May 1, 2013

I Promised to Do What? When Warranties and Correction Obligations Don’t Mix


Failing to understand your warranty can be costly. Agreeing to build to a certain standard (e.g., NASCLA roofing standards) or to ensure that the work will achieve a specified end result (e.g., eligibility for a particular LEED or other green-building rating) are warranties. Unless specifically limited by contract, contractors may be sued for breaching a warranty until the statute of limitations period passes — usually 6 years. Many contractors mistakenly believe they may be sued for only 1 year from completion because their contracts say they will correct all defects within that time frame. Those contractors are risking more than they think.

Often, contracts that take the approach of "everything but the kitchen sink" will have a correction obligation and multiple warranties. Although related, the obligation to correct something is different than a warranty. The confusion is likely to end with the longer, broader warranty controlling. Therefore, while the parties may have intended to have a short warranty — a one-year period in which the contractor will return to repair any problem areas — instead the longer general warranty may continue to operate as a guarantee that the work will be problem-free.

The warranty itself is a promise the parties bind themselves to. A warranty can guarantee that the work or materials are free from defects and can obligate the contractor to take full financial responsibility for any problems arising from defective work or materials. This can extend to problems arising from vandalism during construction or from manufacturing defects, though the warranty can limit its range. A warranty could be limited to covering only defects arising from the contractor or subcontractors' work and to preserving the manufacturers' warranties, rather than guaranteeing the quality of all materials. What is or is not warranted is mostly a matter of what the contract says.

A repair warranty or correction obligation takes this one step further. The contractor promises to return to the site and repair or replace any defective work or materials. If a repair warranty or correction obligation is placed in the construction contract, the contractor must return to make repairs during that time. But claims can still be brought after that time. So, why offer a repair warranty?

Although a correction obligation doesn't absolve a contractor from potential liability for warranty claims down the road, the contractor usually gets to try to fix any problems before being sued for breach of warranty. The repair warranty helps contractors stay out of court, which is of significant value even if it does nothing to shorten the warranty period. At the same time the contractor is in charge of the repair costs.

The details of the repair warranty and the general warranty are important and will affect the parties' obligations and benefits under the contract. As noted above, the warranties can differ in scope from contract to contract, greatly changing the value of the benefit the owner receives from the contract and the potential after-construction costs for the contractor. Both parties should carefully review all warranties together, even if they are in separate places in the contract, to be sure they will blend well and to be sure the parties are each getting the value they agreed on.

The lesson here is to be sure the warranties are clearly spelled out and that all warranties work together. If the parties want a longer warranty, they may also wish to price for the additional risk. If the parties want a shorter warranty, or no warranty at all, additional cost for the extended warranty could be cut. Knowing that a contract guarantees that the work will be free from defects or will be repaired for a certain length of time will help each party bargain appropriately for the risks each party takes on.

For more information on this topic, please contact or call (888) 598-7070.



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