Law360, New York (October 24, 2017, 3:47 PM EDT) —
When most people think “product liability” under the Uniform Commercial Code, disputes over defects in consumer goods — such as automobiles or home electronics — often come to mind. But the UCC also applies to the sale of nonconsumer goods, including generic building materials that are purchased by contractors or property owners in the course of construction. Such was the case in LTL Acres LP v. Butler Manufacturing Co., a recently decided products liability action out of the state of Delaware wherein a Delaware property owner, LTL Acres LP (“LTL”), brought breach of warranty and contract claims against manufacturers that supplied materials used in the construction of a retail and office building. The building was completed in October 2006 and leaked from the very beginning during heavy rains with high winds.
The building was constructed using products sold by both Butler Manufacturing Company (“Butler”) and Dryvit Systems Inc. (“Dryvit”). Butler manufactured pre-engineered roofing and exterior wall components, and Dryvit supplied an exterior finish designed to protect and seal the walls. Both Butler’s and Dryvit’s products were sold with express warranties. LTL alleged that both products were defective and were the cause of the building’s leaks. The dispute was decided on summary judgment motions, and neither defendant was held liable under its products’ respective contract or warranty. Accordingly, LTL Acres offers a valuable framework from which to review some of the most effective defenses applicable to defending defective building material breach of warranty and companion contract claims.
The UCC: Express and Implied Warranties of Sale
In every state, except Louisiana, the Uniform Commercial Code provides uniform treatment for common business transactions. UCC Article 2 outlines certain warranties that are included as part of a sale, including express warranties, created explicitly by the seller and agreed upon by the buyer, usually in a form agreement, and implied warranties, which are imposed by law. Express warranties are typically affirmative promises about the quality and features of goods, usually with a specified form of remedy. Any affirmation of fact or promise made by the seller to the buyer, including those offered through a description of the goods, a sample or floor model can create an express warranty if the buyer relies on it at the time of purchase.
Implied warranties, by contrast, are not created by the seller but are imposed by law to ensure that the goods meet certain minimum standards. There are two such implied warranties under the UCC: the warranty of merchantability and the warranty of fitness for a particular purpose. The warranty of merchantability is imposed on merchants who deal in goods of the kind being sold, and requires that goods must at least be fit for their ordinary purpose. For example, when a cement manufacturer sells a bag of concrete mix, he impliedly warrants to buyers that the mix is fit to be mixed with water and used to build a sidewalk. The implied warranty of fitness for a particular purpose, on the other hand, arises only if the seller knows of the buyer’s particular purpose for the goods and the buyer relies on the seller’s expertise or judgment when selecting the goods. If the seller knows the purpose for which the goods are to be used and the buyer relies on his judgment, the seller impliedly warrants that the goods he sells are suitable for that specific purpose. Using the concrete example, if a buyer informs the cement manufacturer that he desires concrete mix fit to construct a sidewalk, and he purchases the particular mix that the seller suggests, an implied warranty of fitness for a particular purpose attaches to that sale. If, after purchase, it becomes evident that the concrete mix is not suitable to build a sidewalk — and the buyer can prove that he relied on the seller’s skill to select the concrete mix — the seller may be liable for breach of the implied warranty of fitness for a particular purpose.
Defending a Breach of Warranty and Companion Contract Claim
1. Is the plaintiff’s claim timely under UCC § 2-725?
Because of the general durability of building materials, a primary line of defense in a products liability action concerning allegedly defective building materials should be to consider whether the plaintiff’s claims are time-barred by the applicable statute of limitations. The expiration of the statute of limitations is a bar to a party bringing a claim. In order for a property owner to sue a manufacturer to enforce a warranty provision in the sales contract, the claim must not only fall within the stated warranty period, but it must also fall within the applicable statute of limitations period.
The sale of generally available building materials are subject to a four-year statute of limitations period under the UCC. Ordinarily, a cause of action for breach of warranty accrues upon delivery of the goods regardless of the aggrieved party’s lack of knowledge of the breach. But if the warranty extends to future performance, then the cause of action accrues when “the breach is or should have been discovered.” In other words, if a warranty extends to future performance, then the statute is tolled until the date that the property owner discovered or should have discovered a defect.
Whether the Dryvit warranty extended to future performance was a central issue in the LTL Acres dispute. LTL argued that Dryvit’s warranty extended to future performance because it stated that the materials would be free from defects for 10 years from the date of substantial completion of the building. Although the lower court disagreed, holding instead that the Dryvit warranty was a “repair or replacement warranty” that did not implicate the future performance exception, the Delaware Supreme Court overturned that decision in favor of a plain-language interpretation of the warranty. The court explained that a limitation on remedies is not, by itself, dispositive on the issue of whether the warranty extends to future performance. Instead, a warranty extends to future performance if it explicitly provides that the goods will be free from defect for a specific period of time. Although not strictly necessary, inclusion of the word will, as in “the material will be water resistant for a period of 10 years” is sufficient to create a warranty that extends to future performance. The Delaware Supreme Court found that there was no other possible purpose for the inclusion of such language, and held that the warranty was one explicitly extending to future performance. Consequentially, the case was remanded to the lower court for a factual determination on this issue.
On remand, the lower court found that LTL either discovered or should have discovered that the Dryvit products were not performing as warranted by December 2008, and the action was time-barred. The court’s ruling was based on evidence that LTL, through its construction manager and an expert, was aware that the Dryvit was cracking and could have been causing the building’s leaks.
2. Did the plaintiff provide sufficient notice?
To maintain a breach of warranty claim, a plaintiff must adequately notify the seller of any alleged defect within a reasonable period of time after discovery of the defect, pursuant to UCC § 2-607(3)(a). The “reasonable period” prescribed under the UCC may also be supplanted by a specific notice requirement contained within the seller’s express warranty. Notice requirements do not conflict with the statute of limitations, but are merely preconditions that buyers must satisfy in order to benefit from a warranty. The purpose of a notice requirement is to provide the seller an opportunity to cure a defect, mitigate damages, investigate the breach or settle. Accordingly, a buyer’s failure to provide the seller with notice of an alleged breach within a reasonable time after discovery, or within the time prescribed by the express warranty, will bar the plaintiff from any recovery.
In LTL Acres, the court held that LTL’s failure to abide by Dryvit’s 30-day notice requirement prevented LTL from seeking recovery under Dryvit’s express warranty. In doing so, the court rejected LTL’s contention that a 30-day notice requirement was not reasonable. Short notice provisions in warranties are routinely upheld where they are designed to give the seller an opportunity to conduct an investigation and mitigate damages. The court also rejected LTL’s argument that LTL did not expressly agree to the 30-day notice requirement, explaining that a buyer accepts a warranty’s notice provision when it accepts delivery of the covered product with agreement; contractual notice and cure provisions may not be ignored.
3. Was the defect disclaimed?
The UCC provides that a seller may disclaim or modify warranties associated with the sale of goods. Both express and implied warranties may be disclaimed within certain limits. Written disclaimers effectively exclude implied warranties when they are conspicuous and, in the case of the implied warranty of merchantability, explicitly mention the word “merchantability.”
But unlike implied warranties, express warranties are very difficult to disclaim. The UCC provides that “negation or limitation” of express warranties are inoperative to the extent that such a construction is unreasonable, so specific attempts to limit the scope of a seller’s liability under an express warranty will only be enforced if doing so is reasonable under the circumstances. For example, it would be unreasonable for a seller to expressly warrant that its products should be free from defects for a period of time, while simultaneously disclaiming any liability associated with manufacturing defects that become apparent within that same period of time.
A disclaimer that limits liability under an express warranty only to damages or injuries caused solely and directly by defects in the seller’s own products is reasonable. These disclaimers can actually be quite useful to manufacturers defending alleged defects in building materials that typically only make up one component of a larger structure. For example, in LTL Acres the court found that LTL had no claim against Dryvit under the manufacturer’s express warranty, which contained such a clause, because the evidence showed that Dryvit’s products were not the sole and direct cause of the water leakage. The Dryvit warranty explicitly disclaimed any and all damage “not solely and directly caused by defects in Dryvit’s materials.” LTL had also pursued claims against Butler based on undisputed evidence that the pre-engineered walls were dimensionally unstable and compromised the integrity of the cladding. According to an expert report, the combination of the Butler walls and the Dryvit finish resulted in “unreliable water proofing performance.” On this basis, the court held LTL’s claim was not within the scope of Dryvit’s express warranty.
4. Is the plaintiff’s claim subject to the statute of repose?
Finally, while the sale of most building materials are governed under the UCC’s four year statute of limitations, a majority of states have adopted statutes of repose for construction defects. While statutes vary by jurisdiction as to the nature of the claims covered and the length of the repose period, these statutes typically prohibit claims against a defendant who “furnishes construction” beyond a specified number of years. In addition to claims against a builder or contractor, statutes of repose may also apply to manufacturers engaged in the business of engineering building materials to be sold under warranty and applied to a specific construction project.
Statutes of repose, like statutes of limitation, cut off certain legal rights to a would-be plaintiff if the claim is not pursued within a specified deadline. What sets a statute of repose apart from a statute of limitations is that it sets a filing deadline based on the mere passage of time or the occurrence of a certain event that doesn’t itself cause harm or injury. Statutes of repose for construction defects typically begin to run on the date the project was completed, rather than when the cause of action accrues (e.g. by delivery or discovery of defect).
For example, section § 8127 of the Delaware Code, bars claims alleging defective construction of an improvement to real property from being brought against a defendant who “furnished construction” more than six years after substantial completion of the improvement. This statute supplants the four year UCC statute where applicable. A defendant does not have to actually construct a building, or even perform its work on site, in order for § 8127 to apply. Instead, in Delaware the six year statute will apply if it can be shown that the defendant “furnished construction” within the meaning of § 8127. A manufacturer that merely sells products to be used in a construction project “furnishes construction” if the materials sold were specially engineered and fabricated to meet the unique specifications of the plaintiff’s project. In LTL Acres, for example, the court found that the six year statute applied to LTL’s claims against Butler because its metal building system was engineered to meet LTL’s specific needs and could not be used in another construction project. On appeal, the Delaware Supreme Court affirmed that the six year statute of repose, rather than the four year statute of limitations, applied to LTL’s claims under Butler’s express warranty.
Although claims concerning defective construction are often brought under state contract law, a plaintiff may also pursue breach of warranty and related contract claims directly against manufacturers for defects in particular building materials sold and incorporated into a construction project. Like consumer goods, these claims are governed by the UCC. In LTL Acres, the plaintiff’s claims against two independent manufacturers for allegedly defective prefabricated wall components and exterior finish were denied on summary judgment on multiple grounds, making it instructive as to some of the most effective defenses applicable to these claims. Defective building material claims under the UCC are vulnerable to summary judgment because these products often include express warranties with notice provisions and disclaimers that will be enforced where reasonable. Above all, the general durability of building materials makes these claims susceptible to being barred by the statute of limitations or repose.
Somers S. Price is a partner and Dominique A. Meyer is an associate in the general litigation group of Potter Anderson & Corroon LLP in Wilmington, Delaware.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.