This article is written by Amandeep Kaur, a law graduate of Panjab University in Chandigarh, India. The article states the law relating to liabilities of vendors, lessors and builders under the Restatement (Second) of Torts Act in the United States with the help of illustrations and case laws. The article tries to include a detailed explanation of every clause under the Act and the remedies available to builders, vendors and lessors.

It has been published by Rachit Garg.

Table of Contents

Introduction

A tort is a civil wrong. It can be described as an act or omission that causes injury to another person. Whether such injury was caused by the other person intentionally or that person was under a compulsion to do something or he didn’t do that act, as a result of the omission of this act to perform, the injury is caused to the other person. There are generally three liabilities under the Restatement (Second) of Torts – liability for intentional torts, liability for negligent torts, and strict liability for selling and making defective products. In this article, we will try to study the liabilities of vendors, lessors, and builders under torts.

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Definitions of vendor, lessor and builder

Before diving into the topic of the liability of a vendor, lessor, and builder, we need to understand who a vendor, builder, and lessor is.

  • Vendor: A vendor is a person who sells a chattel but does not manufacture, compound, pack, or otherwise create the finished product that is sold. 
  • Lessor: A lessor is a person who grants a lease to someone else. A lessor is the owner of an asset that is leased or rented to some other party, which is known as a lessee. A lessor can be a company or an individual, depending on who or which entity owns the building. The lessor can also be called a “landlord” in some situations and is the owner of the property.
  • Builder: A builder is a person who builds on specific instructions from the client. Generally, he is not the owner of the land. There can be a contract builder, builder vendor and builder lessor. Contract builder is one who is responsible for signing a contract to construct the building, whereas the builder vendor is the one who sells this constructed building, and the lessor is the one to whom the building is sold or leased. The contract builder is held liable for the dangerous defects that he had done in the same way that the manufacturer of products under the law of torts is held liable for defective products. While the builder vendor/ builder lessor is held liable for negligence, they enjoy the immunity of “caveat emptor”. According to the doctrine of caveat emptor, it is the duty of the buyer to be aware before buying his property, as he has the opportunity to inspect the property before buying. However, the courts held that builders can be held liable for negligence for foreseeable damage to an occupier of a building. 

General liabilities in torts

The liability that is available under US law of torts is liability due to negligence under which there is certain duty of care that has to be followed by the party otherwise the party is held liable for the injuries caused due to negligence caused. Since liability under negligence is limited to just the act of the defendant whether he acted carelessly or not, there is another liability that is strict liability and one such example under strict liability is product liability. The law of strict liability was introduced in the nineteenth century. The law has seen a progressive change from the concept of negligence, where a person is held liable due to carelessness and there lies a duty of care, whereas under the doctrine of strict liability, the defendant is held liable irrespective of whether there is negligence on his part or not. There are various causes of action when a person is injured by a defective product. These causes of action can be breach of warranty, which includes breach of any implied or express condition mentioned in the contract, negligence, which is a breach of the legal duty of care by the plaintiff; and strict liability, which makes the defendant liable irrespective of the fact that he behaved in a negligent way or with an intention. The theory of strict liability came into force after certain shortcomings were faced while claiming damages under the rules of negligence and breach of warranty. The doctrine of strict liability was adopted in the case law of Escola v. Coca-Cola Bottling Co. (1944) in the field of defective products.

In addition to this, there exists another type of liability under strict liability which can be called as product liability which is a specific kind of liability and has evolved under the law of torts. As per this liability the manufacturers can be held liable for the injury caused due to the defective product based on doctrine of strict liability and without the want for proof of negligence.

In the above case law, a waitress was injured by an explosion from a Coke bottle. The judgment was given in favor of the waitress based on negligence. It was held that irrespective of the fact that the manufacturer exercised due care, only the principle of strict liability would deter carelessness on the part of manufacturers, as the risk of such accidents is constant. This approach has been adopted by almost every American State under the Restatement (Second) of Torts Section 402.

According to this Section, when a person sells a product in a defective condition, the seller is liable for causing harm when he is involved in selling defective products. The doctrine of strict liability states that the seller shall be held liable even though all possible care has been taken while preparing the product and the consumer has not entered into any contractual relationship with the seller.

Section 402A of the Restatement (Second) of Torts defines who is a seller. This definition is vast enough to include manufacturers, wholesalers, and retailers. Also, those who lease the products on a long-term basis are sellers. There are certainly three main categories of defects that make a product “unreasonably dangerous” to a user or consumer: 

These can be:

  • Manufacturing defects: Manufacturing defects are those defects that occur during the construction or production of an item and the plaintiff just needs to show that the product was defective.
  • Design defects: Design defect cases are more difficult to prove than manufacturing defects, as the plaintiff needs to prove not only that the decided plan was not followed but also he needs to prove that plan was not that good. It always deals with the concept of “was the product safe enough?”, which is a question of reasonableness.
  • Failure to warn defects: The failure to warn of risk involves the following conditions that must be specified such as the risk must be specified along with the reason disclosed for warning.

It has been reiterated by the Supreme Court of North Carolina in the judgment of Swift Co. v. Tempelos (1919) that the words seller, manufacturers and chattels  can be equated with the words builders and vendors.

Liability of vendors 

Strict liability in tort for builder-vendors of homes

Restatement (Second) of Torts Section 402A is a law which provides for strict liability of torts for builder-vendors of homes. Earlier, the doctrine of strict liability was based on the principle of negligence, but this doctrine has seen much expansion since then, when the builder-vendors are no longer exposed only to strict liability.

Liability of vendors 

A chattel can be described as personal property that can be either movable or non-movable in nature. The manufacturers, contractors, and vendors have been given the same meaning by the courts while giving judicial decisions pertaining to their liability. The vendor is held strictly liable when he considers the chattel to be a safe one and does not know the risks associated with it; he cannot escape from this liability on the ground that he was making a conscious misrepresentation of the risks involved. However, his liability can be reduced and can be held liable under negligence when he proves that he delivered the chattel with misrepresentation.

In the case of Pearlman v. Garrod Shoe Co. (1937), the vendor falsely represented the shoes to be fit and of orthopedic design, but the shoes were loosely bunched and creased which further developed blisters in the feet of the wearer. So the Court of Appeals of the State of New York held that the plaintiff should recover on the ground of negligence, irrespective of the contract. Another situation may arise when the vendor firmly believes the chattel to be safe. He may have such a belief without inspecting such chattel. The vendor is to be held liable on the grounds of negligence.

There can be another situation that the vendor may face. This is when the vendor honestly believes the chattel to be safe and harmless for any use. He reasonably believes that there is no need to call any attention to its use as the purchaser is aware of normal dangers he will overcome while using it. Here also, the vendor is not liable for his act. However, the vendor is held liable in such conditions when he has sold the chattel without inspection because he has omitted to do something. 

Thus, the purchaser has all the protection when he has a cause of action against the manufacturer for harm caused by dangerously defective chattel. In some cases, the vendor is liable even if he is innocent for breach of an express or implied warranty. 

While considering the liability of the bare vendors, who are the ones who sell the house but are not involved in the construction of the house, the rights of the purchaser are determined by the terms of the contract between the parties, but the general principle of caveat emptor i.e. buyer beware must be followed. However, there are three exceptions to this general principle:

  • When a house is leased or sold during construction, there is an implied term that works and materials of appropriate standard will be used.
  • When a landlord lets furnished property, it is always implied that premises are fit for purpose.
  • When public authority is discharging duties, it has to be implied that the premises are reasonably fit for human consumption.

Liability of vendor for pre-existing defects

The liability of sellers of real estate which involves pre-existing defects is discussed below. In Anderson v. Cosmopolitan National Bank (1973), the Illinois Supreme Court examined the liability of the real estate sellers due to personal injury from defects that already existed when the contract was entered into and that the buyer could not repair those defects due to a shortage of time. The  Circuit Court of Cook County held that an ordinary vendor is not liable for personal injuries due to defects in the property that occurred after the possession of the buyer. But the Supreme Court reversed the decision and held that a vendor, even though he does not have the property, is responsible for injuries when the vendee or the buyer does not have sufficient time to repair the already existing defects. Thus, there is no difference between the liability of the vendors who sell using installment contracts or by virtue of rights under other contracts.

As a general rule, when a vendor transfers possession and control over property, he is not liable to third persons injured due to defects existing on the premises at the time of transfer. Thus, where a vendor is not responsible for injuries caused due to defects in the property after the sale, he is not liable for the same. This rule is supported by the argument that the negligence of the vendor cannot be the proximate cause of injuries when he does not have property. 

The surrender of property by the vendor to the vendee ceases his liability, and the liability of the vendee begins. It is also to be noted here that in the case of installment contracts, the vendee still has ownership rights and control over the property. In the case of an absolute sale, the vendor divests himself of title and all rights of possession or re-entry into the premises for any kind of repairs. So the installment contractors must not be considered to be vendors. 

On analyzing the situation, when there is an agreement to repair between the vendor and the vendee, a vendor is not liable to the tenant or subtenant for the injuries caused by defects in the premises. And in such circumstances, plaintiffs’ injuries are too remote to make the vendor liable for defects, even if there was an agreement to repair between both of them. However, the courts followed a liberal approach while deciding such cases where an agreement was made between the parties to enter into the premises and repair if any defect existed.

In Alaimo v. Du Pont (1954), the Appellate Court of Illinois held the defendant liable as there was an additional right with the appellant to enter into the premises to repair, which was the cause of the death. Even the courts went to an extent under which a mere covenant to repair would not make the defendant liable. In another situation, such as when the plaintiff got injured by falling from a railing and the defendant agreed to repair earlier but did not repair, the defendant is held to be liable for breach of condition under an agreement to repair, and if due to this non-repair by the defendant, the injury was caused.

The Restatement (Second) of Torts also mentions the liability of the vendor. A lessor of land is subject to liability for physical harm caused to his lessee and others upon the land with the consent of the lessee or his sublessee by a condition of disrepair existing before or arising after the lessee has taken possession if the lessor, as such, has contracted by a covenant in the lease or otherwise to keep the land in repair. 

Exceptions to the general rule of vendor’s liability

As a general rule, the vendor is not liable for any injury that arises after possession has been transferred, but under the exception, the vendor is liable in tort after a transfer of possession and control when he does not disclose a condition that he was already aware of and that could not come into knowledge of the vendee even after reasonable care. The liability of the vendor generally continues till the vendee has discovered the defect or had reasonable time to repair it. This protection further extends to any person to whom a further vendee has leased or sold the house. Now, what amounts to reasonable time is a question of fact. It has to be determined according to the facts and circumstances of the case. 

While holding the vendor liable under this principle, the reasonable time in cases where the defect was knowingly concealed by the vendor continues to run from the time of discovery by the vendee, while, in cases of a patently dangerous defect, the reasonable time starts from the moment ownership is transferred to the vendee. Thus, if the vendor is made liable in such cases after they have given up possession, they will be more reluctant to dispose off their property as they may be subjected to tort liability.

Liability of lessors

The lessor leases his property to the lessee, and this lease is regarded as equivalent to the sale of premises for the time being. The lessee becomes the owner and occupier and is subject to all the responsibilities while being in possession. The lessor surrenders his possession and control of land to the lessee with only reversionary interest, which means that he will return the property to the original owner on fulfillment of certain conditions in the property. Therefore, keeping in mind the above conditions, the lessor is not liable to the lessee or others entering the land for defective conditions existing at the time of the lease. However, there are certain exceptions under which the lessor is liable for defects in the premises stated under Restatement (Second) of Torts, which are explained as follows:

  • Restatement (Second) of Torts, Section 357:  According to this Section, when the lessor contracts to repair, the only remedy earlier available to the tenant was damages for breach of contract in the form of cost of repair or rental value of the property. The tenant could not recover any losses due to personal injuries caused to them. So this Section enables the tenant to recover the losses for the personal injuries caused due to the defects caused as a result of  the lessor.
  • Restatement (Second) of Torts Section 358: According to this Section, the lessor is held liable when there are undisclosed dangerous conditions that are known to the lessor but are unknown to the lessee. Whenever a lessor of land conceals or fails to disclose any condition, either natural or artificial, that is dangerous to the persons on the land, then the lessor is held liable to the lessee or any other person on the land with the consent of the lessee or sublessee after possession has been taken by the lessee. As a general rule, the lessor is not liable for defects in the premises. However, the lessor will be held liable if –
  • The lessee does not know or has reason to know the condition of risk involved.
  • The lessor knew about the risk involved but had reason to expect that the lessee would not discover any condition or realize the risk.
  • If the lessee conceals the condition, the lessor is liable until the lessee discovers it and has taken sufficient precautions against it.

However, the lessor is liable only in case of latent conditions and not to the patent or can be reasonably determined by the tenant.

  • Restatement (Second) of Torts, Section 359: When the lessor leases the land for a purpose that involves admission of the public, then the lessor is under an affirmative duty to exercise reasonable care to inspect and repair the circumstances to avoid any kind of risk to the public who may enter.
  • Restatement (Second) of Torts, Section 360 and 361:  These Sections deal with the circumstances when a building is rented for multiple purposes. For example, a part of the building is used for office use and the other part for residential purposes. Under such conditions, the lessor has possession and control over the common passageways. Thus, an obligation arises on the part of the lessor to exercise reasonable care to inspect and repair the premises to protect the lessee, his family members, employees, invitees, etc. 
  • Restatement (Second) of Torts, Section 362: This Section deals with negligence on the part of the lessor. When the lessor has agreed to repair the defects either by agreement or orally and he fails to exercise reasonable care in repairing the defects, he is held liable for injuries to the tenant, and it is unknown to the tenant that the repairs were negligently made. However, this exception comes only when the lessee lacks knowledge that repairs are either not made or have been negligently made. In the case of Cesar v. Karutz (1875), the Court of Appeals of the State of New York held that the lessor must disclose all the concealed dangerous conditions existing at the time of transfer of possession. This liability extends to not only tenants but sub-tenants, employees, social guests, or any other using the premises. 
  • Restatement (Second) of Torts, Section 379: As per this Section, if the lessor of the property knew or should have known that there existed an unreasonable risk of physical harm to others outside of the land, he shall be liable for the physical harm caused in the same way as he had possession of the property. So the lessor cannot escape liability for causing danger to the public or adjoining property, as he was aware of dangerous conditions existing on the property.

During the early nineteenth century, when an agreement between the lessor and lessee concerning repair clause was breached, the only remedy available to the lessee was contract action for breach. But as of present situation,  lessors are held liable for defects that had caused injury or harm to the tenant, his family members, or their guests. The earlier position under which no remedy was available was adopted by The Restatement (First) of Torts, Section 357, but now The Restatement (Second) of Torts and the Restatement (Third) of Torts, Section 53 (2012), have adopted the latter view and a wider approach.

However, there are certain judgments given by various courts which provide that the lessor is not liable even after the certain exceptions mentioned above. In the case of Pagelsdorf v. Safeco Ins. Co. of America (1979), the Supreme Court of Wisconsin held that none of the exceptions to the general rule applied to the facts of the case. The Court clarified that the landlord is under a duty to exercise ordinary care in the maintenance of the premises. The same rule was applied by the New Hampshire Court in Sargent v. Ross (1973). The Supreme Court of New Hampshire held that the general rule of non-liability would not apply. Instead, the general principles of negligence should apply. The questions such as control, hidden defects, and common use only help to determine negligence. To conclude, it would be wrong to justify the above point where the lessor is not held liable for injury caused due to defective premises. So a landlord owes his tenant a duty to exercise ordinary care.

In Knight v. Hallsthammar (1981), the implied warranty of habitability created a duty on the part of the lessor to deliver the premises in habitable condition. So a number of courts have held lessors legally accountable. In the case of Becker v. IRM Corp. (1985), the Supreme Court of California held that landlords must be strictly held liable for injuries caused by latent structural defects in the premises. However, this decision was criticized a lot and repudiated in Peterson v. Superior Court of Riverside County (1995). It was held that a tenant could not reasonably expect a landlord to have eliminated defects of which he was unaware and which would not have been disclosed by reasonable inspection. 

Certain other relationships have similar duties imposed, such as landlord-tenant, businessman-patron, employer-employee, and carrier-passenger. Thus, there exists a duty on one party who has control over the other to take reasonable precautions against the harm caused due to defects in the property. One such relationship between landlord-tenant is explained below.

Tort liability of Landlord

As a general rule of liability of landlords under the law of torts, when a premises is rented to a tenant and injury occurs on the premises, the tenant, i.e., who is an occupier in the present situation is liable for this. The landlord has no more control over the property now, and he is not even entitled to enter the premises without the tenant’s permission. But recent developments in the law have made the landlord liable for any defects caused on the premises. The rationale behind this liability was kept since the landlord is in a better position than the tenants to pay for the defects caused on the premises and has ultimate control over the general conditions surrounding the apartment. However, there are certain exceptions to this rule, which are discussed below:

Exceptions to general rule

  • There are certain hidden dangers that are known only to the landlord or he should have knowledge about them. He failed on his part to disclose these to a tenant and as a result, the injury has been caused to the tenant.
  • In some cases, the extent of landlord’s liability is so wide that he is made liable even for the dangers caused to people outside the premises. For example, A, a tenant rents his house to a sub-tenant and agrees with the landlord to keep the building repaired. But later on, A neglects to carry out any repair work, due to which the building collapses, crushing the cars parked alongside. So here, A and the landlord both can be held liable for the activities carried out by them, irrespective of the fact that there was an agreement signed between them.
  • The landlord is also held liable if he retains control over the pathways, such as common halls or stairs in an apartment building.
  • The landlord must often repair the premises. It may be statutory duty or by the mode of agreement in the lease. So if he fails to repair any such defects, he is made liable for the defects that can cause harm and danger to the property.

Liability of landlord for disrepair of premises

As a general rule, the landlord is liable for any defects caused in the premises which were reasonably detectable, but when the tenant is made aware of existing dangerous conditions by the landlord or comes to know about these defects by using his senses, then the legal duty of the landlord is completely discharged. The landlord has no duty towards third persons coming upon the land. A legal principle is that where a landlord lets the premises in  a ruinous condition or in a condition where a nuisance is caused, the landlord is held liable for the injuries resulting therefrom. This principle found its recognition in various other judgments in different jurisdictions.

In the case of Ripple v. M. N. Bank (1944), the plaintiff, who was injured on the premises of the lessee, leased to him by the landlord, sued the landlord. The Supreme Court of Ohio ruled in favor of the landlord, Cheadle. The reason was that the landlord’s liability only applies to strangers who have a right to be on the property and for whom the landlord has a duty to maintain a safe environment. This duty is based on the legal principle “sic utere tuo ut alienum non laedas,” which means “use your property so as not to harm others.” The things used on the premises were within the lessee’s permission, so the landlord was not held liable for injuries caused. However, this decision was so criticized that the Court erred while giving the judgment.

Various courts in several other judgments supported the view that the landlord should be held liable in such cases where the landlord takes the rent for premises containing a public nuisance. To conclude this, there have been developments over the past years where the landlord’s non-liability rule has been transformed to the point where he is liable under certain conditions. In a few states, where a landlord leases land either for public or semi-public use, the landlord is under a duty to the lessee to take reasonable care to make the premises fit for the intended use.

Liability of builders

Builder-vendor liability for construction defects in the house

The liability concept under construction defects has seen a major change from the mere principle of caveat emptor, under which the purchaser has to be aware of any defects before buying any property. But now the courts are no longer following the above principle but are making the builders and vendors liable under different legal theories of torts such as negligence, fraud, deceit, breach of contract, breach of warranty, either express. implied or even the principle of strict liability. 

Now what needs to be understood is how the builders and vendors are held liable for breach of warranties and under strict liability principles.

Warranty

The warranties are dealt under the Uniform Commercial Code. These can be either expressed or implied in nature.

Express warranty

An express warranty, as the name suggests, is made in express form, either in written or orally, which states the manner of performance of the particular product. Under express warranty, the vendor must have an affirmation or promise relating to goods and must contain the description of goods or a sample or a model.

While further elaborating on this concept, the courts have interpreted this warranty in different ways. For instance, some courts have held the builder-vendor liable even for the oral statements made by them. In various judgments, the courts considered the statement that the house was first class in materials and workmanship to be a sufficient warranty that covered defects in the roof after two years of purchase. However, it may be difficult for the courts to adjudge the construction defect issues merely on the evidence based on oral statements. 

The Statute of Frauds (1677), although has been an English statute, but this statute has been incorporated by various countries including the US. Incorporating some of the features of this law, the law adopted by various states of the US provides that any conveyance of real property has to be in writing. Also, the oral statements cannot be relied upon by the buyer, as these statements can be exaggerated to some point. So the express warranty in such cases is reliable if it is in written form. So the builder-vendor is held liable based on the written warranties that explicitly provide for guarantees or promises. For example, if there is a written warranty that concerns the manner and skills used in the construction of a particular house, the builder-vendor can be held liable if he breaches any such express warranty. The buyer has the right to seek compensation for damages to the property due to breach of a warranty.

Implied warranty

An implied warranty, on the other hand, is not expressly mentioned by the parties but is one that is created by law or emerges from common sense. The implied warranty may arise on account of the fitness of the product for a particular use. There is an implied warranty under Section 2-314(2) of the Uniform Commercial Code that the goods must be fit for ordinary purposes and must conform to any affirmations of fact that are made in their description. Under Section 2-315 of the UCC, there always lies an implied warranty that the goods are fit for the purpose mentioned whenever a contract is made and the buyer is relying on the seller’s skill and judgment to select a product that is suitable for a particular purpose.

A significant amount of development has occurred in builder-vendor liability in the implied warranty area. In the case of Hilder v. St. Peter (1984), it was held by the Court that when the defendant builds a house for the plaintiff, there is an implied warranty that the house should be habitable and fit for human beings to live in, and such a decision was specifically limited to the sale of an unfinished house by the builder. And such a limitation of an unfinished house that imposes an implied warranty on completed houses was laid down by Colorado Supreme Court in the case of Carpenter v. Donohoe (1964). It was held by the Court that an implied warranty of fitness extended to the purchase of houses, whether they are fully completed or under construction, and such implied warranty arises out of contract to buy. However, later, in the case of Allen v. Wilkinson (1968), the Court of Appeals of Maryland refused to extend implied warranties to completed houses. 

In Staff v. Lido Dunes, Inc. (1965),  the Supreme Court of Trial Term, Nassau County, held that the builder-vendor is liable under the purchase contract as the defects were hidden and could not be discovered by the home buyer during the closing process of buying. As per the doctrine of merger, whenever the property is sold, the terms of the sale contract merge into the deed, which further means that any promises or agreements made in the contract are no longer enforceable once the deed is delivered. So it was held by the  Supreme Court of Trial Term, Nassau County, in the above case that it would be unfair for the Court to apply merger doctrine as it would go against public policy to enforce such a contract, and the builder was still held responsible for them despite the deed being delivered.

However, while interpreting such cases, there is a very thin line that lies between the decisions of the courts that decide liability either on the basis of implied warranties or negligence. As per Section 235.02 of the Wisconsin statutes, the seller can be held liable under an oral agreement that relates to the quality of the construction even though the quality condition is not mentioned in the contract of sale. So the plaintiff can sue the builder-vendor for negligent performance.

Liability of builder-vendor under doctrine of strict liability 

According to Section 402A of the Restatement (Second) of Torts, liability shall be imposed on the builder-vendor for the defect caused, irrespective of whether the builder-vendor had taken reasonable care in the construction or sale of the house. Schipper v. Levitt and Sons, Inc. (1965) is a landmark case on the strict liability of builder-vendors. In the above-mentioned case, the builder, who was a defendant, had not installed a mixing valve to reduce the temperature of hot water at the faucets. Due to this, a plaintiff’s child, who was just 16 months old was seriously burnt by the water from the sink. So the Court of New Jersey held the defendant strictly liable for causing the defect in the house construction. 

In another case, State Stove Manufacturing Co. v. Hodges (1966), the Court held that Section 402A applies to the manufacturer of a product and to a contractor who builds and sells a house with the product in it. In this case, the builder failed to install a relief valve which would prevent the explosion in the heater. The manufacturer was not held liable under this case since the manufacturer assumed that the builder, who installed the heater, would add the relief valve as required. Therefore, the builder’s failure to follow the safety guidelines was seen as the only cause of the accident, and he was held liable for the defect caused.

Although Section 402A does not expressly refer to houses, it is addressed to the liability of the seller of products and not the ‘chattels’. But on a broad interpretation of the word ‘product’, it could include anything which is produced or either constructed such as a house under Section 402A. The word ‘construction’ of a house is similar to the manufacture of a product. But in certain cases, such as in Dippel v. Sciano (1967), the doctrine of strict liability has been taken equivalent to negligence, so the defendant can have the defense of contributory negligence available to him. So to conclude it, the property damages and personal injuries must be recoverable under the doctrine of strict liability.

Builder-vendor liability for recovery of economic loss in construction defects

The doctrine of economic loss tends to limit the recovery of damages in tort for the product unless the product has caused personal injury or damage to the property. Economic loss refers to the loss caused to the party due to the use of the product, which was either inferior in quality or does not work for the intended purpose. As a result of these losses, the product may have a loss in its value. It has been held by the courts that economic losses are not recoverable in tort due to privity of contract. So in order to bring economic losses within the ambit of damages, the property damage has to be legally significant.

Economic loss in negligence

The contract can be enforced in law only by way of standards that the parties have agreed upon, and these standards relate to the quality of the products used or manufactured. On the other hand, under tort law, the standards are imposed by law, with the duty on each citizen to exercise reasonable care to prevent physical harm or damage to the property. So tort law is related to the standards of conduct. In the construction industry, the courts have adopted various other approaches apart from privity defense to shield builder-contractors from liability for injuries to remote parties. These approaches were the doctrine of caveat emptor, under which the buyer must be aware and there is no liability of the vendor. The next approach followed by courts was doctrine of “merger by deed” under which all the contractual obligations of the builder are satisfied once they are merged into the final deed at the closing. Another such approach was the rule of “completed and accepted” by which once the work is completed and accepted the builder’s liability gets terminated. However, later on, in various judgments such as MacPherson v. Buick Motor Co, (1914), the courts held the builders liable under the traditional tort standards for physical harm or damages to the chattel.

Principle of foreseeability

The courts, under the foreseeability principle, went on to equate the scope of liability in tort. The contractors and manufacturers were held liable on the ground that such economic losses were “foreseeable” to them. In Navajo Circle Inc. v. Development Concepts Corp. (1979), a builder and architect were sued on grounds of negligence in the construction of a roof by the plaintiff. The lower court dismissed the petition of the plaintiff but the decision was overruled by the Court of Appeals of Florida, Second District, on the ground of foreseeability, that the defendant must have the legal duty of reasonable care to avoid any risks where the damage is foreseeable. In another case of Coburn v. Lenox Homes, Inc. (1982) the Connecticut Supreme Court held that the builder-vendor must be liable for negligence for foreseeable damage due to the construction of a defective house. 

Thus, foreseeability raises a legal duty of reasonable care upon the builders due to physical harm and damage to the property. In the case of Ales-Peratis Foods International, Inc. v. American Can Co. (1985), the California Court of Appeals gave a judgment under which the principle of foreseeability is based on the following factors:

  • how much the defendant’s actions directly hurt the plaintiff’s interests; 
  • how foreseeable it was that the defendant’s actions would hurt the plaintiff’s interests;
  • the amount of  harm done; 
  • how much the defendant’s actions and the plaintiff’s injury are closely interlinked.
  •  how much the plaintiff is to blame for what happened; and 
  • the public policy that supports the finding of a duty.

Therefore, these factors would prevent negligent interference with the economic damages.

Economic loss in strict liability

According to Section 402A of the Restatement (Second) of Torts, the seller is held liable for selling a defective product that is unreasonably dangerous to the consumer. So whenever there is physical injury to the consumer or damage is caused to the property, the consumer has the right to recover his losses irrespective of the faults. The courts have tried to analyze the situation under which the damage to the product qualifies for physical harm. In the New Jersey Supreme Court’s decision of Santor v. A & M Karagheusian (1965), the plaintiff sued a carpet manufacturer for the cost of a defective carpet. The Supreme Court of New Jersey rejected the economic loss rule, holding that there was “no just cause” for permitting recovery for personal injuries in some cases but denying recovery in others simply because the loss of value is the only damage sustained. The Court held that the nature of damages must not determine the amount of compensation that the plaintiff can seek. Thus, the plaintiff has the right to seek compensation, even if it is purely an economic loss. 

In contrast to the above judgment, the California Supreme Court in Seely v. White Motor Co. (1965), the doctrine of strict liability was outrightly rejected by the said Court on the ground of economic injury. The Court held that this doctrine is applicable only when there is a risk of personal injury.

In Morrow v. New Moon Homes, Inc, (1976), the Supreme Court of Alaska denied the recovery to the plaintiff on the grounds of the above judgment and held manufacturer liable for economic loss arising due to the breach of the implied warranties under UCC  but later on in various judgments, the plaintiff was allowed to recover the damages under the doctrine of strict liability for delivery of a  home with a defective electric heater. 

Recovery of economic loss under strict liability theory

The doctrine of strict liability has been considered to be inappropriate in the construction context. In Conolley v. Bull (1968), the  Court of Appeal of California, First District, Division One did not use the doctrine while deciding the liability of a builder who constructed a house on poor soil. This doctrine has been rejected in the construction context due to a variety of reasons. In some courts, this theory is inapplicable in cases of construction, such as in case of Wright v. Creative Corp, (1972), the Colorado Court of Appeals. Division II held that the purchaser has the opportunity to make a reasonable inspection of the structure of real property. In Jones Laughlin Steel Corp. v. Johns-Manville Sales Corp, (1980), the United States Court of Appeals, Third Circuit, allowed the defendants to use the economic loss doctrine to defend their side. The architect and manufacturer were not held liable for the crack in the roof system of the plaintiff’s factory. The loss incurred was purely economic in nature, and generally, in these kinds of losses, it is the owner who suffers the losses. The parties can at their own instant agree not to make the architect or manufacturer liable by negotiating for warranty protection or by trying to get a lower contract price when purchasing the roof system.

Recovery of economic loss under negligence theory

The recovery of economic loss by the owners of the property on the grounds of negligence theory has been far more successful than other theories such as the doctrine of strict liability. There are certain barriers such as caveat emptor or “completed and accepted defense,” that prevent the owners of the property from making builders liable. So in Moxley v. Laramie Builders, Inc, (1979) the Supreme Court of Wyoming held that the doctrine of caveat emptor cannot be used as a defense for negligent construction.

Similarly, in Simmons v. Owens (1978), a subsequent purchaser was allowed to sue a builder for rotting of wood due to low clearance of exterior siding. The District Court of Appeal of Florida, First District, did not accept “completed and accepted” as a defense on the ground that the purchaser cannot determine where the defect exists. While rejecting the defense of privity, the Superior Court of New Jersey, Appellate Division, in Juliano v. Gaston (1982), held that the homeowner has the right to sue the subcontractor for negligence and claim damages for the harm caused to their property. The fact that the defendant is a subcontractor doesn’t prevent the homeowner from seeking compensation for the damages caused by the subcontractor’s negligence.

In another case, Ales-Peratis Foods International, Inc. v. American Can Co. (1985), Court of Appeals of California, Second District, Division Seven, relied upon the six-factor analysis to determine if economic loss was a foreseeable consequence of negligence on the part of construction contractors. In Redarowicz v. Ohlendorf (1982), the Supreme Court of Illinois upheld the principles of product liability. It was held that liability in tort is not determined either by privity or foreseeability but by the duty that the plaintiff has. The courts have also based their decisions on the amount of property damage that is required to establish injury under tort law.

At present, for example, the California Supreme Court in Aas v. Superior Court (2000), limited the scope of recovery by plaintiffs in construction defects. It was held by the Court that there cannot be any tort recovery and the builder cannot be held liable for the harm that has not caused any property damage even though the defects violated the provisions of building codes relating to the prevention of life, health, and property. In Jimenez v. Superior Court of San Diego County (2002), the Supreme Court of California held that manufacturers were strictly liable when they installed defective windows in mass-produced homes. It was also held that recovery of economic loss under negligence theory does not bar tort recovery under the law of tort for damage to a defective product.

Thus, it can be said that tort law does not require any duty to be imposed on construction contractors for the economic losses arising due to the diminution of buildings. The judicial policymakers will decide whether to extend any such duty on them to serve the best interests of the society. 

Liability of builder vendor’s lender for failure to protect the vendee against defective homes

The liability of the builder vendor was based on the negligence principle against vendees and third parties who were injured by latent defects in home design and construction. But later on, the courts changed their viewpoint and made the contractors strictly liable for the sale of defective homes. The landmark judgment that has redefined this law regarding liability is Connor v. Great Western Savings and Loan Association (1968). It was held that the lender was liable on the ground of negligence in design and construction. There was a negligent breach of duty by the lender since he financed the shareholders who constructed defective homes. The lender was negligent, as he should have taken reasonable steps to prevent potential buyers from buying defective homes. The buyer completely relies on the skill, care, and reputation of the manufacturer, and the manufacturer has to make a representation that the house is safe and suitable for use. 

The earlier courts, while rejecting the theory of strict liability, based their decisions on the ground of caveat emptor, under which the buyer must be aware that he accepted the house after he had an opportunity to inspect it, and if found defective, he would have rejected it there and then only. So later on, the courts ensured that strict liability be applied to builder-vendors and their financial backers in order to be more diligent while dealing with the safety of homes. Thus, even the lenders are strictly liable for defects in houses sold by builder vendors that they finance. All these arguments holding the builder-vendor strictly liable are made applicable equally to savings and loan associations, banks, and any other lenders who finance the construction industry. Since the lender is the main driving force of capital in the construction industry, he is in the best position where he can prevent fraud and defectively designed construction houses. Builder vendors and the contractors who sell the homes are often irresponsible, while lenders are far more responsible and can avoid risk at their hands. 

Lenders will take more precautionary measures while approving development plans and can inspect the defects while the construction is in progress with more care and caution if they are held strictly liable. The lenders are made liable under this theory only to ensure that the house is reasonably fit for the purpose for which it is sold. However, the courts, while deciding the liability of the lender, must keep in mind various factors such as the experience of the builder-vendor, solvency status, and how much control the lending authority has.  For example, a lender who lends money in a housing scheme and later on becomes an entrepreneur shall have strict liability due to the extent of his involvement in the scheme. On the other hand, lenders who provide money to experienced and solvent builders but do not have much control over the enterprise do not face strict tort liability. However, they are held liable for negligence.

The builder-vendor is primarily held liable for any defect since he has immediate control over the construction. The lender can escape from this liability by keeping high interest rates on loans and seeking indemnification from the builders who build defective homes. Thus, all in all, the liability of vendors must be vicarious strict liability based on the principle of social policy instead of a fault principle.

Vendor-builder liability in real estate

The doctrine of strict liability has been applied on a large scale by the courts. The earlier views on which decisions of the court were based are no longer applied. Instead, the courts have extended the applicability of strict liability to real estate. However, the courts have differed in their opinions while applying these doctrines.

Application of doctrine of strict liability in real estate

The landmark judgment that led to the applicability of the doctrine of strict liability to the field of real estate is Schipper v. Levitt & Sons, Inc. (1965). An infant who was the son of the plaintiff was seriously burned by the defective hot water pipe from a sink faucet. Although a complete guide of instructions was made available to the lessee, still the Supreme Court of New Jersey, found that the defendant was liable for negligence. The Court held that there is no difference between real and personal property as far as the principle of liability is concerned. The Court also considered whether the doctrine of strict liability could be made applicable to tort law. After about seven years, in the case of Gay v. Cornwall (1972), the Washington Court of Appeals held that the doctrine of strict liability is applicable to builder-vendors. The house sold to the plaintiff was defective with leaky roofs, broken sewer pipes, vents, and a furnace. The Court held that the builder-vendor was strictly liable irrespective of the fact that there existed a previous legal agreement based on the implied warranties between buyers and builders. This judgment led to the enactment of the Tort Reform Act of 1981 by the Washington Legislature. This Act provides for the statutory liability of the builder-vendors for the construction of defective mass homes.

In the case law Blagg v. Fred Hunt Co. (1981), the question that came before the Supreme Court of Arkansas was whether these builder-vendors are liable even if the original owner sells his home to the subsequent purchaser. It was held by the Court that the warranties should be extended beyond the initial purchaser of real estate whenever there is no change or alteration in the condition of the building since the original sale. The Court also considered that the word “product” should include the word “houses” within its definition.

Conditions where doctrine of strict liability in real estate does not apply

There are contrasting judgments given by the courts under which the doctrine does not apply to real estate properties. The courts have followed a more cautious approach while applying this doctrine. In Chandler v. Bunick (1977), the Supreme Court of Oregon did not hold the defendant strictly liable as there were certain other alternative remedies available to the plaintiff.

In another case Chapman v. Lily Cache Builders, Inc. (1977), the Illinois Appellate Court again did not apply this doctrine while pronouncing the judgment and held that there is an apparent difference between manufacturers of goods and builders of homes. In Wright v. Creative Corp, (1972), the Colorado Court of Appeals. Division II, did not base its decision on Schipper and held that builder-vendors can be held liable only due to negligence for construction defects in property. Since the buyer has the opportunity to inspect the house, faults can be detected by the buyer.

Availability of alternative remedies in real estate

There are contrasting views by different courts on whether the doctrine of strict liability should be applied to builder-vendors in real estate. However, it is more justified that this doctrine must not be imposed and instead, there are certain alternative remedies available. Negligence and strict liability in tort have different connotations. Under negligence, there is a duty of reasonable care that must be followed by builders while constructing the houses. The builder-vendor is held liable under negligence due to violation of law or a statute, whereas the strict liability is based on the nature of the product.

In Stephens v. Stearns (1984), the ​​Supreme Court of Idaho held that negligence can arise due to a violation of statute. The alternative remedy that lies with the purchaser of the house is the implied contractual remedy. This remedy is, however, often confused with the doctrine of strict liability. The implied warranty has application both in contracts and torts. While holding the builder liable under the principle of an implied warranty, the court keeps the view that the home is reasonably suitable for what it was intended to be and not merely a habitable one. Thus, the builder must have a standard of workmanship based on skill and intelligence as possessed by other builders. But under implied warranty, the subsequent buyers cannot claim remedy under implied warranty, as most jurisdictions rely on the concept of privity of contract.

Another remedy available to the buyer is establishing fraud or misrepresentation on the part of the builder. The Restatement (Second) of Torts § 353 deals with such liabilities. It states that vendors are liable if they fail to disclose a condition or conceal a fact that can cause an unreasonable risk to the vendee. This liability dissolves when the vendee has discovered the dangerous condition and had the opportunity to take reasonable precautions.

Thus, in the law of torts, there are not just remedies under strict liability or caveat emptor available to the plaintiff; there are multiple alternative remedies available, such as liability under negligence or breach of warranty. So whenever the doctrine of strict liability is applied, it is always in response to some public need where traditional legal theories are inadequate to provide the relief. 

Builders’ liability in negligence 

The cause of action in negligence requires certain conditions for a person to be made liable under tort. Negligence is a tort and is not related to breach of contract. There must be a reasonable duty of care that has been breached by the other party. This breach has caused injury and damage to another party. There must be a duty of care upon the parties to be fulfilled. For example, a contractor builds a house and installs a defective heating system, which causes burn injuries to a family member. Thus, the builder had a duty of care to exercise reasonable care while installing products.

Liability of builder and architect to third parties due to negligence

As a general rule, a builder is not liable for negligence on a real property to the parties who are not parties to the privity of contract for the injuries caused due to the defects. Also, the employer must have completed and accepted the work. The landmark judgment of MacPherson v. Buick Motor Co. (1914) made the manufacturer and repairer of chattels liable for negligence. Various views supporting the above judgment have been made whether the Macpherson doctrine should be made applicable to building contractors. As per Macpherson doctrine, there is an implied warranty of safety between a manufacturer and private purchaser irrespective of the fact that ownership lies with the retail dealer. However, the courts have been very slow in adopting this view on the grounds of acceptance of the work by the owner earlier after due care. So from time to time, various exceptions have been laid down that hold the builder liable. The builder is liable for negligence if the structure made by him was:

  •  imminently or inherently dangerous.
  • There was knowledge about the defect, and it was concealed on account of fraud and misrepresentation with the buyer.

However, to prove the above facts, the plaintiff needs to show that: 

  •  A dangerous structure was created.
  • The builder knew that it would be used for human habitation.

The courts have followed a reluctant approach while holding the builder liable for negligence. The courts have given varying decisions while creating a thin line between theories based on negligence or implied warranty. In the case law of ABC Builder, Inc. v. Phillips (1981), the plaintiff based his cause of action on grounds of implied warranty or negligence. The Supreme Court of Wyoming held that builder-vendors must furnish safe sites for the homes they are building. They can be held liable if they choose an unsafe site based on an implied warranty. However, the Court also held that it is the duty of the homeowner to warn the buyer about any existing conditions that could pose an unreasonable risk of harm. The broad test of negligence is what a reasonably prudent man could foresee under such circumstances. Negligence has to be read with the knowledge of a risk or injury that can be easily apprehended. The builder-vendor must also realize from his expertise and skill that the site would be safe enough to carry out the work.

The builder-vendor must be able to anticipate sources of dangers, such as the type of soil on which construction is to be carried out. In the case of Cook v. Salishan Properties, Inc.(1977), the Supreme Court of Oregon tried to analyze the applicability of the negligence theory or implied warranty. The law of warranty provides for the liability of the seller without proving his fault. While applying this theory, it has to be seen who has a better opportunity to ensure that what is to be included in warranty. Where the builder has better control over the construction process, implied warranty can be applied. On the other hand, where the builder does not have much role to play in the case of loss caused to the seller, he will be liable under the negligence theory. He is obliged to conduct a reasonable inquiry about the conditions before constructing the site. The Restatement (Second) of Torts imposes the duty on homeowners to warn buyers about unreasonable risks that either exist or are known to exist.

Conclusion

It is the foremost duty of the policymakers to provide for a law dealing with the liability clauses that would serve the interests of society to make the construction contractors, vendors, builders, and lessors liable. Law of torts never imposes a duty on the construction contractors where the owners can be protected from economic losses due to defects in them. In this context, the interests of the injured party, who is the owner of the building, must be considered. The law of tort allows the builders to define or limit their obligations to the owner through an agreement. However, the law of negligence provides an exception to this and provides that the builder must protect the owner by taking reasonable care. Many issues remain unresolved even after the adoption of principles of strict liability, such as how the real estate owner’s liability has to be dealt with by those who dispose of the mass production of houses. The courts have often applied a consumer-oriented approach to protecting helpless and innocent homeowners. But for the construction industry, the applicability of this approach seems to be diluted. The purchasers are in a position to inspect a house for possible defects. Thus the tort law has tried to shift the burden of loss from the injured plaintiff to one who is at fault under the negligence theory to the one who can bear the loss under the strict liability theory. 

Frequently Asked Questions (FAQs)

What is the builder-vendor liability for construction defects in the house?

The builders and vendors are held liable due to negligence, fraud, deceit, breach of contract, breach of warranty either express or implied or even the principle of strict liability. According to Section 402A of Restatement (Second) of Torts, strict liability shall be imposed on the builder for the defect caused, irrespective of whether the builder-vendor had taken reasonable care in the construction or sale of the house.

Is the vendor liable for the pre-existing defects in the house?

As a general rule, a vendor is not liable for personal injuries due to defects in the property that occurred after the possession of the buyer. But there are various exceptions under which a vendor, even though he does own the property, is responsible for injuries when the vendee or the buyer does not have sufficient time to repair the already existing defects. 

What is the liability of the lessor under the law of torts?

The lessor is not liable to the tenant or others entering the land for defective conditions existing at the time of the lease. However, there are certain exceptions under which the lessor is liable for defects in the premises stated under Restatement (Second) of Torts such as the lessor will be held liable if –

  • The lessee does not know or has reason to know the condition of risk involved.
  • The lessor knew about the risk involved but had reason to expect that the lessee would not discover any condition or realize the risk.
  • If the lessee conceals the condition, the lessor is liable until the lessee discovers it and has taken sufficient precautions against it.

References

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