Legal and Regulatory

The Fiction of the One-Year Warranty

Does exposure to claims end after the expiration of a one-year warranty? In reality, claims for breach of contract will remain for the duration of the state’s statute of limitations period after the warranty term expires.
By Joshua Levy
October 26, 2018
Topics
Legal and Regulatory

Lawyers often have to correct common misunderstandings clients have regarding certain legal principles, such as the ability to recover attorney’s fees in litigation and what may be covered by their insurance policies. In the construction law space, a common misconception is the concept that exposure to claims ends after the expiration of a one-year warranty. The false sense of security a construction firm may have after its one-year contractual warranty expires can lead to problems if post-warranty claims are not handled correctly. A written warranty is like any other clause in a contract – it is an agreement between the parties with a certain scope defined by its terms. Believing that a construction firm’s exposure to claims ends after a year is the fiction of the one-year warranty.

Contractor warranties are a typical clause included in construction contracts. For instance the standard warranty included in the AIA General Conditions, the A201, generally states that the contractor warrants that the materials it furnishes will be of good quality and new, will conform to the requirements of the contract documents and will be free from defects.

“If within one year after the date of Substantial Completion any of the Work is found to be not in accordance with the Contract Documents, the Contractor shall correct it promptly after receipt of notice from the Owner to do so.”

The standard clause continues by stating that during the one-year period for correction, if the owner fails to notify and give the contractor an opportunity to make the correction, the owner waives his/her right to require correction by the contractor and to make a claim for breach of warranty. It is easy to see why people misconstrue that type of one-year warranty to be a backstop for all claims related to issues that arise from the work. However, rather than limiting an owner’s right to seek recovery for defective construction after the warranty expires, this type of warranty is referred to as a “call-back” warranty and only truly establishes the way to handle issues that arise during that first year following substantial completion.

The dirty little secret regarding standard one-year warranties is that basic claims for breach of contract alleging defects in construction will remain for the duration of the state’s statute of limitations period after the warranty term expires. The establishment of a one-year period for correction of work in a call-back warranty relates only to the specific obligation (and entitlement) of the contractor to correct the work. The period of time for the call-back warranty has no relationship to the time within which the obligation to comply with the contract documents may be enforced nor to the time within which proceedings may be commenced to establish the contractor’s liability with respect to the contractor’s original obligations to perform the work without defects.

In fact, the AIA A201 confirms that nothing contained in the standard AIA one-year warranty shall be construed to establish a period of limitation with respect to other obligations the contractor has under the contract documents. The duties and obligations imposed by the parties’ construction agreement and the specific rights and remedies available under that agreement are in addition to and not a limitation of duties, obligations, rights and remedies otherwise available by common law. In other words, if a contractor can bring a lawsuit for breach of contract due to defective construction for six years, unless specific language is included in a warranty, a one-year call back warranty will not limit that six-year breach of contract statute of limitations.

Now that the limited purposes of a typical one-year warranty are understood, can the parties contract to limit all claims to one year? The answer, as with most contract provisions, is that the parties may include in their agreement virtually any terms as long as they have a meeting of the minds. Parties can limit contract claims if the contract clearly states the intent of the parties is to limit the available remedies or time frame. A contractor could negotiate for a limitation such as the following:

“The remedies stated in the Agreement are Owner’s sole and exclusive remedies for any failure by Contractor to comply with obligations to Owner, and Owner hereby irrevocably waives any right to assert a claim against Contractor based on a legal theory that a remedy provided herein fails of its essential purpose.”

However in practice it may be very difficult to negotiate for a one-year exclusive remedy for construction defects.

The most widespread warranties in construction agreements are also the most overlooked. Construction professionals and owners are familiar with the comprehensive inspection and approval process prior to a roofing manufacturer issuing a written 20-year warranty. In those situations the warranty extends far beyond statues of limitations for construction defects. However, the basic one-year warranty included in most owner agreements, and flowing down to subcontractors in their subcontract agreements, deserves equal attention. If a contractor believes the standard warranty limits exposure, that is the fiction that needs to be corrected. When contractors enter into an agreement to perform work free from defects, a failure to do so is a breach of contract. The one-year warranty can only move from fiction to fact if these basic principles are understood and negotiated to accept risks and exposures that are clearly understood.

by Joshua Levy

Joshua Levy is a Partner in the Milwaukee, WI office of the law firm, Husch Blackwell. He is the leader of the firm’s Construction & Design Group and serves as an AAA Arbitrator on the Construction Industry Panel. Josh’s past experience as in-house counsel for a national construction firm has given Josh an in-depth understanding of the concerns of owners, developers, architects and contractors.

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