[author: Harper Heckman]
Perhaps the most common misconception held by even sophisticated contractors and subcontractors is that their warranty obligations expire one year after the completion of the project. This mistaken assumption most likely stems from a confusion of their contractual warranty obligations and their separate but related one-year "duty to correct" defective work.
Most form contract documents do make reference to a one-year correction, or "call back" period. Correction periods generally are intended to motivate contractors to return and repair defective work after final payment and demobilization from the site. In order to invoke a "correction" obligation, an owner generally need not prove why an element of construction failed, but only that it did fail. Put differently, it is not the owner's burden to prove the cause of the defect that appears during the one-year period, but only that it was not due to owner abuse or neglect.
In contrast to "correction periods," most "warranties" found in form construction contracts contain no time limitation on a contractor's or subcontractor's warranty obligations. Indeed, a review of the major contract document series failed to uncover any form agreement that attempts to establish an exclusive warranty of only one year in duration. Consequently, if a contractor or subcontractor desires to warrant their work for a time period shorter than that set forth in the applicable statutory period (6 years or 8 years under North or South Carolina law, respectively), the warranty will have to be "home grown."
The first hurdle is establishing that the warranty sets forth the owner's exclusive recourse for post-occupancy defects. In essence, a "warranty" is just one of many representations and agreements interspersed throughout the typical construction contract. Absent an agreement between the parties to the contrary, most courts will view the owner's claim for breach of warranty as but one of several avenues of recovery for construction defects. Therefore, perhaps the simplest way to establish the exclusiveness of a warranty provision is to state that the warranty is, indeed, "exclusive."
In addition to establishing the exclusivity of the one-year warranty amidst the many contractual provisions that can potentially give rise to claims for defective work, a contractor or subcontractor must also dispose of those obligations implied by law, including, in the Carolinas, the implied warranty that the structure will be free from hidden defects in its major systems. As with other warranties, these implied warranties may be disclaimed. However, courts generally will construe the disclaimer as narrowly as possible and in a light most favorable to the owner. Thus, in order effectively to disclaim these implied warranties, the disclaimer must be made in both conspicuous and unambiguous fashion.
In addition to limiting the time period itself, contractors and subcontractors should establish a readily ascertainable accrual date from which the time period will begin to run. This is generally either substantial or final completion of the project. A "bookend" consideration to the "accrual date" issue is defining what action by the owner is required in order to timely assert its claim under the warranty. In this regard, the warranty should be restricted not simply to those claims "arising" or "discovered" within one year, but only to those claims "made," or "initiated," within that year.
The warranty should also require that the owner provide the contractor with prompt written notice of and an opportunity to cure the alleged defect prior to engaging others to correct it. Such a notice will allow the contractor the opportunity to observe and memorialize the alleged defect before it is corrected and to correct it in a cost-effective manner if it chooses to do so.
A warranty, by definition, has to warrant something. However, what a contactor or subcontractor does and does not include in its warranty is just as important as establishing its exclusivity or time limitation. At the end of the day, all that is really required in a warranty is that the work will conform substantially to the requirements of the project drawings and specifications. Contractors and subcontractors should specifically exclude any warranty of the suitability of owner-furnished or owner-specified equipment or materials. Similarly, the contractor should expressly exclude warranty coverage for defective work caused by defective design. Both exclusions are premised upon the owner's implied warranty of the sufficiency of the plans and specifications (a/k/a the "Spearin Doctrine"). Another appropriate exclusion relates to problems which arise from the owner's abuse, misuse, improper maintenance or normal wear and tear.
The warranty also should provide that the warrantor's sole obligation (and the owner's sole remedy) is the repair or replacement of the defective work or materials. Inclusion of "repair or replacement" language dictates the cost of repair, rather the potentially greater damages measured by the diminution in value of the project or the owner's lost profits and other consequential damages, will be utilized, except in cases where the repair or replacement of the defect would constitute "economic waste."
Drafting a warranty that is limited in both time and scope is far easier said than done. This is particularly true when utilizing today's complicated contract documents, containing a multitude of separate provisions which must be harmonized if the one-year warranty is to be truly unassailable. Moreover, even a "perfect" warranty is useless if an owner or upstream contractor considers it too onerous to accept, or a court considers it too unconscionable to enforce. The "you'll never get it if you don't ask for it" approach would suggest proposing the warranty in its entirety in hopes that the "other side" will be either too inattentive or too optimistic to take issue with it. Alternatively, the "spaghetti" approach would pitch the limited warranty in its entirety, and then remove those provisions that do not "stick" with the owner. Either alternative may be a better than relying on form contract language under the mistaken belief that any sort of one-year warranty is created thereby. On the other hand, project owners should be cognizant of attempts by contractors to unreasonably limit the time periods within which they may seek redress for project defects, particularly those that do not manifest themselves immediately after the project's completion. When it comes to warranties, striking a balance that is fair to both parties in indeed a worthy aspiration.