Warranties: They Protect You Until They Don’t

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BUILDSMART

Warranties: They Protect You Until They Don’tMost construction contracts include express warranties. A contractor, subcontractor, or vendor may warrant its work or materials on a project for a period of time after the completion of its work or delivery of its materials. The parties to a construction contract will often negotiate the extent and length of this warranty period. But, what happens when the negotiated warranty period extends beyond the period of time in which a construction professional may be sued for design or construction defects? By statute, many states have declared that after a certain date, construction professionals may no longer be sued for such defects. Recently, two state courts considered whether a plaintiff can sue a contractor for breach of an extended express warranty despite the fact that the statute of repose had otherwise run on the claim. One court agreed while the other did not.

What’s a Statute of Repose?

Almost every state has enacted a statute, specific to improvements to real property, which sets certain time parameters after which a construction professional can no longer be sued for its work on a project. These statutes, known as statutes of repose, are similar to the more commonly known statutes of limitation, which set a date by which a claim must be made once the basis for the claim is known. However, unlike statutes of limitation, statutes of repose do not take into account when the act giving rise to a dispute occurs. Instead, these statutes of repose begin to run automatically upon completion of work or delivery of materials, and they set an outermost limit on the number of years a construction professional may be sued for damages stemming from the improvements. Once the statute of repose has run, there is no cause of action against a construction professional for an alleged design or construction defect that was not discovered prior to the running of the statute. Through enforcing these statutes of repose, courts provide a backstop to the potentially limitless legal exposure construction professionals face when making improvements to real property (CTS Corp. v. Waldburger, 134 S.Ct. 2175, 2183 (2014)).

Seems Like a Pretty Straightforward Rule – What’s the Catch?

In 2014, the North Carolina Supreme Court found that an owner could sue a vendor for breach of warranty despite the fact that the statute of repose had run for the project. In Christie v. Hartley Construction, Inc. et al., the homeowners, the Christies, contracted with Hartley Construction Company for the construction of a home beginning in mid-2004. The home’s exterior required an exterior-cladding system to protect its structural insulated panels from wear and tear. The Christies researched an exterior-cladding system manufactured and sold by GrailCoat Worldwide, LLC and GrailCo, Inc. During their research, the Christies found published on the GrailCoat webpage a 20-year warranty for the exterior-cladding system. Ultimately, the Christies purchased the product from GrailCoat, and GrailCoat installed the product on the Christies’ newly built home. By March of 2005, the home was fully constructed.

The GrailCoat exterior-cladding product later failed, and in October of 2011, the Christies sued GrailCoat for breach of the 20-year warranty. GrailCoat argued that the warranty published on its website was unenforceable because of North Carolina’s six-year statute of repose on causes of action stemming from improvements to real property. Both the trial court and appellate court agreed with GrailCoat. However, the North Carolina Supreme Court ultimately disagreed. In its opinion, the Supreme Court weighed the policy considerations embodied in the enforcement of repose periods against the parties’ freedom to negotiate contract terms. The court concluded that “by contracting for a warranty term that exceeded the repose period, [GrailCoat] waived the protections provided by that statute and [were] bound by [their] agreement.” The North Carolina Supreme Court found that “beneficiaries of the statute of repose,” like contractors and vendors, “may choose to forego” the protections and offer longer warranty periods. When they choose to do so, they must honor their contractual obligations. Thus, in North Carolina, parties can contract around a statute of repose, at least with respect to express warranty periods.

What About Warranties on Work Outside the Tar Heel State?

In 2019, the Georgia Court of Appeals was faced with the same question as the North Carolina court but reached a different conclusion. In Southern States Chemical, Inc. et al. v. Tampa Tank & Welding, Inc. et al., Southern States contracted with Tampa Tank & Welding for the renovation of Southern States’ above-ground chemical storage tank. In the contract, Tampa Tank agreed to a 45-year warranty on its work. The tank ruptured 9 1/2 years later, but Tampa Tank refused to honor its warranty, citing the eight-year statute of repose in effect in Georgia. Similar to the North Carolina trial court and appellate court, the Georgia Court of Appeals agreed with Tampa Tank citing, among other things, the fact that Southern States brought its claim outside the eight-year repose period and so, in essence, it did not have a claim at all.

As would be expected, Southern States believes that the Court of Appeals’ ruling is wrong for many of the same policy reasons cited by the North Carolina Supreme Court. Southern States has asked the Georgia Supreme Court to consider the case on appeal. Only time will tell which way the Georgia Supreme Court will go on this issue.

We Do Work Everywhere – How Do We Protect Ourselves?

Warranties are part-and-parcel of construction contracts for everything from power plants to hospitals to office spaces. For now, construction professionals should remain cognizant of the warranties at play in their existing contracts – both the warranties they provide and the warranties they are provided by others. If a warranty period is longer than a state’s statute of repose, it may not be enforceable. In Georgia, for example, the Southern States decision drastically reduces an owner’s ability to avail itself of long-term warranties on its projects – at least for the time being while the case is being appealed. Before signing an agreement for a project, construction professionals should review the relevant express warranty periods in conjunction with the applicable statute of repose and consider the possible effect of any inconsistencies.