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.

What Warranty Do I Have to Offer?

Last week I got a question from a contractor who had read the June 2016 Consumer Reports article on home improvement. He told me that nine out of 10 contractors in the CU article claim to offer a written guarantee of their work. He wanted advice on the guarantee he should offer. My answer: “Fine. We can work up a written warranty. But understand that all your jobs come with a warranty already – even if you never breathe a word about it in the contract.”

Here’s why that’s a true statement. Forty-six states and the District of Columbia impose an “implied” warranty on contractors on nearly every construction project. Just by taking a job, you guarantee work will be done using customary skill and care, will comply with accepted standards and the finished project will be reasonably fit for the intended use.

Who enforces that warranty? Courts in every state decide construction warranty claims on a case-by-case basis. Exactly what meets state standards and how long the warranty lasts are a question for the judge and jury. Some states (AZ, CA, RI, SC) publish a list of construction standards – defining what constitutes a construction defect. Other states (DE, KY, LA) consider anything that doesn’t comply with the building code to be a defect.

Is there any way to avoid this implied warranty? Yes. That’s called a “disclaimer” of warranty. A carefully worded disclaimer will be enforced in most states if clear and conspicuous (bold type, upper case, “as is,” etc.), especially if the defect in question is part of the negotiations and will be obvious to the buyer. But don’t try to include a disclaimer in every construction contract. That won’t work.

Four states don’t imply any warrant. Instead, GA, ME, MN and NJ require contractors to give an express (written) warranty: Georgia requires a written warranty on single-family and duplex dwellings. See my blog post of March 31, 2009 for details. Maine requires a written warranty for residential jobs over $3,000. Minnesota requires a guarantee on materials and workmanship for one year, plumbing, electrical and HVAC for two years and structural components for 10 years. New Jersey contractors have to include a written guarantee with each bid.

What About an Express Warranty?

All states permit express written warranties in addition to the warranty required by state law. Here are the options if you want to offer more than the minimum warranty. These are listed in order of the least risk to the most risk to the contractor:

• When you install materials, equipment or appliances that come with a written manufacturer’s warranty, pass warranty documents to the owner.
• Offer a warranty on named components. For example, the roof won’t leak for five years or cabinet doors won’t sag for 10 years. Construction Contract Writer offers a good choice of warranties for 40 construction trades – everything from asphalt paving to windows and for any period you select.
• Offer a warranty on all material and workmanship. For example, “Contractor warrants that the work shall be free of defects due to faulty material or workmanship for the period specified in this agreement.”
• Offer a broad form warranty. This is the warranty usually required on public works projects: “Contractor warrants that work performed under this contract shall conform to the contract documents and be free of defects in material, design furnished and workmanship performed by contractor or any subcontractor or material supplier for the period specified in this agreement.”

If you use Construction Contract Writer, the choice is yours. Just check a box to offer the warranty you prefer.

Making Points with Call-Backs

You finished the job last week. This week you get a call from the owner:

The floor squeaks -- or a door or windows doesn’t close quite right -- or there’s a wet spot on the ceiling -- or a pipe in the basement is leaking.

If you’ve been in construction for a while, you could add more examples to my list. So what should you do when you get a call-back? I’ve got a suggestion -- a suggestion that could save both your reputation and some grief.

Most contractors take responsibility for obvious defects in materials and workmanship. That’s an easy choice. It’s the law in most states. It’s also what your clients expect. We live in an economy where vendors make refunds on merchandise that doesn’t live up to expectations. That’s simply good business. Contractors don’t have to make refunds. But they have the same obligation to meet expectations

Call-backs vs. Warranties

The essence of a call-back is that something isn’t working as expected. In that light, a call-back is an extension of the construction process. Many call-backs are items that could have been discovered with a more thorough final inspection.

The essence of a warranty claim is the right to collect money damages. That’s not where you want to be. Call-backs aren’t about money. The owner just wants your crew to check the problem and make it right. That’s perfectly reasonable. You did the work and probably know best what’s needed. Your cost of making repairs is likely much less than hiring another contractor to do the work. And there are other advantages. Doing the right thing earns the owner’s confidence. That builds your reputation. It’s also an opportunity to sell more work.

Set Limits in the Contract

But it’s reasonable to set limits. For example, you’re not liable for call-backs forever. The call-back period could be 30 days or 60 days. On a larger job, the call-back period could be the time between substantial completion (when you write the punch list) and final completion (when the punch list has been worked off).

If the first call-back doesn’t correct the problem, will you make a second call-back on the same problem? If so, does a new call-back period begin running after the second call-back?

Other generally accepted rules on call-backs:

• An owner who doesn’t give notice of a defect within the call-back period waives the right to repair or replacement.
• You have the right to test and inspect any claimed defect during the call-back period.
• You have the right to an opinion from an independent expert before beginning repairs.
• The call-back period starts early on any part of the work an owner occupies early.
• Exclude from call-back protection anything covered by a manufacturer’s warranty.

If your contracts don’t cover call-backs and specify reasonable call-back limits, you’ve set the stage for a serious dispute. The best way to protect yourself: Construction Contract Writer. The trial version is free.

A New Dawn for Georgia Contractors: Warranty

Not many residential contractors in Georgia have experience writing warranties. Builders usually think of warranties as bad news: Nothing good ever came from a warranty. Better to ignore the issue and hope clients never give it a thought. 

That's going to change, at least in Georgia. 

Georgia Code Section 43-41-7 (the Written Warranty Act) now requires that residential contractors deliver a written warranty before starting work on any job valued at over $2,500 (see footnote 1). The Georgia legislature left it to the State Licensing Board for Residential and General Contractors to decide what has to be in that warranty. 

The Board's regulation (see below) went into effect on August 4, 2008. There are two ways to look at this. First, the Written Warranty Act is just another burden contractors have to carry (or find a way to avoid). Second, you could decide that the Written Warranty Act is an opportunity likely to make or save you time and money. I think it's the latter and will explain why. 

When you buy a car or a set of tires or get your car serviced, you get a warranty as part of the deal. That warranty draws a line in the sand – identifying exactly what's covered and what isn't, reducing the margin for dispute. Car dealers and appliance manufacturers wouldn't even consider doing business without a written warranty – for their own protection. Licensed residential contractors need warranty protection even more than appliance dealers. Your risk of loss is greater. 

A good contract with favorable warranty terms will lay off that risk. And the Written Warranty Act makes it easy. The only iron-clad warranty rules: (1) It has to be in writing. (2) Has to explain what's covered and what's excluded. (3) Has to identify duration of the warranty. (4) Has to describe claim procedures and (5) response options. (6) And has to assign any manufacturer warranties. 

What your warranty says on those six points is entirely your call. Nothing in Section 553-7-.01 ties your hands. You can cover or exclude anything and for any period so long as you touch all six bases. There's a certain symmetry to this new law. For several years, Georgia's Right to Repair Act (see footnote 3) has protected residential contractors from suit over claimed construction defects. Before filing suit, the home owner has to work through a 90-day settlement procedure. To get that protection, all you need do is insert a one-paragraph notice in the construction contract. So now the scales are in balance: 

Obligations of the homeowner under the Right to Repair Act weigh against obligations of the contractor under the Written Warranty Act. In a way, it makes perfect sense. 

 If you need help drafting warranties for your jobs, have a look at Construction Contract Writer. You'll find a good selection of sample contracts for residential work, each with a warranty and Right to Repair notice that comply with Georgia law.  

Official Code of Georgia Annotated 43-41-7. Written warranties required A licensed residential contractor and any affiliated entities shall offer a written warranty in connection with each contract to construct, or superintend or manage the construction of, any single family residence where the total value of the work or activity or the compensation to be received by the contractor for such activity or work exceeds $2,500.00. The residential contractor division shall establish the minimum requirements of such warranty. The parties to the warranty may agree to submit any or all disputes arising under the warranty to arbitration. Such agreement to arbitrate shall be enforceable as provided in Part 1 of Article 1 of Chapter 9 of Title 9, the "Georgia Arbitration Code." 

Compiled Rules and Regulations of the State of Georgia Section 553-7-.01 Written Warranty.

(1) Definitions: (a) “Covered contract” shall mean any contract to construct, or superintend or manage the construction of, any single family residence where the total value of the work or activity or the compensation to be received by the contractor for such activity or work exceeds $2,500.00. (b) “Single family residence” shall be deemed and construed to mean a “one or two family residence” as defined in the current edition of the state minimum standard International Residential Code (IRC).

 (2) A licensed residential contractor and any affiliated entities shall offer a written warranty in connection with each covered contract. 

(3) A licensed residential contractor that enters into a covered contract shall provide a written warranty which describes, at a minimum: 

(a) Covered work and activities; 

(b) Covered exclusions; 

(c) Standards for evaluating work and activities, which standards shall be those set forth in the current edition of the Residential Construction Performance Guidelines as published by the National Association of Home Builders; 

(d) The term of the warranty, including commencement date(s) or event(s); 

(e) Claim procedures; 

(f) Contractor response options (such as repair, replace or compensate); 

(g) Assignable manufacturer warranties. 

(4) Prior to the execution of a covered contract, a licensed residential contractor shall attach a complete copy of the written warranty (or an identical blank standard form of it) to the covered contract or otherwise make same available for review. 3 Official Code of Georgia Annotated Sections 8-2-35 to 8-2-41