Warranties are ubiquitous in construction contracts and purchase orders. They are sometimes inducements. They are sometimes negotiated. Oftentimes, however, they are boilerplate, given scant consideration until an issue arises. As a creature of contract, it is important that all parties to the contract understand the nature of a warranty and the obligations they create in order to manage expectations and avoid future disputes.
At its core, a warranty is a two-part promise. The first part is a promise of integrity: the product or service will have the quality or characteristic reasonably expected. This includes expectations expressed as objective criteria (e.g., suitability of materials) and implied expectations (e.g., workmanship or fitness for particular purpose). The second part is a promise of future performance: if a deficiency arises, the warrantying party will address the deficiency.
For example, in construction contracts, the contractor implicitly, if not explicitly, warrants that its work will be performed in a workmanlike manner. This requires the contractor to perform all its work in an ordinary skillful manner, as a skilled worker should do it.1 The warranty of workmanship does not extend beyond final completion unless the defect was hidden or concealed and could not be observed through reasonable means. Therefore, periodic inspections and a final walk-through inspection are critical; the contractor should be notified of all discrepancies prior to the owner accepting the construction and making the final payment. Final payment should be withheld until the discrepancies are satisfactorily corrected. Once final payment is tendered, the owner accepts the project and the warranty of workmanship extends to latent defects that manifest during the warranty period, typically one or two years from substantial completion. If the problem arises during the warranty period, caused by inadequate or defective workmanship, or materials with latent defects, it should be covered under the contractor’s warranty.
Relatedly, the owner implicitly, if not explicitly, warrants its plans and specifications will be adequate to build an acceptable project. Under this warranty, the contractor is entitled to additional compensation if the contractor complies with the owner’s plans and specifications and the resulting product is inadequate.2 This is because a contractor generally does not assume the risk of defective design where another prepares the design, generally the owner’s architect, and the contractor is required to follow it, and did follow it. The risk of defective design is not shifted to the contractor by standard contract language that requires the contractor to visit the site, check the plans, and inform itself of the work.
Controversy arises, however, when the contractor proposes a substitute and the owner approves the substitute, as either a value-engineering proposition or for some other reason. Under these circumstances, the owner can be held to have adopted the substitute and assumed the risk of its unsuitability unless the owner contractually shifts the risk to the contractor as part of allowing the substitution. Moreover, the contractor can be liable for proposing a substitute product depending on its level of involvement in preparing the specifications, selecting the substitute item, and the contractor’s level of expertise.3
As part of any warranty claim, notice of the claim must be given.4 Thus, even if the contractor knows of the deficiency, the owner must still give notice so the contractor will know that the deficiency has become in controversy to the degree that the owner considers it to be a claim under the warranty.
Warranties generally include the time in which notice must be provided (e.g., thirty days from discovery of deficiency). If no time is stated, Courts will infer a “reasonable” time period in which to issue notice.
Once notice is provided, the warrantying party must have an opportunity to cure the deficiency; otherwise, the warranty claim may be void.5 Further, remedies under the warranty are generally limited to repair or replacement of the non-conforming product or service or reimbursement of the purchase price paid for the non-conforming product. Express warranties nearly always disclaim implied warranties and exclude imposition of consequential damages (e.g., lost profits, loss of use, extended financing, overhead, etc.).
Parties to a warranty must understand the nature of a warranty. They must know the result they want the warranty to achieve and negotiate warranty terms to achieve that result. They should always seek competent professionals for legal advice and expert assistance.
1 Newlee v. Heyting, 167 Or 288, 292-93, 117 P2d 829 (1941).
2 Barbour & Son v. Highway Com., 248 Or 247, 257-58, 433 P2d 817 (1967); Gen. Constr. v. Ore. Fish Com., 26 Or App 577, 581-82, 552 P2d 185 (1976).
3 Coghlin Electrical Contractors, Inc. v. Gilbane Building Co., 472 Mass 549, 36 NE3d 505 (2015)
4 E.g. Wagner Tractor, Inc. v. Shields, 381 F.2d 441, 443-444 (1967).
5 E.g., Magnum Construction Management Corp. v. City of Miami Beach, 209 So. 3d 51 (Fla. 3d DCA 2016) (precluding recovery against contractor for alleged defects discovered after completion, where the contract warranty required the contractor to have received written notice and an opportunity to cure the defects and owner remediated the work without giving the contractor the opportunity to cure).