Monday, July 16, 2012

Final Acceptance of Work on a Construction Project - Implications - Part 4 of 5

Warranty Exceptions
Of course, the binding effect of “final acceptance” is tempered by express warranty provisions that may exist in the contract. Contracts often include express warranty provisions obligating the contractor to correct any defects or problems arising one year (or longer) after final acceptance. These warranty clauses give the owner an independent contract right to demand corrections or repairs even after final acceptance. An express warranty clause therefore creates an exception to the general rule that once the owner accepts the work, it cannot go back and allege deficiencies. It is not unusual for an owner to perform warranty inspections near expiration of contractual warranties to identify existing deficiencies and to demand their correction under the contractor’s warranty obligations.

“Latent Defect” Exception
The binding effect of final acceptance is also subject to any “latent defects” that may exist in the work. Final acceptance does not foreclose an owner’s right to pursue the contractor for latent defects until the applicable statute of repose runs. A latent defect is generally defined as a defect in the contractor’s work that was latent or hidden, that was not discovered during inspections leading up to final acceptance, and that could not have been discovered through reasonable inspections. In other words, a contractor cannot conceal (whether intentionally or not) defects in its work and then argue that the owner lost its right to object when the owner failed to discover the defects during final inspections. Because latent defects are problems that are hidden and not reasonably discoverable, the law implies that the “final acceptance” would not include acceptance of these hidden defects. Once those defects are discovered, the law will treat the defects as never having been accepted, or give the owner the right to rescind an earlier acceptance. As a result, a contractor can remain legally responsible for latent defects until the statue of repose runs.

Statutes of repose place an outside time limit on any suit involving the design or construction of a project, including claims for latent defects. This statutory period varies from state to state but typically runs from substantial completion for as little as 5 years and as long as 15 years. Thus, owners can bring latent defect claims against their contractors until the applicable statute runs.

Federal government contracts subject to the Federal Acquisition Regulation emphasize the importance of final acceptance and limit the government’s rights once final acceptance is made. The FAR Inspection of Construction clause states that “Acceptance shall be final and conclusive except for latent defects, fraud, gross mistakes amounting to fraud, or the government’s right under any warranty or guarantee.”

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