSION

Responding to a lack of performance standards for residential contractors,the 78th Texas Legislature enacted the Texas Residential ConstructionCommission Act in 2003." 1 The legislature recognized that the Property Codeand implied warranties were not sufficient to resolve construction issues, andattempted to provide a system to enable consumers and contractors to resolve

73. Id.74. Id. at 274.75. Id.76. See id.

77. See id.78. See id. at 273. The court stated the public policy considerations included cost shifting for

defective construction, an inferior bargaining position on behalf of the consumer, a "foreseeable risk of harmresulting from defects [and] consumer difficulty" in detecting problems and thus, it does seem antithetical

to allow disclaimer when the buyer is "aware." Id. It is reasonable to assume that a buyer who is aware ofthe problems but faced with little or no other housing options would gladly waive the warranty in order forany type of shelter. See id.

79. See discussion supra Part I.

80. See SEN. COMM. ON BUS. & COMMERCE, BILL ANALYSIS, Tex. HB 730,78th Leg., R.S. (2003)(stating that the previous lack of performance standards caused difficulty for homeowners and builders toresolve construction issues). But see discussion infra Parts IV.A-B (comparing the implied warranties withthe statutory warranty).

81. SEN. COMM. ON Bus. & CoMMERcE, BILL ANALYsIs, Tex. HB 730,78th Leg., R.S. (2003).

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their disputes without litigation.8" The TRCC, consisting of nine membersappointed by the governor, includes four residential contractors, threemembers of the general public, a licensed engineer, and a licensed architect orbuilding inspector.8" The Commission members each serve a six-year termwith their expiration dates staggered between different odd-numbered years.84

In addition to their respective expertise, all members must undergo an in-housetraining program.85 The Commission meets quarterly at a minimum, or at therequest of the presiding officer.86 During these meetings the Commissionconducts daily business and provides a public forum for the rule-makingprocess.87

A. Commission Rules

The legislature granted the Commission rulemaking authority to governthe state-sponsored inspection and dispute resolution process .... [govern]administrative regulations; establish[] statutory warranty and building andperformance standards ... approv[e] ... warranty companies; and approv[e]third-party inspectors" to be used in the dispute resolution process.8 Pursuantto standards mandated by the Administrative Procedure Act (APA),89 theTRCC adopted rules establishing the procedures for the registration of buildersand new homes.' ° The Commission also established processes to takecomplaints about contractors, 91 register home inspectors and constructionarbitrators,92 handle dispute resolution between contractors and homeowners,93

and approve warranty companies that can provide warranties on behalf ofcontractors.9" The Commission adopted rules for warranties and building andperformance standards on January 12, 2005. 9" The adopted rules will beeffective as of June 1, 2005.96

82. Id.83. TEX. PROP. CODE ANN. § 406.001(a)(1)-(4) (Vernon Supp. 2004-2005).84. § 406.002(a).85. § 406.006(a).86. § 406.007.87. § 409.002.88. § 408.001(1)-(4).89. TEX. Gov'T CODE ANN. § 2001 (Vernon 2000).90. 10 TEX. ADMIN. CODE §§ 303.1-.23, 303.100-.170 (West 2004).91. TEX. PROP. CODE ANN. § 426.001 (Vernon Supp. 2004-2005).92. § 417.001;10 TEx. ADMIN. CODE §§ 303.200, 318.20.93. 10 TEX. ADMIN. CODE §§ 313.1-.26.94. TEX. PROP. CODE ANN. §§ 430.008-.009 (Vernon Supp. 2004-2005).95. TRCC NEws RELEASE, Commission Approves Standards for Building and Performance,

Warranties (Jan. 12, 2005), available at http://www.trce.state.tx.us/publications/pub-index.htm.96. Id.


B. Registration and Regulation of Homebuilders

Any person or business entity who constructs or supervises theconstruction of a new home or the material improvement of an existing home,other than repairs to a roof, is a builder.97 As such, they must now registerwith the "Commission and obtain a certificate in order to continue theirbusiness in Texas. 98

Applicants must be at least eighteen years old, be a citizen or lawful alien,and provide information that enables the Commission to conduct a criminalbackground check.99 The Commission makes a decision to grant or deny thecertificate based on the results of the criminal background check.'0° While acriminal history is not an automatic denial, applicants must satisfy theCommission of their "honesty, trustworthiness, and integrity."'0 ' Whenconsidering any criminal history, the Commission examines the nature of anycrimes to which the applicant has either pled guilty or no contest in additionto whether they were crimes of moral turpitude."° The main consideration iswhether this applicant can be trusted to do business with the public.'03 If theCommission denies an application, the applicant may appeal the denial and asubsequent hearing is held." 4 Hearings are conducted by the State Office ofAdministrative Hearings.'05 Conspicuously absent from these generaleligibility requirements is any history of construction experience."' 6 Thus,applicants meeting the general requirements of age and citizenship who alsosatisfy the Commission as to their honesty and trustworthiness will be granteda certificate to build residential homes."°7 While an applicant with noexperience may qualify as a builder and be registered, the Commission alsoproposed rules and procedures by which an experienced builder could bedesignated a "Texas Star Builder.' ' 0 8 However, these rules were subsequentlywithdrawn."°

97. § 401.003.98. § 416.001; 10 TEX. ADMIN. CODE § 303.1.99. § 416.005(1)(A)-(B); 10TEx. ADMIN.CODE § 303.5(a).

100. 10 TEX. ADMiN. CODE § 303.5(b).101. § 416.005(2).102. 10 TEx. ADmIN. CODE § 303.5(b)(1).103. See id.

104. § 416.008(a)-(c).105. § 416.008(g); TEX. GOV'TCODE ANN. § 2001.054 (Vernon Supp. 2004).

106. See § 416.005.107. Id.108. § 416.011.109. 29 Tex. Reg. 11337 (10 TEX. ADMIN. CODE §§ 303.300-.306) (withdrawn Nov. 17,2004). The

proposed but withdrawn requirements for the special designation called for either twelve years experienceas a builder or remodeler of residential dwellings or a combination of building experience, membership ina construction trade association, or a four-year university degree in construction science or an equivalent.Id. Additionally, the Texas Star Builder would have had to demonstrate a good financial background andcredit history, adequate general liability insurance, and provide an affidavit attesting to continued

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Under the proposed program, a Texas Star Builder would be a specialdesignation that a builder could present to the public to show that the buildermet the minimum educational requirements set forth by the Commission. °

The proposed minimum requirements for the special designation were eithertwelve years experience as a builder or remodeler of residential dwellings, ora combination of building experience, membership in a construction tradeassociation, or a four-year university degree in construction science or anequivalent.1 ' Additionally, the Texas Star Builder would have been requiredto demonstrate a good financial background and credit history, adequategeneral liability insurance, and an affidavit attesting to continued membershipwith two builders associations or various other conservation associations." 2

Maintenance of the proposed designation would have required twelve hoursof continuing education per year."3 Renewal of the designation would havegiven a contractor a special designation corresponding with the total numberof years as a Texas Star Builder." 4 Commission denial would have beenappealed within the Commission but not be subject to any additionaladministrative relief."5 This proposed designation would be the only thingsetting the experienced builder apart from the newly established."6

C. Registration of New Homes

Beginning January 1, 2004, all new homes must be registered with theCommission." 7 The registration must be submitted to the Commission by thefifteenth day of the month following the title transfer." 8 The Commission willinstitute administrative penalties, disciplinary action, or a combination of bothagainst a builder who fails to register a new home." 9 The only homesexempted from the registration requirement are those where the homeowneris the builder, either with or without employees or independent contractors,and the homeowner resides there for at least one year after completion. 20 Theregistration is complete upon submission of the Commission's preprinted form

membership with two of either builders associations or various other conservation associations. Id.Maintenance of the designation required twelve hours of continuing education per year. Id. Renewal of thedesignation would have given a contractor another special designation corresponding with the total numberof years he or she held the star builder designation. Id. Any Commission denial could have been appealedwithin the Commission but was not subject to any additional administrative relief. Id.

110. TEX. PROP. CODE ANN. § 416.011(c) (Vernon Supp. 2004-2005).111. 10 TEX. ADMIN. CODE § 303.301.

112. Id.113. 10 TEx. ADMIN. CODE § 303.303(a)(1).114. 10 TEx. ADMIN. CODE § 303.303(b).115. 10 TEX. ADMIN. CODE § 303.306.116. TEX. PROP. CODE ANN. § 416.011 (Vernon Supp. 2004-2005).117. § 426.003(a); 10 TEx. ADMIN. CODE § 303.100(a).118. § 426.003(a); 10 TEx. ADMIN. CODE § 303.100(b).119. 10 TEX. ADMIN. CODE § 303.170.120. 10 TEx. ADMIN. CODE § 303.130.


available at their website and payment of a minimal fee.' 2' Within thirty daysof the registration, the Commission provides information to the homebuyerregarding Commission functions, warranties and the building and performancestandards, and information on the complaint process and dispute resolutionprocess. 122 Registration is required to participate in the complaint process,SIRP, or arbitration. 23

D. Registration of Third-Party Inspectors

Home inspectors must also register with the TRCC in order to participatein the SIRP process.124 After a consumer or builder initiates a request for thedispute resolution process, the third-party inspector, upon Commissionapproval, makes initial determinations of any construction defects.'25 TheCommission provides two types of inspectors: 1) inspectors for workmanshipand materials, and 2) inspectors for structural matters. 126

Qualified inspectors for workmanship and materials must have five yearsexperience in residential construction, current International Code Councilcertification as residential combination inspectors, receive less than ten percentof their gross income from expert witness fees, and pass a criminal backgroundcheck.'27 A qualified inspector for structural matters is either a state-licensedprofessional engineer or architect with a minimum of ten years experience inthe residential construction field. 28 Individuals cannot be structural inspectorsif they have received more than ten percent of their gross income from expertwitness fees. 129 After the Commission approves an inspector, the individualmust also undergo a Commission training program. 3 ° Once approved andregistered, the third-party inspector is placed on a Commission list and will becalled, on a next available basis, to evaluate a residential dwelling after thedispute resolution process has been initiated.' 3' Inspectors are not employeesof the state but are maintained on a list of registered inspectors and obtain theirfees from the party filing the complaint.'32

121. 10 TEX. ADMIN. CODE § 303.140.122. 10 TEX. ADMIN. CODE § 303.160.123. § 426.005.124. 10 TEX. ADMIN. CODE § 303.200(a).125. § 428.004.126. 10 TEX. ADMIN. CODE § 303.200(b)(1)-(2).127. § 427.001(b)(1)-(2), (e); 10 TEX. ADMIN. CODE §§ 303.201-.202(c)(1)-(4).

128. § 427.001(c)(1)-(2), (e); 10 TEX. ADMIN. CODE § 303.202(d)(1)-(2).129. § 427.001(e); 10 TEX. ADMIN. CODE § 303.202(c)(3).130. 10 TEX. ADMIN. CODE § 303.207(b).

131. 10 TEX. ADMIN. CODE § 313.11 (a).132. § 428.003; 10 TEX. ADMIN. CODE § 313.9(a)(2).

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E. Inspection and Dispute Resolution

The state-sponsored dispute resolution process SIR must be utilized tosettle disputes prior to any legal action regarding alleged construction defectsfor new construction or interior improvements exceeding twenty thousanddollars.'33 The claim, if covered under the Act, must be brought within tenyears of the date of the initial transfer and within two years of the date thealleged defect was discovered."3 All claims covered by the Act must be foran alleged construction defect.135 The Commission will deny claims basedsolely on personal injury or wrongful death, damage to goods, violations ofreal estate fraud covered under the Business and Commerce Code, damagesresulting from a builder's wrongful abandonment before completion, orviolations of the Property Code relating to construction payments or funds intrust.'36 The homeowner must follow specific procedures to qualify forparticipation in SIRP.' 37 ,

Prior to filing a request for SIRP, the homeowner must give the buildera thirty day written notice of the claimed defect. 38 The owner must then allowthe builder or the builder's designated consultants to access the home.'39 If thealleged defect is not resolved, and the homeowner files a request for SIRP, theCommission appoints a third-party inspector from their approved list withinfifteen days."' The builder continues to have a right of inspection during theSIRP process.' 4' The consumer and the builder have the right to object to thethird-party inspector, which will result in the appointment of the next inspectoron the approved list. 42 Within two days, the inspector should contact thehomeowner and arrange a time to inspect. ' Both the homeowner and thebuilder may attend the inspection along with their consultants andrepresentatives.'" In addition to the physical inspection, the inspector maygather any additional information pertinent to his investigation includinginterviews with any relevant persons.'45

133. § 426.005; see § 409.003 (stating that the SIRP is different from the complaint procedure).

Complaints are taken and maintained in a file for view by the public, and making a complaint does notinitiate the inspection or dispute resolution process. § 409.003.

134. 10 TEX. ADMIN. CODE § 313.4(1), (2)(A).

135. § 436.002(a).136. § 426.001(b)(1)-(2).137. § 428.001.138. § 428.001(c); 10 TEx. ADMIN. CODE § 313.2(a).139. § 428.001(c); 10 TEx. ADMIN. CODE § 313.2(b).

140. § 428.003(a); 10 TEx. ADMIN. CODE § 313.11(a).141. § 428.002; 10 TEx. ADMIN. CODE § 313.10(a).142. § 428.003(b); 10 TEx. ADMIN. CODE § 313.12(a), (c).

143. 10TEx. ADMtN. CODE § 313.13(b).144. Id.145. 10 TEx. ADMIN. CODE § 313.13(c).


After an inspection and investigation of the alleged defect, if the disputeinvolves workmanship or materials, the inspector makes a report recommend-dation within twelve days of his appointment.' 46 If the alleged defect involvesa structural matter, the inspector submits a report with recommendations ofrepair or remediation no later than forty-five days after receiving the request.'47

The report is based on the applicable statutory warranty and building andperformance standards and also includes a recommendation of repairs.'48 Aninspector's report does not include recommendations for payment of monetarydamages, prices, or determinations of loss value.'49 An inspector finding,which substantiates the homeowner's allegations, may result in the builderreimbursing the homeowner for the inspection fee. 150 Either the builder or thehomeowner may appeal an inspector' s report within fifteen days of receivingit 151it. s

Appeals are referred to a three-person panel of state inspectors.12 Thepanel reviews the report and makes written findings of fact within twenty-fivedays, which approve, reject, or modify the inspector's report. 153 The findingof the three-person panel is not subject to further administrative review.'54

Within fifteen days of the submission of the inspector's report or panelrecommendation, the builder may make, by certified mail, a written offer ofsettlement to repair.' 'The offer shall include in reasonable detail the repairsto be made" and assurance that they will be done within forty-five days of thehomeowner's acceptance.' 56 If the homeowner accepts or rejects the offer, itshould be communicated to the builder in writing within twenty-five days." 7

If the homeowner rejects the offer, the builder may submit a supplementaloffer within ten days.' 58 The inspector reinspects upon completion of allrepairs, at the builder's cost, to ensure that the home meets the statutorywarranty and building and performance standards.'59 The inspector thenprepares a post-repair inspection report and the builder has fifteen days toaddress any minor deficiencies.' 6°

146. 10 TEX. ADMIN. CODE § 313.14(a).147. 10 TEx. ADMIN. CODE § 313.14(b).148. 10 TEX. ADMIN. CODE § 313.14(c).149. 10 TEX. ADMIN. CODE § 313.14(d).150. 10 TEX. ADMIN. CODE § 313.18.151. TEx. PROP. CODE ANN. § 429.001(a) (Vernon Supp. 2004-2005); 10 TEX. ADMIN. CODE

§ 313.20.152. § 427.002(a)(1); 10 TEX. ADMIN. CODE § 313.20(a).153. § 429.001(c)(1)-(3); 10 TEx. ADMIN. CODE § 313.20(b)-(d).154. 10 TEX. ADMIN. CODE § 313.20(f).155. 10 TEX. ADMIN. CODE § 313.21(a)-(b).156. 10 TEX. ADMIN. CODE § 313.21(d).157. 10 TEX. ADMIN. CODE § 313.22(b)-(c).

158. 10 TEX. ADMIN. CODE § 313.23.

159. 10TEx. ADMIN. CODE§ 313.25(a).160. 10 TEX. ADMIN. CODE § 313.25(a)-(b).

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F. Registration of Residential Arbitrators and Arbitrations of Disputes

The TRCC also provides certifications of residential constructionarbitrators. 161 Qualified applicants will have "a minimum of five (5) years ofexperience conducting arbitrations between homeowners and buildersinvolving construction defects."' 62 The arbitrator must also be familiar withthe newly established statutory warranties and the RCLA. 163 Comparable tothe third-party inspectors, arbitrators are not employees of the Commission,but they are entitled to hold themselves out to the public as being certified bythe Commission. "

If the parties seek to have their dispute arbitrated, the venue of thearbitration will be the county where the home is located, and this venuerequirement may not be waived by contract. 16 Should the arbitrator grant anaward, the arbitrator should file it with the court of that jurisdiction and withthe TRCC within thirty days.' 66 The parties may disclose the arbitration awardand any agreement to the contrary is unenforceable. 67 The court may vacatean arbitration award only "upon a showing of manifest disregard for TexasLaw" in addition to the specific provisions of the Civil Practice and RemediesCode.

68

161. § 417.001; 10 TEX. ADMIN. CODE § 318.20.162. 10 TEX. ADMIN. CODE § 318.20(b)(1), accord § 417.001(b)(1).163. § 417.001(b)(2); 10 TEX. ADMIN. CODE § 318.20(b)(2).164. See 10 TEX. ADMIN. CODE § 318.20.165. § 436.003(a)-(b).166. § 437.001.167. § 437.001(a)-(b).168. § 438.001.(a) On application of a party, the court shall vacate an award if: (1) the award was obtained bycorruption, fraud, or other undue means; (2) the rights of a party were prejudiced by: (A) evidentpartiality by an arbitrator appointed as a neutral arbitrator; (B) corruption in an arbitrator; or(c) misconduct or wilful misbehavior of an arbitrator; (3) the arbitrators: (A) exceeded theirpowers; (B) refused to postpone the hearing after a showing of sufficient cause for thepostponement; (C) refused to hear evidence material to the controversy; or (D) conducted thehearing,contrary to Section 171.043, 171.044, 171.045, 171.046, or 171.047, in a manner thatsubstantially prejudiced the rights of a party; or (4) there was no agreement to arbitrate, the issuewas not adversely determined in a proceeding under Subchapter B, and the party did notparticipate in the arbitration hearing without raising the objection. (b) A party must make anapplication under this section not later than the 90th day after the date of delivery of a copy ofthe award to the applicant. A party must make an application under Subsection (a)(l) not laterthan the 90th day after the date the grounds for the application are known or should have beenknown. (c) If the application to vacate is denied and a motion to modify or correct the award isnot pending, the court shall confirm the award.

TEX. Civ. PRAc. & REM. CODE ANN. § 171.088 (Vernon 2002).


G. Third-Party Warranty Companies

The Commission also has the authority to approve third-party warrantycompanies who are authorized to provide statutory warranties to thehomebuyer in the place of the builder. 69 The warranties must provide that thecompany will perform all the obligations of the builder and pay for anyconstruction defects covered in the statute. 170

H. Approved Rules Establishing a Limited Statutory Warranty andBuilding and Performance Standards for Residential Construction

On January 12, 2005, pursuant to their rule making authority, the TRCCadopted performance standards for components of a home subject to statutorywarranties for workmanship and materials, and a warranty of habitability. 7'

The performance standards apply to homes where either construction beginsor a contract is signed on or after June 1, 2005.172

1. Statutory Warranty of Workmanship and Building PerformanceStandards

The building and performance standard is "the standard[] to which ahome or an element.., of a home.., must perform."'73 The focus is on theperformance of specific elements within the home, and where the element doesnot perform at its minimum standard, the rule for each element instructs thebuilder to "take such action as is necessary to bring the variance within thestandard stated."'' l7 Where an element of the home is not specifically describedwithin the rules, it is construed in accordance with any written agreementbetween the parties or with "usual and customary residential constructionpractices."'7 5 The rules specifically incorporate and adopt the InternationalResidential Code and the National Electrical Code.176 The minimum standards

169. TEX. PROP. CODE ANN. § 430.009(a) (Vernon Supp. 2004-2005).170. § 430.009(b)(1)-(2).171. Texas Residential Construction Commission Public Hearing and Adoption of Proposed Rules

for Warranties and Building and Performance Standards, available at http://www.trcc.state.tx.us/meetings/meetings index.asp (last visited Jan. 12, 2005).

172. Id.173. Approved Rules, supra note 11, § 304.1(c)(14).174. Id. § 304.10(a)(1)(A). Each performance standard in the rules contains the exact same language

in regards to the builder's responsibility of a variance. See id.175. Id. § 304.1(a).176. Id. § 304.1(b)(3). The International Code Council is a nonprofit organization that has

established a comprehensive and coordinated national model of construction codes. See About ICC:Introduction to the ICC, at http://www.iccsafe.org/news/about/ (last visited Apr. 19, 2005). The NationalElectric Code is a nationally recognized code of electrical regulations developed by the National FireProtection Association. See NFPA Catalog, at http://www.nfpa.org/catalog (last visited Apr. 19, 2005).

2005]


of performance for the elements of a home include the responsibilities of thecontractor and the homeowner. 177

The homeowner is responsible for proper maintenance and care for ahome, and their failure to do so will result in an exclusion of the warranty forperformance. '78 The rule recognizes that maintenance of the home is "essentialto the proper functioning of the home.., and the lot on which it is located"and thus makes the homeowner responsible. 79 The homeowner is alsoresponsible for mitigating damage.'

"The builder is responsible for all work performed under the direction ofthe builder for the period of the applicable warranty.''. This warranty is onlyfor construction defects of which the builder receives notice within theapplicable period.'82 The applicable period of warranty for residentialconstruction and improvements is one year for workmanship and materials;two years for plumbing, electrical, heating, and air-conditioning deliverysystems; and ten years for foundations and major structural components. 83

The builder must be notified of the alleged defect within two years of thediscovery of the alleged defect.' While builders are now on specific noticeof the exact standards to which they will be held, there are numerousexceptions and exclusions from the builder's responsibilities.8 5

177. Approved Rules, supra note 11, § 304.2(a)(c).178. Id. § 304.2(c).179. Id. § 304.2(c)(1).180. Id. § 304.2(c)(8).Additionally, the homeowner is responsible for ongoing maintenance responsibilities that affectthe performance of the home but that may not be expressly stated in this chapter. Such ongoingmaintenance responsibilities include, but are not limited to, periodic repainting and resealing offinished surfaces as necessary, caulking for the life of the home, regular maintenance ofmechanical systems, regular replacement of HVAC filters, cleaning and proper preservation ofgrading around the home and drainage systems to allow for the proper drainage of water awayfrom the home.

Id. § 304.2(c)(1).181 Id. § 304.2(a)(1).182. Id.183. TEX. PROP. CODEANN. § 430.001(b)(1)-(3) (Vernon Supp. 2004-2005). Performance standards

are given for foundations and slabs, framing, drywall, insulation, exterior siding and trim, masonry, roofs,doers and windows, flooring, hard surfaces, paint and wall covering, plumbing, heating, cooling andventilation, electrical systems and fixtures, interior trim, mirrors and interior glass, hardware and ironwork,countertops, fireplaces, irrigation systems, fencing, grading, and pest control. Approved Rules, supra note11, §§ 304.10-.33. Major structural components include: footing and foundations, beams, girders, lintels,columns (other than cosmetic), load-bearing walls and partitions, roof framing system, and floor systems.Approved Rules, supra note 11, § 304.1 (b)(12).

184. Approved Rules, supra note 11, § 304.2(a)(1).185. Id. § 304.2(b).(1) The builder is not responsible for repairs, loss or damage to a component of a home causedby or made worse by any of the following: (A) Work performed... by anyone other than thebuilder or persons providing work or material at the direction of the builder. (B) The negligence,improper maintenance, misuse, abuse, failure to follow manufacturer's recommendations, failureto take reasonable action to mitigate damage, failure to take reasonable action to maintain theresidence or other action or inaction of anyone other than the builder or persons providing work


2. Statutory Warranty of Habitability

The TRCC also adopted a statutory warranty of habitability which isdefined as a

builder's obligation to construct a home or a home improvement that (A) isin compliance with the performance standards; and (B) is safe, sanitary andfit for humans to inhabit; and (C) does not have direct adverse effect on thehabitable areas of the home; and (D) must not have been discoverable by areasonable, prudent inspection or examination of the home or homeimprovement. I"6

The language tracks the previous case law interpretation and the focus remainson the finished product.'87 This warranty applies to latent defects which havea "direct affect on the habitable" area of the home.'88 The applicable warrantyperiod for habitability is two years from the discovery of the condition but notlater than ten years from the earlier of the date of occupancy or transfer of titlefrom the builder to the initial homeowner. 89

or material at the direction of the builder. (C) Failure of the homeowner to comply with thehomeowner's responsibilities as set forth in subsection (C) of this section or as may be statedseparately elsewhere in this chapter. (D) Alterations to the grade of the soil, except alterationsperformed by or at the direction of the builder. (E) Normal wear and tear or normal deteriorationto any component of the home. (F) Extreme weather conditions. (G) Riot, civil commotion,war, terrorism, vandalism, aircraft, vehicle or boat. (H) Fire, smoke or water damage unless suchloss or damage is a direct result of a construction defect. . . . (K) Insects, birds, rodents, verminor other wild or domestic animals unless such loss or damage is a direct result of a constructiondefect. (L) The quality and potability of water unless caused by a construction defect. (M)While the home is being used primarily for nonresidential purposes. (N) Use for which the homeor the component of the home was not designed. (0) Use that exceeds the normal design loadsprescribed by the Code or the engineer of record. (P) Existing trees, shrubs or other plantsresulting from the work necessary to construct the home. (Q) Homeowner delay in reporting aknown construction defect or failing to take reasonable action necessary to prevent furtherdamage to the home. (R) For remodeling projects, improvements, alterations or additions to anexisting residence where the performance standard cannot be achieved due to an existingcondition. (S) Abuse or misuse of a home component or manufactured product by anyone otherthan the builder or persons providing work or material at the direction of the builder. (2) NoActual Physical Damage. The builder shall not be responsible for any condition that does notresult in actual physical damage to the home, including, but not fimited to the presence of radongas, formaldehyde or other pollutants or contaminants, or the presence or effect of mold, mildew,toxic material, or volatile organic compound, unless such condition is a direct result of aconstruction defect.

Id. § 304.2(b)(1)(A)-(S)(2).186. Id. § 304.3(0.187. See supra text accompanying note 68.188. Approved Rules, supra note 11, § 304.3(0(3).189. Id. § 304.3(f)(4).

2005]


3. Scope of Warranties

These statutory warranties are exclusive and effective as of June 1, 2005;they supercede all former implied warranties of workmanship andhabitability. 190 Additionally, a builder and homeowner cannot contract towaive or modify these warranties if the effect is to lessen the standards. 9' Thelaw allows modifications only when the effect is to provide greater warrantycoverage and "more stringent performance standards than are establishedunder this chapter."' 92

4. Cause of Action

The RCLA, enacted in 1989, has until now solely governed actionsagainst contractors arising from construction defects for damages.1 93 Aconstruction defect is a "failure of the design, construction, or repair of ahome" if it is built by a contractor. 94 The RCLA did not create a new causeof action; it limited the causes that already existed. 95 For the first time,homeowners were required to provide notice to contractors and the damagesallowed in construction defect claims were specified. 196 The RCLA continuesto mandate the procedures for settling construction defect claims, unless state-sponsored inspection and dispute resolution is required pursuant to the newTitle 16 of the Property Code.'97

190. Id. § 304.3(h)(1); TEX. PROP. CODE ANN. § 430.006 (Vernon Supp. 2004-2005).191. Approved Rules, supra note 11, § 304.3(i)(1); TEX. PROP. CODE ANN. § 430.007 (Vernon Supp.

2004-2005).192. Approved Rules, supra note 11, § 304.3(i)(2); TEX. PROP. CODE ANN. § 430.007 (Vernon Supp.

2004-2005).193. Act of June 15, 1989, 71st Leg., R.S., ch. 1072, 1989 TEx. GEN. LAWS 4339 (amended 2003)

(current version at TEX. PROP. CODE ANN. § 27.004 (Vernon 2000 & Supp. 2004-2005)).194. TEx. PROP. CODE ANN. § 401.004(a)(1) (Vernon Supp. 2004-2005); Approved Rules, supra note

11, § 301.1(a)(8).195. Sanders v. Constr. Equity, Inc., 42 S.W.3d 364 (Tex. App.-Beaumont 2001, pet. denied).

Claims were usually brought for breach of the implied warranties, fraud, negligence, or under the DTPA.See id.

196. Act of June 15, 1989, 71st Leg., R.S., ch. 1072, 1989 Tex. Gen. Laws 4339 (amended 2003)(current version at TEx. PROP. CODE ANN. § 27.004 (Vernon 2000 & Supp. 2004-2005)). The originalversion of the RCLA capped damages at the greater of the consumer's purchase price or the residence's fairmarket value, and exemplary damages could only be awarded in certain circumstances. Id. Theamendments of 2003 eliminated this cap but stated a claimant could only recover economic damages. Seeid.

197. TEx. PROP. CODE ANN. § 27.004(a) (Vernon 2000 & Supp. 2004-2005). If the claim is notsubject to Subtitle D, Title 16 (SIRP), a homeowner must give the contractor written notice of a claim bycertified mail sixty days prior to filing a claim. Id. The notice should provide any evidence of the natureand cause of the alleged defect and the needed repairs. Id. The contractor then has thirty-five days in whichto request an opportunity to inspect the property. Id. The contractor then has forth-five days to make awritten offer of settlement to the claimant to either repair the defect or have it repaired at the contractor'sexpense. § 27.004(b). If accepted, the contractor has forty-five days in which to make the repairs. Id. Ifthe homeowner does not accept the contractor's offer, the homeowner has twenty-five days in which to


Under the Act, prior to any court action to recover damages or otherrelief, a homeowner must first comply with the processes in the SIRP.'98 If theSIRP fails to resolve the dispute, the homeowner may then bring suit forbreach of a limited statutory warranty under Subtitle D of Title 16.' 99 Thehomeowner must file the suit no later than the forty-fifth day after the third-party inspector issues the recommendation."u In any action subsequent to theSIRP, the report of the third-party inspector or final recommendation of thethree person panel creates a rebuttable presumption that can be overcome only"by a preponderance of the evidence that the recommendation or ruling isinconsistent with the applicable warranty and building and performancestandards."2"1 However, for claims brought under the statutory warranties, thestatute reduces the limitations period, especially for those provisions listed inthe one-year performance standards.0 2 The homeowner can still bring claimsoutside of the RCLA or the Act for fraud or breach of the implied warrantieswithin four years of the accrual of the action.203 Homeowners must bringclaims alleging breach of workmanship or failure to meet the performancestandards of an item included in the one-year warranty within two years of thediscovery of the defect.1' This allows for a total time, from title transfer tofiling of the suit, of three years. 205 The RCLA does not specifically provide alimitations period and thus the limitation period in those actions is determinedby the underlying cause of action.2" Most claims are brought within a fewyears of construction completion, but since a claim for fraud or breach ofwarranty can be brought within four years of its accrual, the limitations periodis substantially longer under these theories. °7

inform the contractor of why it is an unacceptable offer. § 27.004(b)(1). The contractor then has ten daysin which to make a counter offer. § 27.004(b)(2). These time periods are not applicable if strict compliancewould cause the statute of limitations to expire. § 27.004(c). Any action will be dismissed if the aboverequirements are not followed. § 27.004(d).

198. TEx. PROP. CODE ANN. § 426.005(a) (Vernon Supp. 2004-2005).199. §430.011(b).200. § 426.005(a)(1). In the event the report has been appealed, the time to file is extended to forty-

five days after the Commission issues it ruling. § 426.005(a)(2).

201. § 426.008.

202. See discussion infra Part I.B.203. TEX. Civ. PRAc. & REM. CODE ANN. § 16.004(a) (Vernon 2002).

204. See supra text accompanying notes 176-77.205. See discussion infra Part I.B.206. See "rEx. PROP. CODE ANN. §§ 27.001-007 (Vernon 2000 & Supp. 2004-2005). If the

underlying cause of action is negligence or violation of the DTPA, the limitations will be two years fromaccrual of action. Sanders v. Constr. Equity, Inc., 42 S.W.3d 364 (Tex. App.-Beaumont 2001, pet denied).If the underlying cause is breach of warranty, fraud, or breach of contract, the limitation period is four yearsfrom accrual of the action. Id.

207. See § 16.004(a).

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5. Damages

Any award of damages will be the same as provided in the RCLA, asamended by the Act.2"' If the Act applies to an action to recover for aconstruction defect, the claimant is entitled to recover only "economicdamages proximately caused by a construction defect." 2°9 If the claim is foran amount greater than $7,500.00, either the contractor or the homeowner mayfile a motion to compel mediation, which the court will grant.210 Theseprovisions apply unless the contractor fails to make a reasonable offer torepair.2"' Unless the RCLA preempts a claim, homeowners can still file underanother cause of action such as fraud, which allows for exemplary damages,or the DTPA, which includes damages for mental anguish.2 2 The RCLA doesnot preempt every injury that results from a construction defect." 3 The RCLAonly preempts another cause of action to the extent it conflicts.14 Fraud andDTPA violations do not conflict with the RCLA because they are differenttypes of actions .2 " Although a DTPA claim may still be possible from aconstruction defect, a breach of a limited statutory warranty is "not, by itself... a violation of the [DTPA]. 21 6 The conclusion is that a claim for breach ofthe statutory warranties is enough to stand on its own, apart from the DTPA,but the result is that only economic damages will be awarded.217 With theaddition of mental anguish damages, consumers benefit from proceeding underthe DTPA or fraud theories, if possible, in addition to the RCLA.18

208. TEx. PROP. CODE ANN.§ 430.011(b) (Vernon Supp. 2004-2005).209. § 27.004(g). The economic damages allowed are:(1) the reasonable cost of repairs necessary to cure any construction defect; (2) the reasonableand necessary cost for the replacement or repair of any damaged goods in the residence; (3)reasonable and necessary engineering and consulting fees; (4) the reasonable expenses oftemporary housing reasonably necessary during the repair period; (5) the reduction in currentmarket value, if any, after the construction defect is repaired if the construction defect is astructural failure; and (6) reasonable and necessary attorney's fees.

§ 27.004(g)(1)-(6).210. § 27.0041(a)-(b).211. § 27.004(g).212. See Bruce v. Jim Walters Homes, Inc., 943 S.W.2d 121, 123-24(Tex. App. San Antonio 1997,

writ denied).

213. Id. at 121.214. § 27.002(b).215. Jim Walters Homes, 943 S.W.2d at 123. 'The damages available in an action for fraud are not

premised on the construction defect, but on the act of misrepresentation. As such, the damages in a fraudaction are not adequately measured by the terms in which the damages allowed under the RCLA aredefined." Id.

216. TEx. PROP. CODE ANN. § 430.011(c) (Vernon Supp. 2004-2005).217. See id.218. See Jim Walters Homes. 943 S.W.2d at 121.


IV. THE FUTURE OF CONSTRUCTION LIABILITY IN TEXAS

Texas is one of only a few states that have enacted legislation to definethe context of contractor liability for construction defects in new homes.21 9

Legislation in other states "typically require[s] a builder to provide a warrantyagainst certain defects and construction practices that do not meet specifiedstandards."22 The statutes differ in their focus; some provide impliedwarranties with specifications on time limits or statutory remedies, while

others provide waiver provisions, statutory warranties that operate in additionto the implied warranties, registration procedures for contractors, or mandatoryparticipation in home warranty security funds.22" ' Texas has attempted to strike

a balance between the various approaches.222

A. Comparison of the Statutory Warranties and Implied Warranties

The focus for the implied warranty of workmanship was clearly on theconduct of the builder and the builder's ability to perform work which could

be expected from a "generally proficient builder."2 23 The statutory warrantiesappear to focus more on the performance of the residence and the materialsused in construction, as these warranties are referred to only within the

221performance standards sections. 224 Workmanship is "warranted to perform to

the performance standards.... ,225 Performance standards are defined as "thestandard(s) to which a home or an element of a home constructed as part ofnew home construction or a material improvement or interior renovationshould perform. 226 Once again, completely absent from this definition is any

connection to the builder's ability.227 It is the performance of the home or the

home's element that is the focus. 228 As long as the element holds up for the

219. Randy Sutton, Annotation, Validity, Construction, and Application of New Home Warranty

Acts, 101 A.L.R. 5th 447, 475-77 (2004). The following states have also enacted legislation: Connecticut

(CONN. GEN. STAT. §§ 47-116 to -122 (2004)); Indiana (IND. CODE §§ 32-15-7-1 to -11 (2002 & Supp.

2004)); Louisiana (LA. REV. STAT. ANN. §§ 9:3141-3150 (West 1997)); Maryland (MD. CODE ANN., REAL

PROP. §§ 10-202 to -204 (2003)); Minnesota (MINN. STAT. ANN. § 327A.02 -. 08 (West 2004 & Supp.

2005)); Mississippi (MIss. CODE ANN. §§ 83-58-1 to -17 (1999 & Supp. 2004)); New Jersey (N.J. STAT.

ANN. §§ 46:3B-1 to -20 (West 2003)); New York (N.Y. GEN. Bus. LAW §§ 777-777-b (McKinney 1996

& Supp. 2005)); Virginia (VA. CODE ANN. § 55- 70.1 (Michie 2003)). Id.

220. Id. at 447.

221. Patrick J. Cronin, A Call For Legislation in Washington State For Statutory New Home

Warranties, 33 GONZ. L. REV. 571, 586 (1998).

222. See discussion infra Part IV.A.

223. See supra text accompanying note 57.

224. Approved Rules, supra note 11, § 304.2(c).225. Id. § 304.3(c).

226. Id. § 304.1(b)(15).227. See id.228. Id. § 304.1(a).

2005]


requisite one-year warranty period, it meets the statutory requirements. 29

While it could be argued that the builder is proficient if his work meets theminimum performance standards, it is just as likely that meeting the minimumstandard does not ensure a proficient and capable builder.23 Both argumentsare circular, as is the definition of workmanship in relation to performancestandards.23 t In this case, it may be necessary for the statutory warranty ofhabitability to operate as the gap-filler and provide protection to thehomeowner where the performance standards and so-called warranty ofworkmanship leave off.232

The implied warranty of habitability focused on the completed structureand its ability to provide a safe, sanitary residence fit for human habitation.233

The implied warranty held the builder strictly liable only when the house was"unsuitable. '234 The statutory warranty is defined as a builder's obligation.235

The statutory warranty of habitability is extended for ten years, but it isdifficult to determine just how far it will go in holding the builder liable afterthe expiration of the performance standards period. 36 The statutory definitionincludes the builder's obligation to construct a home in compliance with theperformance standards (of the one, two and ten-year warranties), but there isalso a requirement that a defect alleged under habitability have a "direct affecton the habitable areas of the home" before this warranty becomes applicable.237

This leads to the conclusion that discovery of a construction defect specifiedin the one-year performance standards, which previously may have beencovered under an implied warranty of workmanship, now is not covered unlessthe defect makes the house completely unfit for habitation. 238 For the warrantyof habitability to apply, the house would have to be completelyuninhabitable. 39 While this is comparable to the implied warranty ofhabitability as explained in Centex, it also operates as a limitation of thewarranty of workmanship which now expressly ends at one year for certainelements. 24° Thus, a home that is habitable and has a construction defect forwhich coverage is not specifically provided, could be without a warranty.24'

229. Id.230. See discussion infra Part W.B.231. Approved Rules, supra note 11, § 304.3(c).232. See discussion infra Part IV.B.233. See discussion supra Part fI.B.234. See discussion supra Part 11.B.235. See supra Part III.H.2.236. Approved Rules, supra note 11, § 304.3(f)(4).237. Id. § 304.3(0(3). Living space is defined as "the enclosed area in a home that is suitable for

year-round residential use." Id. § 301.1(14).238. Compare § 304.3(a)(1) (providing a one year warranty period for workmanship and materials),

with § 304.3(f)(3) (establishing a ten year warranty period for habitability).239. See Approved Rules, supra note 11, § 304.3(0(3).

240. Centex Homes v. Buecher, 95 S.W.3d 266, 271 (Tex. 2003) (describing the warranty ofhabitability as applying to homes "unfit for living").

241. Construction defects specifically provided for in the one-year warranty include foundations,


While it can be argued that all major elements of the home are included in theperformance standards, the nature of litigation reminds us that statutes can

rarely cover all conceivable types of damages. 42 In an attempt to circumventa "wait and see" approach, a comparison with previous breach of impliedwarranty claims is necessary to further define the limits of the new statutorywarranties and attempt to predict their possible future application.243

B. Applying the Statutory Warranties and Building and PerformanceStandards

In Humber, the claim by Humber was based on a fireplace and chimney

that were alleged to have been improperly constructed by Morton, thecontractor.244 Humber alleged the home had partially burned down the firsttime a fire was started in the fireplace and was, therefore, unsuitable forhabitation.245 The fire occurred four months after construction wascompleted.246 Under the new statutory language, elements of fireplaces aregiven specific performance standards subject to the one year warranty forworkmanship and materials. 47 If one of the specified elements of theperformance standards did not cause the fire, it is probable that the ownerwould have to rely on the statutory warranty of habitability to make a claimagainst the builder and to argue as did the plaintiff in Humber, that the firecaused the house to be uninhabitable.2" The elements of the statutorywarranty of habitability are vague, but one can infer that a current cause ofaction under these facts would proceed substantially as it did under the impliedwarranty of habitability in Humber.249

framing, doors, windows, electrical fixtures, plumbing accessories, cooling and heating system, interiortrim,

fencing and pest control. Approved Rules, supra note 11, §§ 304.10-.33. Specific standards of performance

provided for the two-year warranty are wiring, breakers, electrical fixtures, plumbing accessories, pipes,

wastewater treatments systems, heating and cooling systems components and ductwork. Id. §§ 304.50-.52.

Specific performance standards for the ten-year warranty period includes pier and beam foundations, slab

foundations and other major structural components. Id. § 304.100.

242. See, e.g., Humber v. Morton, 414 S.W.2d 765 (Tex. Civ. App.-Amarillo 1967) rev'd, 426

S.W.2d 554 (Tex. 1968) (defective fireplace); Gupta v. Ritter Homes, Inc., 633 S.W.2d 626 (Tex. App.-

Houston [14th Dist.] 1982) aff d in part, rev'd in part, 646 S.W.2d 168 (Tex. 1983) (concrete damage),

Melody Homes Mfg. Co. v. Barnes, 708 S.W.2d 600 (Tex. App.-Fort Worth 1986) arid, 741 S.W.2d 349

(Tex. 1987) (broken pipe).

243. See discussion infra Part IV.B.244. Humber, 414 S.W.2d at 765.245. d.

246. Id.247. Approved Rules, supra note 11, § 304.29(0-(g). The rules specify performance standards for

refractory panels, fireplace doors, gas leaks, cracks in the masonry, the requirements for a correct draw,

firebox water infiltration and the noise levels for the fans. Id. The facts of Humber do not specify the exact

construction defect that led to the fire. See Humber, 414 S.W.2d at 765.248. Humber, 414 S.W.2d at 765.

249. See discussion supra Part B.A.

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In Gupta v. Ritter Homes, Inc., the second owner of a home, Gupta, suedthe builder for damages caused by excessive settlement of the slab foundationinto the ground that caused damage to the walls, roof, and patio. ° Guptapurchased the home three months after its completion, and the cause of actionaccrued shortly thereafter when he began to notice cracks in the wall,driveway, and garage slab.25' The builder responded and made minor repairswhen the owner informed him.2 1 The cracks increased in severity, but thebuilder refused to perform any additional repairs.253 Gupta subsequently filedsuit against the builder and sought economic damages for breach of theimplied warranty under the DTPA and for negligence. 4 The court held thatthe builder was subject to the implied warranty even to a subsequent buyerconcerning latent construction defects. 5 Performance standards for slabfoundations are included in the ten-year warranty section of performancestandards.256 From the available facts, it appears these damages would fallunder the ten-year period because they concern structural performance.257 Assuch, a homeowner in this position would be covered under the statutorywarranty, but only for economic damages as now allowed under the RCLA.255

In Melody Homes, the suit involved the purchase of a mobile home anda breach of implied warranty for repairs made by the original builder.25 9 Thehomeowners purchased the home in May 1980.2' They experiencedcontinuous puddles and dampness in the house for two years.26' In June 1982,the homeowners discovered a sink had not been connected to a drain in aninterior wall.262 Damage developed to the sheetrock and insulation.263

Workers were first sent out to repair the problem in July 1982, and on oneother occasion, but the problem was not fixed.2 64 Additionally, the workers didnot reconnect the washing machine drain which caused the house to flood.265

250. 646 S.W.2d 168, 169 (Tex. 1983).251. Gupta v. Ritter Homes, Inc., 633 S.W.2d 626, 626-27 (Tex. App.-Houston [14th Dist.] 1982)

affd in part, rev'd in part, 646 S.W.2d 168 (Tex. 1983).252. Id. at 627.253. Id.254. c Id.255. Id. at 628.256. Approved Rules, supra note 11, § 304.100 (stating that slab foundations shall be evaluated using

the "Guidelines for the Evaluation and Repair of Residential Foundations" as published by the Texas sectionof the American Society of Civil Engineers (2002), known as the ASCE Guidelines).

257. Id. § 304.100(a)(1).258. TEx. PROP. CODE ANN. § 27.004(g) (Vernon 2000 & Supp. 2004-2005).259. Melody Homes Mfg. Co. v. Barnes, 741 S.W.2d 349 (Tex. 1997).260. Id. at 351.261. Melody Homes Mfg. Co. v. Barnes, 708 S.W.2d 600 (Tex. App.-Fort Worth 1986) affd, 741

S.W.2d 349 (Tex. 1987).262. Id.263. Id.264. Id.265. 741 S.W.2d at 351.


Subsequently, the homeowners filed suit against Melody Homes for breach ofthe implied warranty under the DTPA.266 The court held that there was an"implied warranty to repair or modify existing tangible goods or property ina good and workmanlike manner.'2 67 The court defined good andworkmanlike as "that quality of work performed by one who has theknowledge, training, or experience necessary for the successful practice of atrade or occupation and performed in a manner generally considered proficientby those capable of judging such work." '268 Performance standards for waterpipes are specifically included in the statutory warranty under the two-yearperiod.269 Specifically, the rules state that "a water pipe shall not leak. 27°

They also state that a builder should repair any leak; however, the homeowneris required to shut off the water supply "immediately" if necessary to preventfurther damage to the home.27" ' Upon discovery, the homeowner is required togive the contractor thirty days notice.272 Additionally, the homeowner mustthen initiate the request to participate in the SIRP process on or before thesecond anniversary of the date of discovery but not later than the thirtieth dayafter the warranty expires.273 Accordingly, the statutory rules require this claimbe filed within two years of discovering the broken pipe in the wall but notlater than thirty days after the two year plumbing warranty expired.274 Thiswould have put the plumbing performance standard expiration in June of 1982(two years after title transfer plus thirty days).275 The homeowners would havehad to discover the broken pipe by May, give the builder a thirty day notice,and then file the request for SIRP.276 Because the broken pipe was notdiscovered until June, this claim would in all likelihood be barred as not timelyif based on the original plumbing construction defect.277 This is not to say,however, that it could not be brought under the statutory warranty ofhabitability which can be brought until the tenth anniversary of the effectivedate of warranty. 278 However, it does illustrate some of the potentialshortcomings of the Act because a habitability claim would necessitate thehome being uninhabitable, which is a subjective approach based on many

266. Id.267. Id. at 354.268. Id.269. TEX. PROP. CODE ANN. § 430.001 (b)(2) (Vernon Supp. 2004-2005); see Approved Rules, supra

note 11, § 304.51.270. Approved Rules, supra note 11, § 304.51(a)(2).271. Id. § 304.51(a)(2)(A)-(B).272. 10 TEx. ADMIN CODE § 313.2(a) (West 2004).273. TEx. PROP. CODE ANN. § 426,006 (Vernon Supp. 2004-2005); Approved Rules, supra note 11,

§ 313.4.274. Approved Rules, supra note 11, § 304.3(a)(2), (f)(4).275. See id. § 304.3(f)(4).276. See supra text accompanying note 256.

277. Approved Rules, supra note 11, § 304.3(f)(4).278. See id.

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variables.279 It raises the question, "would damage to sheetrock make a homeuninhabitable?" Arguably, the legislature intended to avoid the subjectiveapproach by creating these statutory warranties, but obviously this approachremains in effect.280

V. CONCLUSION

Homebuyers should remain wary of entering into a contract for a newhome with an unknown contractor with no reputation. 8' The existence of theResidential Construction Commission does not ensure that the person buildinga home is now any more experienced than the one who could have built ahome last year.282 While one would assume that a construction commissionwould regulate construction, the TRCC operates as more of a registrationagency than a regulatory agency.283

Residential homebuyers interact with the construction industry whileundertaking the most important and likely most expensive decisions of theirlives. As construction practices become more complicated, the need forcomprehensive regulation increases. 2

4 Homebuyers deserve a system that notonly protects them but one with established standards.285 A minimum amountof regulation should include standards at least on par with those that regulatethe local barber.286 The TRCC complaint procedure is just that, a complaintprocedure. 287 No resolution will be found in this process, but at least itprovides a forum for other homebuyers to investigate any prior complaintsabout a contractor they are considering.288 Likewise, the proceduresestablished by the TRCC to track contractors amount merely to registration asopposed to the much needed regulation. 289 This may be the first step tocomprehensive regulation of an industry that previously operated unfetteredfrom all state interaction.2 °

Now, the TRCC provides homebuyers with at least a procedure to makea complaint against a builder, request state sponsored dispute resolution forconstruction defects, and understand whether the warranty company they aredealing with is providing a warranty that gives them at least the minimal

279. Id. § 304.3(f)(2)(A)-(D).280. See SEN. COMM. ONBUS. &COMMERCE, BILL ANALYSIS, Tex. HB 730, 78th Leg., R.S. (2003).281. See discussion supra Part I1I.A-H.

282. See discussion supra Part lI.A-H.283. See discussion supra Part IU.B.284. See supra note 2.285. See supra text accompanying notes 78-81.

286. See supra note 6.287. TEX. PROP. CODE ANN. § 409.001 (Vernon Supp. 2004-2005).288. Id.289. See discussion supra Part 1I.B.

290. See supra Part II.A.


warranties required by the state.29' Construction defects that fit specificallywithin the statutory guidelines will predictably result in a quick resolutionupon a report by the state registered inspector.292 While the public policybehind the prior implied warranties of workmanship and habitabilityacknowledged the importance of the home purchase and focused on the buyerand their lack of knowledge in the construction field, the new statutorywarranties focus more on the finished product and appear to remove or insulatethe builder from the equation to a greater extent than the original RCLA.293

However, the guesswork has been reduced somewhat. Although the processis in its infancy, the statutory warranties of workmanship and habitability andbuilding and performance standards appear to provide homebuyers with, if nothigh, then at least workable standards, and at the very least, a starting point.294

The next few years will determine if the Commission will take an active rolein encouraging higher standards and qualifications of contractors or if they willrestrict themselves to registration of contractors and act merely as aclearinghouse for dispute resolution.

by Teresa Barnett

291. See supra Part MI.A-H.292. See supra Part h.E.293. See discussion supra Part IV.A.294. See supra Part 1i.H.

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Documents

Redsidential Construction Liability and the Texas