It happens all the time. I get a frantic call from a contractor client about claims for defective work. The client insists the warranty has expired because more than a year has passed since completion of the work and can't understand how the owner, or general, thinks it has a claim. Then I look at the contract and, nine times out of ten, I see what I have come to expect — there is no one year warranty. Instead, it's an open warranty, with no express time limitation, and it lasts as long as the work warranted should last if properly constructed. So I have to tell the client the bad news: it is exposed to liability for the defective work, and it's probably not covered by insurance.
What about the standard one year warranty? It's a myth. And, so it seems, one of the most misunderstood concepts on the commercial side of the construction industry. The confusion seems to come from the prevalence of the so-called one year call back period. This is the standard contract provision that gives you the right to fix any defective work if notified by the owner before the end of one year. It requires the owner to give you, the contractor, a chance to correct the work before the owner can hire someone else to do the work and back charge you for the corrective work costs. And if the owner tries that without giving you a chance to fix your work, then you're off the hook. Then, not only can’t the owner back charge you for the corrective work, the warranty on that work is likely void as well.
What's so confusing about this? Well, many contractors assume this one year call back period is the warranty, or the only warranty provision in the contract. But that's typically not the case. Most standard form contracts also have a separate warranty provision that may or may not be limited to one year. Often they are not limited to one year, and thus warrant the work for as long as work of the type warranted should last. In this case, after the one year call back period is over (assuming there is one), the owner no longer has an obligation to give the contractor a chance to correct the work. It can go out and hire someone else and make a claim against the contractor for the costs of the corrective work, a claim based on breach of warranty.
Don't feel bad if you didn’t realize many of your contracts have warranties without express time limitations. It's just as often that owners insist on inserting a true one year warranty without realizing they just cut years off their warranty rights. When owners don’t make this mistake, at least some states have statutes that limit the time in which warranty claims can be brought, though the periods are typically quite long.
Now that we have identified the problem, what can be done about it? Sometimes nothing — you either agree to an open warranty or you don’t get the job. But at least you should go into the contract aware of your exposure for defective work. Other times you can do something about it. You can either delete the open warranty provision, and maybe use the call back period as the only warranty, or you can insert language to limit the warranty to the length of time that makes sense for you based on your negotiating power and the contract price. At a minimum, you should consider that giving up the protection of a true one year warranty is worth something to bargain with.
Let's review a real case as an example. A mechanical contractor subcontracts with a large general contractor on a casino project. There is a problem with the HVAC piping, and the casino owner sues the general, which in turn sues the mechanical subcontractor. The mechanical subcontractor takes the position that its one year warranty expired, but the subcontract incorporates the terms of the prime contract (which provided a longer warranty), and further provides that the subcontractor would be obligated to the stricter terms where they were in conflict. So instead of a one year warranty, the subcontractor was bound to the three year warranty in the prime contract.
Another case had similar facts, except the prime contract had a true one year warranty. This would have been good for the mechanical subcontractor except that its own subcontract had a one year call back provision and an open-ended warranty. To make matters worse, the open warranty ran expressly to the owner as well as the general contractor. So while the general contractor might have been off the hook for the defective work, the mechanical subcontractor was exposed to a direct claim from the owner on top of an indemnity claim from the general.
The learning points? Read all of the warranty provisions in your contract; watch out for pass through clauses that incorporate stricter terms of the prime contract; and at least be aware of your risks.
Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation.