How Can I Limit My Liability For Bad Work Claims?

So how can a contactor limit its liability for bad work claims?

At least in Indiana, the answer depends on the type of project. For most commercial projects, the parties are free to negotiate the period of time the contractor can be held liable for defective or non-conforming work. A disclaimer or limitation of warranties will generally be enforced by the courts as long as the contract language is clear and unambiguous. Courts, however, generally disfavor disclaimer language; even the clearest language may not be enough to disclaim liability for a bad work claim depending on the nature of the claim and the factual circumstances involved.

It gets a bit trickier when the contract both creates and disclaims warranties. An “express warranty” is a representation or promise in a contract that certain facts are true and will remain true – it is not necessary to use words such as “warranty” or “guarantee” in order to create an express warranty. And an express warranty cannot be disclaimed by language disclaiming “all warranties.” Courts will attempt to reconcile the two provisions, usually finding that the express warranty trumps the disclaimer provision.

For example, a statement in a construction contract to the effect that the contractor will perform “in a good and workmanlike manner” creates an express warranty in favor of the owner; a disclaimer of “all warranties” will probably not be interpreted as excluding the “good and workmanlike” warranty created by the express language of the same contract. In other words, if you want to disclaim liability, avoid contractual language that may create an express warranty in the first place.

A contractor’s attempt to limit liability may be frustrated unless the contractor also disclaims “implied warranties,” warranties that are not stated in the contract but are “implied” from the nature of the work or the relationship of the parties. For example, most states, including Indiana, recognize that in performing work and furnishing materials, the contractor impliedly warrants that the work will be performed in a “workmanlike manner.” A disclaimer of “all warranties” probably will not effectively disclaim this implied warranty.

It is a bit more difficult to disclaim warranties applicable to residential projects – homes built for persons who intend to occupy them. Indiana’s “New Home Construction Warranties” statute permits a builder to disclaim all implied warranties only if the builder provides the homeowner with certain express warranties.  In addition, those warranties must be backed by insurance, including completed operations insurance for consequential damages, and the homeowner must sign a disclaimer form entitled “Notice of Waiver of Implied Warranties,” the language of which is set out in the statute.

It should be noted that a valid contractual disclaimer of warranties may not be a winning defense to a third party claim involving property damage or personal injury. These are claims “sounding in tort” (a French word for a legal “wrong”) and the injured party may be able to maintain a claim for “negligence” against a contractor even if the contracting parties agree otherwise. Most contractors are protected against such claims by commercial general liability insurance.

By J. Greg Easter