Contractual Warranties: An Important Tool for Managing Liability Risks

July 21, 2011

This article originally appeared in the Wisconsin Builders Association May 31,2011 Builder Buzz Blogpost

Contractors have three important tools for managing the risk of customer claims:

  • Quality performance
  • Good relationships
  • A well-crafted, written construction contract

Within the contract, common risk management clauses include standard of care, warranties, insurance, indemnification and dispute resolution.

In Wisconsin, contractors building a structure generally can only be sued for breach of contract. (There are other legal theories for owners to sue home remodelers and those providing services like design or repair.) This is because the “economic loss doctrine” provides that one providing a “product” can only be sued under its purchase contract, and a building is considered a product.

Warranties provide an exceptional opportunity to control the risk and scope of liability in the construction contract. Contractors should consider two features in drafting warranties:

  • Limiting the scope of the warranty
  • Making the warranty the exclusive remedy for resolving claims

Under state law, there are implied and statutory warranties for providing a building fit for its intended use. The time period for bringing contract claims is typically six years. However, the parties to the contract can agree to a narrower scope of warranty, e.g., satisfying the general standard of care for workmanship; and they can also agree to a shorter duration for making claims. It is common for the contractor to provide a one to two year warranty, in addition to manufacturers’ warranties.

If the contractor wants to limit remedies and time period to the warranty, it also must be expressly limited to the contractual warranty. That is, the contract must specify that the warranty is the customer’s only recourse for asserting claims.

Several standard form contracts, such as the WBA contract, have good warranty language. It is also prudent to have your attorney review the form of contract that you use for both the warranty language and its consistency with other contract terms.

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