Using Performance Standards to Mitigate Customer Disputes Presented by: Matthew J. Whipple and Frank C. Thompson J2059931
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The Default Universe Basic Contract, Description of Work And Price Warranties are Implied Not Well Defined, Unclear Duration and Content Enforced Only In Court Likely Court of Common Pleas Need an Attorney/Long Road of Litigation Decided By Judge Or Jury No Expertise in Construction Likely Sympathetic to Homeowner Uncapped Risk Exposure 4
The Controlled Universe Detailed Contract, Includes Dispute Resolution Mechanisms Warranties and Standards Are Express Defined in both content and duration Alternative Dispute Resolution More Cost Effective Decided by Neutral with Expertise Show benefits of controlled universe and give contractual guidance for how to make it happen 5
General Warranty Principles Warranty is an express or implied promise that something in furtherance of a contract is guaranteed by one of the parties (Black s Law Dictionary) 6
General Warranty Principles 7
General Warranty Principles A guarantee of quality, condition, or functionality, related to goods or services May be Express or Implied Implied warranty is one that arises by operation of law. Express warranty is explicitly granted by one party Often related to a contract, but does not have to be part of a contract Legally Binding Obligation 8
Implied Warranties Warranty implied by law/courts Do not need to intend to make warranty Often designed to protect consumers/buyers (minimal level of protection) Examples: Workmanlike Construction/Habitability Builder is in best position to perform in reasonably workmanlike manner and to ensure building is fit for purpose of habitation Not well defined/question of degree 9
Examples (continued) Merchantability Applies to sale of goods Product will perform like products of similar type Typical lawnmower lasts 5 years, all lawnmowers should last that long Fitness for Particular Purpose Goods should be fit for purpose intended Insulation will keep room at certain temperature 10
General Warranty Principles Problem is uncertainty duration, scope, remedy Breach of Implied Warranty - Workmanlike Manner In the absence of an express agreement to the contrary, the law implies a promise by a builder that the construction will be performed in a reasonably good and workmanlike manner and in accordance with good usage and accepted trade practices, resulting in a merchantable structure. Good and workmanlike means that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work. 11
General Warranty Principles (Cont d) Workmanlike may also be defined as the degree of care that a skilled workman, in this instance a [contractor], would exercise under like or similar circumstances in the community in which the work is done. 12
General Warranty Principles (Cont d) Court, and likely jury, will decide these things No particular expertise, have to be educated on the spot by professionals with conflicting opinions May be sympathetic to homeowner/consumer 13
Implied Warranties may be disclaimed (if proper procedures followed) If you can disclaim, why give any warranty? Customer relations/business reasons The Tommy Boy effect stand behind your work No warranty may be unenforceable in certain circumstances, particularly warranty of habitability. Express warranty more likely enforceable 14
Express Warranty Terms explicitly stated, usually both in function and duration Can be written or oral Most home construction contracts, both new construction and remodeling, reference some express warranty Example roof will last for 20 years 15
Limited Warranty Many agreements have general language about a one year warranty Confusion about builder s warranty and manufacturer s warranty May be unenforceable May be unclear as to scope, how to address alleged problems Sample Agreement in Handout Incorporates reference to Residential Construction Performance Guidelines, published by National Association 16 of Home Builders
Performance Guidelines Generally Comprehensive set of recommendations for standards in residential construction, both how to assess problems and appropriate remedies Meant to give clarity to the contractor, but also peace of mind to the homeowner 17
The NAHB Residential Construction Performance Guidelines Beyond building codes and local regulations, builders, remodelers and their customers have sought measurable benchmarks that deal with the expectations of performance and workmanship in the products provided by the residential construction industry. Codes address matter of health, safety and welfare, these guidelines match expectations of performance and workmanship. 18
History of the Guidelines The core of these guidelines were first established under insured warranty programs. More than 20 years ago the NAHB Remodelers embraced similar standards. NAHB Remodelers and the NAHB Single Family Builders Committee combined to publish the first edition in 1996. The fifth edition has just been compiled and published. 19
Fifth Edition 20
Scope of the guidelines A collection of minimum performance criteria. Many contractors build to tighter tolerances. Not intended to answer all questions related to construction workmanship and performance in a specific residential project. Based on building techniques and quality measures across the United States. Local variations in techniques, materials, or environmental conditions may render some guidelines inappropriate in evaluation or remedy. 21
In that instance, the parties should provide in writing another standard to take precedence. The Guidelines have the flexibility to reflect remodeling specific conditions such as out of plumb or out of level existing structures. The Guidelines are available for purchase at the NAHB Builder Books table in the conference hallway exhibit area and may also be purchased online at builderbooks.com Here are a few specific examples of the Guidelines. 22
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Implementation of Guidelines Unlike building code, do not apply by default Incorporate into contract, depending on engagement, may want to incorporate specific sections/provide applicable sections to homeowner in advance 27
Implementation of Guidelines (con t) Exclude other warranties Sample language (from standard PBA Model Agreement): OWNER VOLUNTARILY, KNOWINGLY AND INTENTIONALLY, AFTER HAVING HAD THE OPPORTUNITY TO CONSULT WITH SEPARATE COUNSEL, HEREBY UNCONDITIONALLY WAIVES ANY EXPRESS OR IMPLIED WARRANTY OF HABITABILITY, INCLUDING WITH RESPECT TO ANY LATENT DEFECTS, AND ANY IMPLIED WARRANTY OF WORKMANLIKE CONSTRUCTION AND ANY OTHER EXPRESS OR IMPLIED WARRANTIES EXCEPT FOR THOSE SPECIFICALLY SET FORTH [HEREIN] 28
Right to Repair Clause Notice of Claim and Right to Repair Handout Can be tailored to situation Major features: Places requirement on homeowner to notify contractor within 30 days of discovery of an alleged defect Prevents aggrieved homeowner from simply initiating a dispute Gives right of inspection, before homeowner takes any action 29
Right to Repair Clause Gives right to correct work that might be defective Opportunity to explain if not at fault Tries to keep lines of communication open If no agreement, document steps in writing and provide to homeowner 30
Alternative Dispute Resolution ADR is an alternative way to traditional litigation to resolve disputes Takes many forms, most often mediation and arbitration Mediation is usually non-binding, negotiation with outside input Arbitration is binding, a decision by one neutral or a panel 31
Alternative Dispute Resolution Goals are to both cheaper and quicker than litigation Complaint to trial is easily a year ADR, particularly for smaller claims, can be weeks or months Additional goal is decision maker with subject matter expertise. Can be a lawyer or exjudge, but could also be an engineer, architect, or contractor 32
ADR (con t) Preserves privacy of dispute process Reduces risk of large judgments 33
ADR Clauses ADR generally must be laid out in contract Some courts have mandatory ADR for certain types of cases Under PA s Home Improvement Consumer Protection Act, specific requirements as to form of clause, font, signature lines, recovery of attorney s fees. See Sample Clause Handout, designed to comply with HICPA guidelines 34
ADR Clauses Efficiency of ADR is only as effective as the clause General ADR clause can be problematic Lawyer as arbitrator, may see dispute as litigation, allow arbitration to drag on Sample clause is more specific, includes requirements for the arbitrator, pre-hearing discovery, time frame for holding arbitration 35
ADR and Performance Guidelines Work in tandem to address disputes Guidelines give more objective standards Curtails protracted litigation battles Tiered escalation Notice of Claim/Right of Repair Possible Mediation Arbitration with clear guidelines 36
Construction Dispute Resolution Services CDRS is a nationwide professional dispute resolution firm that specializes in both residential and commercial construction disputes and is available to conduct mediations and/or arbitrations. CDRS provides construction specialists and expert witnesses for any form of dispute resolution including civil litigation. Trained in mediation and arbitration. 37
Many of the CDRS professionals are / have been, licensed contractors, architects, home inspectors, building code officials, construction attorneys or other construction related industry personnel who can provide an expertise that only an experienced construction related professional can provide. Several local professionals including Frank Thompson. Visit us at http://www.constructiondisputescdrs.com for more information. 38
Questions? Matthew J. Whipple, Esq. (412) 566-6116 mwhipple@eckertseamans.com