Negotiating Warranties by American Subcontractors Association, Inc.
Negotiating warranties can be anything but straightforward. For example, if a subcontractor provides a "one-year warranty" of its work, is the construction owner required to make a claim within a year, discover all defects within a year, or merely prove that any claimed defect arose either during construction or the first year afterwards? The hassle of creating a clear and effective warranty can be considerable. The down-side of warranties can be offset by the important advantages they offer, including controlling risks associated with construction defect claims and receiving additional income for maintenance work. Subcontractors that want to offer warranties need to decide what level of risk they can accept and stand up for their risk tolerance level in contract negotiations.
Some of the critical considerations for subcontractors that want to offer warranties are:
* The statute of repose and statute of limitations that apply to their work.
* The written warranty's definition of the "triggering event" of the warranty.
* How the written warranty specifies a time limit.
* How the written warranty disclaims implied warranties.
* Court and industry opinions regarding the nature of, and standards that apply to, the work.
ASA members can access information about these and other warranty topics in the Stand Up! section of the ASA Web site at www.asaonline.com . ASA's "Addendum to Subcontract" (2004) also includes model language at paragraph four that can be helpful.
What strategies can a subcontractor employ to negotiate a subcontract agreement with the kind of warranty it wants to offer? Before starting negotiations, recognize that a subcontractor's bid is an "offer" under the law of contracts, giving the upper-tier contractor the power to "accept" and lock in the terms. Once the contractor accepts the offer, the signing of the written contract documents is a mere formality if those documents were specified in the bid documents and the subcontractor bid "per plans and specs." However, if the subcontractor's bid is conditioned on terms that vary from the terms that the contractor wants, then the contractor's insistence that the subcontractor agree to different terms is, under the law of contracts, a "counter-offer," giving the subcontractor the power to accept, reject, or negotiate. So a subcontractor should follow two steps to get the terms that are crucial to its estimate into the final contract: (1) include those terms as conditions of the subcontractor's bid, and (2) include those terms in the final, signed agreement.
Performance Standards
Understanding the dynamics of negotiation will help a subcontractor avoid inadvertently agreeing to performance standards for work to which it does not wish to adhere. If there is a disagreement about performance standards, then it is extremely important for the subcontractor to learn about the disagreement before the agreement is already in place. Likewise, if the subcontractor's bid is based on a particular standard, then the subcontractor should be certain that its bid is expressly conditioned on the use of that standard. ASA's "Addendum to Subcontract" (2004) provides a blank for the insertion of a quality standard as may be applicable to your particular specialty.
Another, related concern is how a subcontractor can respond to a potential client that insists work be performed not just according to industry standards but also in "strict compliance with the specifications." Strict or absolute compliance with specifications will make the subcontractor responsible for an extraordinary amount of warranty work above and beyond accepted standards. The subcontractor can point out that if it performs work in a "workmanlike" manner (which the subcontractor by law impliedly warrants anyway), then the work would be acceptable to ordinarily prudent and reasonable people. By definition, the client that asks for more is asking for more than is 'reasonable.'
Clients may ask for warranties of building code compliance, or fitness of materials or equipment for the owner's purposes. In this case, the design-bid-build subcontractor needs to remind the potential client that the bid did not include a cost item to hire an architect or engineer to review the designs and specifications. It makes no sense for the subcontractor to provide a warranty that the materials and equipment that it installs will be fit for the owner's particular purposes, because the owner specified the materials and equipment that the subcontractor is supposed to use: "The owner hired a design team to make sure the owner specified what the owner wanted, so if you want a warranty of fitness, why not ask the design team for it?"
Construction Defect
In a world where construction defect claims are commonplace, the responsibility of the owner to properly maintain and periodically inspect the building to remediate problems before they become disasters cannot be ignored by responsible contractors and subcontractors. If the subcontractor finds itself negotiating with a general contractor or construction manager that is unwilling to discuss the importance of proper maintenance and inspections with the owner, then the subcontractor might consider that, in the long run, it would be better to pass on the project.
When providing a warranty, the subcontractor needs to envision and address the way it will respond to claims. A subcontractor can negotiate a "right to cure" that provides the subcontractor with a contractual right to notice of claims in advance of repairs or corrections, as well as a way for the subcontractor to inspect and repair the work.
Subcontractors will fare better in negotiations by being very clear that they are not seeking an unfair advantage with a right-to-cure clause: "All we're asking for here is what's reasonable, for a 'reasonable opportunity' to make an inspection and fix the problem. When I want to make claims for extra compensation based on mistakes that other people make on the project, your contract requires me to give notice, and I'm just asking to make that reciprocal."
One easily overlooked aspect of warranty negotiations is the extension of warranties. Subcontractors generally will not want to allow corrective work to extend the warranty. A negotiating point to remember here is that if the subcontractor's warranty is extended each time it makes a repair, it will have a much stronger incentive to deny coverage under its warranties when claims are made.
Time Limits
Perhaps the most sensitive negotiations related to warranties will relate to time limits on warranties. Time limits on warranties are justified to give the owner, who is in actual control and possession of the premises, appropriate incentives to provide for proper maintenance of the finished premises, and to engage in regular inspections for dangerous or defective conditions. The danger to be avoided is that the owner will rely on a perpetual warranty by the builder as an excuse to ignore its own responsibilities as the operator of the finished facility. When a builder's warranty limits are challenged, the builder should point out that lengthy warranty periods subject the builder to ever-increasing risks that it will be held liable for problems caused by improper maintenance, owner modifications that become undetectable after the passage of time, or misuse. As a practical matter, the solution to an impasse in negotiations on these issues will often be for the subcontractor to offer a longer warranty period to customers that agree to purchase a regular inspection and maintenance program from the subcontractor for a nominal fee. From the subcontractor's perspective, the opportunity to keep its own records of regular inspections and maintenance of its finished work will address the subcontractor's primary concern to avoid liability for problems it did not cause. If, on the other hand, the owner rejects the offer of a maintenance and inspection program, the subcontractor's insistence that it must limit its exposure for warranty claims will appear more reasonable.
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