§ 6.3.6 Breach of Contract

• Jurisdiction: Arizona

§ 6.3.6 Breach of Contract . Whereas the preceding bases for the right of rescission arise primarily at the time of contract execution, breach of contract is the broad basis that encompasses material breaches after contract execution. This category includes the entire spectrum of contracts. The most typical cases are contracts for the transfer of real property and construction contracts. In a real property case, either the vendor or the purchaser may be the breaching party. 3 D. Dobbs, supra, at 274-75, 294-99, 312-13. In the construction contract case, it is usually the contractor who fails to perform as required in the contract. Id. at 446-48.

The case of Hall v. Read Development, Inc., 229 Ariz. 277, 274 P.3d 1211 (2012), raised the question of “whether the remedy of rescission is available to a subsequent purchaser in connection with a claim for breach of the implied warranty of habitability.” Id. at 278, 274 P.3d at 1212. Plaintiff Hall discovered various structural problems with the house soon after purchasing it from the previous owner in 1999. In 2004, she filed suit against the defendant Read Development, Inc., the original builder. The lawsuit included a request for rescission of the purchase. The trial court granted defendant’s motion for summary judgment on that issue, denying rescission due to the lack of privity. The case went to trial on other issues.

On appeal, Hall argued that “because a party need not be in privity to maintain an action for breach of the implied warranty of habitability in Arizona, by implication, privity is also not required for the remedy of rescission.” Id. at 284, 274 P.3d at 1218. Division 1 of the Arizona Court of Appeals began its analysis by distinguishing the exception to the privity requirement which allows “subsequent purchasers of a house to bring a claim for breach of the implied warranty of habitability against the builder” from the need to have a contract between the parties for the remedy of the rescission to make sense. Id.

The contractual remedy of rescission “abrogate[s the contract] and undo[es] it from the beginning; that is, not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made.” Reed v. McLaws, 56 Ariz. 556, 562-63, 110 P.2d 222, 225 (1941). Thus, rescission restores the parties to the status quo before entering into the contract. Id. at 563, 110 P.2d at 225. Generally, rescission is justified where a failure of consideration of an essential part of a contract exists. Miller v. Crouse, 19 Ariz. App. 268, 272, 506 P.2d 659, 663 (1973).

Id. (emphasis added). The court concluded:

Moreover, providing subsequent purchasers with the ability to rescind a contract negotiated and entered into between other parties is not a viable solution. We cannot return RDI and Hall to the status quo because they never contracted with each other; instead, RDI sold the house to the original purchaser. Hall’s only contract was with the original purchaser of the house. We therefore decline to require a builder to return funds to a

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