Thursday, August 2, 2018

Important Information for Modular Factories from Leading Industry Attorney


By Steve Snyder, Attorney at Law
August 2018
A homebuyer enters into a contract with a modular builder to build a modular home. The Builder then enters into a separate contract with a Manufacturer to manufacture and ship the home to the Homebuyer’s building lot. In these two transactions, there is no contractual relationship (the legal term is, no privity of contract) between the Manufacturer and the Homebuyer. If the Homebuyer later has a problem with the finished modular home which he has been unable to resolve with the Builder or through a service report to the Manufacturer, the Homebuyer then hires an attorney to file a law suit, and the attorney sues the Builder and the Manufacturer for Breach of Contract. Often these law suits will also allege that the Builder is an agent or affiliate of the Manufacturer and as such, the Manufacturer is responsible for defects caused during the onsite installation and completion of the home.
The “Doctrine of Privity of Contract” is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. The premise is that only parties to the contracts should be able to sue to enforce their rights or claim damages under the contract.
As a result, the Manufacturer will file a responsive pleading, usually Preliminary Objections, or a Motion to Dismiss, depending on what state you are in, wherein, the Manufacturer’s attorney will argue that there was no privity of contract between the Manufacturer and the Homebuyer, and as such, the Complaint should be dismissed as to the Manufacturer. In most states this will work. The Manufacturer’s attorney will respond that the Builder is not an agent of the Manufacturer; however, that is generally a matter that would be determined at trial, costing the manufacture addition legal fees as they proceed through the lengthy and expensive legal proceeding.
Many modular manufacturers today, make use of a notice or waiver document that they require the Builder to have their Homebuyer sign, acknowledging that the Homebuyer is entering into a contract with their Builder and not with the Manufacturer and that the Builder is not an agent, subsidiary or employee of the Manufacture. This notice, signed by the Homebuyer(s) will be very helpful to the Manufacturer in persuading the court to dismiss the complaint, as to the Manufacturer, in the early stages of the suit.
To get around the privity of contract defense, the Homebuyer’s attorney may also include a negligence claim in the suit, alleging that, notwithstanding the lack of contract privity between the Homebuyer and the Manufacturer, the Manufacturer was negligent in the design or manufacturing of the modular home.
This is where the economic-loss rule (also known as the Gist of the Action Doctrine) comes in. The economic-loss rule provides that when two parties have a contractual relationship, the economic loss rule prevents one party from bringing a negligence action against that party or other parties when their losses are purely economic (not personal injury damages). Essentially the court has determined that when the gist of the action is a contract dispute between two parties to a contract, the plaintiff cannot also allege a negligence claim in order to get around the lack of privity of contract with the Manufacturer.

The problem is that there are some states, specifically, Arkansas, Connecticut, Louisiana, New Jersey and Virginia, and possibly the District of Columbia, that do not follow the general rule. There are other states that have a hodge-podge of exceptions to the general rule and so you have to take each state individually.

The result of the differences in how states handle this issue, requires that a manufacturer who is requiring homebuyers to sign an acknowledgment, notifying them that they are entering into a contract, exclusively with their builder and not with the manufacturer may not be fully protected in all states. I have redrafted several of these notices to include a waiver of negligence and implied warranty claims. If you want me to review your companies Waiver form or review other documents you use in your business, please feel free to give me a call (717) 975-7799 or email me at

Steven R. Snyder, Esquire Attorney at Law 635 Glenbrook Drive Harrisburg, PA 17110 (717) 975-7799 Fax (717) 526-2044

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