March 21, 2018

I recently saw a commercial that trumpeted a 10-year or 100,000-mile powertrain warranty on a $14,000 car. The next day, I was on the phone with a contractor who insisted that he would only guarantee his work on a multimillion-dollar building for one year. How was it possible for me to get a 10-year warranty on an inexpensive car, but my client could not get a more substantial warranty on a project that was 200 times more expensive? The contractor explained that his warranty policy is “the industry standard.” But is it?

The Warranty Onion: Misconceptions Based on Misreadings

Many contractors (and some owners) believe that under most industry-standard construction contracts, the contractor is not responsible for correcting defective construction discovered more than one year after completion because those contracts establish a “standard, one-year warranty.” Although a contractor could certainly include language in the construction contract expressly providing for a one-year warranty, there is simply no such thing as an industry-standard, one-year warranty.

The likely source of this misconception is found in common construction documents, such as AIA Document A201 – 2017, General Conditions of the Contract for Construction Projects. Specifically, Section 12.2.2.1 provides that:

“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 designated portion thereof … or by terms of any applicable 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. … During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty.”

This one-year correction period has become known in the construction industry as a “one-year warranty.” Both owners and contractors point to this provision as a contractual limit on the contractor’s obligation to correct defective work discovered more than one year after completion of the construction.

However, when this section is read in conjunction with Section 3.5.1 of A201, it is clear that the intent is not to provide a one-year limitation period. Thus, while the contractor’s obligation to repair may be limited to one year, the contractor’s financial obligation to pay to correct defective work is not as limited.

Section 12.2.2.1 states that the one-year requirement is “in addition to the Contractor’s obligations under Section 3.5.” Thus, the obligation at Section 12.2.2.1 is in addition to and not a limitation on Section 5.5.1.

Section 3.5.1, entitled “Warranty,” states:

“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. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage.”

It is important to note there is no language in Section 3.5.1 that establishes any sort of limitation period. Further, Section 12.2.5 states:

“Nothing contained in this Section 12.2 shall be construed to establish a period of limitation with respect to other obligations the Contractor has under the Contract Documents. Establishment of the one-year period for correction of Work as described in Section 12.2.2 relates only to the specific obligation of the Contractor to correct the Work, and has no relationship to the time within which the obligation to comply with the Contract Documents may be sought to be enforced, nor to the time within which proceedings may be commenced to establish the Contractor’s liability with respect to the Contractor’s obligations other than specifically to correct the Work.”

As a result, the contractor’s warranty obligations set forth in Section 3.5.1 are not limited by any contractual timeframe. Rather, under Illinois law, a claim for breach of construction warranty may be brought if discovered within 10 years after the time the act or omission occurred, which would be no later than completion of the construction unless otherwise specified. That means a claim for defective work under Section 3.5.1 can be brought at any point during that timeframe, regardless of the “one-year” language contained in Section 12.2.2.1.

If the construction contract contains express language limiting the contractor’s obligations to the one-year period after the completion of the project, then that provision will be a defense for the contractor against an owner asserting a claim outside of that one-year period. However, if the construction contract incorporates an unmodified version of A201, the applicable warranty will not be limited to one year.

Know Your Contract Language (and What It Means for You)

It is important for the contractor, and ultimately the owner, to be aware that concern over how long the warranty runs does not necessarily end with the owner-contractor agreement. The parties also need to consider the language in the contractor’s subcontract. Most contractors use the same subcontract form from project to project, and generally those subcontracts contain language that binds the subcontractor to a one-year warranty. In essence, while the contractor may be providing the owner with a longer warranty, the subcontractor might not be. Unless the subcontract states that the owner-contractor agreement has priority over the subcontract (e.g., “in the event of conflict the terms of the Prime Contract will govern and control”), the contractor may be obligated to the owner to correct defective subcontractor work without the subcontractor having any responsibility for the performance of the corrective work.

Contractors and owners should examine contract provisions carefully to ensure clarity on warranty limitations and be wary of misconceptions about “industry standards.” For more information regarding a specific contract or questions about construction warranties, contact your Much Shelist attorney.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.