In December 2001, the Minnesota Court of Appeals issued an important decision regarding statutory home warranties in the case of Koes v. Advanced Design, Inc., 636 N.W. 2d 352 (Minn.Ct.App. 2001). The impact of this case will be felt by homebuilders across Minnesota, because it substantially extends the duration of homebuilders’ liability under the statutory warranties they are required to provide to home buyers.

The dispute in Koes arose from an alleged drainage problem in a new home constructed by Advanced Design, Inc. (“ADI”) for Timothy and Kristine Koes (the “Koes”). The Koes alleged that the drain tile was installed higher than the heat ducts which allowed the ducts to fill with water. The Koes alleged a violation of the statutory warranties that afford protection from defects to new home buyers.

There are several statutory warranties that apply to new home construction. Minnesota Statutes Section 327A.02 subdivision 1(b), provides a two-year warranty period from the “warranty date,” which is the date of the homeowner’s first occupancy or when the homeowner takes legal or equitable title. This is one of the standard statutory warranties that most people think of, when they think of statutory home warranties. Section 327A.02 provides that the homeowner must notify the contractor within six months of when the owner discovers or should have discovered the loss or damage.

There are also statutes of limitations that apply to construction defect cases. Minnesota Statutes Section 541.051 subdivision 1(a) provides a two-year limitations period from the date of discovery of the damage, and a statute of repose essentially cuts off a contractor’s liability for defects ten years after substantial completion of the home. However, subdivision 4 of section 541.051, provides that section 541.051 does not apply to the statutory warranties provided in section 327A.02, so long as the action is brought within two years of the discovery of the breach.

In Koes, the court attempted to reconcile the seemingly conflicting statutory requirements. The Koes took occupancy of their home in June 1997 and thus under the straightforward interpretation of 327A.02, the two-year warranty period provided by that section would have expired in June 1999. The Koes first recognized the problem with the drain tile and heat ducts in July 1999, and first gave ADI written notice of the problem in September 1999, which appeared to put them outside the two-year warranty period. However, the Koes had notified ADI of the problem within six months of discovery of the problem as required by the statute and they commenced their action within two years of discovery of their injury as required by 541.051. Hence, the issue before the court was how to resolve the apparent conflict between the homeowners reporting the defect after the two-year warranty discovery period expired, but within both the two-year discovery period of 541.051 and the six-month notification requirement of 327A.03(a).

The court concluded that a homeowner’s right to recover under 327A.02 is only limited by the requirement that a homeowner report a breach of warranty within six months of discovery of the breach. This opinion can be read to allow an action to be brought on a defect which occurs within the two year period after substantial completion, but which is not discovered until many years later. Any defect associated with the original design or construction would fall within the two year warranty and therefore be actionable indefinitely, so long as the contractor is given notice of the defect within six months of its discovery and a lawsuit is commenced within two years of its discovery.

The Colorado Supreme Court recently addressed a similar issue in Hersh Co., Inc. v. Highline Village Associates. Colorado has a two-year statute of limitations which pertains specifically to construction projects, but it has a more general statute of limitations providing a three-year limitations period for breach of warranty claims. In this case the contracts provided five-year warranties for repair and replacement of defective labor and materials. The owner discovered defective work in 1993 that it requested be repaired. Limited repairs were made but when paint continued to peal and the owner demanded additional repairs in 1995, the contractor refused to perform any additional work. In 1996, the project owner sued the contractor.

The court held that the three-year statute of limitations applied to warranty claims that contain a “repair-or-replace” provision such as the contracts at issue in this case. The three-year period under this statute did not begin to run until the breach of warranty is discovered or should have been discovered. The court held that breach of warranty does not occur until the person supplying the warranty refuses to perform. Therefore, the court concluded that the statute of limitations was satisfied because the action was filed within three years of [the contractor’s] refusal to perform more repair work.

Contractors in Minnesota and Colorado need to be aware of the possible existence of warranty claims for much longer periods than previously anticipated. Contractors therefore need to reevaluate the adequacy of their risk management techniques with respect to warranty claims.
About the Author: Kristin Poppenberg is an attorney with the law firm of Faegre & Benson, a law firm whose construction law practice is recognized nationally in construction litigation and risk management for contractors, design professionals, sureties, insurers, project owners and others. She may be contacted at 90 South Seventh Street, Minneapolis, MN 55402; (612) 766-8273 or Report, Vol. 4, No. 4 (Apr 2002).