NC Supreme Court Upholds Enforceability of Long-Term Express Warranties
June 17, 2015
This piece originally appeared as a "featured newsletter article" from the North Carolina Bar Association's Construction Law Section.
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In the summer of 2013, a divided North Carolina Court of Appeals caused a stir in the construction community when it held in Christie v. Hartley Construction, Inc., 745 S.E.2d 60 (N.C. App. 2013) (hereinafter “Christie 1”) that the six-year North Carolina statue of repose for improvements to real property trumps the bargained-for duration terms of an express warranty. The case was appealed. On Dec. 19, 2014, after much anticipation, the North Carolina Supreme Court reversed this portion of the lower court’s decision and held that parties can effectively waive the protections of the statute of repose by entering into long-term express warranties. Christie v. Hartley Construction, Inc., 367 N.C. 534, 766 S.E.2d 283 (2014) (hereinafter “Christie 2”).
In 2004, the Christies contracted to have a house custom built in Chapel Hill. For the exterior, the builder applied a waterproof cladding system manufactured by GrailCoat WorldWide. GrailCoat’s website provided a 20-year express warranty on the product.
In March 2005, construction was completed and the certificate of occupancy was issued. After the Christies moved into their new house, however, the GrailCoat system failed to effectively waterproof the home’s structural components.
In October 2011, the Christies sued the product manufacturer seeking monetary damages for breach of express warranty among other causes of action, alleging GrailCoat’s waterproof cladding system was defective and caused extensive water damage to their home. Despite GrailCoat’s 20-year express warranty, both the trial court and the Court of Appeals dismissed the claim for monetary damages on the grounds that the six-year statute of repose had run.
Although the trial court dismissed the Christies’ suit for monetary damages, the court suggested the statute of repose would not preclude the Christies from seeking specific performance as a remedy. Due to inherent defects with GrailCoat’s cladding system, however, this was not a feasible option for the Christies.
Analysis of the Court of Appeals' Holding
The statute of repose at issue in Christie 1 was N.C.G.S. § 1-50(a)(5), which provides “[n]o action to recover damages based upon . . . the defective or unsafe condition of an improvement to real property” is recoverable more than six years after “the specific last act or omission of the defendant . . . or substantial completion of the improvement.” Although prior decisions indicated an express long-term warranty permitting damages would be enforceable regardless of the expiration of the statute of repose, the lower court appeared to base its holding on the case of Roemer v. Preferred Roofing, 190 N.C. App. 813, 660 S.E.2d 920 (2008).
In Roemer, the plaintiffs sued for damages arising from breach of a lifetime warranty. Similar to the Court of Appeals’ decision in Christie 1, the court held the plaintiff’s remedy for breach of warranty after the statute of repose expired was limited to specific performance. It is unclear, however, whether the Roemer court based its holding on a literal interpretation of the phrase “(n)o action to recover damages” in the statute of repose, or whether it was based on the actual language of the warranty at issue. In Judge Hunter’s dissent in Christie 1, he questioned the court’s reliance on Roemer as precedent, and expressed his belief that the basis of the Roemer holding was not the language of the statute of repose, but rather, the limited scope of the warranty at issue in that case. 745 S.E.2d 60 at 63-64.
Analysis of the Supreme Court's Holding
Rather than distinguishing Roemer, the Supreme Court reached its conclusion by analyzing the conflict between the public policy embodied in the repose period set out in N.C.G.S. § 1-50(a)(5) and the right of parties to contract freely and bind themselves as they see fit. Christie 2, 766 S.E.2d 283, 287.
In its analysis, the Court described that the public policy underlying N.C.G.S. § 1-50(a)(5) is to “provide a bulwark against the possibility of open-ended exposure to suits for damages.” Id. The Court recognized that the six-year repose period provides important protection, which parties in the construction industry may rely upon when making business decisions on matters such as pricing and insurance coverage. Id. The Court, however, found no public policy reason to give support for why a party should not be able to bargain away or waive the statute’s protections. Id. Instead, in the context of long-term express warranties, the Court found strong public policy justifications for allowing parties to contractually waive the statute of repose.
The Court observed that suppliers of improvements to real property use warranties to indicate their willingness to stand behind their products or services. Id. at 287-88. By offering a warranty that exceeds the six-year statue of repose, businesses can obtain an edge over their competitors. Id. at 288. The Court further observed that the popularity of extended warranties that allow a customer to purchase additional protection shows that buyers are mindful of the duration of warranty coverage and derive value from the added protection. Id.
The Immediate Impact of the Court's Holding
Prior to the Court of Appeals’ holding in Christie 1, the general understanding throughout the North Carolina construction industry was that the duration of an express warranty would be dictated by the warranty’s terms, not the statute of repose. The Supreme Court’s holding marks a return to the status quo. From a public policy standpoint, the Court’s holding is beneficial in that it incentivizes construction professionals to put forth their best product. From an equity standpoint, the holding is fair. As the Supreme Court describes in Christie 2, “[a] warranty that a seller knows is unenforceable is a sham, useful only to beguile the unsuspecting.” Id. If the lower court’s decision stood, it could have created a windfall for suppliers of improvements to real property whose long-term warranty obligations would prematurely expire. This would come at the expense of the holders of such long-term warranties by depriving them of the benefit of their bargain -- a benefit they likely paid for.
Some contractors, suppliers and design professionals might not like the Supreme Court’s holding. They may prefer a liability timeline that automatically cuts off in six years and may feel pressured by competitors to offer long-term warranties against their will. These are valid grievances, but they should not take precedence over the right to contract freely. Further, these aggrieved parties can respond by simply pricing their products and services accordingly; something they would have already been doing prior to the Court of Appeals’ holding in Christie 1.
The Long-Term Effect of the Court's Holding
Although the Court’s holding ostensibly stands for the proposition that a party automatically waives the protection of N.C.G.S. § 1-50(a)(5) when it provides an express warranty that exceeds the repose period, some ambiguity remains as to whether this is the case. The Court placed heavy emphasis on the fact that the Christies “were influenced by GrailCoat’s twenty-year warranty when making their final decision” to purchase the cladding system. Id. This raises the question of whether a party must demonstrate actual reliance before a long-term warranty will trump the statute of repose. Lower courts will probably construe the reliance language in Christie 2 as dicta, but it is certainly possible that a lower court could find otherwise, although only time will tell.
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Jonathan Massell is an associate with Nexsen Pruet, PLLC in Greensboro. Jonathan’s practice focuses primarily on construction law and business litigation. He can be reached at email@example.com.