Use a Written Warranty To Limit Claims

 Most builders avoid any mention of warranty in their contracts. Why ask for trouble? Right?

 If that’s your attitude, keep reading. You may be missing an opportunity.

Like it or not, every builder issues at least an implied (unwritten) warranty on every job. In most states, this is called the implied warranty of workmanlike construction. It covers whatever state law says it covers and whatever a court considers reasonable. Except in rare cases, you can’t disclaim this implied warranty. It goes with the job.

But your contract can include an express (written) warranty that limits or modifies your implied warranty. A case decided in Colorado earlier this month is a good example.

Weyerhaeuser manufactures wood floor beams. Dream Finders Homes and a subsidiary installed those I-beams in their new homes. The beams came with a written warranty against manufacturing defects. For breach of this written warranty, Weyerhaeuser agreed to cover the cost of repairs “not to exceed 3 times the original purchase price.” Weyerhaeuser’s warranty disclaimed any responsibility for other damages.

In December 2016, Weyerhaeuser changed the formula for fireproofing their G2 floor beams. The new G4 floor beams had a coat of urea-formaldehyde. By spring 2017, buyers of homes with these G4 floor beams were complaining of a chemical odor in the basement that irritated their eyes and throat. Weyerhaeuser stopped shipping G4 beams and hired a contractor to remove the coating in 38 homes. The cost of remediation was far beyond three times the original price of the joists.

Dream Finder Homes conceded that Weyerhaeuser met their obligation under the warranty. Still, they sued for negligence and fraudulent concealment. Dream Finder’s suit asked damages for lost profits, extra legal expense, financing costs, builders risk insurance and higher operating costs. The trial court awarded damages against Weyerhaeuser of over $14 million. Weyerhaeuser appealed.

What Would You Decide?

If Weyerhaeuser met their obligations (under the contract), were they still liable for negligence? Every law student will recognize the issue: contract law (promises made) vs. tort law (an obligation to the public entirely apart from any agreement). The “economic loss rule” limits recovery in tort when there’s an underlying contract. Someone injured by a breach of contract has no claim for tort damages absent an independent duty of care under tort law.

Last month, a Colorado appellate court (2021 COA 143) reversed the trial court decision. According to the appellate court, Dream Finder Homes was trying to recover for damages expressly excluded by their written warranty. Contract damages were enough. That warranty saved Weyerhaeuser $14 million.

There’s a lesson here for every builder. A written warranty can save you a bundle. Define in your contract exactly:

• What constitutes a defect, and,
• What you plan to do if the warranty is breached.

Any reasonable attempt to resolve warranty claims is likely to be upheld by a court.

So where do you get good warranty contract language? That’s easy. Construction Contract Writer includes warranty language for nearly every trade and every type of project. The trial version is free.