Recent Legislation Affects Contractor’s Written Warranty Agreements

Recent Legislation Affects Contractor’s Written Warranty Agreements

By Hunter B. Emerick
Saalfeld Griggs PC

In its most recent session, the Oregon Legislature amended the 2003 Notice of Defect Act. The Notice of Defect Act generally requires that a residential owner provide a written notice to a contractor describing the details of any construction defect before that owner may commence any action against the contractor. The new legislation expands the Notice of Defect Act by providing both residential and commercial contractors with an opportunity to attempt to define the standards by which a construction defect will be judged.

The Written Warranty Act (SB 574) (the “Act”) allows contractors who build a new structure to record a written warranty agreement in the county records. The Act directs county clerks to accept written warranty agreements for recordation into the county records. The new statute requires that written warranty agreements are signed and acknowledged by both the contractor and original owner of the new structure, set forth any express warranties furnished by the contractor, and identify the contractor, the original property owner, and the real property. The Act specifically provides that all subsequent owners of the structure will be placed on notice of both the benefits and the burdens of the written warranty agreement. Finally, the Act provides that the written warranty agreement will not affect title to the property any longer than ten (10) years after the date the instrument is recorded.

This new statute is only permissive. A contractor is not required to make a written warranty agreement or enter such an agreement into the county records. This legislation was sponsored by the Oregon Homebuilders’ Association. There may be, however, some significant risk management strategies which might motivate both residential and commercial contractors to enter into such agreements with the original owners of new structures and then record those agreements in the county records.

Frequently, the courts imply warranties of workmanship into newly constructed residential and commercial properties. These warranties are imposed by courts without the parties agreeing to any particular warranty to be offered by the contractor. In addition, with newly constructed residential structures, courts frequently imply a warranty of habitability.

Because these implied warranties have been developed by the courts, the full scope, extent, and definition of those implied warranties are ill-defined. This lack of specificity leads to inconsistent applications and difficulties in predicting whether any specific defect alleged by a homeowner has violated a standard of workmanship. Frequently, the standards of workmanship asserted by the experts for both sides are no more than the culmination of those witnesses’ personal experiences in a specific trade.

Because of this imprecision, contractors should use disclaimers on the implied warranties imposed on them by the courts. The courts developed these implied warranties by analogy to warranties that are implied under the Uniform Commercial Code for sales of goods. The Uniform Commercial Code allows sellers of goods to disclaim implied warranties, if done in an appropriate and conspicuous manner. Certainly, one reason a contractor might decide to enter into a written recorded warranty agreement would be to disclaim these implied warranties of workmanship and habitability.

Of course, the original owner would more likely sign a written warranty agreement if a written express warranty was provided in exchange for the disclaimer. The benefit for the contractor in entering into a written express warranty would be that the contractor could clearly and precisely define the scope and extent of the written warranty. The contractor could also require that an objective standard be used to judge whether any alleged construction defect violated the warranty and if so, what might be a reasonable cure. By doing so, the contractor could better manage the risk of construction defect claims by providing a predictable and consistent standard against which the contractor’s work would be judged. In addition, the contractor could consider other terms in the written warranty agreement, such as restricting the period of time within which warranty or defect claims could be made.

ontractors should become familiar with the Written Warranty Act (SB 574) and consider using documents in their business which will allow them to take advantage of the risk management opportunity presented by this new statute. Please call our office if you have any question regarding this new law.