Texas Construction Law Blog

If you ask owners, general contractors, or subcontractors how long the warranty lasts that they received or gave on a construction project, they will often tell you that they have a “one year warranty.” However, if the parties used a standard construction contract form such as those from the American Institute of Architects (AIA) or the Engineers Joint Contract Documents Committee (EJCDC), that may not be the case. Under unmodified AIA or EJCDC warranty language, owners have the ability to bring warranty claims or claims for “latent” ^[i] construction defects out to the limits set by the statutes of limitations and repose—well after expiration of the “one year warranty” that parties sometimes think they have.

This blog post provides an overview of the typical warranty structure in standard construction contract forms, how Texas law limits the time to bring warranty and latent defect claims in the absence of contract limits, and how owners and contractors can negotiate specific contract language limiting or not limiting the time to bring warranty and latent defect claims.

Overview of good workmanship and callback warranties.

There are two primary types of warranties found in construction contracts. Good workmanship warranties establish the quality bar that a contractor’s work must meet, while “callback” or repair warranties obligate contractors to repair or replace work that does not meet the quality bar. While specific warranty language varies, many construction contracts have this warranty structure.

For example, in the EJCDC C700 General Conditions, Section 7.1 contains the following good workmanship warranty, “Contractor warrants and guarantees to Owner that all Work will be in accordance with the Contract Documents and will not be defective.”^[ii] Likewise, Section 15.08 of the EJCDC C700 General Conditions contains the following callback warranty:

If within one year after the date of Substantial Completion (or such longer period of time as may be prescribed by the Supplementary Conditions or the terms of any applicable special guarantee required by the Contract Documents), Owner gives Contractor written notice that any Work has been found to be defective, or that Contractor’s repair of any damages to the Site or adjacent areas has been found to be defective, then after receipt of such notice of defect Contractor shall promptly, without cost to Owner and in accordance with Owner’s written instructions: (1) correct the defective repairs to the Site or such adjacent areas; (2) correct such defective Work; (3) remove the defective Work from the Project and replace it with Work that is not defective, if the defective Work has been rejected by Owner, and (4) satisfactorily correct or repair or remove and replace any damage to other Work, to the work of others, or to other land or areas resulting from the corrective measures.^[iii]

These warranties addressed in more detail in a previous Porter Hedges construction law blog post with examples from the American Institute of Architects (AIA) A201 General Conditions.

The time to bring warranty and latent defect claims is limited by the contract, statute of limitations, and statute of repose.

Typically, the callback warranties are limited to one year from Substantial Completion, though the length of this period is often specifically negotiated. Parties often expect that their warranty rights and obligations are limited to the callback warranty period set forth in the contract. However, parties sometimes overlook that the good workmanship warranties generally do not contain time limits.^[iv] As a result, if these typical industry forms are not modified, a contractor can still be financially responsible for defective work and latent defects under the good workmanship warranty even after the callback period expires. Without a time limit on the good workmanship warranty in the contract, a party’s deadlines to bring warranty and latent defects claims under Texas law are limited only by the statutes of limitations and repose.

The statute of limitations – 4 years from when the claim accrues.

Under Texas law, the statute of limitations for breach of contract and breach of express warranty is four years, and begins to run when the cause of action “accrues.”^[v] Breach of contract claims generally accrue when the contract is breached and breach of warranty claims accrue when the goods are delivered.^[vi] For breach of the good workmanship warranty, the breach occurs and the claim generally accrues when the work was defectively performed. For claims of breach of the callback or repair warranty, the breach occurs and the claim accrues when the contractor fails or refuses to repair the defective work.^[vii] If the contract provides a specific callback period, the callback warranty claim would further need to be made within the callback period to be timely.

However, accrual of contract and warranty claims can sometimes be tolled by the discovery rule. The discovery rule “defers accrual of a claim until the injured party learned of, or in the exercise or reasonable diligence should have learned of, the wrongful act causing the injury.”^[viii] Application of the discovery rule is limited to situations “where the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.”^[ix] As a result, if the discovery rule applies, latent defect claims can sometimes be brought over four years after the project is completed.

While the statute of limitations provides the default rule, the parties have the ability to shorten the statute of limitations by contract or to modify the impact of discovery rule. For instance, in the recent case of Town & Country Partnership v. Dyad Construction, L.P., the Houston 14^th Court of Appeals considered the effect of the following language from the 2007 version of the A201 General Conditions:

As to acts or failures to act occurring prior to the relevant date of Substantial Completion, any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events not later than such date of Substantial Completion[.]^[x]

The Court of Appeals held that this language was effective to exclude the discovery rule and held the owner’s claims were barred by limitations.^[xi]

The statute of repose – 8 to 10 years from substantial completion with a possible 1-2 year extension.

Contract and warranty claims on construction projects are further limited by the statute of repose. “Unlike traditional limitations provisions, which begin running upon accrual of a cause of action, a statute of repose runs from a specified date without regard to accrual of any cause of action.”^[xii] Under Texas law, the statute of repose for claims against a person/entity who “constructs or repairs an improvement to real property” is generally 10 years after substantial completion on private projects, and 8 years after substantial completion on most public projects, with the ability to extend this period one to two years if a written claim for damages, contribution, or indemnity is presented to the contractor near the end of the repose period.^[xiii] The discovery rule does not extend the statute of repose. The effect of the statute of repose is to cut off claims that have not been filed as of the date set forth in the statute, regardless of whether such claims have accrued or are known.

Takeaways.

The lack of a contractual time limit on the good workmanship warranty in typical industry forms can result in a rude surprise for contractors or subcontractors who find themselves on the hook for warranty and latent defect claims long after they thought the “one year warranty” expired. But it can also come as a surprise to owners. If an owner is unaware of how a warranty dispute would be addressed under these standard provisions when negotiating a contract, an owner may inadvertently bargain away the ability to make claims for latent defects out to the limits of the statutes of limitations and repose. By understanding how long warranty obligations last under standard contract form provisions, owners and contractors are better positioned to make informed decisions and to negotiate for specific contract language addressing their situation.

In light of this, Owners will want to negotiate for separate good workmanship and callback warranty provisions structured along the lines of the standard AIA and EJCDC forms and to avoid collapsing the good workmanship and callback warranties into a single warranty provision with a “warranty period” when negotiating the construction contract. Doing so can prejudice the owner’s ability to assert latent defect claims later.

By contrast, contractors may want to consider negotiating for an express time limit on the good workmanship warranty. If that is not possible, another way for contractors to reduce their exposure to warranty claims is negotiate for the type of contract language at issue in the Town & Country case providing that all claims accrue at Substantial Completion. Contractors will also want to make sure that the warranties they are receiving from subcontractors align with the warranty provision in the contract with the owner. For example, if a general contractor agrees to standard AIA warranty provisions in the owner contract, but a single time-limited warranty in its subcontracts, the general contractor may be left holding the bag if a significant latent defect issue arises after expiration of the subcontractor warranties but within the statutes of limitations and repose.

^[i] “Latent” construction defects are those that are not discoverable by reasonable inspection, while “patent” defects are those discoverable by reasonable inspection.
^[ii] EJCDC C700 § 7.17 (2018 ed).
^[iii] EJCDC C700 § 15.08(A) (2018 ed).
^[iv] See EJCDC C700 § 7.17 (2018 ed); AIA A201 § 3.5 (2017 ed.).
^[v] Tex. Civ. Prac. & Rem. Code § 16.004.
^[vi] E.g., Stine v. Stewart, 80 S.W.3d 586, 582 (Tex. 2002); B. Mahler Interests, L.P. v. DMAC Construction, Inc., 503 S.W.3d 43, 49 (Tex. App.—Houston [14th Dist.] 2006, no pet.).
^[vii] Austin Co. v. Vaughn Building Corp., 643 S.W.2d 113 (Tex. 1982).
^[viii] B. Mahler Interests, 503 S.W.3d at 49.
^[ix] Id. quoting Cosgrove v. Cade, 468 S.W.3d 32, 36 (Tex. 2015).
^[x] Town & Country P’ship v. Dyad Construction, L.P., 2023 WL 3529696 (Tex. App.—Houston [14^th Dist.] May 18, 2023, no pet.).
^[xi] Id.
^[xii] Galbraith Engineering Consultants, Inc. v. Pochucha, 290 S.W.3d 863, 866 (Tex. 2009).
^[xiii] Tex. Civ. Prac. & Rem. Code § 16.009.