How well do you understand what is in your construction contracts? If you knew working with an attorney would ensure that you and your business would be 100% protected, you would probably choose to always work with an attorney before starting a construction project, right? Our team of esteemed attorneys wants to work with you at the start of any new project to avoid expensive litigation costs and situations down the road where you are held liable.
Most people in the construction industry are comfortable with warranting their work. It is an important step in the construction process, but did you know that you could be liable for so much more than you even realize? It is crucial that you do not go into a construction project blind! Knowing what provisions are included is essential to the success of a project! In this blog, we will break down the breach of express and implied warranties, the positives and negatives of warranties, and detailed examples of everything you need to know to protect yourself on the front-end. So let’s dive in and discuss warranty causes of action—think smart before you start!
Breach of Warranties Breakdown
There are several causes of action that Texas Law permits when a party is alleging a violation of a warranty, whether it be express or implied. To learn more about different types of warranties read our last blog.
The first cause of action permitted is breach of an express warranty.
The elements of this cause of action are:
- The defendant-seller made an express affirmation of fact or promise relating to the goods;
- That affirmation or promise became part of the bargain;
- The plaintiff relied upon that affirmation or promise;
- The goods did not comply with the affirmation or promise;
- The plaintiff was damaged by the noncompliance; and
- The failure of the product to comply was the proximate cause of the claimant’s injury.
In order to win a breach of express warranty claim, a plaintiff must prove they relied upon the warranty. Remember, the statute of limitations for breach of express warranty is four years.
Breach of an implied warranty
Another cause of action is breach of an implied warranty.
To prevail on an action for breach of implied warranty of merchantability, a plaintiff must prove:
- That the merchant sold goods to the Plaintiff;
- That the goods were unmerchantable, that is, unfit for ordinary purposes;
- That the plaintiff notified the defendant of the breach; and
- That the plaintiff suffered damages.
Additionally, it is important to note that proof of a defect is required for a claim of breach of implied warranty of merchantability.
Protections for consumers
Lastly, Texas law provides protections for consumers against breach of warranty under the Deceptive Trade Practices Act. The DTPA gives a consumer who purchased a product in Texas the right to recover damages, including attorney’s fees, for:
- Breach of express warranty;
- Breach of implied warranty; or
- A misrepresentation or failure to disclose by the seller prior to the purchase.
This is an important cause of action because it allows the recovery of attorney’s fees. Additionally, if the plaintiff can prove that the violations occurred knowingly, or with intent, a plaintiff can recover up to three times their damages incurred.
It is important to note that the federal government has also issued protections when it comes to warranties, under the Magnuson-Moss Act. This act does not require sellers and manufacturers to provide warranties but instead requires sellers and manufacturers who do offer written warranties to clearly disclose and describe the terms of those warranties. When having an attorney review your breach of warranty claim, it is important to make sure that any express warranties are clearly drafted and comply with all requirements of this federal law. In the event that non-compliance is found, a prevailing party can also be awarded attorney’s fees under this Federal Act.
Many sellers and manufacturers do not want to include the implied warranties of merchantability and fitness that are automatically included in all sales of goods and services in Texas. In order to do so, they have to provide a disclaimer that is legally sufficient to eliminate these warranties in the transaction.
Implied Warranty of Merchantability
Because the implied warranty of merchantability under the Uniform Commercial Code (UCC) is based on such vague terms as “ordinary,” “fair,” and “adequate,” it can easily provide the basis for a breach of warranty claim for almost any dissatisfied buyer. A disclaimer for this implied warranty must include specific language that mentions merchantability, it must be clear, and it must be communicated before the sale. While the UCC does not require the disclaimer to be in writing, in practice, it almost always is. A conspicuous provision is one that a reasonable person against whom the provision is enforced should have noticed. Texas Courts have generally found a provision to be conspicuous if it is either capitalized, bold typeface, italicized letter, a different color, larger text, or in a separate section requiring acknowledgment.
Implied Warranty of Fitness for a Particular Purpose
In contrast to the concept of merchantability, which is based on the ordinary use of the goods, the implied warranty of fitness for a particular purpose is based on the specialized needs of the buyer. The creation of the implied warranty of fitness for a particular purpose requires that the seller, when entering into the contract, knows or has reason to know both:
- The particular purpose for which the buyer is purchasing the goods; and
- That the buyer is relying on the seller’s skill and judgment to provide goods.
The seller can disclaim the implied warranty of fitness for a particular purpose; however, any language excluding or modifying the implied warranty of fitness for a particular purpose must be in writing and must be distinct.
The seller can also exclude the implied warranty of fitness for a particular purpose by including written, “as is,” language. While there is no requirement of a specific disclaimer, in practice, most sellers refuse to acknowledge the implied warranty of fitness for a particular purpose by specifically referring to it by name.
The implied warranty of habitability requires good and workmanlike performance by the contractor resulting in habitability in the residence. Specifically, the contractor warrants that the building that is constructed for residential use is safe, sanitary, and fit for human habitation at the time of the sale of the new house. This warranty is also extended to future purchasers of the residence should they discover any latent defects. A latent defect is a fault in the property that could not have been discovered by a reasonable, thorough inspection. These latent defects must be the type of defect that would render the house “so defective that it is unsuitable for its intended use as a home.”
Frequently asked questions about breach of warranty
In a breach of warranty case in a construction contract from the viewpoint of a subcontractor—what are the dangers and what is a subcontractor liable for when they didn’t negotiate warranties in the contract beforehand?
Let’s talk about a plumbing issue, for example:
The building wasn’t put into use until two or three years after construction. A plumbing defect was found where water leaked, damaging drywall that caused mold. There is an astronomical amount of damage now. There are no limitations in the warranty. So, potentially the subcontractor could be liable for all of those damages caused by the plumbing issue. Also, it was an express warranty, so there isn’t a requirement that the owner or general contractor notify the sub. The subcontractor may have no idea, nor did they have an opportunity to fix, slow, or mitigate the damage. This is a perfect example of the dangers of not including limitations when you offer an express warranty. Things happen all the time after or during the construction process that, sometimes, you are completely unaware of. From the subcontractor’s perspective, a $50,000 job that you completed and were paid for could easily turn into a lawsuit where you are sued for $300,000 worth of damages.
When should a consumer notify the subcontractor when suing for a breach of warranty?
Texas law states that when someone is suing for breach of an implied warranty, one of the things that they have to prove is that the consumer notified the sub. When they are suing for an express warranty, all they have to prove is that the contractor gave an express warranty and they breached it. So, as part of that express warranty, subs need to include a notification provision because the law doesn’t require it. For example, if you offer a consumer a warranty with no notification provision and their stuff breaks down, they can just sue you. They don’t have to call you or give you an opportunity to remedy the situation.
What are the most common questions an attorney might come across from a subcontractor or material supplier in regard to warranties?
Doesn’t the owner or general contractor have to tell us about it? Aren’t we required to have some type of notice?
The most common questions about warranties we find are in regards to the process of a consumer notifying them or if they have to be notified of the issue. When it comes to express warranties, unless the actual warranty dictates that the owner or general contractor begin some type of notice period, they do not have to give you notice. With implied warranties, the law does require the general contractor or owner to notify the contractor or supplier of the issue before suing them for breach of warranty. The consumer or general contractor has to actually tell the sub that there was a problem and give them the opportunity to fix it. And then, if it doesn’t get fixed from there, the consumer could sue.
What are a few examples of warranty provisions a sub might see in construction contracts?
It truly is just like any other contract; the best bet is to have a lawyer draft it. With that being said, because it is just like a contract, you can say whatever you want it to say. It doesn’t have to have any particular formalities in it. It can be drafted any way the contractor would like.
If there is a warranty in the GC’s contract, does the sub have to have a specific provision or follow a specific format?
If it’s the GC’s warranty that a sub is expected to uphold and it goes downhill, then the language has to be clear that it applies to the sub as well because warranties typically go up. The warranty in the prime contract is going to be for the owner to have from the GC. So, the warranty in the subcontract is going to be for the GC to have against the sub, or even potentially for the owner, because, again, it goes straight up. If someone is looking at their own express warranty that is being drafted, there isn’t going to be any standard language required. The only thing that is standard will be what is for parts and for labor. It usually says what the warranty covers. It’s going to be very similar to contract law, where although there’s no specificity, if the court has to interpret it, you want to make sure the courts can hang their hat on that language.
Do I have to issue/honor a warranty if I have not been paid in full?
This is the most common warranty question our team is asked. The way most subcontracts are written, you are required to issue a warranty even though you have not been paid in full. Because you have agreed to these terms you must issue the warranty, but you can issue it with a restriction. You issue the warranty and state that no claims are answered until you are paid in full.
Below is language you can add to your warranty to limit claims until after you are paid.
No claims on this warranty will be addressed until the remaining balance for the work the warranty is based on is paid in full. The total amount that must be paid is $________.
The same thing will apply if you have not been paid retainage. If you are required to issue a warranty and have not been paid retainage, add the following language to your warranty:
No claims on the warranty will be honored until retainage in the amount of $_______ is paid in full.
If you don’t have these types of restrictions on a warranty when you issue the warranty, you will have to respond and resolve any claims made on the warranty after it’s issued. In addition, if you issue a warranty without the above restrictions, there will be claims that you have been paid in full.
What is the best word of advice to a subcontractor in regard to warranties on a residential contract?
The best advice would be to draft your own express warranty, and make sure that you put limitations in that will prevent you from paying consequential damages. For example, if you’re doing plumbing work, you want to stick to that work with plumbing labor only. You don’t want to start being responsible for mold, kitchen sinks, furniture, etc., because those damages will continue to add up.
What are examples of the dangers with warranties, other than not giving limitations, that a contractor needs to look out for or be concerned about?
Most people in the construction industry are pretty comfortable with warranting their work. The only thing they should look out for is being tied to a warranty in a prime contract when they’ve never seen the prime contract. Remember to ALWAYS review the prime contract. If you haven’t seen the prime contract, you don’t know what you’re truly liable for. Don’t do anything blind. When subcontractors are working, they need to make sure what they’re are liable for is tailored to what they’re actually doing…not what other people are doing. Protect yourself!
Breaking down the positives and negatives of warranties
Positives: A subcontractor and material supplier can control what they are offering and limit their exposure. They can control any consequential damages they might be liable for. Offering a warranty for their services also provides peace of mind for those up the chain.
Negatives: A downside would be not being informed about your exposure. There’s potential for an exposure that could be four to five times more than the contract price. They would then potentially be tied up in litigation even if they feel like they didn’t do anything wrong. Even if it’s not their fault, if they do not have particular exclusions in their warranty, it costs money to prove that it’s not your fault. It’s still an expense that they will have to incur and will hurt their bottom line because not a lot of people have thousands and thousands of dollars just to prove they did not do anything wrong. Remember to have exclusions and limitations that could potentially knock the fee to the five- or ten-thousand-dollar range in attorney fees as opposed to having to go to a jury and incur expensive legal costs just to say they didn’t do anything wrong.
There are so many things to think about when drafting warranties into your construction contracts. We have an experienced team of attorneys who want to protect you and your business. Contact us today to talk to an esteemed member of our team to set yourself up for success for the future of your business. If you are unsure about what is in the provisions of your contract or just want more information on warranties in your construction contracts, Our Owner & Managing Partner, Karalynn Cromeens, will discuss all of this and more at our Construction Warranty Webinar on September 16, 2020.
Join us! You do not want to miss out on this important discussion that can save you time and money for you and your business. We look forward to seeing you.