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.

Construction Warranty in 50 States

Warranty isn’t a popular topic with contractors. Warranty claims come in two sizes, expensive and even more expensive. Worse, no one wins a warranty dispute. And there’s almost nothing a contractor can do to avoid warranty claims. Better to cross your fingers and ignore the subject.

If that’s how you feel, keep reading. I’ll offer another viewpoint.

No too long ago I took a call from a contractor in a dispute with a condo association. The contractor had laid pavers around the perimeter of their complex. It was a big job and the condo Board was pleased – at first. About two years later the pavers started to “pump” where trash trucks made stops. The association claimed the pavers weren’t laid to spec. They hired an engineer and a lawyer and demanded that the entire job be torn out and done again –at the contractor’s expense. The job had passed every inspection, including soil density tests. But the original contract didn’t say anything about warranty. Obviously, the contractor needed help.

Warranties come in two flavors, express (written in the contract) and implied, either by court decisions or by statute (state law). All states enforce the terms of any express warranty in the contract. Most states also require that residential construction be done in a workmanlike manner. That’s an implied warranty. It’s not part of the contract and is separate from any written express warranty. The term and coverage of implied warranties will be whatever a court decides on a case-by-case basis or whatever state law requires.

Warranties State-by-State

Many states restrict or limit any attempt to disclaim the implied warranty of workmanlike construction, especially on residential jobs. For example, Kansas imposes a fine of up to $10,000 for trying to disclaim an implied warranty of fitness for purpose. Other states permit a contractor to disclaim implied warranties if wording, type size, and placement in the contract are just right.

Minnesota’s statutory warranty has to be written into every residential contract – three paragraphs of very precise language. The warranty runs for one year on materials and workmanship, two years on plumbing, electrical and HVAC and ten years on any "major construction defect".

California makes residential builders liable for a long list of construction defects. The builder has to either make repairs or compensate the owner for the loss – including relocation and storage expense. The warranty expires in either one, four or ten years unless another expiration period is in the contract.

Pennsylvania law implies a warranty of good workmanship -- what's reasonable under the circumstances, not perfection. An implied warranty of habitability is breached if a defect presents a “major impediment to habitation”.

New Jersey provides an express Home Owners Warranty (HOW) to all buyers of new homes. Every new home sold in New Jersey comes with a limited warranty against construction defects for up to ten years. Home builders in New Jersey are required to enroll in either the state warranty plan or a private warranty plan approved by the state.

Georgia’s Written Warranty Act requires that contractors deliver a written warranty before starting any residential work valued at over $2,500. 

Every residential job in both Florida and Texas comes with an implied warranty of good workmanship and habitability. But contractors in both states can disclaim all warranties if the contract leaves no doubt about what’s covered and what’s not.

In New York, the implied warranty requires that work be done with reasonable care and competence. Any attempt to disclaim that warranty is unlikely to work.

So what’s a contractor supposed to do?

My advice is to be pro-active. Don’t have your warranty dispute end up on some desk at two law firms. Write an express warranty into your contracts. Identify exactly what’s covered and what’s excluded. That would have saved my friend the paving contractor thousands. In his case, pavers were subsiding where water from yard sprinklers drained across the pavement. A written warranty excluding damage from standing water would have saved at truckload of grief.

Where do you look to find out what warranty your state requires? Where do you get good warranty agreements that protect contractors, no matter the type of project? I’m glad you asked. The best source I know is Construction Contract Writer. The trial version is free.