From the smallest home improvement project to the tallest building reshaping the Nashville skyline, there are various warranties in play on every construction project. These warranties are often found directly in the contract — for example, a one-year warranty on labor and materials. Many times, suppliers and manufacturers also provide their own material and equipment warranties — such as a 20-year roof membrane warranty or a 10-year warranty on a rooftop HVAC unit.[1]

Other warranties are implied by law.[2] With so many warranties flowing to and from various parties, each containing different terms, limitations and exclusions, construction warranties can be a puzzling subject. And issues such as statutes of limitation and repose, “call back” warranties and disclaimers only add to the confusion. If you represent owners, developers, contractors, subcontractors, suppliers or manufacturers, whether in transactions or disputes, you need to understand construction warranties and how they are interpreted and applied in Tennessee. While this article focuses on the most common (and most commonly litigated) construction warranties, those flowing from the contractor to the owner, the concepts below apply to other warranties as well.

Express Warranties

With varying degrees of complexity and enforceability, most construction contracts contain express warranties. An express warranty is an assurance about the transaction that forms part of the “basis of the bargain,” and on which the buyer relies.[3] Reliance distinguishes a warranty from mere statements of opinion or “puffery.”[4]

One of the more common express construction warranties is in the American Institute of Architects (AIA) General Conditions of the Contract for Construction:

The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation, or normal wear and tear and normal usage.[5]

This provision contains three warranties: (1) the materials and equipment will be of good quality and new; (2) the work will follow the contract documents; and (3) the work will be free from defects. Equally noteworthy is what the warranty does not contain. Notice there are no time limit in the warranty and no disclaimers, and the only exclusions relate to acts and omissions by someone other than the contractor. Compare this to a typical residential warranty, which contains various exclusions, disclaimers and limitations on the builder’s liability and is often limited to one year.[6]

One-year warranties are a source of uncertainty for parties and their counsel. The statute of limitations on actions for injury to real property is three years from the date the injury is discovered or should have been discovered.[7] And the statute of repose places an outside limit on construction-related claims at four years from “substantial completion.”[8] Does a one-year limited warranty trump the statutes of limitation and repose? Or may an owner still bring claims for latent defects after the one-year period?

In Hankins v. Johnson,[9] the Court of Appeals held that a one-year warranty in a construction contract limited the time to assert claims under that warranty. “The trial judge did not err in holding that the parties were bound by their contract for a one-year warranty despite a longer statute of limitations.”[10] Though Hankins was an unreported decision, it followed established precedent that courts would uphold a shortened contractual limitations period in other contexts if it was reasonable.[11] Presumably, a one-year express warranty does not bar claims for breach of other contractual provisions or, assuming you can avoid the economic loss rule, tort claims.[12]

A related but distinct concept is a “period of correction,” also known as a “call back” warranty. The most common example is in AIA A201–2007, which states in part:

In addition to the Contractor’s obligations under Section 3.5, if, within one year after the date of Substantial Completion of the Work … any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so …. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty.[13]

This provision appears to bar any defect claims not made during the first year, especially claims for breach of warranty. And contractors and their counsel commonly make this argument. But the provision also states:

Nothing contained in this Section 12.2 shall be construed to establish a period of limitation with respect to other obligations the Contractor has under the Contract Documents. Establishment of the one-year period for correction of Work as described in Section 12.2.2 relates only to the specific obligation of the Contractor to correct the Work, and has no relationship to the time within which the obligation to comply with the Contract Documents may be sought to be enforced, nor to the time within which proceedings may be commenced to establish the Contractor’s liability with respect to the Contractor’s obligations other than specifically to correct the Work.[14]

If the distinction was not clear enough, the AIA itself has addressed the subject:

The General Conditions provide for a one-year period after Substantial Completion during which the Contractor is specifically required to return to the site and correct any Work that is found not to conform to the Contract requirements, upon written notice from the Owner. This correction period is often incorrectly referred to as the Contractor’s “one-year warranty.” The term “one-year warranty” should never be used on contracts based on the AIA General Conditions. Many contractors mistakenly believe that they have no responsibility for defective or nonconforming Work after one year. In fact, the Contractor may be held liable financially for Work that does not conform to the general warranty for as long as may be allowed by the applicable statute of limitations or repose.[15]

Although Tennessee courts have not addressed this issue, contractors that rely on the one-year period of correction do so at their peril.[16] As with any aspect of express warranties, if the parties intend to limit the contractor’s obligations, they should do so clearly and unequivocally. If the limitation is reasonable, Tennessee courts likely will enforce it.

Implied Warranties

Historically, the doctrine of caveat emptor governed the owner-builder relationship. The parties’ obligations were limited to the “four corners” of the contract and, if not otherwise addressed, the risk of defects was on the owner. Erosion of caveat emptor in Tennessee began in the late 1940s, as the post-War era saw a “dramatic increase in the sales of newly constructed homes by builder-vendors.”[17]

In the 1949 case of Haynes v. Morton,[18] a homebuyer sued a builder for defective and incomplete construction. Though the contract said nothing about the kind or quality of materials, the buyer testified the builder agreed to build the house of “‘topnotch’ and ‘A-Number one’ material.”[19] The trial court applied caveat emptor and directed a verdict for the builder.[20] The Court of Appeals reversed, finding the construction agreement was “collateral and an inducement to the contract for the sale of the lot,” and that the contract did not cover the entire agreement on construction.[21]

Assaults upon caveat emptor continued into the 1970s. In the unpublished opinion of Vincent v. Jim Walter Homes Inc.,[22] the court deemed a house a “product” and adopted an implied warranty it would be built “in a workmanlike manner and suitable for habitation.”[23] In 1980, the Supreme Court appeared ready to officially adopt an implied warranty in Zack Cheek Builders Inc. v. McLeod,[24] but the facts got in the way. “[E]ven if we were to reverse our previous position on this question, an implied warranty of habitability would not be applicable to this case, because the disputed issue involved a problem with the land itself, and not with the dwelling situated on it.”[25]

Then, in 1982, the Tennessee Supreme Court explicitly adopted the doctrine of implied warranty in Dixon v. Mountain City Constr. Co.[26] Upon reviewing the history of caveat emptor, the court noted that many jurisdictions had circumvented the rule by predicating liability on other theories, including Haynes and Vincent.[27] Expressing disapproval of the “circumvention movement,” the court met the issue “head-on” and recognized the legitimate expectations of the home buying public that workmanship and materials used by builder-vendors should meet certain standards.[28] The court chose an implied warranty adopted in North Carolina as its model:

[W]e hold that in every contract for the sale of a recently completed dwelling, and in every contract for the sale of a dwelling then under construction, the vendor, if he be in the business of building such dwellings, shall be held to impliedly warrant to the initial vendee that, at the time of the passing of the deed or the taking of possession by the initial vendee (whichever first occurs), the dwelling, together with all its fixtures, is sufficiently free from major structural defects, and is constructed in a workmanlike manner, so as to meet the standard of workmanlike quality then prevailing at the time and place of construction.[29]

Important to note is just how narrow the warranty is. It applies only to dwellings, only if the vendor is in the building business, and extends only to the initial purchaser. Further, the warranty applies only when the contract is silent, leaving builders and buyers free to contract on different terms and expressly disclaim warranties.[30]

One year later, Hays v. Gilliam[31] refused to apply the implied warranty to an apartment building because it had not been “recently constructed” and was not a “dwelling.”[32] In Patterson v. Jim Walter Homes Inc.,[33] the court wanted to extend the rule to subsequent purchasers, recognizing that a growing number of jurisdictions had done so, but felt “constrained … by the narrow ruling in Dixon.”[34]

Other cases have addressed the adequacy of disclaimers and express warranties in supplanting the implied warranty. In Dewberry v. Maddox,[35] the defendant claimed the implied warranty did not apply to structural problems because the contract included an express warranty. That provision stated: “Seller agrees to have plumbing, heating, electrical, applicances [sic], and air conditioning systems in good working order at time of closing.”[36] The court found this warranty inadequate to supplant the implied warranty. “It would completely defeat the precedent set by Dixon if a seller could circumvent the implied warranty by expressly warranting some aspect of a new house which has nothing to do with the workmanship or the materials used.”[37]

The contract in Dewberry also contained this disclaimer, which the defendant argued should defeat the implied warranty: “Purchaser accepts Property in its existing condition, no warranties or representations having been made by Seller or Agent which are not expressly stated herein.”[38] The court disagreed. In new construction, the buyer is relying on the builder’s skill. Thus, a valid disclaimer must be “clear and unambiguous,” and the buyer must have adequate notice of the protections being waived.[39]

Compare the case of Bunch v. Cooper,[40] in which the court found an express warranty and disclaimer adequate to supplant the implied warranty. At closing on a new home, Cooper gave the Bunches a one-year warranty for which they signed an acknowledgement.[41] It included this disclaimer in capital letters: “THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, AND FITNESS FOR A PARTICULAR PURPOSE.”[42] Even so, the Bunches argued the implied warranty applied because the original contract for sale was silent.[43] The court rejected this argument because not only did the Bunches sign the acknowledgment, they also made claims under the warranty.[44]

This area of the law continued to develop through the 1990s and early 2000s. One case declined to extend the implied warranty to a residential contract because the seller did not construct the house.[45] Other cases followed the holding in Bunch, refining the law on the adequacy of express warranties and disclaimers.[[46] But the common thread is that all of these cases fit within the narrow framework erected in Dixon.

A Broader Implied Duty?

In the 2008 case of Bowling v. Jones,[47] a homeowner sued its builder for failing to construct a house in a workmanlike manner. Following a bench trial, the court awarded damages to the homeowner, finding the home had no value.[48] The Court of Appeals upheld the judgment, deeming it “well settled” that a construction contract carries implied warranties against defects and that the builder will perform in a workmanlike manner.[49]

Though the facts fit within the confines of Dixon, the case is noteworthy because it never mentions Dixon or its progeny. Rather, the court adopted this implied warranty that arguably is broader:

A contract to construct an entire building is essentially a contract for material and labor, and includes an implied warranty protecting the owner from defective construction. Once a builder undertakes a construction contract, the common law imposes upon him or her a duty to perform the work in a workmanlike manner, and there is an implied agreement that the building or work performed will be sufficient for the particular purpose desired or to accomplish a certain result. Thus, a failure to perform a building contract in a workmanlike manner constitutes a breach of the contract.[50]

Other cases have addressed or adopted the Bowling warranty, most notably the 2011 Tennessee Supreme Court case of Federal Ins. Co. v. Winters.[51] The Winters court approved the Bowling warranty and extended it, noting that other authorities recognize the obligation as applying to all service contracts.[52] And while some of these authorities refer to the obligation as a “warranty” and others as a “duty,” the court found the distinction unimportant.[53] The court adopted an implied duty to perform all service contracts, including construction contracts, skillfully, carefully, diligently, and in a workmanlike manner.[54]

Time will tell how much Bowling and Winters have expanded the implied warranty established in Dixon. Consistent with the “dwelling” aspect of Dixon, no cases have applied the duty in the commercial construction context.[55] Also not entirely clear is whether courts will apply the implied duty without regard to the language of the contract. The Winters court provided a clue when it stated: “In addition to the explicit terms, contracts may be accompanied by implied duties, which can result in a breach.”[56] Presumably, courts will still uphold valid disclaimers of the implied duty, but counsel should read closely the holdings in Bowling and Winters and draft their clients’ contracts accordingly.

Conclusion

Warranties can be a confusing subject. On a construction project, where multiple parties are providing materials and services, all of which are subject to express and implied warranties of varying scopes and lengths, they can be perplexing. But you can help bring clarity to the owner-builder relationship by finding out what your client expects, reading the applicable cases and authorities, and drafting thoughtful language before a project begins. And if your client gets into a dispute, you can read the applicable warranties and disclaimers, determine how the courts might interpret and apply them, and know the duties and obligations that might be implied.

This area of the law is uncertain and evolving, but a good understanding of the key concepts will serve your clients and their projects well.

Notes

1. This type of warranty might be subject to the warranty provisions in Article 2 of the Uniform Commercial Code, depending on whether the “predominant factor” of the transaction is goods or services. Hudson v. Town & Country True Value Hardware Inc., 666 S.W.2d 51, 53-54 (Tenn. 1984).
2. One example of an implied warranty, known as the Spearin doctrine, is the owner’s warranty to the contractor that the plans and specifications are suitable for construction. United States v. Spearin, 248 U.S. 132 (1918).
3. Harriman Sch. Dist. v. Southwestern Petroleum Corp., 757 S.W.2d 669, 673 (Tenn. Ct. App. 1988).
4. See, e.g., Price Bros. Co. v. Philadelphia Gear Corp., 649 F.2d 416, 422 (6th Cir. 1981) (“In order to determine whether the pre-contract statements … were in fact a basis of the bargain and thus an express warranty, or whether they were merely a seller’s ‘puffing,’ the court should consider the circumstances surrounding the transaction, the reasonableness of the buyer in believing the seller, and the reliance placed on the seller’s statements by the buyer.”).
5. AIA Document A201–2007 § 3.5.
6. The “limited warranty” I signed-up for when I purchased my home consists of a 19-page booklet that purports to limit and exclude coverage for everything from dripping faucets to floor squeaks. What was it President Lincoln said about “he who represents himself”?
7. Tenn. Code Ann. § 28-3-105 (2016); McCroskey v. Bryant Air Conditioning Co., 524 S.W.2d 487, 491 (Tenn. 1975).
8. Tenn. Code Ann. § 28-3-202 (2016). Unless the injury occurs during the fourth year, in which case the action must be brought within a year after the injury. Tenn. Code Ann. § 28-3-203 (2016).
9. Hankins v. Johnson, No. 88-328-II, 1989 WL 19913, at *4 (Tenn. Ct. App. Mar. 8, 1989).
10. Id. at *8.
11. See, e.g., Ford Motor Co. v. Moulton, 511 S.W.2d 690, 694 (Tenn. 1974), cited in Hankins, 1989 WL 19913, at *4; State v. Evans, 334 S.W.2d 337, 342 (1959).
12. The economic loss doctrine is a judicially created principle that attempts to maintain separation between contract/warranty law and tort law by barring recovery in tort for purely economic loss. Lincoln Gen. Ins. Co. v. Detroit Diesel Corp., 293 S.W.3d 487, 488-89 (Tenn. 2009).
13. AIA Document A201–2007 § 12.2.2.1.
14. AIA Document A201–2007 § 12.2.5.
15. The American Institute of Architects Official Guide to the 2007 AIA Contract Documents, pp. 231-32 (The American Institute of Architects 2009).
16. Some courts and commentators characterize the correction period as a strict liability remedy — outcome-based as opposed to conduct-based. “The distinguishing characteristic of the ‘correction’ obligation is that an owner invoking it need not prove why a particular system failed, but only that it did fail.” Lorence H. Slutzky, The “Call Back” Warranty, Notice, Cure, Spoliation and Failure to Secure “Special” Warranties (ABA Forum on the Construction Industry 2002 Annual Meeting). The correction period “is basically an agreement to repair or replace the faulty work regardless of the reason for the defect, so long as it is not due to abuse or neglect by the owner.” All Seasons Water Users Assoc. v. Northern Imp. Co., 399 N.W.2d 278, 285 (N.D. 1987). See also R. Harper Heckman, Drafting the “Perfect” One-Year Warranty, 27:3 Constr. Law. 5 (2007).
17. Dixon v. Mountain City Constr. Co., 632 S.W.2d 538, 540 (Tenn. 1982).
18. 222 S.W.2d 389 (Tenn. Ct. App. 1949).
19. Id. at 391-92.
20. Id. at 392.
21. Id.
22. CCH Prod. Liab. Rep. § 8278 (Tenn. Ct. App. 1978).
23. Id., quoted in Dixon v. Mountain City Const. Co., 632 S.W.2d 538, 541 (Tenn. 1982).
24. 597 S.W.2d 888 (Tenn. 1980).
25. Id. at 892.
26. 632 S.W.2d 538 (Tenn. 1982). Other authorities distinguish the “implied warranty of good workmanship and materials,” as it was called in Dixon, from the “implied warranty of habitability,” as it has been called in other Tennessee cases. Tennessee courts appear to make no such distinction and treat the terms synonymously. Thus, I will refer to it simply as the “implied warranty.”
27. Id. at 540-41.
28. Id. at 541.
29. Id. (quoting Hartley v. Ballou, 209 S.E.2d 776, 783 (N.C. 1974)).
30. Id. at 542.
31. 655 S.W.2d 158 (Tenn. Ct. App. 1983).
32. Id. at 160-61.
33. 1985 WL 4821 (Tenn. Ct. App. Dec. 31, 1985).
34. Id. at *2; see also Meyer v. Bryson, 891 S.W.2d 223, 226 (Tenn. Ct. App. 1994) (holding a remote purchaser could not prevail on a warranty claim because Dixon limited application to the original vendee). Since Patterson, the court has clarified that a subsequent purchaser may maintain an action in negligence if the defects are latent and not known or reasonably discoverable by the previous owner or subsequent purchaser. Briggs v. Riversound Ltd. P’ship, 942 S.W.2d 529, 531 (Tenn. Ct. App. 1996).
35. 755 S.W.2d 50 (Tenn. Ct. App. 1988).
36. Id. at 54.
37. Id.
38. Id.
39. Id. at 55. See also Axline v. Kutner, 863 S.W.2d 421, 424-25 (Tenn. Ct. App. 1993) (holding the term “one-year builder’s warranty” was meaningless and not an express warranty, and rejecting as inadequate the same disclaimer language addressed in Dewberry).
40. No. 03A01-9705-CV-00154, 1997 WL 600150 (Tenn. Ct. App. Sept. 30, 1997).
41. Id. at *1-2.
42. Id. at *1.
43. Id. at *2-5.
44. Id.
45. Herman v. Farmington Grp., No. 02A01-9207-CV-00189, 1993 WL 90361, at *3 (Tenn. Ct. App. Mar. 30, 1993).
46. Wilkes v. Shaw Enterprises LLC, No. M200601014COAR3CV, 2008 WL 695882, at *9 (Tenn. Ct. App. Mar. 14, 2008) (holding that a promise to erect a house “in accordance with good building practices” supplanted the implied warranty and required proof as to whether the construction breached the standard); Wright v. Stevens, No. 03A01-9903-CH-00064, 1999 WL 1212166, at *5-6 (Tenn. Ct. App. Dec. 17, 1999) (furthering the rule that silence is required to invoke the implied warranty); Radant v. Earwood, No. 02A01-9802-CV-00029, 1999 WL 418339, at *9 (Tenn. Ct. App. June 22, 1999) (upholding an express warranty and disclaimer).
47. 300 S.W.3d 288 (Tenn. Ct. App. 2008).
48. Id. at 290.
49. Id. at 291.
50. Id. (quoting 13 Am. Jur. 2d Building and Construction Contracts § 10 (2000)).
51. 354 S.W.3d 287 (Tenn. 2011).
52. Id. at 291-92.
53. Id. at 293.
54. Id.
55. Two commercial construction cases have addressed the implied duty, but neither of them appeared to apply it. Centimark Corp. v. Maszera Co. LLC, No. E2013-02689-COA-R3CV, 2014 WL 6468944, at *14 (Tenn. Ct. App. Nov. 18, 2014), appeal denied (Mar. 12, 2015) (quoting Bowling without further discussion); Northwest Tenn. Motorsports Park LLC v. Tennessee Asphalt Co., 410 S.W.3d 810, 817 (Tenn. Ct. App. 2011) (citing Bowling but declining to apply it because of express provisions in the contract).
56. Winters, 354 S.W.3d at 291.

BRIAN M. DOBBS is a member of Bass, Berry & Sims PLC in Nashville, where his practice focuses primarily on construction law, including all aspects of construction transactions and disputes. A graduate of Auburn University and the University of Tennessee College of Law, Dobbs spent his first six years of practice in California before returning to Tennessee in 2007. He is a member of the American Bar Association Forum on Construction Law and currently serves as Communications Chair for the Tennessee Association of Construction Counsel.