N.C. Supreme Court Reverses the Court of Appeals, Holds a 20-Year Warranty Means What It Says

In September 2013, I blogged about the decision of the North Carolina Court of Appeals (“COA”) in Christie v. Hartley Construction, Inc., which held that owners of an improvement to real property could not recover money damages under a supplier’s express 20-year warranty because the lawsuit was filed outside of North Carolina’s applicable six-year “statute of repose.”  That statute, codified at N.C. Gen. Stat. § 1-50(a)(5), bars damages actions arising from improvements to real property asserted more than six years after substantial completion.  The COA’s Christie decision effectively meant that the statute of repose trumped an express warranty of a longer duration.

As I mentioned in my prior blog post, however, one of three COA judges on the Christie panel dissented from the majority’s opinion, giving plaintiffs the right to appeal to the state’s Supreme Court.  They did.  And that Court reached the opposite conclusion of the COA majority, ruling that the protection provided by the six-year statute of repose could be waived without violating North Carolina public policy.

Let’s break down the North Carolina Supreme Court’s decision in Christie:

Pertinent Facts

Homeowners contracted with Design-Builder (“D/B”) for the construction of their new home.  D/B constructed the home with structural insulated panels (“SIPs”) as load-bearing exterior walls that needed to be protected from the elements by an exterior cladding system.

Monday MemoD/B recommended that Homeowners use Supplier’s synthetic stucco system, marketed by Supplier as “extremely well-suited [for] use over Structural Insulated Panels.”  Homeowners researched the recommended system on Supplier’s website, which promised that when properly installed, the product “is fully warranted for twenty years to not crack, craze, fatigue or delaminate from the substrate.”  Homeowners claimed they bought Supplier’s product based, in part, on these representations. The result, however, was not pretty:

Several years later, [Homeowners] began to notice cracks and blistering in [Supplier’s system] and moisture intrusion into their home.  Further investigation revealed that the moisture had caused substantial rot and delamination of the SIPs, significantly compromising the structural integrity of the home.

Homeowners made a demand under Supplier’s 20-year warranty.  Supplier offered to replace the synthetic stucco system, but refused to compensate Homeowners for the labor cost of installing the replacement product or
for any damage caused by the moisture intrusion into their home.

Homeowners sued.  The trial court granted Supplier’s motion for summary judgment based on the statute of repose.  As you know from above, the Court of Appeals affirmed the trial court’s decision in a divided opinion.  Homeowners appealed to the state’s Supreme Court.

The Supreme Court’s Rule Statement

[T]he six-year repose period set out in the statute provides valuable protection to those who make improvements to real property, but … the beneficiaries of the statute of repose may choose to forego that protection without violating any rule of public policy.

The Outcome of the Case

The state Supreme Court found that Homeowners’ evidence suggested they carefully researched Supplier’s system and other possible exterior cladding systems for their home, and were influenced by Supplier’s 20-year warranty when making their final decision.  The Court held as follows:

As a result, we conclude that [Supplier] knowingly and freely entered into a contract of sale with [Homeowners] in which [Supplier] bargained away the protections of the statute of repose. The contract at issue provided for a warranty of twenty years.  That warranty stands in its entirety.

The Key Takeaways

  • The outcome of Christie represents not only a boon to owners of extended warranties, but also a victory for “freedom of contract” proponents.  Suppliers presumably include the cost of their potential warranty exposure in their pricing, and gain the full benefit of their bargain at the time their products are sold.  End-users should be entitled to nothing less than the full benefit of their bargain, including the expectation that suppliers will stand behind their express warranties, no matter how long in duration.
  • Suppliers should be careful about the online representations they make about their products.  Claiming on your website that your product is “fully warranted for 20 years” might boost sales, but such a representation, as Christie demonstrates, can clearly result in a very long liability tail.
  • Careful contract drafting can be helpful in limiting the scope of a warranty — extended or otherwise — to repair/replacement of the warranted product.  Contact an experienced construction attorney to learn more.

What do you think?  Did the North Carolina Supreme Court get the Christie decision right?  As always, comments and questions are most welcome.

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Filed under NC case law, State law, policy & news, Warranty Claims

Construction Bonds Come With Strings Attached. Make Sure You Know What They Are.

When serious trouble befalls a bonded contractor, its surety might be called upon to shoulder significant risk both downstream (i.e., payment obligations to subs & suppliers) and upstream (i.e., performance obligations to the owner, if the bonded contractor is prime, or to the prime, if the bonded contractor is a sub).

Yet even when adversity strikes, sureties don’t expect to suffer a loss, as counter-intuitive as that might sound.  That’s a feature of suretyship distinguishing it from insurance (for a handy, 1-page chart summarizing other distinctions, see page 6 of this 18-page surety primer by CNA Surety).

How do bonding companies seek to avoid losses on troubled construction projects?  One of the most significant weapons in the surety’s loss-avoidance arsenal is the “general indemnity agreement” or GIA, an instrument that virtually every surety requires each bonded contractor, the contractor’s owners and the owners’ spouses to sign as a condition of surety credit extension.  The GIA vests in the surety numerous rights and remedies against the corporate and individual indemnitors, which are typically triggered once trouble starts brewing.

Here are some of the key rights enjoyed by sureties under a typical GIA:

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Custom-Build Your Next Arbitration Clause

Image by Tingeling via Pixabay.com

Image by Tingeling via Pixabay.com

Of all the great AEC content in the Twitterverse this week, the following chirp from Kansas City construction attorney Rob Pitkin (@KCconstrlawyer) really piqued my interest:

Rob’s tweet links to this article from Gary Rubin, a New York construction lawyer, about how to make arbitration more cost-effective.  Gary discusses how parties can use the contract negotiation phase of their relationship to craft a better arbitration provision.  He even suggests helpful language aimed at curtailing the duration of the hearings and the arbitrators’ authority to award certain types of damages.

All of which crystallized something I’ve been thinking about in recent years: arbitration is not a “one-size fits all” deal.  While in theory arbitration presents construction industry stakeholders with an attractive alternative to the very public, very long and very expensive litigation process, in practice, arbitration procedures and costs often elude the parties’ control. These are by no means novel thoughts on my part; a number of other observers have raised similar concerns (see here and here for a couple examples).

Now for the good news.

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Paying Twice For the Same Work is Horrendous. What Can You Do About It in North Carolina?

If you’re a prime contractor on a private, commercial construction project, your contract with the owner likely includes a provision requiring you to bond off or otherwise dispose of real property liens filed by your subs & suppliers.  And if you’re a prime contractor on a bonded public project, the agreement of indemnity between you and your bonding company makes you ultimately responsible for any bond claim the surety might pay.

Either way, you’re exposed to financial loss arising from the lien & bond claims of second-tier and more remote subs & suppliers, even if you faithfully pay your first-tier subs each and every time payment is due.

So what can you do about the risk of double payment in North Carolina?

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Filed under Lien Law, Payment Bonds, Subcontractors

Courts Generally Will Enforce North Carolina’s Anti-Indemnity Statute, But How Far?

Back in March, I wrote about the role of North Carolina’s anti-indemnity statute in the construction industry.  The statute, codified at N.C. Gen Stat. § 22B-1, appears below (you can click the image for a larger version):

Anti-Indemnity Statute

As my previous blog post indicated, the statute prevents “one party from shifting the entire risk of its own negligence to another.”  A recent case from the U.S. Bankruptcy Court for the Eastern District of North Carolina demonstrates how courts utilize the so-called “blue pencil” doctrine to accomplish that goal.

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Filed under Federal case law, Indemnity Claims, State law, policy & news, Subcontractors

A Few Simple Words That Make a World of Difference for Lower-Tier Miller Act Claimants

If you’re a lower-tier subcontractor or supplier on a public construction project, it might be tempting to calendar your notice-of-claim deadline 90 days (in the case of federal Miller Act projects) or 120 days (in the case of North Carolina “Little Miller Act” projects) from your last furnishing of labor and materials, regardless the nature of that last furnishing.

Resist that temptation.

It overlooks a few simple but critical words recited in the federal Miller Act, as well as similar language contained in North Carolina’s Little Miller Act.

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Filed under Federal case law, Payment Bonds

Have a Lien Claim Arising from an Improvement to Leased Property? Aim for the Right Target.

In most cases, the “owner” of a tenant improvement project is NOT the record owner of the real property, but rather the tenant who entered into the contract for the improvement.

That distinction can be critical when perfecting and enforcing mechanics liens in North Carolina.

Take, for example, the fireproofing contractor who asserted a mechanics’ lien enforcement action against both the landlord and the tenant of a leased premises in yesterday’s unpublished Court of Appeals decision in Century Fire Protection, LLC v. Heirs.

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Subcontract Negotiation Is a Question of Leverage. Leverage Is a Function Of . . .

Two tweets touching upon subcontract negotiation dynamics jumped out at me this week.  The first was from zlien founder Scott Wolfe, Jr., who linked to his recent blog post about general contractors who demand that their subcontractors sign away their lien rights:

Money quote from the post:

General contractors scream that relationships are important, but really, it’s relationships on their terms.  …  In reality, however, the subcontractor is likely feeling a bit abused.  They accommodate because of the general contractor’s influence and contracting power.

The second tweet was from good friend and Virginia construction attorney Chris Hill, who linked to fellow Virginia attorney Juanita F. Ferguson’s piece discussing (among other things) forum selection clauses in subcontracts between out-of-state prime contractors and local subs:

Money quote from the post: “local contractors must be savvy in negotiating contracts with out-of-state companies.”

Which, in turn, begs the Friday Forum money question:

What factors impact the relative bargaining power of primes and subs when it’s time to make a deal?

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Filed under Construction Risk Management, Contract Review & Negotiation, Forum Selection Clauses, Subcontractors

N.C. Construction Industry First Fractures, Then Coalesces, Around Prequalification Legislation

By a whopping 116-0 margin, the N.C. House of Representatives yesterday passed House Bill 1043 (“HB 1043″), aimed at bringing objectivity and uniformity to the prequalification of contractors on public construction projects in the Tar Heel State.

Don’t let yesterday’s vote tally deceive you, however; the legislation was not without its share of controversy.

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Filed under Construction Management, Project Delivery Systems, State law, policy & news, Subcontractors

Bound, But Determined: How Subs Might Evade Terms Binding Them to Decisions of Architects

It’s typical for subcontracts to include a clause binding the subcontractor to the decisions of the project architect.  Such terms help general contractors and construction managers at-risk avoid obligations to subs below that can’t be passed through to owners above.  That’s a sensible and enforceable risk allocation most of the time.

But not all of the time.

Sometimes, the architect doesn’t play fairly.  Sometimes, the prime contractor fights hard for itself, but not hard enough for its subs.  And sometimes, a statute might provide a remedy when the subcontract does not.

On such occasions, as discussed below, subcontractors might avail themselves of an escape hatch:

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Filed under Change Orders, Delay Claims, NC case law, Subcontractors