As attorneys, one of the most important services we provide to clients is identifying, explaining, and advising about risk. In the commercial construction context, both owners and contractors must understand risk, and to the extent possible, negotiate a tolerable allocation of risk. Failing to do so may expose clients to years of unexpected liability.

A great deal of focus, understandably, is directed at risk faced during construction. Construction contracts typically address: (1) design responsibility; (2) insurance; (3) cost increases and change orders; (4) bonding; (5) scheduling and delays; (6) payment; (7) disputes and termination; and (8) waivers of subrogation. These primarily address issues that arise during construction.

But as some clients have learned the hard way, the risk does not end at completion of the project. How the client managed its post-construction exposure may be even more critical to the ultimate success or failure of the project. By identifying and understanding post-construction risks, clients are better equipped to allocate those risks according to their own tolerance.

One of the most common methods of allocating post-construction risk is by warranty. A warranty should define the scope of the risk faced, establish obligations, and ideally should limit the duration of the risk. The typical commercial construction contract contains an express warranty addressing workmanship, defects, and repairs after substantial completion. The express warranty may also require the owner to provide notice of the claim and details of the contractor’s obligation to rectify the claim. But if the contract does not contain an express warranty, does an implied warranty apply? Is there specific contract language that can reduce the risk or other contractual provisions that can limit the client’s exposure or reduce uncertainty? The answer is yes, or more accurately, probably.

A contract without an express warranty may subject the client to the broader and less predictable application of the implied warranty of good and workmanlike services. While Texas law is not completely settled on whether this common law implied warranty applies in the commercial context, it is clear that commercial parties can eliminate that risk through contract. All Metals Fabricating, Inc. v. Foster Gen. Construction, Inc, 338 S.W.3d 615, 625 (Tex. App.—Dallas 2011, no pet.) To avoid this uncertainty, an express warranty should be drafted so that it is clear that the parties intend to replace any implied warranties and fully describe the specific obligations and manner of performance, identify the duration of the warranty, and outline the deadline and scope for notice requirements.

Even an express warranty, however, may not be enough to fully predict or limit post-construction risk. Nothing freezes the warm fuzzies of a seemingly clear one-year warranty than a contractor learning its one-year warranty may be enforceable for 10 years. The boogeyman of the construction industry, “latent defects,” are those defects that are not discoverable through reasonably prudent inspection. Latent defect claims are the source of substantial construction litigation in Texas. The cases are complicated, expensive, and risky. Latent defects discovered after the expiration of an express warranty period or even the applicable statute of limitations could still pose substantial risk for years after construction is completed if the warranty is not clear that the parties intended otherwise.

Generally, a defect claim accrues when defective work is completed, even if the defect is not immediately discovered. However, the discovery rule can toll the accrual of a defect claim until the defect is discovered, potentially extending a warranty period and the statute of limitations, or worse, making the ten-year statute of repose the applicable deadline to file a lawsuit. While application of the discovery rule should be rare, if a defect is inherently undiscoverable and the evidence of injury is objectively verifiable, exposure to claims can be extended significantly and the uncertainty of risk is broadened.

Whether this uncertainty and risk can be fully mitigated under Texas law is unclear. But when representing sophisticated commercial clients, the risk and options to address them should be understood so that the objective intent of the parties to the contract can be clear in the contract. For example, at least one Texas court has held that a contractual provision expressly setting the accrual date for all claims and wrongful acts at substantial completion will abrogate application of the discovery rule and prevent tolling of the statute of limitations period. Town & Cnty. P’ship v. Dyad Constr., L.P., No. 14-22- 00339-CV at *10, 2023 Tex. App. LEXIS 3354, (Tex. App.—Houston 14th Dist., May 18, 2023, no pet.). If upheld, such a provision would eliminate substantial risk and uncertainty for contractors. Further, a contractual provision setting an accrual date and requiring notice of a warranty claim during the warranty period can effectively limit warranty claims to those noticed during the applicable period. Id. at *18–19; Giant Eagle Inc. v. Excentus Corp., No. 3:14-CV-1195-B, 2014 U.S. Dist. LEXIS 196191, at *9–10 (N.D. Tex. Aug. 2, 2014). Again, this is an option and potential solution that would mitigate risk. Whether these provisions would always be enforced is not guaranteed, but failing to identify and understand these potential modifications,  regardless of side, could greatly impact the allocation of the post-construction risk. Clients decide their ultimate risk tolerance, but attorneys should make the task less confusing and more manageable.