Warranty wars

Type of specification may determine when implied warranty trumps express warranty
August 11, 2010

Owners often require that contractors provide them with stringent express warranties. Contractors usually also assume such contractual obligations as the duty to visit the site, check the owner's plans and generally inform themselves of all requirements of the work.

The cumulative effect of the express warranty and all of the contractual obligations imposed upon a contractor give the owner significant ammunition to use against the contractor in the event that defects occur.

Contractors, however, are not without their own ammunition to defend against challenges that they breached their express warranty or contractual obligations. Without knowing it, owners often give their contractors an implied warranty that may trump the contractor's express warranty and contractual obligations. The battle of warranties may be decided by the type of specification an owner either directly, or through its design professional, provides to the contractors.

Design vs. performance spec

A distinction must be made between design specifications and performance specifications. Design specifications explicitly state how the contract is to be performed and they permit no deviation. Performance specifications, on the other hand, specify the results to be obtained and leave it to the contractor to determine how to achieve those results. This distinction is easy to state, but often difficult to apply because specifications frequently combine elements of each.

The law is not always based on common sense, but common sense does prevail in the context of determining a contractor's liability for following an owner's design specification. Courts around the country, following a 1918 U.S. Supreme Court decision, generally rule that a contractor should not be penalized for doing exactly what it was required to do under the owner's plans, notwithstanding other contractual obligations. This principle, known as the "Spearin Doctrine," is taken from the name of the U.S. Supreme Court case: Spearin vs. United States, 248 U.S. 132, 39 S.Ct. 59, 63 L.Ed. 166 (1918).

In Spearin, the government awarded a fixed-price contract to George B. Spearin to build a dry dock at the Brooklyn Navy yard in accordance with the government's plans and specifications. Construction of the dock necessitated relocation of a section of a 6-ft. sewer. The plans indicated the new route for the replacement section of the sewer. The government provided the contractor with plans indicating dimensions, materials and location of the section to be relocated. Spearin faithfully followed the plans and specifications and the government accepted this work.

While Spearin was still on the job, heavy rains and a high tide caused flooding that resulted in extraordinary pressure that broke the sewer. The flooding, in turn, damaged the dry dock project, forcing Spearin to stop its work. A dispute ensued between Spearin and the government over payment to Spearin for the costs to pay for the repairs. As Spearin refused to make the repairs without compensation, the government used other contractors to complete the project.

The case ultimately reached the U.S. Supreme Court, which sided with Spearin. The court conceded that ordinarily where a contractor agrees, for a fixed sum, to do something that is possible to be performed, the contractor will not become entitled to additional compensation because unforeseen difficulties are encountered. The court recognized, however, that there must be an exception for the situation where the contractor is forced to build according to plans and specifications prepared by the owner. In that case, the contractor will not be responsible for the consequences of defects in the plans and specifications. Thus, the owner by implication warrants the accuracy and suitability of its specifications. If the specifications provided by the government do not work for their intended purpose, contractors are justified in refusing to continue performance without a commitment for payment.

The Spearin rule applies regardless of whether the owner prepares the specifications or whether they are prepared by a design professional hired by the owner. In either case, the contractor has the right to rely upon the implied warranty.

Competing strategies

The key to winning the battle of the implied warranty versus the contractor's express warranty is to establish the specification as either a design specification or a performance specification, depending on the professional's point of view. Just because a specification provides some details concerning how the work is to be performed, it does not convert what would otherwise be a performance specification into a design specification.

The best way for the contractor to win is to successfully establish that the applicable specification is exclusively a design specification that carries with it an actionable implied warranty. Even if that is established, however, an owner may still succeed in negating its implied warranty if it can establish that the specification was sufficiently ambiguous that an ordinary contractor would have a duty to inquire into the omissions or misstatements made in the specifications.

If there are obvious defects in the plans and specifications, a contractor who fails to make reasonable inquiry at bid time may be denied compensation for the extra costs it incurs in having to perform extra work caused by the incomplete or inaccurate specification. This is problematic for the contractor because he must prove that the specification was either defective or ambiguous without establishing that the defect was so apparent as to give rise to a duty to inquire.

The implied warranty that courts will read into the contract will serve as an equalizer to the extra leverage that owners typically have at the time of negotiating contract terms.

Legal columnist Richard A. Stockenberg is a member of the St. Louis law firm of Gallop, Johnson & Neuman LC (e-mail: rastockenberg@gjn.-com), where he limits his practice to construction law. No statement here should be acted upon until your attorney assures you that it applies to your situation.

         
 

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