Legal Implications of Construction Defect Claims

Every remodeling contractor believes that the work they do will never be found to have any problems. Even if one arises, more often than not, the strong relationship that most contractors create with their clients helps to smooth out any rough spots which may pop up during or after a project. But when a problem arises that goes beyond the level of simply “talking through it”, a contractor needs to consider the potential issues that arise where claims are made regarding workmanship, defects, etc.

Common issues that may lead to a potential claim for a construction defect can include water intrusion and water damage (windows, roofs, siding, etc.), heaving/settlement of flatwork areas, structural deficiencies/damage and material defects, etc.

Large or small, many times these issues can arrive well after you have left the job, although that is not always the case. There are a number of things that a remodeling contractor should consider when faced with this type of situation.

CONTRACTUAL PROVISIONS

The logical starting point in analyzing any dispute with a customer would be the terms and conditions of the contract between the parties. Unless superseded by applicable laws, the terms of the contract will generally govern any issues that arise and how they should or will be dealt with.

There are a number of common contract provisions that could come into play in a situation where a contractor is dealing with a claim for defects in work done:

• Dispute Resolution– your contract may include a provision requiring any disputes between the customer and contractor regarding a project go through a dispute resolution process often involving mediation and/or arbitration. A claim for construction defects may fall under such a provision and may need to be dealt with according to that process.
• Performance Guidelines – if your contract includes guidelines for how the work will “perform”, it should be reviewed closely to determine if the claimed issues are performing as required or whether the issues exceed the standards set out in those guidelines.
• Notice of Claim provisions – there could be a provision that requires notification of an issue within a certain time frame or be otherwise barred. Such provisions must be followed and may even allow for the contractor to have a chance to resolve an issue (“right to cure” provisions) before it proceeds to legal action.
• Hold Harmless and Indemnity Clauses – this would pertain more to the relationship between a general contractor a subcontractors, but there may be contractual language that requires a subcontractor to “protect” a general contractor where the subcontractor’s work is at fault. Depending on the circumstances, this may be an important step of resolving a defect claim by requiring a subcontractor to take care of a problem.

There may be other contract provisions to consider when facing this type of situation and the above are merely some possibilities to be aware of. A close review of your contract before and after problems arise is a good standard practice.

WARRANTIES

Depending on the language of your contract or what may be required under your state’s laws (see below), there may be a warranty that could apply to a claim(s) made by a customer. Some contracts include specific language that sets out a warranty (express, implied, limited) for the work that is done and requires the work be done pursuant to and perform as set forth in that warranty for a set period of time (one, two, or ten years is common depending on what is covered). In addition, manufacturers’ warranties could also come into play where a defect may be in a product that was incorporated into your project. To the extent the issue is a product-related issue, where possible it should be dealt with through the applicable manufacturer’s warranty.

APPLICABLE LAWS

Many states have put laws in place which cover situations where construction defects arise in remodeling/home improvement projects. These laws often require that a contractor receive a notice of a claim and an opportunity to repair. A sample list of states with “right to repair” laws is set out below. Consulting local counsel when facing these types of issues is vitally important to gain an understanding of what the applicable laws may be.

For example, In Minnesota, there is a statutory home improvement “warranty” system that sets forth certain warranties that are placed on all remodeling projects by law (Minnesota Statutes Chapter 327A). There are one, two and ten year warranties for various aspects of a remodeling project that contractors are required to abide by. In addition, and perhaps more importantly, under that system, when a homeowner makes a claim against a contractor for a defect in the construction project there is a process which must take place to attempt to resolve the dispute. The process requires notification to the contractor within a certain amount of time of when a claim is discovered. Once that notice is provided, the contractor has a right to inspect the project and the claimed defects (within 30 days) and an opportunity to make an offer to repair the defects within a stated period of time (within 15 days of the inspection).

Many other states have similar legal processes in place that look to achieve a similar purpose. The general idea behind these laws is to set up a process to resolve disputes of this nature at an early stage by providing a contractor a right to repair a defect (and at least some time limit on when such a claim could be made). In addition, most states have time limits within which a claim based on an alleged construction defect must be brought to the attention to the contractor. Consult a local attorney as there is a wide variation on states’ laws in that regard and it is an important consideration in this type of claim.

POTENTIAL LEGAL ACTION

In the event that an issue is not resolved through discussion/negotiation or through a dispute resolution system under your state’s law or the language of your contract, it may rise to the level of formal legal action between the parties. If that is the case, a contractor will certainly want to immediately retain counsel to assist with the process and represent your interests. There can be a number of defenses to claims for construction defects including timing-related defenses (statutes of limitation), notice requirements, claims against third parties, scope of damages, etc. Furthermore, in most states there are procedural steps required to be taken and deadlines for responding when legal action is started on a claim. A contractor should not delay in consulting with legal counsel when faced with a legal action as failure to take prompt action can jeopardize future rights, defenses, and obligations.

INSURANCE COVERAGE

Depending on the nature and scope of the potential claim, it is likely that a contractor’s Commercial General Liability (CGL) insurance policy would provide coverage for potential construction defect claims. A claim would need to be submitted to the insurer in the proper manner to trigger the claims process and potential handling. Submitting a claim is important for two reasons. First, because a CGL policy typically requires an insurer to “defend” a contractor in a legal proceeding at the insurer’s cost. Second, the policy would generally provide coverage for damages that the contractor may be found liable for in such a construction defect claim subject to potential policy limitations, exclusions, etc. which are outside the scope of this discussion. Always consider contacting your insurance agent when a claim arises to determine what steps might need to be taken in the event a claim, formal or informal, is made in order to protect yourself.

No contractor wants to be involved in a project dispute that rises to the level where the issues listed above come into play. However, the more projects one does and more customers one comes into contact with only increase the likelihood that the next project is the one where things go sour. If and when it happens, having a basic understanding of the issues, rights and obligations of the parties involved can be a great help in knowing how to proceed. As always, consulting with legal counsel (and insurance agent) should be done for a full review of the best steps for resolving such issues.— Christopher R. Jones

Christopher R. Jones, Esq. is an attorney in the Construction Law Practice Group with Hellmuth & Johnson, PLLC in Minnesota and a NARI member (NARI-MN) who actively represents companies and individuals in the remodeling industry. He handles both transactional and litigation matters including drafting and reviewing contracts, collections, mechanic’s liens, project disputes, etc. He can be reached at (952) 746-2156, or at www.hjlawfirm.com.