Andrulis v. Levin Construction Corp.

RODOWSKY, Judge. This is an action for breach of a construction contract brought by homeowners against the builder. Two legal issues are presented. The first involves implied warranties under Maryland Code (1974, 1988 Repl.Vol., 1992 Cum.Supp.), § 10-203 of the Real Property Article. 1 That question is whether § 10-203 warranties include work done by the builder other than in or on the dwelling house.

The second issue is whether the trial court properly invoked the principle of economic waste in order to limit expectation interest damages for certain deficiencies in the work. In 1987 Levin Construction Corporation (Levin) commenced construction of the house located at 7220 Armat Drive, Bethesda, Montgomery County, Maryland. The next year Levin offered the substantially completed dwelling and lot for sale. Peter J. Andrulis, Jr. and Marilyn W. Andrulis (the Andrulises), husband and wife, entered into a contract with Levin (the Contract) under which Levin agreed to add certain features, including a forty foot by sixteen foot swimming pool to be constructed in the spring of 1989.

The Andrulises promised ³⁵⁷ to purchase the land and improvements for $1,276,900, consisting of $1,241,900 cash at closing and a $35,000 promissory note. At the closing, held in December 1988, $15,748 of the cash was escrowed to cover specified, incomplete work that should have been completed by closing. The instant action was commenced in February 1990 in the Circuit Court for Montgomery County as a complaint for interpleader by the escrowee. The Andrulises were designated as plaintiffs and Levin as defendant.

A court trial of the matter consumed ten days, in stages, between May and July 1991, resulting in a finding that the Andrulises were entitled to $138,033 in damages. The note was declared paid and satisfied, and the interpleaded funds were awarded to the Andrulises. After those credits, including interest, judgment was entered against Levin for $78,616.40. The order entering judgment listed thirty deficiencies and specified the amount awarded as to each.

Levin appealed to the Court of Special Appeals. That court, in an unreported opinion and for reasons to be set forth, infra, affirmed in part, reversed in part, and remanded for further proceedings. The Andrulises petitioned for certiorari, and Levin conditionally cross-petitioned. We granted both petitions.

I A general description of the premises is required for an understanding of the legal issues concerning warranties. A 7220 Armat Drive is a trapezoidally shaped lot. The street frontage, which is the north side of the lot, is 87 feet. 2 The rear, or south, lot line is 78 feet. The western boundary is 147 feet, while the eastern is 206 feet.

The three-story brick house faces the street, and is approached by a circular driveway. From entrance to rear the building measures 56 feet. ³⁵⁸ For most of that depth the width of the house is 71 feet. Included in the building on its east side is a one and one-half story, two car garage facing the street. Behind the house is a large patio, and behind the patio is the swimming pool.

The distinctive feature of the lot is that, moving from the north boundary to the south boundary, the ground ascends from an elevation of 30 feet to perhaps 58 feet. The front entrance to the house, reached by an outside staircase, is seven feet above ground level, but the rear entrances are level with the patio. The in-ground swimming pool is at a higher elevation than the patio, and the pool’s water surface and its surrounding concrete apron or “bib” create a terrace in the slope ascending from the patio to the south boundary.. There is an outside walkway, connecting the patio to the front lawn, on the west side of the house.

As a result of this construction at varying elevations, there are retaining walls between the house and the property’s rear, west, and east boundaries. The walls to the rear and on the west side are made of brick, with large planters incorporated into the total configuration of walls and steps. Specifically, there are staircases, planters, and a brick retaining wall on the north, or house, side of the pool, rising from the patio level to the pool level. There is a brick retaining wall on the south side of the pool, supporting the slope from the pool to the rear of the premises.

There are brick retaining walls on the east and west sides of the pool. There is a brick retaining wall on the west side between the walkway and the boundary. There is also a timber retaining wall on the east side of the house. The circuit court found that the § 10-203 warranties had been breached by defects in the above-described work.

That finding was based principally on the testimony of the Andrulises’ expert, John Thomas (Thomas), an architect and builder. Much of the testimony relevant to the instant § 10-203 issue had to do with drainage of surface water and of percolating ground water. Thomas described either the absence of or ³⁵⁹ deficiencies in, moisture protection or waterproofing, weepholes, and foundation drainage systems. Levin submits that the maximum “swing” on the § 10-203 issue is $41,040, consisting of the following items: West side retaining wall $10,000.00 Waterproofing of retaining walls 6,000.00 Retaining wall weepholes 4,500.00 Sidewalk caulking 600.00 Garage 5,000.00 Timber retaining wall 1,100.00 Rear yard, catch basin, and grates 4,130.00 Planter drains and tie-ins 5,510.00 Pool lights and light covers 1,000.00 Patio slab 2,500.00 Front walkway 450.00 Fence posts 250.00 Total $41,040.00 The Court of Special Appeals concluded that, of the above-listed items, only the garage was clearly within the § 10-203 warranty and that those items described as west side retaining wall, waterproofing of retaining walls, retaining wall weepholes, and timber retaining wall would be within the warranty, if those “walls are necessary for the house’s structural stability.” Under the mandate of the Court of Special Appeals, that factual issue would be determined on remand. 3 B Under the common law of Maryland, except in unusual circumstances, “ ‘there is no implied warranty in the sale of a completed residence.’ ” Thomas v. Cryer, 251 Md. 725, 726 , 248 A.2d 795, 795 (1969) (quoting Allen v. Wilkinson, 250 Md. 395, 398 , 243 A.2d 515, 517 (1968)).

The General Assembly responded to the absence of warranties by Chapter 151 of ³⁶⁰ the Acts of 1970 which, as amended, is now Title 10, Subtitle 2, “Express and Implied Warranties.” Section 10-203(a), in its aspects relevant to the issue before us, has been substantially unchanged since its enactment in 1970. Those relevant parts read: “[I]n every sale, warranties are implied that, at the time of the delivery of the deed to a completed improvement or at the time of completion of an improvement not completed when the deed is delivered, the improvement is: (1) Free from faulty materials; (2) Constructed according to sound engineering standards; (3) Constructed in a workmanlike manner; and (4) Fit for habitation.” Definitions for the subtitle, as originally enacted, provided that “ ‘[improvements’ includes all fixtures and structures attached to realty IN THE NATURE OF PRIVATE DWELLING UNITS.” The capitalized words were added to the definition in the course of passage of Chapter 151. The definition of improvements was amended by Chapter 694 of the Acts of 1971. Preambles to the bill advise that the subtitle “was intended to cover newly constructed homes only,” and that “[tjhere is some confusion as to whether or not this law applied to or applies to already existing homes or would cover improvements made by individual homeowners.” The 1971 enactment then made the following amendment (italics indicate new matter in the bill as introduced to then existing law; brackets indicate matter deleted from then existing law by the bill as introduced; and capitals indicate amendments in the course of passage): “ ‘Improvements’ includes all newly constructed private dwelling units and all fixtures and structures [attached to realty in the nature of private dwelling units] which are made a part of the newly constructed private dwelling units at the time of their construction by BUILDING contractors and subcontractors.” ³⁶¹ Following Code revision, that definition, now found in § 10-201(b), reads: “ ‘Improvements’ includes every newly constructed private dwelling unit, and fixture and structure which is made a part of a newly constructed private dwelling unit at the time of construction by any building contractor or subcontractor.” The Revisor’s Note to § 10-201 advises that the only changes to subsection (b) “are in style.” Md.Code (1974), Revisor’s Note following § 10-201.

C The Andrulises contend that each of the disputed items is a “fixture [or] structure which [was] made a part of [the] newly constructed private dwelling unit” constructed by Levin under the Contract. Levin, on the other hand, contends that the Court of Special Appeals properly considered legislation enacted after the 1970 adoption of Subtitle 2 in order to construe “improvements” as used in the earlier legislation. Chronologically the analysis begins with Chapter 31C, “New Home Warranty and Builder Licensing,” of the Montgomery County Code (MCC) as enacted by 1986 Laws Montgomery County ch. 49, § 1. That legislation requires the County Executive to establish by regulation the terms of a new home warranty, including minimum performance standards.

MCC § 31C-3(a). A new home warranty security fund is created to guarantee the payment of warranty claims, and that fund is derived from assessments on builders. MCC § 31C-5. By Executive Regulation No. 22-86 (Exec.Reg.), the Montgomery County Executive implemented the local legislation.

Following the provisions for warranties and standards, Exec. Reg. § 4.10.d, headed “Exclusions from Warranty Coverage,” in part provides: “1. Defects in outbuildings including detached garages and detached carports, except outbuildings which contain the plumbing, electrical, heating, cooling or ventilation systems serving the home; swimming pools and other recreational ³⁶² facilities; driveways; walkways; boundary walls; retaining walls; bulkheads; fences; landscaping, including sodding, seeding, shrubs, trees, and plantings; off-site improvement or any other improvements not a part of the home itself.” Section 8.1 of Exec.Reg. 22-86 permits a builder to use a “private Alternate New Home Warranty Security Plan” if approved by the county agency administering the program. In the instant matter, and in compliance with the local law, Levin furnished the Andrulises “Insurance/Warranty Documents” issued by Home Owners Warranty Corporation.

That warranty excludes, inter alia, “[djefects in outbuildings including, but not limited to detached garages and detached carports (except outbuildings which contain the plumbing, electrical, heating, cooling or ventilation systems serving the Home); site located swimming pools and other recreational facilities; driveways; walkways; patios; boundary walls; retaining walls; bulkheads; fences; landscaping (including sodding, seeding, shrubs, trees and plantings); off-site improvements; or any other improvements not a part of the Home itself.” The General Assembly of Maryland, aware of the Montgomery County program, addressed security for new home warranties in Chapter 223 of the Acts of 1990, which added Subtitle 6, “New Home Warranties,” to Title 10 of the Real Property Article. In general, Subtitle 6 requires certain disclosures, see §§ 10-602 and 10-603, under pain of criminal sanctions for failure to comply, see § 10-609. A builder must disclose in writing to the owner whether or not the builder participates in a new home warranty security plan, and, in either event, certain further disclosures are required. See §§ 10-602 and 10-603.

A new home warranty security plan must conform to minimum standards set forth in § 10-606. “New home” is a definitional term in Subtitle 6. Section 10-601(i) provides: “(1) ‘New home’ means every newly constructed private dwelling unit in the State and the fixtures and structure ³⁶³ that are made a part of a newly constructed private dwelling unit at the time of construction. (2) ‘New home’ does not include: (i) Outbuildings, including detached garages and detached carports, except outbuildings that contain plumbing, electrical, heating, cooling, or ventilation systems serving the new home; (ii) Driveways; (iii) Walkways; (iv) Patios and decks; (v) Boundary walls; (vi) Retaining walls not necessary for the structural stability of the new home; (vii) Landscaping; (viii) Fences; (ix) Off-site improvements; (x) Appurtenant recreational facilities; and (xi) Other similar items as determined by the Secretary.” Subtitle 6 does not apply to “new home warranties offered, or new home warranty security plans operating in Montgomery County,” with certain exceptions not applicable here. § 30— 610. Thus, Subtitle 6 is not applicable to the Andrulises’ new home.

Further, although the Montgomery County local law and implementing Exec.Reg. 22-86 are applicable to the Andrulises’ new home, those local provisions cannot repeal or restrict the operation of Title 2. Consequently, § 10-203(a), the implied warranties provision exclusively relied on by the trial court, remains the governing statute. In the matter before us the Court of Special Appeals concluded, and Levin urges, that “improvements” as used in § 10-203(a), and as defined in § 10-201(b), should have a scope limited to the reach of “new home” as defined in § 10-601(i). In other words, Levin contends that, by the process of construction, this Court should incorporate the specific exclu ³⁶⁴ sions found in § 10—601(i)(2) into the definition of “improvements” under § 10~201(b).

Citing decisions of this Court stating rules of statutory construction, including Hope v. Baltimore County, 288 Md. 656, 666 , 421 A.2d 576, 581 (1980), Levin submits that “since these two statutes pertain to the same general subject matter, the two statutes must be construed together and harmonized to the fullest extent possible.” Brief for Appellee at 24. We start with the plain language of the statute. “Improvements” in § 10-201(b) includes not only the dwelling unit per se but also “every ... fixture and structure which is made a part of a newly constructed private dwelling unit at the time of construction.” Thus, a reading that attempts to limit § 10-203 implied warranties to the dwelling unit per se has no support in the language employed in the statute. This Court had occasion to address §§ 10-201 and 10-203 in Starfish Condominium Ass’n v. Yorkridge Serv. Corp., 295 Md. 693 , 458 A.2d 805 (1983).

The condominium, located near the Atlantic Ocean in Ocean City, Maryland, consisted of three garden apartment buildings, each containing three floors with four units on each floor. Id. at 696-97 , 458 A.2d at 807 . The beachfront construction utilized breezeways in lieu of enclosed hallways. The breezeways and the stairways connecting the breezeways of the three floors were part of the condominium common elements.

Id. at 702 , 458 A.2d at 810 . One of the alleged breaches of implied warranty related to the stairways. Id. at 703 , 458 A.2d at 810 . We said: “Each of these alleged defects relates to a ‘fixture and structure which is made a part of a newly constructed private dwelling unit,’ so that it constitutes an improvement under § 10-201(b).

Each is the subject of the warranty provided by § 10-203(a).” Id.. Thus, Starfish did not limit the warranty under § 10-203 to the dwelling unit per se, or to fixtures or structures immediately attached to the dwelling unit per se. Nor did we limit the warranty to fixtures or structures outside the walls of ³⁶⁵ the dwelling unit that might be necessary for the structural stability of the dwelling unit. Against all of this background, the 1990 enactment of Subtitle 6 has the opposite effect from that for which Levin contends.

In stating a primary definition of “new home” in § 10-601(0(1), the General Assembly used nearly the identical language employed in 1971 to define “improvements” in Subtitle 2. Then, faced with the breadth of that definition and its literal application in Starfish, the General Assembly recognized that, in order to limit the sweep of the primary definition of “new home” in the new statute dealing with security for warranties, it was necessary to state specific exclusions. These specific exclusions are found in subsection (2) of the “new home” definition. There are no specific exclusions in § 10-201(b), and the § 10-601(0(2) list of exclusions cannot be added to § 10-201(b) by judicial fiat.

All of the items of work done that are involved in this issue and listed above are “a part of’ this private dwelling, newly constructed by Levin, that was sold by it to the Andrulises. There is no need for a remand to determine whether the retaining walls are necessary for the structural stability of the dwelling house. D The Court of Special Appeals said, and perhaps alternatively held, that “the warranty provisions embodied in the [Cjontract make it evident that the parties intended to exclude the disputed items, except for the garage and the retaining walls necessary for the house’s structural stability, from coverage.” This apparently refers to the program under the Montgomery County local law, and to the Home Owners Warranty Corporation policy which contained the exclusions quoted above. For at least two reasons these aspects of the transaction do not abrogate § 10-203 implied warranties in this case.

First, the Contract explicitly states that “[njotwithstanding anything to the contrary, [Levin] shall provide applicable warranties as ³⁶⁶ required by State ... codes/law regarding the construction of the subject property.” Second, § 10-203(d) provides: “Exclusion or modification of implied warranty.—Neither words in the contract of sale, nor the deed, nor merger of the contract of sale into the deed is effective to exclude or modify any implied warranty. However, if the contract of sale pertains to an improvement then completed, an implied warranty may be excluded or modified wholly or partially by a written instrument, signed by the purchaser, setting forth in detail the warranty to be excluded or modified, the consent of the purchaser to exclusion or modification, and the terms of the new agreement with respect to it.” The attempted exclusion in the Contract does not comply with § 10-203(d). See Starfish, 295 Md. at 702 , 458 A.2d at 810 (exclusion provision ineffective because of failure to advise of the implied warranties sought to be excluded). II The second issue concerns the measure of damages for breach of the § 10-203 warranties as they apply to a foundation drainage system for the dwelling house itself.

The parties agree that the local building code requires that a drainage system be installed on the outside of, and at the base of, the foundation of the dwelling. 4 Its primary purpose is to prevent water infiltration into the dwelling by keeping the water level below that of the foundation. ³⁶⁷ The Andrulises’ expert, Thomas, had excavated at the northeast and southwest corners of the house during one of the hiatuses in the trial. Based on what he observed, and on what he did not find, Thomas opined that there was no foundation drainage system on the west and north sides of the house. He adhered to his previously expressed opinion that the drainage system, where installed, was not installed properly and was not functioning properly. Thomas explained that over time, perhaps in fifteen to twenty years, hydrostatic pressure would damage the foundation walls, necessitating their repair.

Thomas further opined that the installation of a foundation drainage system after the house had been completed would be very expensive. He said that the work could not be done with a backhoe, but that it would have to be done by hand. Plantings would have to be removed. A swath across the patio in the back of the house and sections of walkway and of driveway would have to be removed.

In the rear of the house, excavation would have to be to a depth of twelve or thirteen feet. At one area on the west side, where there is a deep window well near a planter, the contractor would have to tunnel sideways for a short distance to install the drain. In his revised written estimate, Thomas placed the cost of installing a functioning foundation drainage system on all four sides at $55,625. We quote the trial court’s findings on this issue: “An irrefutable fact is that I accept Mr. Thomas as a highly credible expert and a highly credible witness and while I have not—and while I don’t disagree with the estimates he has given as to certain work that needs to be done, that could be done, I just simply do not find it reasonable under the circumstances that that be done. “But let me say that, in my view of judging witnesses, I accept the truthfulness and credibility of this witness, as well as the evidence that he has produced ... and I am left with the conclusion by a bare preponderance of the evi ³⁶⁸ dence—this one is close—but the [Andrulises] have made out a case in this respect. “By a bare preponderance of the evidence which is their standard of proof, the [Andrulises] have shown that it is more likely than not that on two sides of that house the drainage system was not installed. “I am not going to elaborate extensively on how the damages testified to by Mr. Thomas of $55,625 are arrived at because I am not going to accept that figure.

Instead, I take an alternate view. “... This basement has existed for four-plus years and there is very little evidence of any leaking in that basement, very little. “The argument is made you should award damages because it will leak eventually____ Maybe it will leak eventually and maybe it won’t, but we have had some