Builders’ warranties – what are they, and how long do they last?
Historically the breach of a “warranty” was regarded as not as serious as the breach of a “condition”, which would give the client the right to cancel the building contract. But these days those old rules have been superseded by Part 2 Subpart 3 of the Contract and Commercial Law Act 2017, so some warranties do actually give you the right to cancel the contract if they are breached. The same is true under the Consumer Guarantees Act 1993 and the Building Act 2004. Under the building contract you are free to state what repercussions there will be if a warranty is breached, and this will prevail over the Contract and Commercial Law Act 2017, but not the other two Acts.
In legal terms, we need to distinguish warranties from guarantees. In the context of the building industry, a warranty is a promise given by the builder to the property owner (or vice versa) in the building contract. A guarantee is a promise given by a third party to the property owner (or the builder). A good example is the personal guarantee that the directors or major shareholders of building companies have to give to their company’s bank or their landlord when the company gets a bank loan or leases some premises. Another example is the guarantee that members of Certified Builders or Master Builders can offer their customers. Unlike a warranty, those guarantees are issued to property owners by an underwriter, not by the builder. For example, the Halo guarantee available through Certified Builders is issued by a Lloyds of London syndicate.
There is a popular misconception that if you don’t have a warranty, or your warranty has “run out”, then you don’t have any rights against the party that supplied you defective goods or services. That is why retailers are able to entice consumers with the promise of a warranty – as though they are promising you something you don’t already have – and it is why there is a booming market in “extended warranties” that you actually have to
pay for. That frustrates the Government and lobby groups like Consumer NZ Inc. – so much so that they got the Fair Trading Act amended in 2014 to require all retailers of consumer goods or services who sell extended warranties, to tell their customers in plain English that they probably have better legal rights already.
Similar misconceptions persist in the building industry. For example, some residential builders give their clients written warranties that their building work will be defect-free for a specified number of years and under certain conditions, as if this was some kind of bonus or added value to the client. Homeowners who discover defects after the warranty has run out may be tempted to resign themselves to their fate and pay for the repairs themselves. In fact, if they got proper legal advice they would be told that they already have five separate warranties under the law, three of which can’t be contracted out of, and four of which last for up to 10 years.
In the commercial building sector the situation is entirely different because three of those warranties – those in the Consumer Guarantees Act 1993 and the Building Act 2004 – generally don’t apply. So commercial property owners are left with whatever warranties may be found in the building contract itself, and the law of negligence that requires the careless builder to compensate the owner for losses arising out of his faulty workmanship or materials, that were reasonably foreseeable. In both cases the commercial property owner’s rights may be significantly curtailed by exclusions or limitations of liability in the building contract itself.
It is probably for that reason that the major standard-form building contracts (which were written at least partially to protect the interests of property owners) contain separate warranty agreements that the builder is obliged to give the property owner on completion. The warranty in NZS 3910:2013 is found in Schedule 13, and the warranty in NZIA SCC 2018 is found in Schedule G1. Sometimes you also find warranties buried in the specifications issued by the Engineer or the Architect, so look out for those.
The NZS 3910:2013 warranty
Under NZS 3910:2013 you make an election when you fill out the special conditions, as to whether warranties are required from the contractor, and if so, for which items of work. The warranties must be supplied to the Engineer before the practical completion certificate is issued, and they must be in the form of Schedule 13 “or as otherwise acceptable to the Engineer”. Any warranties provided by the contractor do not supersede or override the contractor’s obligations under the building contract. The warranties state how long they are to last for, but regardless of what they say, they come to an end after 10 years.
Interestingly, there is no space in the special conditions to specify who the warranties are to come from, but the warranty agreement itself contemplates that it might be given by someone other than the contractor – sometimes, but not necessarily, a subcontractor. The party giving the warranty (the “warrantor”) simply promises that the relevant building works are “as required in the [building] contract”, and (unless otherwise agreed) “shall be in accordance with good trade practice”.
If the warranty is given by the contractor, then to some extent it is superfluous, given that the contractor has already given comprehensive promises to the property owner under the contract itself. For example under clause 2.1.2 of the General Conditions of Contract the contractor undertakes that it will “carry out the work described in the Contract and fulfil its obligations thereunder”. The Building Contract includes not only all the tender and agreed post-tender documents but also the special conditions, the general conditions, the specifications and drawings, the schedule of prices (if applicable) and any agreed additional documents.
Throughout the General Conditions the contractor makes all sorts of additional promises relating to setting out, building materials, timing, compliance with laws, quality plan, and removal and making good of non-complying work. If it later turns out that those promises weren’t honoured, then the property owner can sue the contractor for damages for up to 6 years after the non-compliance is discovered (but no later than 10 years after the default arose).
In addition, under clause 5.1.1 the contractor promises that it will “remedy defects in the Contract Works” and under Part 11 there are comprehensive obligations on the contractor to remedy defects that are discovered during the defects notification period (3 months after practical completion unless otherwise stated). Under clause 11.4.1, the contractor remains liable for any obligation that remains unperformed or not properly performed, even after the issue of the final completion certificate. And to top it off, under Part 7 the contractor agrees to indemnify the property owner against any loss or liability arising out of the contract works, other than those for which the property owner is responsible. That indemnity once again lasts for up to 10 years.
All of the above rights are in addition to the product warranties that are typically issued by product manufacturers or importers. Although they don’t name the intended recipient (because the manufacturer or importer doesn’t know who they are) they can be enforced by the property owner directly against the manufacturer or importer.
The terms of the product warranties may limit the rights that a commercial property owner has, but a homeowner can ignore many of those limitations under the Consumer Guarantees Act.
by Geoff Hardy
Auckland Commercial Lawyer