Print

Library

Risk Management Articles


A Practical Guide to Construction Warranties, Part I
By Paul M. Lurie, Esq.


Warranties, sometimes called guarantees, define and limit the responsibility of contractors for repairs of the construction project, both during and after completion of construction. Warranties establish the standards for determining defective work. Unlike implied warranties, which arise in the non-construction context, most construction warranties are express warranties and are contained in the construction agreement, general conditions, plans or specifications, supplementary general conditions, in contractor's written exceptions or in purchase orders.

Typical subjects of warranties are:

Basic Warranty for the Quality of the Work

The Uniform Commercial Code's implied warranties of merchantability and fitness for purpose do not normally apply to construction contracts because they are considered contracts for services rather than for goods. Therefore, every contract for construction of any improvement or the installation of major equipment should contain the general basic warranty of quality. The elements of this warranty are:

  1. Materials and equipment will be new and of good quality; and
  2. The materials, equipment and labor furnished will be free from defects and in conformance with any design requirements.

The issues which arise under the basic warranty are:

One approach of allocating risk on these issues is that provided by the American Institute of Architects Document A 201, the General Conditions for the Contract of Construction, 1997 Edition and its EJCDC equivalent in Document 1910-8. These warranty terms have been accepted by the Associated General Contractors of America, the principal general contractor's trade association. While there is consensus to the fairness of these "middle of road approaches," many clients prefer to modify the standard forms.

Sections 3.5 of A201 and 6.19 of 1910-8 contain a general warranty of quality, without specific time limitations. This obligation will be enforceable until barred by the applicable statute of limitation or repose:

"The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the Contract Documents, that the Work will be free from defects not inherent in the quality required or permitted, and that the work will conform with the requirements of the Contract Documents. Work not conforming to these requirements, including substitutions not properly approved and authorized, may be considered defective. 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. If required by the Architect, the Contractor shall furnish satisfactory evidence as to the kind and quality of materials and equipment."

While architects and engineers are not normally parties to construction contracts, it is important that they obtain the benefit of these warranties as third-party beneficiaries of the agreement between owner and contractor. This status is important to allow the design professional to make claims against the contractor in the event that the owner makes claims against the design professional for failure to detect defective work. Such protection is included in these standard forms. It is not unreasonable for a contractor wanting to limit its liability for abuse, modifications by others, improper maintenance or operations or normal wear and tear. However, as drafted in the A-201, these exceptions are conditions precedent, rather than subsequent, to the enforceability of the warranty. This subtle drafting difference may adversely affect the burden of proof in an owner's claim.

In the event of breach of this warranty, A201 provides several owner remedies:

  1. the right to reject work during construction;
  2. the right to require the contractor to come back and make repairs for a period of one year; and
  3. right to sue for money damages.

The right to reject work during construction is contained in Section 12.2.4 of A-201:

"If the Contractor fails to correct nonconforming Work within a reasonable time, the Owner may correct it in accordance with Paragraph 2.4. If the Contractor does not proceed with correction of such nonconforming Work within a reasonable time fixed by written notice from the Architect, the Owner may remove it and store the salvageable materials or equipment at the Contractor's expense. If the Contractor does not pay costs of such removal and storage within ten days after written notice, the Owner may upon ten additional days' written notice sell such materials and equipment at auction or at private sale and shall account for the proceeds thereof, after deducting costs and damages that should have been borne by the Contractor, including compensation for the Architect's services and expenses made necessary thereby. If such proceeds of sale do not cover costs which the Contractor should have borne, the Contract Sum shall be reduced by the deficiency. If payments then or thereafter due the Contractor are not sufficient to cover such amount, the Contractor shall pay the difference to the Owner."

Section 12.2.2 is the "call back" remedy, limited to one year from substantial completion or the date stated in a special warranty:

"If, within one year after the date of Substantial Completion of the Work or designated portion thereof, or after the date for commencement of warranties established under Subparagraph 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. This period of one year shall be extended with respect to portions of Work first performed after Substantial Completion by the period of time between Substantial Completion and the actual performance of the Work. This obligation under this Subparagraph 12.2.2 shall survive acceptance of the Work under the Contract and termination of the Contract. The Owner shall give such notice promptly after discovery of the condition."

A perennial source of confusion is the relation between the general warranty obligation in Section 3.5 and the "call back" provision in Section 12.2.2. Under the "call back" concept, the contractor is obligated to "correct the work," but only for a period of one year from substantial completion unless that time has been modified by a special warranty. Many owners and contractors mistakenly believe that this clause creates a one-year contractual limitations period for claims for money damages under the general warranty. However, A-201 Section 12.2.6 states that this obligation to correct does not limit any other remedy which the owner may have. This other remedy is the right to sue for damages for breach of warranty until barred by a statute of limitations and/or repose. Unfortunately, many architects, engineers and specification writers compound the problem by inserting "one year" warranty language into the various technical sections of the specifications manual. This has the effect of substantially diluting the owner's remedies.

Therefore, Owners may want to consider the following after giving due regard to the economic effect on bid pricing:

Delete Sections 3.5, 12.2.2 and 12.2.6 and substitute the following:

"The Contractor warrants to the Owner, Architect and Engineer that materials and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the Contract Documents, that the Work will be free from defects not inherent in the quality required or permitted, and that the Work will conform with the requirements of the Contract Documents. Work not conforming to these requirements, including substitutions not properly approved and authorized, may be considered defective. In the event the Owner determines that there has been a violation of this Section 3.5, Contractor shall promptly correct the condition after receipt of written notice. Provided that the expense attributed to abuse, modifications by others, improper maintenance or operations or normal wear and tear shall be the responsibility of the Owner."

Paul M. Lurie is a partner in the Construction Law Group at Schiff Hardin & Waite in Chicago, Illinois and Legal Affairs Editor of Structure. He is an experienced mediator and arbitrator on the AAA Large Complex Case Panel and frequently speaks and writes on the subject of dispute resolution. He can be reached at plurie@schiffhardin.com.

Reprinted with permission on behalf of Paul M. Laurie, Esq.

Privacy Policy | Legal Notice | Site Map | Search

Website 2006 InsPro Corporation.
All Rights Reserved.