Construction defect law may not be flawless

New July 1 law requiring contractor-provided, two-year warranties on building envelopes for commercial structures could turn out to have a few defects of its own, legal experts say

Daily Journal of Commerce, Portland, Oregon
Monday, June 2, 2008
BY MELODY FINNEMORE

A new law that takes effect July 1 requires general contractors to offer a two-year warranty on the building envelope of large commercial structures. While the law is intended to protect building owners against defects in materials and workmanship, it still leaves plenty of room for problems to arise, according to attorneys specializing in design and construction law.

Under the new law, commercial contractors will be required to annually inspect the structures they build during the warranty period. And the warranty may exclude issues that come up because of improper building maintenance by the owner, according to the Oregon Construction Contractors Board.

Eric Grasberger, a partner at Portland’s Stoel Rives who specializes in development, construction and design law, chaired the Construction Claims Task Force that met for two years to gather testimony regarding building defects and put together a set of recommendations for the 2007 Legislature.

“Our goal was to try to improve the quality of construction in Oregon, reducing the number of construction defects plaguing commercial and residential consumers and reducing the cost of insurance for contractors,” he said.

Many of the task force’s recommendations, particularly those related to residential warranties, were opposed by industry trade groups, Grasberger said, adding the resulting warranty laws for both residential and commercial projects bear little resemblance to those crafted by the task force.

“These new warranties really don’t offer much, in my opinion,” Grasberger said. “Most contractors were already offering some kind of warranty for at least one year, and there was already an implied warranty that work would be done in a workmanlike manner. All the new statutes say is that general contractors have to offer a residential and commercial warranty.

The terms of these warranties are not specified and there is no explicit limitation on whether the warranties may contain disclaimers and other limiting terms. The two new warranties displaced the task force’s recommendations, which offered more comprehensive protection for consumers.”

Tim Calderbank, an attorney with Bullivant Houser Bailey’s Portland office, represents several general contractors and a few owners of public buildings, primarily school districts. He said the most immediate impact of the new law is that project costs will rise. These costs – which include increased insurance costs and the additional expense of providing annual inspections during the warranty period – most likely will be passed on to owners.

While the law’s focus on building envelopes is intended to prevent problems such as the onslaught of water intrusion troubles that have dogged the industry for the last five to 10 years, it actually may open up another avenue for lawsuits, Calderbank said.

“Now there’s an extended warranty obligation on the part of the general contractor and that may lead to additional lawsuits for breach of warranty,” he said. “On the pro side, certainly general contractors are going to be paying very close attention to the work on the building envelope to make sure it’s done right the first time so they won’t have to worry about it.”

Calderbank ensures his clients’ contract documents include terms that specifically comply with the new warranty requirements. “Another thing I’ve been advising my clients is…to have pretty tight language in their contracts about what an owner’s obligations are with regards to maintenance requirements,” he said.

Dean Aldrich of Aldrich Eike in Portland said much of his work revolves around defect-related construction claims, though commercial structures generally carry a lower risk for such problems.

“The defect problem mainly has involved residential structures. We have had a fair share of problems with commercial structures such as hospitals, hotels, schools and eldercare facilities, but it’s nothing like the residential market,” Aldrich said.

Aldrich said about 75 percent of his practice is representing property owners, and general contractors make up the other 25 percent. He advises his contractor clients to pay particular attention to the way they cost their projects.

“It’s all about costing the job properly. Construction is basically the allocation of risk and costing those risks,” he said. “And many of those costs are incremental. Owners will usually be glad to share in those costs as long as the contractor stands behind the work.”

Aldrich also advises contractors to hire an independent inspector to carry out the annual inspections required under the new law. “Because then if something goes wrong, someone else carries the liability,” he said.

While the new law has its share of detractors, Aldrich said it does have at least one positive impact.

“The nice thing about it is it’s a start and it does force a dialog between the contractor and the owner about envelopes, where significant problems can develop,” he said. “So long as everybody has a dialog about what’s going to happen, these projects usually work out.”