Briefing Paper 89-9 — September 1989

By Bob Huber

The “implied warranty” doctrine is the most significant exception to the general rule that, absent contrary agreement, the contractor generally bears the risk that contract performance will be more difficult or expensive than anticipated.  The landmark case of United States v. Spearin, 24B U. S. 132 (1918), and later cases hold that an owner furnishing contract documents to prospective bidders impliedly warrants the accuracy of any factual representations and the adequacy of the specified design, materials, and methods.  A general contractor impliedly warrants the accuracy and the adequacy of the owner’s contract documents to its subcontractors to the same extent that the owner warrants them to the general contractor.  This implied warranty is not overcome by the general clauses requiring the contractor to examine the site, to check up the plans, and to assume responsibility for the work until completion and acceptance.

1. Warranty of Accuracy

To recover for a breach of the implied “warranty of accuracy”, a contractor must show that:             

  • the contract documents contain representations which are materially different from those actually encountered,               

  • the contractor justifiably relied upon those representations, and

  • the actual conditions increased the cost of performing the work.

The contractor is not required to prove fraud or negligence or any other wrongdoing by the owner.  If the owner breaches the warranty, then the contractor is entitled to recover the difference between (1) the reasonable cost of performing the work if the conditions had been as represented, and (2) the reasonable cost of performing the work under the conditions which were actually encountered.

In Halye Floor Covering, Inc. v. First Minnesota Construction Co., 253 N. W. 2d 809, 811 (Minn. 1977), for example, a subcontractor was awarded extra compensation when a scaling error on the plans caused the subcontractor to underestimate the amount of carpet that would be needed.  Other examples of the breach of the warranty of accuracy include misrepresentations about soil conditions, site access, the availability of temporary power or other facilities, the quantity of materials required, the adequacy of the contract time for completion, and earthwork balance.

2. Warranty of Suitability

With the “warranty of suitability”, the owner implicitly represents that the design, materials, and methods prescribed in the specifications will yield a satisfactory end product within the contract period.  An owner breaches this warranty when the contractor’s end product, though constructed according to specifications, contains defects requiring remedial work or when the prescribed design or methods are so deficient that the work cannot be completed without the use of another, more expensive design or method.  If this warranty is breached, then the owner is liable to the contractor for any remedial costs or for employing a more expensive design or method to complete the work, as well as any related delay damages.  If the contractor is bound to build according to the owner’s plans and specifications, therefore, the contractor will not be responsible for the consequences of defects in them.  Having retained design responsibilities, the owner bears the risk of design failure.

In McCree & Company v. State, 253 Minn. 295, 91 N. W. 2d 714 (1958), for example, a highway contractor  recovered the extra costs incurred in taking the corrective action necessary to meet the owner’s soil compaction requirements.  The contract documents specified both a compaction method and a compaction density, but the soil conditions made it impossible to achieve the required compaction with the prescribed method.  Only by deviating from the owner’s specifications, installing a French drain and importing fill, could the specified compaction be obtained.  The court held that the specifications of a compaction method and a compaction density impliedly warranted that soil conditions were such that the specified compaction could be met using the specified method.  The inability to achieve the compaction with the method was a breach of that warranty.  The contractor was awarded the additional cost of installing the perforated pipe and the “impact” costs resulting from the owner’s undue delay in approving the corrective measure.

An express guarantee by the contractor against all “defects in workmanship and materials” does not shift responsibility for design failure on to the contractor; it only guarantees that the contractor will follow the plans and specifications.  In other words, work is “defective” for purposes of the guarantee only if it does not comply with the plans and specifications.  Any other construction of the guarantee would in effect require the contractor to indemnify the owner or architect/engineer for their own fault, which would violate Minnesota’s anti-indemnification statute.

Importantly, the warranty of suitability applies only to design,” or “method,” specifications.  Analogous to recipes in a cookbook, design specifications dictate the materials and the method of performance.  They often include precise measurements, tolerances, in-process and finished product tests, quality control, and inspection.  In contrast, the warranty of suitability does not apply to “performance” specifications, which dictate only the performance characteristics of the end product and leave the choice of materials and other design entirely up to the contractor.  With total discretion in design, the contractor generally bears the risk of failure under a performance specification.

3. Owner Defenses

The implied warranty doctrine does not apply to design-build contracts or other instances in which the owner does not supply the plans or specifications, and it does not apply if the plans and specifications supplied by the owner provide no direction and represent nothing. Even if the plans and specifications provide direction or make misrepresentations, however, a contractor’s implied warranty claim may be defeated if:

  • an unusual risk or error or failure associated with a particular contract exists but has been explicitly disclosed by the owner in clear, non-boilerplate language and expressly and consciously assumed by the contractor;

  • the inaccuracies and errors are minor and of the sort normally anticipated in any project;

  • the contractor did not rely upon the inaccuracy or deficiency;

  • the defects are so obvious that the contractor was or should have been aware of them when bidding, but did not bring them to the owner’s attention; and

  • the contractor deviates from the prescribed design.

In other words, a contractor may not recover if it suffers no damage, performs work which it knows will be useless to the owner, knowingly assumes and identified risk, or does not follow the specifications.  An owner who insists upon performance after being notified of a potential design deficiency by the contractor, however, assumes the risk of failure and cannot claim that the contractor’s knowledge of the defect vitiates its right to recover.

4. Summary

Consistent with traditional legal principals, the “implied warranty” doctrine places the risk upon the entity in the best position to prevent loss, the owner, whose plans and specifications contain the deficiency.  At the same time, equity prevents the contractor from knowingly taking advantage of the deficiency.

A basic understanding of the doctrine is important to contractors, design professionals, and owners. If all parties have a working knowledge of the underlying principles, a large number of construction disputes can be readily resolved and contract administration greatly enhanced.

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