Susan Linden McGreevy explains why warranties are one of the most misunderstood concepts in the construction industry.
In our experience, warranties are one of the most misunderstood concepts in the construction industry. Many owners, designers and contractors think they have put a one-year warranty in their contracts, when in fact they are 100% wrong.
Many times, they don’t even understand what a warranty is. Most of the time, they don’t understand what it covers, and how long the contractor or vendor is on the hook.
What is a warranty?
A warranty is a representation made by one party upon which another party may rely. It is not the same as a guarantee (which is a promise to stand for the debt of another) even though many contracts use the terms interchangeably. Warranties may be express (written in the contract or stated orally), implied (by the common law) or statutory (set forth in a state’s statutes).
Most, if not all, construction contracts contain warranties. Examples of express warranties routinely included in construction contracts are:
- A warranty that work will be performed in a good and workmanlike manner;
- A warranty that materials will be new and of good quality; and
- A warranty that the work will conform to the requirements of the contract documents.
In limited circumstances, courts have implied warranties to protect parties where there were no express warranties to do so. The theory is that in some circumstances the parties intended a warranty to apply even though the contract doesn’t expressly say so. The warranty of “habitability” that runs from homebuilders to the purchaser of the home is an example of an implied warranty.
Statutory warranties are created by legislation and become part of some contracts by operation of law. The Uniform Commercial Code, which has been enacted in some form in every state, creates statutory warranties that apply to the sale of goods.
In the construction context, purchase orders to material suppliers will usually be governed by the UCC. Further, if a subcontract is dominated by the purchase of goods more than labor, there is a chance a court will (or will not) find that the subcontract primarily concerns the sale of goods such that the UCC may apply.
UCC statutory warranties on the supplier or subcontractor include:
- The warranty of fitness for a particular purpose (that the goods will serve the buyer’s intended use if the seller has reason to know that intended use); and
- The warranty of merchantability (that the goods will be of at least average quality, conform to the promises made on any labels and are fit for the ordinary purpose for which the goods are used).
How is a warranty different from a one-year correction period?
Many form contracts (such as the AIA) clearly differentiate between a contractor’s warranty obligations (to build according to the plans and specs) and its one-year correction period (when it has the right and obligation to fix its work if it fails). One difference between the two obligations is the burden of proving why the work failed: If the work fails during the one-year period, the contractor has to fix it, no questions asked (assuming the failure wasn’t due to misuse). After the one-year period, the owner has the burden of proving that the warranty was breached — that the work wasn’t done according to the plans and specs or that the part didn’t last as long as it should have.
A second difference is how long the contractor is on the hook. If a contractor fails or refuses to correct work in the one-year period, the owner must file suit within the statute of limitations (say, five years), starting from the end of the one-year period. If the contractor has warranted that the work will meet the plans and specs, and (for example) a masonry wall crumbles in four years, the owner may have five years from the date of failure to bring its suit. How long the warranty exposure will go on will depend on how long the particular part of the work should have lasted: Carpet normally wears out before concrete; caulking will need to be replaced long before the windows should be expected to fail.
What happens if the two concepts get mixed up?
Frequently, we see contracts where someone has called the one-year correction period the “warranty” period and, in fact, goes so far as to say in the real warranty clause that it is for one year (perhaps longer for specific pieces of equipment). Such phrasing could result in an owner having no one to hold responsible if the building falls down in 367 days. We doubt that any owner expects to pay good money for concrete, masonry, steel or other sturdy components of a project that will fall apart after one year, but this is the mess someone could end up in by not reading and understanding the contracts.
Often, even if the warranty clause in the general conditions is clear, there is conflicting language in the front end of a project manual prepared by a designer. Contractors should pay more attention to the exact words used in their contracts. They may be surprised to find that their warranty obligations are not as great as they thought.
Can you avoid long exposures to warranty claims?
Of course, if the other party will agree to it. Most manufacturers print on their labels and in their literature that they are giving “limited” warranties only, and “disclaiming” all other warranties. Courts will typically enforce disclaimers of implied and statutory warranties as long as the disclaimer is clear and unequivocal. But you have to be careful; a failure to change all warranty language in the contract could end up creating inconsistencies that will take a judge or jury to resolve. It is not enough to draft a clear disclaimer. You also have to make sure that the entire contract is consistent with the disclaimer.
Warranties are a part of every construction contract. Those who take the time to understand how those warranties work will gain an advantage over those who do not in managing risk on their projects.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., 816/421-4800, e-mail to firstname.lastname@example.org.