You may be familiar with (or at least aware of) the warranties provided under Chapter 327A of Minnesota Statutes. These warranties include a one-year warranty on all workmanship and materials, a two-year warranty on plumbing, electrical or other mechanical systems, and a ten-year warranty against major construction defects. The warranties apply to new or newly remodeled residential property (which can include single-family homes or community associations, such as condominiums or townhouse) and are binding against the builder (of new construction) or contractor (in the case of a remodeling project). Throughout the rest of this article, I will refer to both as a "contractor,” although readers should appreciate the statute applies to two categories of construction projects.
For years Chapter 327A has contained certain procedures that owners (or community associations) must follow to preserve a claim for a breach of one or more of these warranties. Effective January 1, 2011, these procedures now have been revised, and steps have been added. The Legislature’s goal in making these changes is to try to reduce the number of lawsuits that are necessary to resolve these warranty disputes, but as with any new process there will always be traps for the unwary. Navigating the new procedures is bound to catch more than a few people off guard.
The process still provides that written notice of an alleged defect must be delivered to the contractor within six months of the discovery of the defect, with a new exception for situations where it can be shown that the contractor had actual notice of the claimed defect. Of course, it’s best to provide timely written notice if you wish to rely on this statutory warranty. Many have lost claims by failing to provide this notice within six months of discovering the defect.
After this notice has been provided, the contractor has always been required to inspect the alleged defect within 30 days and propose a repair. The amendment specifies, however, that the contractor is now permitted to conduct invasive testing to evaluate damage or the proper repair. "Invasive” testing may involve making test cuts in exterior or interior walls and/or using a probe to test the moisture content of wood framing members, though the statute is not clear about what is fair game. It is of course fair to permit the contractor a reasonable opportunity to understand fully the defect (if any) involved, and the contractor is required to place the property back into "pre-inspection condition” following any invasive procedures, but it is unclear how this restoration process will be measured or enforced in practice.
In the event the contractor inspects the property and the parties cannot agree on the proposed repair (claimants should carefully evaluate proposed repairs, preferably with the assistance of a trusted contractor, engineer or attorney), the claimant must (yes, must) follow through with the new "home warranty dispute resolution process.” The new dispute resolution process requires the selection of a "qualified neutral” from a list maintained by the Minnesota Department of Labor and Industry. There are rather short timeframes applicable to the steps for selecting a neutral, so potential claimants should consult with an experienced member of the construction industry and/or a construction attorney before submitting their claim to the Commissioner of the Minnesota Department of Labor and Industry. Otherwise they will find themselves with little time to make a decision about the neutrals from which they must choose to evaluate their case and no way to evaluate those neutrals.
After a neutral has been selected, the parties must meet together with the neutral and each will submit its own reasons why its proposed repair is proper. There is a fee of $25 per party for participation in the process, in addition to the hourly fees of the neutral. It also is possible the parties will use attorneys to represent them through this process, though neither party is required to do so.
According to the amendment, at the end of this process the neutral third party does not issue a binding decision (it simply is an evaluation). This evaluation may not be used as evidence in any later litigation. The process does provide the parties with perhaps a better understanding of the potential damages at stake and the chances of a favorable (or unfavorable) result, though working with the proper professionals should already serve this purpose at the outset of any potential dispute.
Barring certain exceptions, the parties must complete this dispute resolution process before litigation can be commenced. There are four situations which in which a party may commence litigation earlier, however:
1. Litigation may be commenced immediately if:
a. The contractor fails to conduct an inspection within 30 days after written notice of the defect has been provided;
b. The contractor performs the inspection but fails to provide a written proposal to make a repair of the alleged defective condition within 15 days after the inspection is complete; or
c. The contractor provides a proposed repair, to which the parties agree, but the contractor does not perform the repair.
2. Alternatively, litigation may be commenced following the expiration of 60 days after the contractor has made a repair proposal, whether or not the dispute resolution process is complete.
In the event the evaluation process is not successful in bringing the parties to a resolution, the new amendment also alters certain timing considerations applicable to a construction defect lawsuit. Although Chapter 327A relates to certain warranties, there are numerous other claims (or theories of recovery) applicable to construction defect cases, all of which might be affected by a delay in the commencement of litigation. These can include claims that the contractor breached an applicable contract or that the contractor was negligent. There are other warranties that may apply as well, including warranties applicable to common interest communities and warranties covering the sale of goods (such as windows, doors, shingles, etc.). Each of these claims has not only its own standards, but each also has an applicable (and often different) limitations period (the period within which a suit must be brought before it is barred by the passage of time). Accordingly, the amendments to 327A now provide that, for as long as the parties are engaged in this statutory procedure, or for 180 days (whichever is longer), all potential claims will be "tolled” (meaning their expiration will be delayed). This is a useful provision for ensuring the parties do not lose their right to commence litigation as a result of participating in this mandatory dispute resolution process.
The new provisions of Chapter 327A certainly have created more theoretical opportunities for construction defect cases to reach resolution outside of court. However, both parties still must act reasonably for the process to be constructive because there is little consequence to a party who fails to reach a reasonable resolution even under this new protocol. Therefore, until we have seen this process utilized a few times, we will not know whether it will provide the parties with a legitimate alternative to litigation or just another hurdle to clear. Meanwhile, it seems likely that the parties to these disputes still are going to need competent and informed advisors to ensure they comply with the process and take full advantage of the purpose it is designed to serve.