GROUP

WARRANTY GROUP

INSURANCE SERVICES

INSURANCE SERVICES

INSPECTION SERVICES

INSPECTION SERVICES

WARRANTIES | INSPECTIONS | INSURANCE

Implied in Construction By Richard T. Petitt

August 2012 WARRANTY GROUP

WARRANTY GROUP

INSURANCE SERVICES Warranties for new home construction would seem to be fairly A comprehensive examination of all types of implied straightforward. warranties is beyond the scope of this article and, likely, INSURANCE SERVICES your tolerance to read.

INSPECTION SERVICES One might think that a warranty should be strictly a matter of the with warranty documents between the seller The themes of the implied warranties, however, generally and buyer. remain the same.

But what happens when warranties are created or imposed Accordingly, this article will present a quick overview of INSPECTION SERVICES by the law in the absence of contract or the intention of the general categories of implied warranties, beginning first the seller? with those arise from the (which is the evolving

WARRANTIES | INSPECTIONS | INSURANCE law that develops from cases and judicial decisions), and Such is the realm of implied warranties. continuing to those that arise from statutes enacted by the legislative branches. Simply stated, an arises by operation of law and exists regardless of any intention of the seller to create it. Types of Warranties The warranty springs from the seller’s breach of some duty, Let’s first examine the common law theories. which amounts to taking advantage of the purchaser by reason of some superior knowledge or the reliance by the purchaser First, there exists the implied warranty that a structure on the seller’s representation or judgment. has been constructed in a workmanlike manner.

Implied warranties are particularly troublesome because A workmanlike manner does not mean the best construction they are created by operation of law, without any intent of available; rather, it means that the work is in accordance with the seller. the accepted norms of the industry.

A Legal History A contractor can, of course, create an express warranty that the work will be of a higher quality, which may exceed the Implied warranties were first recognized in English courts workmanlike manner standard. during the early 19th Century. This calls for the contractor to avoid “puffing” or Suits for breach of warranty were first brought in other superlative language in its contract documents and (non-contract) as actions on the case for deceit the breach collateral marketing materials – such documents with treated as an offense against society rather than as a matter unsubstantiated superlative claims are a favorite exhibit of merely between private litigants. the plaintiff’s attorney.

While express warranties were routinely enforced in the Second, there exists the implied warranty of fitness of United States, implied warranties were slow to be recognized. plans and specifications (constructability).

With some exceptions, the general rule of law for the greater Put simply, there is a duty to use due care in the preparation part of the 19th Century was or ”buyer beware.” of the plans and to ensure that they are reasonably fit for the The tables were slanted clearly toward the seller. buyer’s intended use.

With mass production and the industrial revolution, however, On the other hand, when an owner gives a contractor a set the caveat emptor doctrine gradually receded and the notion of of plans and specifications for constructing a building, there sellers’ implied warranties of quality expanded. is an implied warranty from the owner that the plans and specifications are fit to make the improvement. At this point in our modern legal history, the pendulum has swung the other way and, in this writer’s opinion, substantially favors the buyers and their attorneys. There are now many different versions of implied warranties, and the law varies from state to state.

2 Bonded Builders Warranty Group | bondedbuilders.com | 800-749-0381 WARRANTY GROUP

WARRANTY GROUP

INSURANCE SERVICES One limitation on the owner’s warranty of constructability Courts have been asked to determine the coverage of this is a disclaimer of liability, i.e., a warning that the plans and warranty in various cases. A court has decided that the implied specifications are incomplete and the owner disclaims warranty of habitability or fitness does notINSURANCE extend to SERVICES a defective responsibility for delays/problems resulting from completion sea wallINSPECTION that was onSERVICES residential subdivision lots. An inadequate or revision of the drawings. sewer system was found to be violative of the implied warranty of fitness of a residence. Also, where the contractor knows that the design is inadequate, the contractor is obligated to inform the owner It has also been held that defective workINSPECTION in roads, SERVICES of the omission in order to give him an opportunity to correct subdivision drainage, and a footbridge was not covered by the problem. the implied warranty of habitability of a residence. On the WARRANTIESother hand, | INSPECTIONS the warranty | INSURANCE of habitability was held applicable to Third, there is an implied warranty that the building settlement of a lot creating cracks in a house where the house constructed will be in accordance with the plans on file with and lot were sold as a package. the local building authorities. The fact that the house and the lot were sold under separate This can be a dangerous warranty. It runs in favor of the does not preclude the implied warranty of habitability initial purchaser of a newly constructed residence. of the lot-house package.

Because plans and details of buildings typically change The measure of damages for such a breach of warranty, considerably from the time of drawings until actual construction, where repair can be done, is the cost to repair which there may be slippage between making changes and filing these substantially gives the owner that to which he or she is entitled. changed plans with the local building authority which issued the permit and keeps a record of the plans. It is the duty of the party holding the permit to update the plans on file. With respect to the statutory implied warranties, the most Fourth, there is an implied duty to build in compliance common source is from the Uniform Commercial Code. with the developments restrictive covenants. In one case, a developer had recorded covenants and restrictions which The Uniform Commercial Code has been adopted in all of required the dwelling units to have an enclosed garage and the United States except Louisiana, and includes provisions sufficient driveway to accommodate two cars. on two implied warranties in the sale of goods.

There was a further restriction against parking on the The first of these is the warranty of merchantability. Briefly, property in other than an enclosed garage. The plans for the the warranty of merchantability means that goods that are sold structure reflected the size of the garage ultimately built. by someone in the business of selling goods must be normal However, the garage as built was too small to accommodate and conform to any promises made on the container or label. two regular-sized cars. The court determined that the developer breached its implied warranty to build in accordance with the It does not mean that the goods have to be the best restrictive covenants. available, but they do have to be of fair and average quality.

Fifth, there is an implied warranty of fitness and This warranty may be in addition to express warranties. merchantability, which has also been referred to as a warranty Note that courts have held that Uniform Commercial Code of habitability. It has been called “the breach of a warranty implied warranties apply to goods that are installed, particularly implied by law by minded courts in the where they handle a dangerous force such as electricity. sales of real as an exception to the late common law rule of caveat emptor.” The warranty obligation does not sound in The implied warranty of merchantability is not a proper legal negligence. theory for recovery of economic loss (as distinguished from personal injury or property damage) without .

Bonded Builders Warranty Group | bondedbuilders.com | 800-749-0381 3 WARRANTY GROUP

WARRANTY GROUP

INSURANCE SERVICES An action for breach of an implied warranty pursuant to • Ensure that your contract documents and marketing performance of a contract does not lie where there is no materials disclaim the implied warranties where permissible. privity of contract. This is state-by-state question of law. For example, in most INSURANCE SERVICES states, the implied warranties under the Uniform Commercial INSPECTION SERVICES The statutory warranty of fitness of goods is also found in Code can be disclaimed. the Uniform Commercial Code. It applies only to the sale of goods. Where the seller of a product knows the intended use of This is likely common sense, but when a dispute with its product, there is an implied warranty that a product will be a homeowner arises, go the extra mile in addressing the suitableINSPECTION for the SERVICES purpose for which it is sold. homeowner’s concerns, even if it is, in your opinion, not a construction defect. For this warranty to come into play, the seller must know WARRANTIES | INSPECTIONS | INSURANCE the particular purpose for which goods are required. The seller Too many construction defect cases could be avoided by must also know that the buyer is relying on the seller’s skill or the builder implementing an inexpensive fix and obtaining judgment to select or furnish suitable goods. a full release before the homeowner visits his friendly plaintiff’s attorney. Where these two preconditions exist, the goods furnished are warranted to be fit for the purpose for which For disputes that cannot be settled, make sure that you have they are intended. This warranty may also be in addition to a strong mediation and/or arbitration provision in your contract, an express warranty. along with an express jury trial waiver. Juries are substantially biased against builders. Finally, there are a myriad of condominium and new homebuyer statutes that codify the Uniform Commercial Richard T. Petitt is the managing Code warranties and a number of the common law warranties member of Petitt Worrell Craille Wolfe. (i.e., the warranty of habitability). These statutes either directly PWCW maintains offices in Tampa and incorporate by reference the other implied warranties or create Atlanta and is counsel to some the of new and complicated hybrids. the nation’s largest homebuilders. As many developers and builders know, these statutes are used with great frequency by the plaintiff’s lawyers when a condominium association is going through the turnover process a few years after the initial construction.

Protect Yourself Now that I have laid out the various themes of these unintended, implied warranties, the question arises: “How can I, as a prudent builder, insulate myself, as much as possible, from these unintended warranties.” While it is impossible to completely deflect liability, the following are some suggestions:

• Have a clearly stated express warranty that defines, in certain terms, the terms of the warranty and the construction standards that apply.

• Have your contract documents and marketing materials reviewed by competent construction attorney on a yearly basis.

4 Bonded Builders Warranty Group | bondedbuilders.com | 800-749-0381 9642 0115 BBWG