In December 2001, the Minnesota Court of Appeals issued an important decision regarding statutory home warranties in the case of Koes v. Advanced Design, Inc., 636 N.W.2d 352 (Minn. Ct. App. 2001). The impact of this case will be felt by homebuilders across Minnesota because it substantially extends the duration of homebuilders' liability under the statutory warranties they are required to provide to home buyers.
The dispute in Koes arose from an alleged drainage problem in a new home constructed by Advanced Design, Inc. ("ADI") for Timothy and Kristine Koes (the "Koes"). The plaintiffs allege that the drain tile and heating system were improperly installed, in that the drain tile was installed higher than the heat ducts which allowed the ducts to fill with water. The Koes alleged a violation of the statutory warranties that afford protection from defects to new home buyers.
There are several statutory warranties that apply to new home construction. Minnesota Statute section 327A.02 subdivision 1(b), provides a two-year warranty period from the "warranty date," which is the date of the homeowner's first occupancy or when the homeowner takes legal or equitable title. This is the standard statutory warranty that most people think of, when they think of statutory home warranties. Section 327A.03(a) provides that the homeowner must notify the contractor within six months of when the owner discovers or should have discovered the loss or damage.
There are also statutes of limitations that apply to construction defect cases Minnesota Statute Section 541.051 subdivision 1(a) provides a two-year limitations period from the date of discovery of the damage, and a statute of repose that bars action regardless of discovery or non-discovery ten years after substantial completion of the work. The statute of repose essentially cuts off a contractor's liability for defects ten years after substantial completion of the home. However, subdivision 4 of section 541.051 provides that section 541.051 does not apply to the statutory warranties provided in 327A.02, so long as the action is brought within two years of the discovery of the breach.
In Koes, the Minnesota Court of Appeals attempted to reconcile the seemingly conflicting requirements of 327A.02 and 541.051. The Koes took occupancy of their home in June 1997. Thus, under a straightforward interpretation of 327A.02, the two-year warranty period provided by that section would have expired in June 1999. The Koes first recognized the problem with the drain tile and heat ducts in July 1999, and first gave ADI written notice of the problem in September 1999, which appeared to put them outside the two-year warranty period. However, the Koes did notify ADI of the problem within six months of discovery of the problem (as required by 327A.02) and commenced their action within two years of discovery of their injury as required by 541.051 subd. 4. Hence, the issue before the Court of Appeals was how to resolve the apparent conflict between the homeowners reporting the defect after the two-year warranty period expired, but within both the two-year discovery period of 541.051 and the six-month notification requirement of 327A.03(a).
The Koes Court concluded that homeowners may bring an action under section 327A.02 subdivision 1(b), after the two-year warranty period expires, so long as the action is brought within the two years after the discovery of the damage, as provided in section 541.051, and the six-month reporting requirement of section 327A.03(a) is satisfied. This decision significantly extends a contractor's liability for warranty claims.
The Court stated:
According to the plain language of the statute, the statute of limitations set forth in Minn. Stat. § 541.051 does not apply to § 327A.02. Section 541.051, subd. 4, does not expressly state that the breach must be discovered within the warranty period. Citations omitted. The statute (§ 541.051, subd. 4) only provides that the action 'shall be brought within two years of the discovery of the breach.' Citations omitted. Further, there is no reference to any statute of repose that limits the time in which a cause of action must be brought for breach of warranty under section 327A.02. Thus, the Koes Court concluded that a homeowner's right to recover under 327A.02 is only limited by the requirement that a homeowner report a breach of warranty within six months of discovery of the breach as provided by section 327A.03. Hence, this opinion can be read to allow an action to be brought on a defect which occurs within the two year period after substantial completion, but is not discovered for many years thereafter. Any defect associated with the original design or construction would fall within the two year warranty and therefore be actionable indefinitely, so long as the contractor is given notice of the defect within six months of its discovery and a lawsuit is commenced within two years of its discovery.
The Koes Court reasoned that that the Koes notified ADI of the breach of warranty within the six-month period required by section 327A/03(a) and satisfied section 541.051, subdivision 4, by bringing their cause of action within two years after the discovery of the defect, because there was "no evidence presented that they should have discovered the defect any earlier."
The Court acknowledged potential indefinite liability issues in its decision. However, it stated that if a statute of repose or some limitation on homeowners' rights of recovery should apply, that the change or clarification must come from the legislature. One would hope that for the sake of all contractors, the legislature will take action or the case will be reversed. To date, however, the law stands.
The Colorado Supreme Court recently addressed a similar issue in Hersh Co. Inc. v. Highline Village Associates. In Hersh, a painting contractor was hired to repaint two apartment complexes in 1992. The contracts provided five-year warranties for repair or replacement of defective labor or materials. In 1993, the paint began to peel. The complex owner requested that the contractor, Hersh, repair the paint under the warranties. Hersh made limited efforts to repair and the paint continued to peel. In September 1995, the complex owner requested additional repairs and Hersh refused to perform any further work. In October 1996, the complex owner sued Hersh.
Colorado has a two-year statute of limitations which pertains specifically to construction projects. However, Colorado also has a more general statute of limitations that provides a three-year limitations period for breach of warranty claims. The two-year period begins to run when the claimant discovers or should have discovered the physical manifestations of the defect. Here, the complex owner discovers the defect in January 1993, but did not bring its action until October 1996.
Therefore, under the Colorado construction project statute, the complex owner's action was time-barred. However, the Colorado Supreme Court held that the more general statute of limitations applied to warranty claims that contain a "repair-or-replace" provision such as the contracts at issue in this case. The three-year period under this statute did not begin to run until the breach of warranty is discovered or should have been discovered. The Court held that breach of a warranty does not occur until the person supplying the warranty refuses to perform. Therefore, the Court concluded that the statute of limitations was satisfied because the action was filed within three years of Hersh's refusal to perform more repair work.
Thus, under Hersh, a contractor's liability for breach of warranty claims in Colorado has been extended from two years, to three years. Further, the three-year period does not begin to run until the owner demands performance and the contractor refuses to perform. The only potential limit on liability under this logic is the six year statute of repose provided by Colorado law.
Neither the Minnesota or Colorado case addressed the issue of whether the plaintiff must prove that the defect actually existed within the warranty period. In Koes, the defect went to the design of the home and therefore necessarily existed within the two year period. In Hersh, the paint first began to peel within the period of the repair-or-replace warranty. But neither decision expressly stated that the plaintiff was required to prove that the defect existed within the warranty period. However, one would presume that this remains a requirement of a warranty claim; to hold otherwise would mean that the warranty itself extends indefinitely as compared with merely the right to commence an action under the warranty.
In any event, contractors in Minnesota and Colorado need to be aware of the possible existence of warranty claims for a much longer period. Contractors therefore need to reevaluate the adequacy of their risk management techniques with respect to warranty claims.