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A Brief Overview of Remedies for Faulty Work

December 13, 2016adminTips and Pointers0

This article takes a brief look at possible remedies for faulty work following project completion.  Thoughts expressed here are based on construction-contract language found in many standard contracts, but differences in contract language and project location can change these basic propositions so attorney review and consultation is critical.

Under a standard AIA contract and many other standard forms, faulty work might be addressed under several legal theories.  First, owners typically receive a “call-back” warranty applicable for one year following substantial completion.  Second, owners typically benefit from several warranties, some required by the standard construction contract and some required by law.  Third, owners often pursue contractors for breaches of other contractual provisions governing quality of the work.  Fourth, owners often seek indemnification from contractors under most standard contracts.  Other remedies may apply, but we will briefly focus on these four common approaches.

1. The “Call-Back” Warranty

The call-back warranty, also known as the correction period, is an owner’s first line of defense.  The purpose of the call-back warranty is to require the contractor to physically return to the site to correct faulty workmanship and materials.

The call-back warranty puts the burden of correction on the contractor, rather than the owner.  Owners need not prove why a particular defect occurred, only that a defect exists.  The contractor is obligated to either correct its work or show why its work is not defective or falls under an exception to the call-back warranty.  Under the call-back warranty, the contractor is obligated to return to the site and correct its work at its cost.  Call-back warranties typically expire one year after substantial completion.

2.   Express and Implied Warranties

Depending on the contract’s language, the call-back warranty is arguably different from other warranties provided in the contract.  It’s important to consult your attorney regarding the possible differences.

Construction contracts often also provide the following three warranties: (a) a warranty regarding the quality of materials used in construction, (b) a warranty that the work will comply with standards provided in the contract documents, and (c) a warranty that the work will be free from defects.  Additional special or extended warranties may also be expressly provided and there may be express warranties for supplies incorporated into the project.  Express warranties are often subject to exclusions.

In addition to the express warranties, several implied warranties may apply, depending on applicable law and contractual disclaimers.  While express warranties arise from contractual language, implied warranties are inferred from the facts or created by operation of law.  These implied warranties could include workmanlike performance, suitability of construction work, and, for supplies provided on a project, warranties for merchantability and fitness for a particular purpose.

If the contractor breaches one of these warranties, the owner’s damages may be based on either the cost to repair the defective work or the difference in the value of the project with the faulty work as compared to the project’s value had the work been properly performed.  In either case, the damages can be substantial. Additional remedies might include rental costs incurred due to delayed completion, economic loss resulting from breach of warranty, loss of full use and enjoyment of the property caused by the breach, and the probable costs of future repairs.

As discussed above, the call-back warranty period is typically effective for the one-year period following substantial completion.  Other express and implied warranties, however, are governed by the applicable statute of limitations period in the state in which the project is located.  In Indiana, the statute of limitations is 10 years, but states vary considerably. A state’s statute of repose can also be critical.  As opposed to applicable statutes of limitation, statutes of repose generally begin to run upon substantial completion of the project.  These statutes operate to cut off claims after a designated period of time, regardless of whether a defect is discovered during the period.  These periods also vary by jurisdiction.  In Indiana, the statute of repose is 10 years.

3.  Breach of Contract

In addition to the express warranty provisions discussed above, construction contracts often contain other provisions obligating the contractor to ensure that its performance and work meet certain standards.  Sometimes those provisions are very similar to warranty language, but they are different because they permit a breach of contract action, rather than a breach of warranty action.  That distinction can be important because (a) the burden of proof may be different, (b) different statutes of limitations may apply, and (c) different damages measures may apply.  For example, contracts may permit recovery of consequential, incidental, liquidated damages, and other remedies for breaches of contract, while not providing those remedies for breach of warranty.

4.   Indemnification

Common indemnification provisions may provide another distinct avenue for recovering damages resulting from faulty work.  For instance, standard AIA language obligates the contractor to indemnify the owner “from and against claims, damages, losses, and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work . . . to the extent caused by the negligent acts or omissions of the Contractor . . . .”  Unless otherwise provided in the contract, the limitations period for contractor’s indemnification obligation is the same as for breach-of-contract actions.  However, the section affords at least one additional, and significant, benefit—recovery of attorneys’ fees.

Conclusion

Under standard construction contracts, a variety of approaches exist to remedy faulty work.  The call-back warranty is the first line of defense.  Additionally, recovery may be available under express and implied warranties, other obligatory standards in the contract, and through indemnification.  Differences in contract language and project location vary the availability and scope of these remedies, making attorney review and consultation critical.

 

By: Charles B. Daugherty

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