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A written warranty is a very important part of every construction agreement. The written warranty clause attempts to assign responsibility for the cost of repairing defects that arise after the project has been completed. It is important to attempt to define and limit what the contractor is responsible for repairing and for how long the contractor remains liable to the owner for correcting defects. The warranty clause may also attempt to exclude many minor variations in the structure which occur after project completion that are not actual defects.
Express and Implied Warranties
When the project is completed and the contractor has been paid in full, he still has a legal obligation to promptly investigate any work that fails, or any defects
that arise during the express warranty period (often the one-year period specified in the warranty section of the contract with the owner) and also during any implied at law warranty period that may be required your state laws. Some complaints may be covered by an express or implied warranty and others may not be covered at all for reasons discussed herein.
If you receive a call from the owner about an alleged construction defect or failure, promptly respond to the call and investigate to determine the nature of the alleged defect and whether you are responsible. In many states, depending upon numerous factors discussed below, the contractor’s responsibility for the project may well extend past the typical one-year express warranty period specified in many contracts.
Warranties generally can be divided into two main categories, express warranties and implied warranties. An express warranty is a written or oral promise made in conjunction with a contract under which the contractor assures the quality, utility, or performance of the completed project for a stated period of time. The contractor essentially guarantees that the quality of the materials and workmanship will remain at a specified, reasonable, or workman like standard free from major defects and will remain at that level for a stated period of time.
An implied warranty is a warranty that is imposed by state law upon the construction transaction. Different states may treat implied warranties very differently in terms of what type of warranty is imposed and how long the owner (or even a subsequent owner in many cases) may invoke the implied warranty for the contractor’s work. Check with an attorney familiar with construction law in your area to find out the applicable statutes of limitation or repose. Some states may place longer or additional implied warranties upon a contractor who builds and sells new homes (a developer) than upon a contractor who enters into a remodeling or new home construction contract with an owner. Courts in many states have also determined that contractors who build and sell new homes must automatically provide to the original purchaser of the home (and sometimes often subsequent purchasers) implied warranties of merchantability, habitability, and fitness for a particular purpose under the principles established by the Uniform Commercial Code (U.C.C.). While the U.C.C. was written specifically to govern the sale of “goods” by a “merchant,” many courts have referred to the language of the U.C.C. in determining the outcome of warranty disputes related to certain aspects of the construction business. The Implied Warranty of Merchantability and the Implied Warranty of Fitness for a Particular Purpose and Implied Warranty of Habitability are defined in the Uniform Commercial Code and can be summarized as follows:
• Implied Warranty of Merchantability: The goods must pass without objection in the trade and be generally fit for the purpose for which they are intended.
• Implied Warranty of Fitness for a Particular Purpose: When the seller has reason to know the purpose for which the goods are required and when the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is (unless excluded or modified in a manner consistent with state or federal law) an implied warranty that the goods shall be fit for such purpose.
• Implied Warranty of Habitability: This implied warranty is routinely applied to new housing, where the builder/vendor warrants that he has complied with the local building codes in constructing the residence and that the residence was built in a “workmanlike manner” and is suitable for habitation. Contractors should take note that some states which are more consumer-protection oriented are beginning to apply similar types of implied merchantability, fitness, and habitability warranties to builders and remodelers as well as developers.
Where applicable, the UCC warranties require the that remodeler and new home builder be bound by implied warranties that their work is generally free of defects, has been completed in a workmanlike manner, and is generally suitable for the intended purpose for which it was built. The trend of many courts has been to expand the implied warranties available to the owner.
It is also important to recognize that, in many states, even when a one-year express warranty is agreed to by the parties in the contract, if a defect arises after one year and the applicable statute of limitations for the type of claim (e.g., breach of contract, negligence, misrepresentation, patent defect, latent defect, etc.) has not expired, the owner still may bring a lawsuit against the contractor. In some states, the contractor may be sued for certain construction defects for up to ten years from the date of substantial completion of the project. While the contractor’s exposure under the statute of limitations is not endless, ten years is a long time! The contractor’s promise to repair a defect and his subsequent failure to do so may even give the owner more than ten years to file a lawsuit against the contractor.
Hype Versus Warranties in Advertising
The contractor must always be careful about making promises — either orally or in writing — that he cannot keep. Some states have held that a contractor’s comment to the owner that “this roof won’t leak for the next 50 years” or “this concrete will never crack” have been later construed by the courts as additional express
warranties provided by the contractor. On the other hand, the law recognizes that not all sales claims are express warranties. Claims or opinions made by the builder that the buyer could not reasonably rely on when signing the contract are considered by the law to be mere sales hype or “puffing.” For example, advertising that you are a “quality contractor” or “one of the best in the field” is more likely to viewed by the courts as sales hype — not an express warranty.
The kinds of activities that can create a warranty include any statement of fact or promise made by a seller to the buyer, any description of the goods, or any sample or model used by the contractor to make the sale. This might include printed advertisements and brochures, radio or television spots, internet advertising, contracts/proposals, business cards, job-site signs, vehicle signs, photos, models, plans, or specifications. The seller does not need to use words like guarantee or warranty to create an express warranty.
So, for example, if you advertise that you are a specialist in a certain field or that your roofs “never leak” and the owner relies on that representation in awarding you the contract, then you may be held to a higher standard by the owner, the court, or the arbitrator if a future depute arises over the quality of your work. In addition to increasing your exposure to civil suits over warranty issues, providing false, deceptive, or misleading advertising is also against state and federal criminal law. For example, advertising or stating that you are licensed to perform a type of work that you are not licensed for would clearly be illegal false advertising and misrepresentation. Or claiming that your new technology for installing a product is “time-tested” when in fact the product and installation methods are brand new would likely be crossing the line between aggressive advertising and misrepresentation.
Exactly what is puffing and what is a warranty or misrepresentation is not always clear. Accordingly, it is wise to be conservative about the promises or representations you make in your advertising or in remarks casually spoken to the owner. In short, if you’re not sure that your company can live up to a statement, don’t make it — either verbally or in writing.
Patent and Latent Defects
Construction defects are generally divided into two categories, patent and latent defects. Patent defects are those that are generally apparent or can be discovered in the exercise of ordinary care and prudence by the owner. Latent defects are defects that are less apparent, perhaps concealed, and would not be discoverable by the ordinary care and prudence of the owner. Many states indicate the time period in which an owner can file suit against a contractor depending upon
whether the defect is considered a patent or a latent defect. While many states limit suits on patent defects to a shorter time period — perhaps two to four years from
completion — some allow an owner to bring suit for a latent defect for up to ten years in some situations.
In addition to whether a defect is patent or latent, the exact amount of time you could be liable to the owner will depend on a number of factors. These include what state you are in, how the warranty clause in your contract was drafted, whether you were the developer of the home or only the contractor, whether the alleged defect is being claimed by the person you contracted with or a subsequent purchaser, how long the owner waits to file the suit after discovering the defect, and how many years have elapsed since the completion of the project.
While the owner may not succeed with a lawsuit based on breach of warranty due to the limitations of the warranty clause, he may well succeed based on negligence or some other “theory of recovery” against the contractor. For this reason, the contractor must be concerned with the applicable statutes of limitations or repose related to construction in his state. In many states the contractor must also accept that it is not likely that he will be able to fully limit his liability based on express warranty clauses and disclaimers. These liability limiting devices may help, but they will not bar the owner from filing suit, nor will they ordinarily bar the owner from recovering damages in a situation where the defect in the work appeared much earlier than typically expected and was due to the negligence of the contractor or one of his subcontractors.
Latent Defect Claims: Factors To Consider
If you are ever faced with an alleged warranty defect or the threat of a lawsuit based on a latent defect, don’t assume that you can ignore it because the project was completed a long time ago. Also, if the house was sold to a subsequent owner, don’t assume that you no longer have any exposure because you did not contract with the current complainant. Instead, promptly investigate the owner’s complaint, document your investigation in writing, and contact an attorney who is familiar with the statutes relating to construction defects in your state. Factors to consider include the following:
• Is the person claiming the defect the party you contracted with to perform the work or is he a subsequent purchaser of the property?
• Did you build and sell the house to the person alleging the defect or just build or remodel the house for the person alleging the defect?
• Were you the contractor and the designer, or did the owner furnish you with plans to follow in constructing the project? Is the alleged defect due to design errors?
• Does your comprehensive general liability insurance cover a portion of the alleged damages or provide legal defense coverage? When faced with a lawsuit or arbitration demand where the owner is seeking more than several thousand dollars, you should first consider submitting the action to your insurance agent for defense coverage. In many instances, the claim will trigger your defense coverage and your carrier will pay all or most of your legal fees related to the legal action. Discuss this with your local attorney immediately.
• Did your contract expressly limit your liability for the type of defect being claimed? Does your state law allow you to contractually limit your liability in this situation?
• Do state or federal warranty laws (e.g., Magnuson Moss Warranty Act) govern the alleged defect?
• Is the defect patent or latent?
• How many years have elapsed since substantial completion or final permit sign-off of the project?
• How many years have elapsed since the claimant’s discovery of the alleged patent or latent defect?
• Are other parties potentially liable for the defect (e.g., the owner, architect, subcontractor, material supplier)? Should these other parties be called in to investigate at this time? Does the owner have homeowner’s insurance that would correct the damage or alleged defect? Has the claim been tendered to the owner’s insurance company?
• Has the alleged defect arisen through inadequate or improper building maintenance, alteration, extreme act of nature or abuse by the owner?
• Did the alleged defect arise due to an unauthorized deviation in the plans and specifications by the contractor or was the project built according to approved plans and specifications?
• Does the alleged defect involve a violation of applicable building codes?
• Has the owner waived all or part of his rights by failing to inspect and claim a patent defect within the express warranty period?
• Has the owner waived his rights by accepting the alleged defect, through a failure to mitigate, reduce, or limit damages once he realized there was a defect? If, after carefully investigating the alleged defect and potential liability, it’s still difficult to accurately assess the contractor’s liability, you should consider fixing the alleged defect as a “gesture of good faith.” Consider whether you could make the repair for significantly less money and time than it would take to go through a legal proceeding.
As long as the cost is not too high, just fixing the problem sometimes makes more sense than battling over liability and suffering the loss of reputation that usually accompanies warranty disputes. If this is the course of action you choose, explore whether other potentially responsible parties will contribute to a repair effort. Let them know that if they don’t contribute they may be sued by the owner. Prior to making such a repair, you should discuss with your attorney whether a Settlement and Release Agreement is needed between you and the owner to release you from any further liability related to the defect.
Contractors should pay attention to which manufacturers’ product warranties are shorter in duration than the express or implied warranties that may apply to
their contract with the owner. If some manufacturers’ warranties are shorter than the contractor’s warranty, the contractor may want to factor into the cost of the
project any additional risk or “insurance” he has to provide on these items.
It is possible to draft a warranty clause that “passes through” manufacturers’ warranties from the contractor (the original purchaser of the products) to the owner
upon either final completion or the expiration of the contractor’s express warranty period. Whether such a clause would stand up in court would depend on the
specific product warranties and on state consumer-protection laws.
Regardless of the legality of such a clause, it certainly would not help foster good customer relations. For example, most customers would not be happy if, three months after their addition was completed, they called the contractor with a legitimate warranty claim and were told to “call the manufacturer and have him make it right.” Even if the manufacturer’s warranty clearly covers the alleged defect, I think the contractor should still quickly investigate the owner’s complaint and assist the owner with correcting the problem if at all possible. This is simply good customer service, which will help build your reputation and win referrals.
After the expiration of the express warranty period provided by the contractor and manufacturer, you’ll be in a more complicated area that is governed more by state, and in certain cases, federal law. Such disputes where the liability may be shared by some combination of the owner, contractor, and product manufacturer should be investigated by the contractor and discussed with an attorney familiar with warranty law in your state.
Additional Express Warranty Exclusions
Contractors may want to consider developing a list of items that are excluded from the contractor’s warranty. These items could be placed directly in the warranty clause or made an addendum to use with large projects. A few of these excluded items are suggested in certain warranty clauses in agreements on this site. They include items that fall within the scope of normal owner maintenance, such as caulking that shrinks or minor stress fractures in materials as a result of the curing of lumber, concrete, or other materials. Additional areas to be excluded from the warranty clause in your contract could include such items as: wood that checks or cracks, drywall or stucco that develops minor cracks, fading of paint or stains due to sunlight exposure, floor squeaks, damage caused to structure due to owner’s activities or failure to maintain, and any items furnished or installed by owner.
Pay Attention to the Punch List
The contractor can prevent many warranty problems from developing by scheduling numerous thorough inspections during the construction and punch list phases. It is a good idea to make frequent quality inspections prior to covering up distinct phases of the project. Quickly correct items that aren’t in conformance with the plans, codes, or workmanlike practices. After the project is substantially complete, don’t take forever to complete the punch list. Once again, delaying the punch list work will only leave a bad taste in the owner’s mouth at the time both of you may have had just about enough of each other. In addition, this is the time that the owner is showing off his new project to friends and is being asked, “How was the contractor”? Even though it can be difficult, the final punch list phase is a critical time for customer relations. Putting in some extra effort will pay off in terms of future referrals, getting your final check, and avoiding significant warranty claims down the road!
Customer Service Follow-Up
Some contractors make a note to call the owner both at six months and twelve months after the project is complete to see if any warranty work has arisen and to answer any questions the owner may have. While some contractors would view this as willfully and knowingly sticking their head back in the lion’s mouth, taking the
time to do this leaves a long-lasting positive impression in the mind of the owner that can pay off in the long run with increased referrals.
Important Notice to Contractor and Disclaimer:
Before using or relying on the template forms and information above, read the template forms with care, fill in, modify, delete, add language to, and revise portions of the template forms according to your specific needs and any state laws applicable to the type of job you are using the document for. Use of the form templates on this site does not constitute the formation of any kind of attorney/client relationship between you and us. You should seek and obtain independent legal advice from a licensed attorney in your local area familiar with construction law before using or relying on any of the forms or information on this site. The forms and information on this site are provided only as general information, not legal advice and may or may not reflect the most current legal developments, your specific needs or laws applicable to the state where you conduct business. Only the original purchaser of the forms has a limited license to modify, edit, print and use the forms.