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Law/Courtroom - August 2003

The 'One-Year Warranty' - Does Such A Thing Exist In Texas?

By William M. Coats

Many construction contracts, including those that incorporate the AIA form of General Conditions, have a clause that most people in the construction business refer to as the "one-year warranty."

As an example of the one-year clause, Section of the 1997 version of the AIA General Conditions reads: - In addition to the Contractor's obligations under Paragraph 3.5, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Subparagraph 9.9.1, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty. If the Contractor fails to correct nonconforming Work within a reasonable time during that period after receipt of notice from the Owner or Architect, the Owner may correct it in accordance with Paragraph 2.4.

Notice that this clause starts with the phrases "In addition to the Contractor's obligations under Paragraph 3.5," and when you check back to 3.5.1, you will find a warranty from the contractor that is not limited to one year.

Reading these clauses together, it is clear that the contractor's warranties under an AIA contract extend longer than one year, but that the specific obligation to return and correct work is limited to "within one year after substantial completion" in most instances.

The fact that the obligation to return and correct is limited to one year does not mean that the warranty in 3.5 cannot be enforced after the expiration of one year. It continues to be enforceable by a lawsuit for damages thereafter, even though the contractor can no longer be specifically required to return and correct work. To complicate matters further, there are warranties that are implied even when not stated in a construction contract.

The warranty imposed by 3.5 of the AIA General Conditions has no stated expiration, although in most cases it will not be enforceable beyond the limitation period applicable to contract claims, which is four-year period from a breach of contract. (How to calculate the start of the four-year period is a complication beyond the scope of this article, because of the possibility that the warranty subject may be a latent defect, and limitations do not run on latent defects until discovered.)

Contractors often attempt to control extended exposure to warranty claims by adding a limit on warranty enforcement shorter than the four-year limitations period; however, when attempting to accomplish this, be warned that a Texas statute voids any effort to contract for a limitation period of less than two years.

This statute has kept lawyers and courts busy making the distinction between two-year limitation clauses that run afoul of the statute. Clauses attempting to require suits "within two years" are void and the four-year limitation period applies. Those that do not run afoul of the voiding statute provide that "no suit can be commenced after the expiration of two years from the date the cause of action accrues."

The difference in the time periods provided by these two clauses is one day ... what a difference a day makes!

Another interesting aspect of the warranty expiration questions becomes relevant when a public owner is attempting to enforce a warranty against a surety. The Texas public bonding statute requires suits on a bond within one year of completion of the work. If a public owner seeks to impose a warranty obligation on a surety, it can only do so within the special one-year limitation period applicable to the bond.

Since this short limitation period is prescribed by statute, rather than by contract, it does not run afoul of the voiding statute. This can be a pitfall for public owners under contract schemes that provide warranty inspections that are held one year after final completion. By the time the inspection is held, the right to sue the surety under the performance bond may have expired.

Does a one-year warranty exist? The answer under the AIA documents is "no."
Warranty exposure lasts longer than a year and any constructor who refuses calls for warranty performance simply because the demand was made more than one year after completion does so at some risk.

I suppose the moral of this story may be that the best way in Texas for a contractor to get the benefit of a one-year limit on warranty exposure is to do nothing but public bonded work, and then go broke and let its surety handle the warranty.

William M. Coats is a director and member of the executive committee and head of the Construction/Surety section of Houston-based Coats, Rose, Yale, Ryman & Lee PC.

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