The Construction Lawyer’s

Bucket List2015 Annual Meeting

Guarantees, Warranties and SOLS:Top 10 Considerations to Fill Your Warranty Bucket

Suzanne M. McSorleyStevens & Lee, P.C.Lawrenceville, NJ

Christopher E. NgGibbs Giden LLPLos Angeles, CA

“I Guarantee Warranty It”

A lawyer’s play on the most famous guarantee warranty of all time?

#1: A Warranty by any Other Name is Still a Warranty

• Guarantee: a secondary obligation to perform if the primary obligor defaults.

• Warranty: an assurance or promise of a particular outcome upon which another party may rely.– “I guarantee your windows will not

leak” = warranty

#2: Warranties Come in Many Shapes, Sizes…and Statutes

• Contractor / Subcontractor / Suppliers / Owner / Design Professionals / Engineers

• Express (written and oral)• Implied (common law and

statutory)

#3: Express Warranties Regarding Quality May Go On and On and On…

• Standard Form Contract Warranties for Work:– Quality of Materials– Conformance to the Contract Documents– Free from Defects

• No time limit on quality warranties in form contracts

• Beware of “Extended Warranties” which may inadvertently shorten(not extend) warranty

#3: Standard Quality Express Warranties May Go On and On and On…

• Identify correct statute of limitation– Traditional breach of contract statute– Breach of warranty statute – UCC statute– Special statute for improvements on real estate

• Be wary of:– warranty period for material that is shorter than

expected life of building component– warranty period so short that building

component will not be exposed to “design condition.”

#3: Standard Quality Express Warranties May Go On and On and On…

• Understand what triggers the running of the statute– Conceptually triggered by “occurrence of the last essential

element to the cause of action”– UCC: 2-725

• Delivery and installation of the goods starts statute unless the warranty by its terms promises future performance

• Discovery rule, where promise of future performance– Upon “completion” of the Project– Upon “discovery” of the breach

• “Discovery” of a hidden defect is in the eyes of T.A.R.P.• Discovery comes when T.A.R.P. knows or should have known

about the problem, but not necessarily about the cause of the problem

– Contract language can trump the statute of limitation and the discovery rule

#3: Standard Quality Express Warranties May Go On and On and On…

• Statutes of Repose Triggered by Objective Events– Completion, Substantial Completion, etc.– Not by discovery

• Equitable tolling and equitable estoppel may provide relief from the statute of limitations– Unlikely to be applied to the statute of repose

• “Reasonable” notice of breach of express warranty is often required

#4: When You Assume, You Make an A$% out of U and ME

• Don’t assume your state’s common law applies to warranty issues– Sale of construction materials and

other goods are governed by the UCC– Common law governs service contracts

• “Hybrid contracts” require the application of the “predominant factor” test

#4: When You Assume, You Make an A$% out of U and ME

• “Battle of the Forms”– Review client purchase orders and supplier

invoices and consider “Battle of the Forms” issues

– Warranty disclaimers and limitations often a part of purchase order / invoice terms and conditions

– Contracts often formed by conduct (not on terms)

– Knock-Out rule plus “gap fillers” from UCC• Gap fillers permit incidental and consequential

damages

#5: Choose Warranting Words Wisely

• Be wary of warranting design• Shop drawings, product data, samples, technical

specifications , etc. create express warranties• Is contractor required to warrant that the building

will meet building codes? – Agreeing that “work will be completed according to all

laws, building codes and regulations” may confer a contractor warranty that the design is code complaint

• Handle performance specifications with care– Use objective criteria (e.g., output per day, hours of

operation before maintenance) rather than subjective “satisfaction” criteria

#6: Myth of the 525,600 Minute(One-Year) Warranty

• “Five-Hundred Twenty-Five Thousand Six-Hundred Minutes…. How do you measure, measure a [one] year [construction warranty]?”

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#6: Myth of the 525,600 Minute (One-Year) Warranty

• “It is common, even customary, for construction contracts to include a 12-month warranty of material and workmanship….” = WRONG!

• Likely source of confusion over the duration of construction warranties is the one-year call back warranty– Complements the standard quality express

warranties; combines warranty with a remedy.– Warranty tied to performance bond

#7: Call-Back Warranties are Not All Created Equal

• Generally applies to non-conforming work reported within one year of substantial completion– One year correction period is extended for work first

performed after substantial completion– Performance of corrective work does not trigger new

one-year correction period for corrective work

• Owner must provide prompt written notice and opportunity to cure, or risk both a waiver of right to require correction and right to assert warranty claim

#7: Call-Back Warranties are Not All Created Equal

AIA A201 (§ 12.2)

ConsensusDOCS 200 (§ 3.9)

EJCDC C-700 (§ 13.07)

One-year correction period does not constitute a limitations period for quality warranties (§12.2.5)

One-year correctionperiod does not constitute a limitations period with respect to contractor’s other express contractual obligations

Corrective action must be completedin accordance with owner’s instruction; “evergreen” warranty for corrected work

Contemplates role of design professional as party who may give notice of defective work to contractor

Contractor’s right to notice and cure extends beyond one-yearcorrection period(§ 3.9.4)

If contractor fails to correct work, owner may recover repair and associated costs (legal and engineering fees)

#7: Call-Back Warranties are Not Created Equal• When negotiating a call-back warranty, consider:

– What will trigger the call-back warranty (e.g., “substantial” or “final completion”);

– The duration of the call-back period (e.g., one or two years);

– The duration of the call-back warranty period for any corrective work (e.g., evergreen provision);

– The time within which the owner must notify the contractor upon discovery of any defect;

– The time within which the contractor must commence to cure the defective work;

– The damages and costs the owner may recover in the event of failure or refusal of the contractor to honor its call-back obligations;

– Make proposed fix and approval of corrective work contingent upon design professional approval.

#8: Implied Warranties Can Be Thorny• Implied warranties come from common law and

statutes and relate to:– Conduct (e.g. implied warranty of workmanlike

performance)– End-result (e.g. implied warranty of merchantability /

fitness of materials)• UCC §2-314: Merchantability

• Disclaimers of implied warranties require conspicuous language and are strictly construed

• Statutory implied warranties can supplant or supplement express warranties

• States are split regarding whether privity is required

#9: Be Wary of Gaps and Overlaps in Warranties

• Make sure all warranties are intended• Suppliers sell materials with limited

warranties• Contractors usually asked to provide

broad warranties• Warranties in subcontract and prime

contract often do not line up

#9: Be Wary of Gaps and Overlaps in Warranties

• Review entire project manual for consistency • Include order of precedence clause to make

sure that the desired warranty language controls

• Make sure that insurance coverage is compatible with warranty exposure– Default insurance may conflict with true

exposure– “Claims-Made” CGL coverage is unlikely to cover

all

#10: Disclaim and Limit Carefully

• Ensure compliance with jurisdiction’s requirements for disclaimers of implied warranties

• Disclaimers generally permitted, but strictly construed

• To enforce implied warranty disclaimers, UCC says…– Implied warranty of merchantability: “the

language must mention merchantability” and must be “conspicuous”

– Implied warranty of fitness: “must be in writing” and “conspicuous”

#10: Disclaim and Limit Carefully

• Consequential damages• Cost to uncover or restore property• Cost of heavy equipment needed to make repair or

replacement• Cost of repair / cost of replacement goods only• Costs of business interruption• Inclusion / exclusion of design & workmanship• Limitation of liability

– A dollar amount– Pro-rated warranty

#10: Disclaim and Limit Carefully

• AIA A201 excludes damage from improper operation, abuse, misuse or normal wear and tear:– “The Contractor's warranty excludes

remedy for damage or defect caused by abuse, modifications not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear under normal usage”

#11: BONUS…The Owner Makes Warranties too!

• Express Warranty of Title• Implied Warranty of the Plans and

Specifications—the Spearin doctrine• Implied Warranty of Full Disclosure• Warranties in Technical Specification

Sections– Designer professional’s specifications

sometimes include “one-year warranty” language in same project manual that includes longer warranties

Bucket List Takeaways…

• Take better design and make sure product is “built to last” – not just “warrantied”

• Don’t over-rely on warranties; be vigilant to prevent defective work in the first place

• Research track record of product in similar climate/environment/exposure

Bucket List Takeaways…

• Treat warranties as risk-shifting devices– Extended (both in time and in scope)

warranties will (and should) come with increased price tags

– Extended warranties are almost always available from material and equipment suppliers, but at an increased cost

• Consider requiring subcontractor performance bonds to ensure warranty liability is passed through to responsible trade

Bucket List Takeaways…

• You buy workers’ compensation insurance and do everything to ensure that you don’t have a work-related accident. DO THE SAME WITH WARRANTIES. Real claims often result in considerable unrecoverable out-of-pocket and interruption costs.

• There is no such thing as standard legal boilerplate for warranty provisions