Issues With Construction Contractors’ Warranty Obligations – Part 1
Contractual warranty obligations can be an unexpected source of risk and expense for construction companies. The duration of typical warranties, the scope of many such warranties and the extent they are effectively transferred to subcontractors and suppliers are often misunderstood and a source of controversy when a building system or component fails. This article deals with the duration of a contractor’s warranty obligations under standard contract documents. A future article will address scope and “pass through” issues.
Many contractors believe their warranty obligations are limited to the (typically) one-year “correction of work” period common in most contracts. But in fact, standard warranty obligations extend for six years in most cases in New York, and a recent appellate court decision may extend the one-year “correction” obligation even further in some cases.
First and generally, a warranty is a contractual undertaking that one’s work and materials will be of a specified quality, whether the word “warranty” is used or not. Outside of home building and improvement (where statutory warranties apply), a construction contractor’s warranty obligations are strictly a matter of contract. This means, at least in theory, that contractors have a say in what warranty obligations they commit to. But you need to know where those warranty obligations are located.
Most construction contracts, including all the standard industry forms, have both a general “warranty” clause and a distinct “correction of work” clause. The first is a general commitment that the work will be free from defects. Such “warranty” clauses are typically unlimited in time, and may therefore be enforced by an owner for up to six years after substantial completion (the statute of limitations in New York for bringing a breach of contract claim). The typical “correction of work” clause, on the other hand, seldom includes the word “warranty” but it nevertheless obligates the contractor to repair or replace “defective” work of which notice is given within a particular period (usually one year) after completion. These clauses, which may not be located near one another in the contract, are similar but they carry distinct obligations.
For example, the standard AIA general conditions, form A201-2017, includes the following two sections:
3.5.1 The Contractor warrants to the Owner and Architect that materials and equipment furnished under the contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials or equipment not conforming to these requirements may be considered defective.
12.2 Correction of Work
12.2.2 After Substantial Completion
18.104.22.168 In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work or a designated portion thereof or after the date or commencement established under Section 9.9.1, or by terms of any 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 notice from the Owner to do so, unless the Owner has previously given a Contractor a written acceptance of the conditions.
This same duality of warranty provisions is found in the standard contract forms published by ConsensusDocs (Nos. 200 and 410), the Engineers Joint Contract Document Committee (C-700) and the Design Build Institute (No. 535). It also appears routinely in many other owner-generated contracts.
The general “warranty” clauses of these contract forms are significant, because they can be enforced by the project owner throughout the statute of limitations period for a breach of contract action, which is six years in New York. This means that a contractor who declines to correct defective work in years 2-6 after substantial completion, or to reach some other settlement with an owner, can successfully be sued by the owner for either the cost of having the defect corrected by others or the loss in building value caused by the defect. The only effective way to limit this exposure under a general warranty clause is to negotiate a shorter limitations period for bringing a breach of contract action.
Special Problems with Special Warranties.
Many contract specifications require the contractor to provide the owner with special or extended warranties from the product manufacturer for particular products or systems. And typical subcontracts pass those obligations on to one or more subcontractors. Typical examples include 25-year warranties for roofing materials, or 10-year warranties for calking or sealing materials. The requirement is common enough that manufacturers routinely make such warranties both readily available and directly enforceable by the project owner without regard to privity of contract.
It has been widely assumed in the construction industry that the contractor’s responsibility for such special warranties ends upon delivery of the specified manufacturers’ warranties to the owner or its representative. However, a recent decision from New York’s Appellate Division has held that a contractor’s one year “correction of work” obligation was extended to ten years by the requirement to provide a manufacturer’s warranty of that duration.
In HTRF Ventures, LLC v. Permasteelisa North America Corporation, the Court permitted a building owner to sue a curtain wall subcontractor for building leaks ten years after the contract was finished, because of a specification requirement – which Permasteelisa complied with — to provide a ten-year warranty from the manufacturer of the sealant that was used on the building. For reasons undisclosed in the decision, the building owner chose to sue only the subcontractor, and not the manufacturer, more than nine years after the project had been turned over to the owner.
In allowing such a belated suit against the subcontractor, the Court acknowledged that any liability based on the subcontractor’s general warranty obligation had expired after six years (four years earlier). But it found a “hook” in the separate “correction of work” clause, which committed Permasteelisa to correct defects in material or workmanship “discovered within one (1) year from the date of the acceptance of the Project . . . or for such longer period as may be provided in the . . . Contract Documents.” In fact, the specifications had required Permasteelisa to furnish its own extended five-year warranty for its work and materials. That special warranty, of course, had expired. But the Court (with one judge dissenting) allowed suit against Permasteelisa to continue anyway, ruling that the ten-year period specified for the sealant manufacturer’s warranty was a “longer period provided for in the contract documents” that extended the sub’s own one year “correction of work” obligation to ten years.
It is tempting to dismiss the result in this case as an anomaly based on peculiar warranty language in a particularly onerous design-build contract. However, the contract language the Court focused on may also be found in several industry standard contract documents. For example, DBIA Document 535 commits the design-builder to correct defective work for one year “or within such longer period to the extent required by any specific warranty included in the Contract Documents.” The EJCDC standard general conditions (C-700) has similar language, as does the ConsensusDocs design-build contract (No. 410). And while the ConsensusDoc owner agreement (No. 200) limits the “correction of work” period for prime contractors to one year, its subcontract form (No. 750) makes the requirement one year “or for a longer period of time as may be required by specific warranties in the Subcontract Documents.” While the AIA A201-2017 doesn’t include this precise language, it does include language that could be confused to reach a similar result.
Conceivably the Permasteelisa case will be rejected by other appellate courts, but in the meantime, contractors will have to carefully negotiate the warranty terms of their contracts if they wish to avoid a similar extension of their own warranty obligations to match the duration of the longest-lived manufacturer’s warranties called out in the specs.
As noted at the beginning of this article, the duration of a contractor’s own warranty obligations, even in the presence of required manufacturer’s warranties, can be limited by careful negotiation. The same is true for other warranty pitfalls, to be discussed in a future Part 2 of this article.
Tony Adams is a founding partner of Adams Leclair. Part 2 of this article will be published in May 2021.